Bank of Montreal's (BMO.TO: Quote) quarterly profit rose by a higher-than-expected 18 percent as capital markets income surged and a recent U.S. acquisition started to contribute, Canada's No. 4 lender said on Tuesday.

The results, the first in a wave of Canadian bank reports due over the next two weeks, boosted BMO's shares and suggested the bank's rivals may also outperform in a quarter that had been expected to be dismal for lenders.

They beat expectations on all the main factors, which is not only positive for BMO, but bodes well for the group, said John Aiken, an analyst at Barclays Capital.

BMO stock was up 3.3 percent at C$59.22 on the Toronto Stock Exchange just after midday, and shares of other Canadian banks were also hither.

Income for BMO's capital markets division more than doubled to C$279 million ($282 million) from C$130 million as trading revenue and mergers and acquisition activity rebounded from a poor performance a year earlier.

The beat was primarily driven by capital markets trading revenue, said National Bank Financial analyst Peter Routledge. The stress of the summer didn't get into their third-quarter results.

The banks' third quarter runs from May through July, meaning the results caught the leading edge of the market selloff that began in late July.

Profit at BMO's U.S. division rose 94 percent to $95 million, helped by the $4 billion acquisition of Wisconsin bank Marshall & Ilsley, a deal that closed about a month before the end of the quarter.

The M&I acquisition more than doubled BMO's branch count in the U.S. Midwest. BMO entered the region when it bought Harris Bank in the 1980s, and had been slowly expanding the franchise before the M&I transaction.

The bank said annual cost savings from the integration of M&I would exceed $300 million.

Canada's banks have been active acquirers in the wake of the global financial crisis. Their strong balance sheets and steady profits have enabled them to shop for bargains among their international rivals.

LOAN GROWTH OFFSETS NARROWING MARGINS

Net income rose to C$793 million, or C$1.27 a share, in the third quarter ended July 31, from C$669 million, or C$1.13 a share, a year earlier.

Adjusted earnings reached C$1.36 a share, the bank said, topping the average analyst estimate of C$1.31, according to Thomson Reuters I/B/E/S.

Profit at BMO's core Canadian retail banking operations rose a slim 1.8 percent to C$432 million. Loan growth offset narrowing interest margins, with rates still near historic lows.

Low rates had also eroded retail banking profit in the previous quarter, prompting dire warnings from analysts that revenue growth at Canadian banks would slow sharply.

In the event, the narrowing margins were not as bad as expected in the third quarter, Aiken said.

The implication from our standpoint is competitive pressures are still there but they didn't intensify in the quarter, which is definitely a positive against what the outlook was coming out of Q2, he said.

The stronger-than-expected profit performance also reflected credit quality and more effective cost controls -- a focus as revenue growth slows, he said.

Loan-loss provisions fell to C$174 million from C$214 million a year earlier.

Canadian banks have benefited from a steady decline in loan-loss provisions as the economy has healed in the wake of the 2008 financial crisis.

But analysts say the profit gains from lower provisions may soon run out, particularly as economic weakness in Europe and the United States raises the threat of loan defaults.

National Bank of Canada (NA.TO: Quote), the country's No. 6 bank, and Royal Bank of Canada (RY.TO: Quote), the No. 1 lender, report results on Thursday and Friday, respectively.