UPDATE 5-Bank of Montreal profit lifted by loan growth

Q2 EPS C$1.34 vs C$1.26 a year earlier

* Q2 adjusted EPS C$1.35 vs C$1.28 a year earlier

* BMO sees increased cost savings from acquisition of M&I (Adds analyst, CEO comments, updates share price move)

By Euan Rocha

TORONTO, May 25 (Reuters) - Bank of Montreal (BMO.TO) reported a quarterly profit on Wednesday that topped investor expectations, driven largely by growth in its Canadian lending portfolio and a drop in provisions for soured loans.

The Toronto-based bank also said it expects cost savings from its proposed acquisition of Wisconsin-based Marshall & Ilsley (MI.N) to exceed earlier expectations.

Some analysts were disappointed, however, that BMO did not retract a plan to issue up to C$400 million ($408.2 million) in equity, even though its capital ratios remain in good standing. The equity issue is aimed at ensuring that the bank remains in-line with regulatory requirements following the close of the M&I deal.

"We argued last quarter that the bank would not need to resort to this measure to maintain good standing with respect to the new Basel III capital ratios," said National Bank analyst Peter Routledge. "This quarter's results support that argument."

BMO's chief executive, while speaking on a conference call, indicated that he was encouraged by the bank's capital levels, but reiterated that BMO would make a final call on the equity issue only around the time the deal closes later this quarter.

Analysts contend that the proposed issue remains an overhang on shares of BMO, which closed just under 1 percent higher on Wednesday at C$62.05.

SOLID QUARTER

BMO, which owns a network of retail banking operations spread across Canada and in the U.S. Midwest, said net income in the quarter ended April 30 rose to C$800 million, or C$1.34 a share, from C$745 million, or C$1.26 a year earlier.

The bank said adjusted earnings rose to C$1.35 a share from C$1.28 a year earlier. Analysts on average had forecast earnings of C$1.31 a share, according to Thomson Reuters I/B/E/S.

"We would characterize this as a solid quarter for BMO," wrote Barclays Capital analyst John Aiken in a note to clients. "BMO's second quarter was a good start to earnings season, and should help support the sector's valuations."

Canada's highly conservative banking sector weathered the global financial debacle with relative ease. While U.S. banks have struggled with revenue growth and their stocks have tumbled this year, shares of Canada's top banks have risen and outpaced the broader Canadian stock market. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For share performance graphic: r.reuters.com/zej69r For StarMine Data on Banks: link.reuters.com/fyd69r For graphic on CPI/benchmark rate: r.reuters.com/xep69r ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

Analysts caution that Canadian banks could now be entering a more difficult phase in the business cycle as interest rates begin to climb and retail lending begins to slow. [ID:nN15208168] [ID:nN15209406]

BMO's results already began to show some evidence of this trend as growth in its personal lending business within Canada slowed on a sequential basis.

M&I TAKEOVER

BMO said it expects the Marshall & Ilsley acquisition to give a slight boost its fiscal 2011 earnings after excluding restructuring and integration costs.

The deal, which was announced in December last year, will more than double the size of BMO's retail banking presence in the United States. BMO, which initially expected the deal to result in about US$250 million in cost savings, said it now expects savings to exceed US$300 million.

The transaction, which was approved by Marshall & Ilsley shareholders on May 17, is still subject to certain regulatory approvals.

BMO, which traces its history back to the early 1800s, is the first of Canada's big six banks to report. National Bank of Canada (NA.TO), Toronto-Dominion Bank (TD.TO) and Canadian Imperial Bank of Commerce (CM.TO) report quarterly earnings on Thursday.

Royal Bank of Canada (RY.TO), the largest of Canada's big six, reports on Friday, while Bank of Nova Scotia (BNS.TO) the last to report, comes next Tuesday. [ID:nN2043497]

($1=$0.98 Canadian) (Reporting by Euan Rocha; editing by Peter Galloway

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