Toronto-Dominion Bank (TD.TO: Quote) boosted its dividend on Thursday as it reported that strong loan volumes in the United States and Canada drove it to a higher-than-expected quarterly profit, pushing its shares higher.

The strong result and dividend increase -- the second for TD this year -- cap a relatively strong fiscal third quarter for Canada's big banks, although economic turmoil and European debt problems promise difficulties ahead.

Profit at TD's flagship Canadian retail bank operations rose 13 percent due to loan and deposit growth, while its U.S. retail bank -- among the top 10 in the United States after six years of expansion -- had a 21 percent jump in profits.

Wealth management income rose 26 percent year-over-year.

The asset growth was very strong, said CIBC World Markets analyst Robert Sedran. The results out of the U.S. in particular are very encouraging.

The loan growth was partly offset by the impact of narrow interest margins, a problem that is likely to persist as interest rates stay low.

Wholesale banking profits dropped 40 percent as fixed income trading suffered.

I think the bigger issues around uncertainty created by European debt concerns, the U.S. debt ceiling, and the broader global economy created some challenges in markets, TD Chief Financial Officer Colleen Johnson told Reuters.  

About 25 minutes into trading on Thursday, TD shares were up 0.8 percent at C$78.10 on the Toronto Stock Exchange, while the broader market was down 0.5 percent.

ROUGH WATERS AHEAD

TD said earnings growth should moderate in coming quarters due to slower loan volume growth and margin pressure.

But Johnston said the bank will maintain its goal of annual growth of 7-10 percent in earnings.

While we do expect revenue growth to slow down, we're taking a hard look at our expenses, she said.

Sedran agreed that the sector faces challenges ahead.

The next four quarters will not be as powerful as the last four quarters for the sector, he said.

Net profit rose 23 percent to C$1.45 billion ($1.48 billion), or C$1.58 a share, in the quarter to July 31, up from C$1.18 billion, or C$1.29 a share, a year earlier.

Stripping out special items, the bank earned C$1.72 a share, handily beating analysts' expectations of C$1.62.

TD raised its dividend by 3 percent to 68 Canadian cents a share, the second Canadian bank to do so this quarter.

As well as its Canadian and U.S. retail banks, TD owns a 44 percent stake in online brokerage TD Ameritrade (AMTD.O: Quote).

TD closed a US$6.3 billion purchase of Chrysler Financial earlier this year and agreed in early August to buy Bank of America's (BAC.N: Quote) US$8.6 billion Canadian credit card portfolio.

Johnston acknowledged that weakness in the U.S. financial sector has provided opportunities and could continue to do so.

If we like the business and we think there's franchise value, we would definitely consider acquisitions that are financially and strategically compelling, she said.