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Bank of Montreal on Bay St. from King St. West, in Toronto

Fred Lu/The Globe and Mai

Bank of Montreal boosted profit for the fiscal second quarter, hiked its dividend and held its mortgage portfolio stable in a volatile market, but still suffered a letdown as slower-than-expected U.S. business activity dragged on the bank's growth.

Toronto-based BMO is the first of Canada's Big Six lenders to report results for the quarter ending April 30. Expectations for the sector were restrained after a first quarter in which the largest banks all beat forecasts, which made for a tough act to follow.

The issue hanging over Canadian banks as earnings season kicks off remains the widespread unease about the health of the country's mortgage market – and on that front, BMO's results were steady. Housing prices keep soaring and besieged alternative mortgage lender Home Capital Group Inc. has been fighting to stay afloat, sparking fears of contagion.

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For subscribers: BMO's capital-markets arm comes to parent's help

Yet the 90-day delinquency rate for BMO's Canadian residential mortgage portfolio remains healthy at just 23 basis points (100 basis points equal one percentage point).

"I hope that our results communicate that things are stable," Tom Flynn, BMO's chief financial officer, said in an interview, adding: "We don't see a negative catalyst on the horizon for the [mortgage] market over all."

BMO has about $104-billion in Canadian residential mortgages – the total stayed flat compared with the prior quarter – 55 per cent of which are insured. The loan-to-value ratio of uninsured mortgages held steady at a comfortable 54 per cent.

"Critical to the near-term outlook for the sector, there was no deterioration in domestic residential mortgages," John Aiken, an analyst at Barclays Capital Canada Inc., said in a research note.

Instead, a few key metrics stood out as surprise disappointments, marring an otherwise solid set of core results, as BMO begins a months-long leadership transition. Chief executive officer Bill Downe will retire at the end of October after a decade at the helm, and chief operating officer Darryl White will take over the CEO role.

In the second quarter, weaker growth in BMO's retail businesses was primarily the result of higher provisions for credit losses – or money the bank sets aside to cover soured loans. Provisions climbed to $259-million, an increase of $58-million from the same period last year, most notably in the commercial arm of the bank's U.S. operations.

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The surge came as the biggest surprise among BMO's second-quarter figures, but Mr. Flynn said the higher provisions are "more reflective of one-off situations" than any broader weakening of credit.

"Our view on credit losses is that credit conditions are stable and relatively benign," he said.

Even so, the higher provisions for losses were the driving force behind an unexpected 7-per-cent dip in profit from the bank's U.S. personal and commercial division, which operates as BMO Harris Bank, compared with a year earlier.

"We see good confidence in both the consumer segment and the commercial segment. Normally, confidence drives activity," Mr. Flynn said. "[First-quarter] loan growth in U.S. banks was lower than people expected, and it feels like that just reflected a little bit of a pause in activity as people wait to see exactly how the new policies of [U.S. President Donald Trump's] new administration get rolled out."

BMO earned $1.25-billion or $1.84 a share for the quarter that ended April 30. That was up 28 per cent from $973-million or $1.45 a year earlier, when results were hampered by a restructuring charge.

Adjusted to exclude certain items, BMO said it earned $1.92 a share. Analysts polled by Bloomberg were expecting adjusted profit of $1.93.

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Total revenue was $5.74-billion, up from $5.1-billion in the same quarter last year.

"Perhaps we had expected too much," Darko Mihelic, an analyst at RBC Dominion Securities Inc., said in a research note that takes "a mildly negative view of [second-quarter] results."

On a positive note for shareholders, BMO increased its quarterly dividend by 2 cents to 90 cents a share, as several analysts had expected it would.

Profit in BMO's core Canadian banking operations rose 1 per cent in its latest quarter, to $531-million, while capital markets profit rose 12 per cent to $321-million. In the bank's wealth-management arm, profit surged 86 per cent higher compared with a year earlier, to $251-million.

Though analysts cautioned against overreacting to the weaker profit figures from BMO's Canadian and U.S. retail operations, investors were less charitable – the bank's share price was down 3.3 per cent to $91.98 at Wednesday's close of trading on the Toronto Stock Exchange.

"Neither business would appear to have lasting issues, but the results this quarter will likely weigh on the near-term outlook," said Robert Sedran, an analyst at CIBC World Markets Inc.

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