Bank of Montreal reported a higher-than-expected quarterly profit on Tuesday and said it was buying the Diners Club North America credit card business to double its corporate card portfolio.

The deal, combined with a 16 percent rise in quarterly earnings, emphasizes the relative strength of Canada's big lenders as they emerge from the financial crisis with excess capital and solid balance sheets.

BMO, Canada's fourth-largest bank, kicked off the earnings season for the big banks with net income of C$647 million ($610 million), or C$1.11 a share, for its fourth quarter ended Oct. 31, up from C$560 million, or C$1.06, a year earlier.

That was well above analysts' average estimate of 98 Canadian cents a share, according to Thomson Reuters I/B/E/S, and BMO shares rose at the open on the Toronto Stock Exchange before sinking back along with those of the other big banks.

BMO shares were down 0.3 percent at C$53.32 in early trade. The Toronto exchange's financial index was down 0.5 percent.

Earnings were ahead of our expectations on better-than-expected revenues and lower loan loss provisions than expected, RBC Dominion Securities analyst Andre-Philippe Hardy wrote in a note to clients.

Minutes before announcing the surprisingly strong results, Toronto-based BMO said it was buying Diners Club North America credit cards from Citigroup Inc.

The deal, part of Citigroup's strategy to shed non-core or unwanted assets, gives BMO exclusive rights to issue Diners Club cards in the United States and Canada. It will also more than double BMO's corporate card business, as many business travelers use Diners Club cards.

The terms of the deal were not disclosed.

While BMO said the deal would add nearly $1 billion of receivables and $7.8 billion of card transactions, Barclays Capital analyst John Aiken said the acquisition was more about BMO's attempts to make further inroads in the U.S. market than about a grab for earnings power.

While this may not be overly material to earnings -- representing less than 2 percent of BMO's business lending portfolio -- we do view it as an opportune expansion that leverages its Canadian/U.S. platforms, Aiken said in a research note.

Diners Club is well-known to U.S. consumers, while BMO is far from a household name, despite its big presence in the U.S. Midwest through its Chicago-based Harris Bank unit.

The companies expect the deal to close before the end of the March, pending regulatory approvals.

This acquisition will immediately enhance our competitive position by placing us among the top commercial card issuers in North America, said Frank Techar, the head of BMO's personal and commercial banking business.

RESPECTABLE PROFITS

Earnings for the fourth quarter showed strength across most of BMO's business lines and geographies, and the bank's Tier I capital ratio climbed to 12.2 percent from 11.7 percent in the third quarter. That's well above that of many global rivals, and suggests BMO is well-positioned for future acquisitions.

Macquarie analyst Sumit Malhotra said BMO's beat in the quarter was driven by expense management, noting that total expenses of C$1.9 billion were down 5 percent from the third quarter.

We view this as another 'grind-it-out' quarter of respectable profitability for BMO, Malhotra wrote in a research note.

The amount the bank set aside to cover bad loans fell to C$386 million from C$465 million, a sign that credit woes may be easing as the recession recedes, at least in Canada.

The dividend was unchanged at 70 Canadian cents per common share, as expected.

Net income in Canadian retail banking rose 22 percent to C$394 million in the quarter from a year earlier, as revenue increased across personal, commercial and cards businesses.

Income on the capital markets side was stagnant. It edged down to C$289 million from C$290 million, ending a string of big quarterly increases.

Net interest income rose 2 percent to C$1.44 billion from C$1.41 billion

BMO is the first of Canada's big six banks to report fourth-quarter earnings, with the others presenting results over the next three weeks.

($1=$1.06 Canadian)

(Additional reporting by Euan Rocha in Toronto and Dan Wilchins in New York; Editing by Peter Galloway)