Updates with details from conference calls, adds 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 the Canadian economy despite tensions in the Middle East.

The three banks are the first to report for the quarter in which the 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.

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.

"Our business clients consistently tell us that improving Canadian regulatory competitiveness is essential to unleashing Canadian growth and unlocking Canada's potential," he said, adding that the federal government's recent steps to set deadlines and simplify processes were positives. "They are a good start."

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% benefitting 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%. At National Bank, quarterly 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 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 1.5% in Toronto and BMO gained 0.6%.

($1 = 1.3833 Canadian dollars)