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By Nivedita Balu and Ateev Bhandari
(Reuters) -Bank of Montreal on Wednesday beat analysts' profit estimates and showed signs of recovery at its struggling business in the United States, sending shares up 3.5% in Toronto.
BMO, Canada's third largest lender by market capitalization, earned C$2.62 ($1.90) per share in the second quarter, boosted by higher lending income and smaller than expected reserves to cover for bad loans in an uncertain environment amid trade talks. Analysts had forecast earnings of C$2.54, according to LSEG data.
BMO is one of the Canadian banks that has rapidly expanded in the U.S. through acquisitions. But that business struggled as losses related to some commercial loans increased, hurting credit quality.
In the U.S., loan loss reserves were smaller compared to the prior quarter, while executives said they were ready to grow the U.S. business as economies improve and expect commercial lending activity to rise in the second half of the year.
However, BMO, like its peers remained cautious as U.S. President Donald Trump's trade policies have created uncertainty for Canada's economy and as investors look for Prime Minister Mark Carney's pro-business policies.
"We remain cautious... the outlook for the Canadian economy has weakened with rising unemployment and declining GDP growth. The US market has shown resilience, but momentum has softened," Chief Risk Officer Piyush Agrawal said.
Net interest income, or earnings on loans minus deposit costs, jumped 13%.
It said loan loss provisions, the amount lenders set aside as rainy day funds, rose to $1.05 billion from C$705 million, but was lower than analysts' estimate of C$1.07 billion.
Still, BMO's provision for performing loans, or loans that are cleared on time, jumped to C$289 million from C$47 million, signaling it was preparing for a volatile environment.
"A good quarter overall for BMO," Scotiabank analyst Mike Rizvanovic said, noting that credit-related issues for the bank have moderated.
BMO also benefited from the fee-based wealth management, while its peer National Bank of Canada's was boosted by strength at its capital markets business.
National Bank topped analysts' profit estimates as it integrated Canadian Western Bank after a C$5 billion acquisition earlier this year.
The Montreal, Quebec-based lender earned C$2.85 per share, topping estimates of C$2.40.
($1 = 1.3814 Canadian dollars)
(Reporting by Ateev Bhandari in Bengaluru and Nivedita Balu in Toronto; Editing by Devika Syamnath and Chizu Nomiyama)