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Banks surprise with dividends and big profits

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Three of Canada's top banks raised their dividends after reporting stronger-than-expected third-quarter profits on Thursday, as Canadians continued their robust borrowing habits despite high debt levels and fears of a housing slowdown.

The dividend increases by Royal Bank of Canada (RY-T), Toronto-Dominion Bank (TD-T) and Canadian Imperial Bank of Commerce (CM-T) come on the heels of similar moves by Bank of Montreal (BMO-T) and Bank of Nova Scotia (BNS-T) earlier this week, meaning Canada's top five banks have all lifted payouts this quarter.

Analysts had expected at least two dividend increases, but few expected more than three.

RBC, the country's largest bank, unexpectedly lifted its payout by 5 percent to 60 cents.

That came on the back of a 73-percent rise in net profit that, along with a 42-percent profit gain at CIBC, had some observers shaking their heads, given the results came in what's considered a challenging profit environment.

"These headlines are just out of sight," said John Kinsey, a portfolio manager at Caldwell Securities in Toronto.

Excluding one-time items and discontinued operations, RBC's profit rose a more modest 18 percent to $2.0 billion against a weak quarter a year earlier, while adjusted profit was $1.31 a share, topping analysts' estimates of $1.18 a share.

TD, Canada's No.2 bank, posted a 14-percent rise in net income to $1.7 billion, and an adjusted profit of $1.91 a share, ahead of estimates of $1.84 a share.

No. 5 lender CIBC said quarterly profit jumped 42 percent to $841 million, while adjusted profit was $2.06, ahead of analysts' s expectations of $1.96.

Results this year have shown that domestic loan growth is beginning to slow, likely due to government moves to calm the red-hot housing market and more cautious borrowing in general by heavily indebted Canadians.

But the banks largely bucked the trend this quarter, as RBC's Canadian banking income rose 24 percent to a record $1.1 billion from $888 million a year earlier, while CIBC's climbed a steady 8 percent to $594 million.

On the wholesale banking side, both RBC and TD showed strong year-over-year gains, as bond trading rebounded from weakness a year ago.

Both TD and CIBC shares were down in trading, which Barclays Capital John Aiken said was likely due to the fact that expectations for the banks had been lifted following the stronger results from BMO and Scotiabank earlier in the week.

He also warned not to read too much into the robust loan growth during the quarter.

"Extrapolating this quarter going forward is going to be difficult, given the expected slowdown on the mortgage side that we're likely to see domestically," he said.

Speaking on a conference call, Dave McKay, RBC's group head of Canadian banking, said the spring mortgage season had been very robust, but played down expectations that the strength will continue.

"As far as the mortgage business, you have to expect some slowdown," he said.

INVESTORS SEEK YIELD

Both CIBC and TD had been expected to raise their dividends, but TD's 7-percent payout increase was more than expected, and the bank also raised its target payout ratio -- the amount of profit it sets aside to pay out as dividends -- to a range of 40-50 percent from 35-45 percent.

TD chief financial officer Colleen Johnston said the decision to raise the ratio was prompted by feedback from investors.

"I think dividend yield is really highly valued in this low interest rate environment, and that was certainly an impetus for us to increase the payout range," she said in an interview.

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