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Towers of major Canadian banks are seen in the Bay Street financial district in Toronto.

Gary Hershorn

Resurgent growth in Canada is helping buoy banks' profits through a period of more modest expansion in key markets outside the country.

Bank of Nova Scotia and Bank of Montreal both earned more than expected in the fiscal third quarter, anchored by their core Canadian retail operations. The two banks boosted profits by 7 per cent and 11 per cent, respectively, and the improvements came largely on their home turf.

The results mark a reversal of sorts. Several large Canadian banks have lately looked abroad for opportunities to fast-track their growth as they faced a difficult task squeezing more profit from the domestic market. But with Canada's economic forecast looking sunnier, the country's largest banks are sounding increasingly optimistic about their ability to grow at home, dampening occasional turbulence from choppy foreign markets.

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"I'd say our expectations for the Canadian business have moved up from where they would have been at the beginning of the year," Tom Flynn, BMO's chief financial officer, said in an interview. "And that's really on the back of a better outlook for the economy over all."

Toronto-based Scotiabank, which is Canada's third-largest lender by assets, enjoyed a 12-per-cent bump in profit from its Canadian retail banking arm, which contributed $1.05-billion to earnings, topping the billion-dollar mark for the first time. A third of that increase came from gains on the sale of real estate, but Scotiabank expects its Canadian banking division can keep growing profit by 6 to 9 per cent annually.

"After disappointing during [the second quarter of 2017], this segment rebounded," said National Bank Financial Inc. analyst Gabriel Dechaine.

BMO, the country's fourth-largest lender, followed suit with 9-per-cent profit growth from its Canadian personal and commercial banking arm, compared with a year ago.

The bank earned $614-million on the strength of stronger deposits and lower loan losses.Both banks expect the growth of their mortgage portfolios to slow somewhat as government measures introduced to cool skyrocketing home prices in Toronto and surrounding regions continue to ripple through housing markets. But they don't expect that to put the brakes on their overall prospects in Canada.

Returns from banking operations abroad were less stellar. Scotiabank's international profit climbed 16 per cent to $614-million, outstripping domestic growth, largely on the strength of better results in the Caribbean. But the bank posted sluggish growth of just 1.9 per cent in its crucial Latin American markets – Mexico, Peru, Chile and Colombia – which it calls the "Pacific Alliance." Slower growth was due partly to flooding in Peru, as well as fluctuations in energy prices and inflation in Colombia, even as Mexico has performed well.

"We run [the international banking business] as a portfolio of countries," said Sean McGuckin, Scotiabank's chief financial officer. With Pacific Alliance countries projected to grow by 9 to 11 per cent annually, "we are definitely seeing good growth in front of us," he said.

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Profit of $279-million from BMO's U.S. personal and commercial banking segment, which operates as BMO Harris Bank, was flat. The U.S. economy is still growing, and Mr. Flynn said the bank still expects the business to do well, relative to its peers. But the pace of expansion appears to have slowed for now.

"There's some uncertainty about the timing of implementation of the U.S. policy changes, and with that, we think some investment spending [by businesses] has been spread out over a longer period of time," Mr. Flynn said.

Over all, Scotiabank earned $2.1-billion or $1.66 per share in the third quarter, compared with $1.96-billion or $1.54 a year ago.

Adjusted to exclude certain items, the bank earned $1.68 a share. Analysts surveyed by Bloomberg were expecting $1.64 a share.

BMO reported profit of $1.39-billion or $2.05 a share, improving from $1.25-billion or $1.86 in the same quarter last year.

Adjusted profit climbed 6 per cent and BMO said it earned $2.03 a share, ahead of analysts' projection of $2.

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Profit from BMO's capital markets arm fell by 8 per cent to $292-million, because of lower revenue and higher expenses. Revenue from trading fell 11 per cent from a year ago to $616-million due to lower client activity. Revenue from investment and corporate banking rose 17 per cent to $451-million, bolstered by M&A advisory work. "The market was just a little more quiet," Mr. Flynn said.

The weaker results from capital markets, combined with sluggish U.S. earnings, appeared to weigh on BMO's share price on Tuesday. The bank's stock closed down 2.55 per cent on the Toronto Stock Exchange.

By contrast, Scotiabank's global banking and markets division bucked a trend of weaker capital markets results among its peers, with its profit rising 5 per cent from the prior year to $441-million. The bank said this gain was driven by better contributions from its equities business and its lending operations in Canada, the U.S. and Europe. It also set aside less money to cover soured loans. However, revenue in the unit fell 3 per cent to $1.1-billion. Scotiabank's stock closed virtually flat on the day.

With a report from Christina Pellegrini

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