* Q1 EPS C$0.91, vs C$0.80 a year earlier
* Loan loss provisions appear to have peaked
* Shares fall 1.4 pct on profit-taking (Recasts with analyst comments, share price)
TORONTO, March 9 (Reuters) - Bank of Nova Scotia (BNS.TO) posted a 17 percent surge in quarterly profit on Tuesday, capping a stronger than expected earnings season for Canadian banks, but its shares fell as investors locked in profits after two weeks of gains.
The profit by Scotiabank, Canada's third-largest lender, ended the sector's earnings season on a high note and suggested the worst of the recession's credit woes were over and profit growth lay ahead.
A string of upside surprises by Scotiabank's rivals since Feb. 25 had raised the bar for the Toronto-based bank to surge past expectations, so its merely modest beat was met with selling across the financial services sector on The Toronto Stock Exchange.
"I wouldn't put too much stock in today's share performance. Scotia's first quarter was quite good but we're seeing a reaction to expectations that had been building up for a couple of weeks now," Edward Jones analyst Craig Fehr said.
"If we wanted to sum up the overriding trend for the quarter for the banks it would be early signs of credit stability, which is critical ... I think Q1 set the table for a transition year when headwinds subside and some of the underlying growth resumes."
Scotiabank reported higher profits, lower loan losses and stronger revenues than analysts had expected, echoing strength displayed earlier by other domestic banks, with the exception of Royal Bank of Canada RBC.TO, which missed expectations.
But shares of Scotiabank fell 1.4 percent to C$49.42 on the Toronto Stock Exchange. All of the country's big six banks were lower, and the financial services index was down 0.5 percent.
Scotiabank shares hit a 52-week high of C$50.36 on Monday, nearly double the C$25.28 52-week low reached a year ago. Canadian bank shares have surged in recent weeks as most exceeded first-quarter profit expectations.
NET INCOME HIGHER
Scotiabank said it had net income of C$988 million ($959 million), or 91 Canadian cents a share, in the first quarter ended Jan. 31. That compares with C$842 million, or 80 Canadian cents a share, a year earlier.
Diluted cash earnings, which add back amortization of intangible assets, were 93 Canadian cents a share, up from 82 Canadian cents a year earlier.
Analysts, on average, had expected 88 Canadian cents a share, according to Thomson Reuters I/B/E/S.
"Revenues, expenses and provisions for credit losses were better than our expectations. All three divisions' earnings were ahead of our estimates and capital ratios were also higher than expected," RBC Dominion Securities analyst Andre-Philippe Hardy said in a research note.
Return on equity, a key measure of profitability, rose to 17.4 percent from 16.2 percent.
The amount of money set aside to cover bad loans rose to C$371 million from C$281 million, but was down from C$420 million in the fourth quarter.
Executives told analysts in a conference call that loan loss provisions across portfolios, while lagging the overall economic recovery, appear to have peaked.
Consumers and businesses have struggled to pay back debts during the recession, taking a bite out of bank profits. Analysts have been watching loan loss provision levels to see if credit woes have turned the corner.
Domestic banking income rose 28 percent to a record C$560 million on the back of stronger lending, deposits and net interest income.
The gain more than offset continued difficulties in international banking, a big part of Scotiabank's business. Net income in that segment was C$294 million, down from C$388 million a year earlier, as loan losses rose and the stronger Canadian dollar hurt earnings.
Scotiabank is Canada's most international lender, with big operations in Latin America and the Caribbean.
The bank also improved on its capital position, with the Tier 1 capital ratio rising to 11.2 percent from 10.7 percent in the fourth quarter. That is in line with domestic rivals and well above the strength of most global players.
The cash leaves the bank well-positioned to make acquisitions, and Waugh noted that he saw "many opportunities" that fit Scotiabank's strategy of buying a small asset and then increasing control and share over time.
"We don't like large acquisitions, regardless of what the environment is, so we like to build on what we've got ... and we think adding on in moderate size is better than doing something big size," Waugh told analysts on a conference call.
"We see opportunities and we will prudently look at then as they come up."
($1=$1.03 Canadian) (Reporting by Andrea Hopkins; editing by Rob Wilson)