* BMO profit tops estimates
* Markets-related revenue rises, loan-loss provisions fall
* Shares up 0.6 pct
* Company to buy back up to 2.3 pct of shares
* CWB shares fall 3.5 pct as profit misses estimates
By Cameron French
TORONTO, Dec 4 (Reuters) - Bank of Montreal topped estimates with its fourth- quarter profit on Tuesday, but the stock failed to gain traction as investors took a cautious view of its lending performance, while smaller rival Canadian Western Bank missed estimates and fell 3.5 percent.
Profit at BMO, Canada's fourth-largest bank, was boosted by a doubling of wholesale banking income and a gain on U.S. loans that had previously been written down. BMO acquired Wisconsin lender Marshall and Illsley (M&I) last year, more than doubling the branch count of its U.S. midwest bank.
But the performance was marred by narrower interest margins on BMO's retail lending businesses, which drew attention in a lending climate that analysts expect to slow due to a softening Canadian housing market.
BMO, the second of Canada's "big five" banks to report year-end results, earned C$1.1 billion ($1.11 billion), or C$1.59 a share in the fourth quarter ended Oct 31. That compared with a year-earlier profit of C$768 million, or C$1.11 a share.
Adjusted profit was C$1.65 a share, well ahead of analysts' expectations of a C$1.43 per share profit.
"It was a sizeable beat, but when you scratch below the surface you're looking for sources of earnings that you can feel confident can be replicated into the future and we didn't see too much of that," said Brad Smith, an analyst at Stonecap Securities.
The bank's shares ended the session up 0.6 percent at C$59.63, only slightly outperforming its Toronto-listed Canadian rivals, even as the bank said it planned to buy back up to 2.3 percent of its shares.
Canadian banks are bracing for an expected slowdown on domestic consumer lending growth as a cooling housing market, combined with concerns about record Canadian debt loads, prompt more caution among borrowers.
Loan volume at BMO's flagship Canadian retail bank grew by about 8 percent year-over-year, but interest margins narrowed to 2.67 percent from 2.88 percent, as loans were renewed at current rock-bottom interest rates.
Income from the unit was flat at C$439 million.
While there are few signs that interest rates are set to rise, Frank Techar, BMO's head of personal and commercial banking, said the bank expects to slow the margin erosion by lowering its cost of capital.
"We are turning our attention to deposit growth. The single biggest opportunity we have to mitigate suppression of margins on this time is to increase our retail deposits growth," he said on a conference call.
Margin pressure also weighed on Canadian Western, Canada's seventh-largest bank by market capitalization, which posted a 20 percent profit gain. But the results disappointed investors who had been looking for a better result.
The bank earned C$43.0 million, or 55 Canadian cents a share, up from a year-earlier C$35.9 million, or 47 Canadian cents a share.
The result, the 98th consecutive quarterly profit for the Edmonton, Alberta-based bank, was driven by a 14 percent rise in loans and an C$8.5 million increase in net gains on securities. But it was held back by interest margins that narrowed to 2.67 percent from 2.79 percent.
"Net interest income was lower than we anticipated as greater-than-expected loan growth was offset by greater-than-anticipated margin pressure," RBC Capital Markets analyst Andre-Philippe Hardy said in a note.
Adjusted cash earnings of 56 Canadian cents a share fell just short of analysts' expectations of a profit of 58 Canadian cents a share.
Canadian Western raised its dividend by 6 percent to 17 Canadian cents a share, which analysts had expected. Its shares fell C$1.00 to C$28.00.
BMO's adjusted provisions for credit losses were C$113 million, down from C$281 million a year earlier, helped by the unexpected repayment of impaired loans acquired when BMO bought M&I.
BMO paid $4.1 billion for M&I, which it combined with its Chicago-based Harris Bank.
Excluding the impact of the impaired loans, profit for the U.S. bank fell 16 percent to C$130 million, due to a reduction in certain loan portfolios and regulatory changes.
Also driving BMO profit was a doubling of wholesale banking income, due largely to a jump in equity and interest rate trading revenues from a relatively weak quarter a year ago.
Stronger capital markets income was also key to Royal Bank of Canada's (RBC) better-than-expected 22 percent rise in quarterly income reported last week.
Toronto-Dominion Bank and Canadian Imperial Bank of Commerce will report on Thursday, while Bank of Nova Scotia will release results on Friday.