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Bank of Montreal made a record $776-million.

Jim Ross for The Globe and Mail/jim ross The Globe and Mail

The massive share offering Bank of Montreal planned for later this year to pay down part of its $4.1-billion purchase of U.S. bank Marshall & Ilsley Corp. has been slashed in half, and might be reduced even further.

BMO plans to issue about $400-million of stock to pay for its acquisition of the Wisconsin-based bank, down from an $800-million offering that was originally planned, since the bank faces less pressure to amass capital ahead of new global banking rules.

Speaking on a conference call with analysts on Tuesday, as BMO reported profit rose 18 per cent in the first quarter, chief executive officer Bill Downe said the size of the offering could be reduced even further.

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That came as good news to investors concerned about the dilution of BMO's stock in order to pay for the acquisition, which has not yet closed but is the biggest in the bank's history.

BMO confirmed it was shrinking the size of the equity offering after regulators issued a timeline for banks to meet new global capital requirements that was more flexible than originally expected.

Under new international banking rules agreed to in September, 2010, global banks must increase their Tier 1 capital ratio to 3.5 per cent by 2013, and gradually boost that figure to 7 per cent by 2019.

BMO's increased profit was driven by higher earnings at its capital markets and wealth management divisions and better loan growth.

The bank made a record $776-million, or $1.30 a share, in the first quarter, compared to profit of $657-million, or $1.12, during the same period a year ago. Revenue rose 11 per cent to $3-billion.

"What I like is revenue growth everywhere," Mr. Downe said in an interview, referring to the performance of BMO's various divisions during the quarter. "Which makes me believe the consistency of the strategy across the businesses and the alignment is starting to work extremely well."

The earnings were slightly higher than the $1.29 a share that analysts were expecting.

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Provisions for credit losses, the amount of money banks set aside to cover bad loans, fell to $248-million, a drop of $85-million from a year ago and down $5-million from the previous quarter.

Profit at the capital markets division rose 21 per cent to $257-million, driven by a better market for underwriting in the quarter ending Jan. 31. BMO's private client group made $153-million in the quarter, up 38 per cent.

Retail banking was mixed, with Canadian profit from its branch operations rising 10 per cent to $444-million, while earnings from the bank's U.S. division fell 17 per cent to $42-million, due to impaired loans.

The U.S. division has struggled amid the slumping economic recovery south of the border, which has hurt lending. However, analysts said the M&I purchase should help on that front, by giving the bank a greater base in the Midwest. Its existing Harris Bank network is focused around the Chicago area.

"Profitability struggles continue," analyst Peter Routledge at National Bank of Canada said of the U.S. retail bank operations in a research note to clients. "BMO has addressed this challenge by purchasing M&I … so the long-term outlook for BMO's U.S. franchise has improved."

However, Mr. Routledge noted BMO faces the challenge of returning M&I's struggling operations to profitability, which were hit hard by the downturn.

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BMO announced its dividend for the second quarter would be unchanged at 70 cents. BMO faced a higher tax rate than usual in the quarter which clouded its performance somewhat, the bank said.

The bank's shares fell slightly - dropping less than 1 per cent to $61.77 by the end of the day - in spite of the record quarter for profit. Analyst said the market reaction was due to higher expectations for bank earnings after CIBC and National Bank both beat Bay Street's expectations by a considerable margin.

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