Adds details in paragraphs 6-7 from National Bank call, updates shares

By Nivedita Balu and Arasu Kannagi Basil

May 27 (Reuters) - Canadian banks BMO Financial BMO.TO, Bank of Nova Scotia BNS.TO and National Bank of Canada NA.TO on Wednesday beat analysts’ estimates for quarterly profits, strengthened by domestic business and capital markets income, while signaling an optimistic outlook for Canada despite tensions in the Middle East.

The three banks are the first to report for the quarter, in which big lenders faced continued uncertainty from U.S.-Canada trade tensions, as well as broader economic challenges from the Middle East conflict and higher commodity prices weighing on consumer wallets.

"I'm actually relatively optimistic about the outlook for Canada, despite the war ... We're an oil-exporting nation, you've got a new business-friendly government that is trying to get things done," Scotiabank CEO Scott Thomson told analysts.

"You've seen a lot of foreign money leave Canada, and now you have a lot of foreign money looking at Canada for foreign direct investment," he said. Canadian pension funds are also investing more domestically, he said.

BMO's CEO Darryl White said clarity on U.S.-Canada trade and new infrastructure investments could drive a stronger growth outlook in the medium term, but the Canadian economy remains mixed amid inflation and employment challenges.

National Bank CEO Laurent Ferreira said there was a lull in business investment, but added he was encouraged by the government's focus on infrastructure projects.

"This uncertainty could further impact business investment ... but if we look beyond the near term, Canada is well positioned to benefit from ongoing efforts to reindustrialize our economy," Ferreira told analysts.

The big banks, which control over 90% of the market, tend to benefit from key projects and also play a role on the advisory side.

For the quarter, Scotiabank’s domestic retail business grew 53%, benefiting from growth in personal day-to-day and savings deposits and a 3% rise in loans. At BMO, earnings were supported by strong fee-driven income at its capital markets segment, where adjusted net income grew 46%. National Bank's profit was helped by an 18% rise in earnings in both personal banking and wealth management.

CHALLENGES REMAIN

Canadian banks, renowned for their resilience, have built strong reserves underpinned by robust regulatory oversight, diversified their businesses and maintained conservative lending practices, allowing them to withstand challenges that have gripped the global banking industry.

Still, the banks are preparing for uncertainty by putting aside large chunks of money for potentially souring loans to shield their profits. Scotiabank's loan loss provisions stood at C$1.22 billion ($881.95 million), while analysts had projected C$1.11 billion, according to LSEG data. BMO recorded provisions of C$739 million, compared with estimates of C$787 million. National Bank's provisions of C$233 million were lower than the estimate of C$255 million.

BMO's Chief Risk Officer Piyush Agrawal said there is pressure building with delinquency rates rising, but the lender was working with consumers to help them. Scotiabank executives said high energy costs, trade uncertainty, and higher unemployment are pressuring both consumers and businesses.

"There is resilience, yes. But does that continue?" Michael Dehal, a senior portfolio manager at ​Dehal Investment Partners at Raymond James said, pointing to Equifax data that showed insolvency volumes have increased to levels not seen since 2009. "I think that's where you're going to see cracks with these banks performing going forward."

BMO, the country's third-largest bank by market capitalization, recorded adjusted earnings of C$3.67 per share, compared with the average analysts' estimate of C$3.45. Scotiabank reported earnings of C$2.02 per share, comfortably beating the estimate of C$1.94, while National Bank's earnings of C$3.23 beat the estimate by 10 Canadian cents.

Scotiabank shares were up 1% in Toronto and BMO was marginally up. National Bank's shares were down 2.4%.

($1 = 1.3833 Canadian dollars)