* Domestic loan growth helps BMO, Scotiabank top estimates
* Scotiabank hikes dividend
* BMO holds dividend steady, some had expected increase
* BMO shares rise 0.4 pct, Scotiabank drops 1.7 pct
TORONTO, Aug 27 (Reuters) - Bank of Nova Scotia and Bank of Montreal kicked off the reporting season for Canadian banks on Tuesday with slightly stronger-than-expected results that highlighted the resilience of their domestic franchises but weakness in international operations.
Despite concerns that a cooling housing market in Canada would dry up growth in loan profits, domestic lending income was up at both banks, likely helped by home buyers rushing to lock in cheap mortgages before rates move higher.
That compensated for international banking income that fell short of expectations and pressured the shares of Scotiabank, the most internationally focused of the country's banks.
"The story for the quarter so far is strength in Canada and weakness outside Canada," said Peter Routledge, a banking analyst at National Bank Financial.
Scotiabank, Canada's No. 3 lender, posted a 17 percent jump in profit after stripping out the impact of last year's sale of the bank's main Toronto office tower, a deal that added C$614 million to 2012 results.
On a net basis, the bank earned C$1.8 billion, or C$1.37 a share, down from C$2.1 billion, or C$1.69 a share.
Excluding items, it earned C$1.32 a share, exceeding the C$1.30 average estimate of analysts, according to Thomson Reuters I/B/E/S.
Scotiabank also raised its dividend for the fourth time in two years, boosting its quarterly payout by 3.3 percent.
But its stock fell 1.7 percent, as investors reacted to an underwhelming performance at its sizeable international unit.
"The earnings were broadly in line, so.... I would say the decline in the shares reflected the market's concerns over the results from that (international) segment as well as the outlook," said Robert Sedran, an analyst at CIBC World Markets.
BMO, the country's No. 4 bank, said net profit rose 17 percent to C$1.14 billion, or C$1.68 a share, which topped analysts' estimate of a profit of C$1.52 a share, according to Thomson Reuters I/B/E/S.
The bank's shares rose just 0.4 percent, which analysts attributed in part to its decision not to raise its dividend.
The results from Scotiabank and BMO are the first of a Canadian bank reporting season that had been expected to show pressure on domestic earnings growth due to borrower fatigue and a housing market that has cooled after a decade-plus run.
Instead, domestic income at both banks was an area of strength.
"The Canadian banking area in both of them did quite well, a bit of a surprise with everybody looking for a slowing in growth because of the mortgage situation and the high debt that Canadian consumers are carrying," said John Kinsey, a portfolio manager at Caldwell Securities, which manages about C$1 billion and holds Canadian bank stocks.
Scotiabank's Canadian banking income jumped 13 percent to C$590 million, helped by the 2012 acquisition of ING Groep's Canadian online bank, but also driven by widening interest margins, marking a reversal of recent trends.
At BMO, Canadian retail bank profit rose 9 percent to C$497 million, as a narrowing of interest margins was more than offset by a strong 10 percent growth in loans.
Intense competition had prompted Canadian banks to cut mortgage rates to rock-bottom levels in recent years, eating into the profit they make on loans, although fixed mortgage rates - which typically follow the path of 5-year bond yields - have begun to rise in Canada over the past month.
That could result in wider margins in coming quarters, and also likely helped boost sales volumes during the third quarter, as buyers anticipating higher rates rushed to buy homes at cheap rates, Frank Techar, the head of BMO's Canadian retail bank, said on a conference call.
"I do think there's been a little bit of bring-forward with respect to the perception that rates are going up," he said.
However, once that boost runs out, higher rates should further put the brakes on home sales, Techar added.
The strength in Canada offset a weaker performance for both banks' international divisions, which they have been bulking up in recent years as a vehicle for growth outside Canada's entrenched banking market.
BMO's acquisition of Wisconsin lender Marshall & Ilsley in 2011 essentially doubled the size of its Chicago-based Harris Bank unit, giving it exposure to U.S. Midwest clients in the midst of a rebound from the 2008 banking crisis.
Net income at Harris climbed 7 percent to $147 million, with the result pinched by interest margins that narrowed by 41 basis points. On an adjusted basis, profit rose 4 percent.
Scotiabank, meanwhile, has been steadily building a footprint through Latin America and Asia.
Scotiabank's profit from its international unit jumped 26 percent to C$494 million, but that was largely due to a C$90 million gain on the sale of an insurance subsidiary by Scotiabank's 49 percent-owned Thanachart Capital Pcl in Thailand.
Excluding that and some other items, income from the unit rose 3 percent on the year and fell 4 percent from the second quarter.
Royal Bank of Canada and Toronto-Dominion Bank , the country's two largest banks, as well as No. 5 lender Canadian Imperial Bank of Commerce, will report results on Thursday.