Market rally loses steam despite drop in US claims

LONDON (AP) — Higher-than-expected Chinese inflation figures on Thursday gave some investors a chance to cash in recent gains on the world's financial markets in spite of more good news from the U.S. with another fall in weekly jobless claims.

Nonetheless, many of the world's stock indexes remained within touching distance of their recent record highs after the 4,000 fall in U.S. claims to a new five-year low of 327,000.

"The latest reading continues to come in below forecast and so provides a positive surprise," said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co.

However, the claims figures, coming on top of last week's surprisingly strong monthly nonfarm payrolls data for April, failed to help European stocks recover earlier losses or and give an early boost to U.S. trading.

In Europe, Germany's DAX, which has set a series of record highs, was up a further 0.16 percent at 8,262. The CAC-40 in France ended Thursday 0.7 percent lower at 3,942 while the FTSE 100 index of leading British shares dropped slightly, 0.02 percent, to 6,581, broadly unaffected by the expected decision by the Bank of England to keep its monetary policy unchanged.

Trading in many parts of Europe was light as many countries were on a public holiday, though markets remained open.

In the U.S., the Dow Jones industrial average was down 0.05 percent at 15,1097 while the broader S&P 500 index fell 0.2 percent to 1,628.

The claims figures helped shore up the dollar, which was making another attempt to breach the 100 yen mark. Several attempts over the past few weeks have just fallen short. It was 0.4 percent higher at 99.34 yen, while the euro was trading 0.4 percent lower at $1.3104.

Earlier, government figures showing China's consumer price index rose 2.4 percent in the year to April, up from 2.1 percent the previous month and ahead of expectations of a more modest advance to 2.2 percent, had given the markets a soft tone.

Many reasons have been cited for the recent strength of stock markets around the world, including hopes over the U.S. economy, a seeming easing in Europe's debt crisis and an aggressive new monetary policy from the Bank of Japan.

Earlier, Japan's Nikkei 225 index dropped 0.7 percent to 14,191.48 — a modest retreat after a strong run that's sent the Nikkei up to five-year highs.

Another aspect of the Bank of Japan's massive monetary stimulus has been to weaken the yen dramatically. That feeds through into stocks as a lower currency makes the country's exports relatively cheaper.

Elsewhere in Asia, Hong Kong's Hang Seng fell 0.1 percent to 23,211.48 after the Chinese inflation figures. However, mainland Chinese shares were mixed with the Shanghai Composite Index down 0.6 percent to 2,232.97 while the smaller Shenzhen Composite Index gained 0.2 percent to 967.69.

South Korea's Kospi index was also in focus as it jumped 1.2 percent to 1,979.45 after the Bank of Korea lowered its benchmark interest rate for the first time in seven months. In announcing that it was lowering the rate by a quarter percentage point to 2.5 percent, the Bank of Korea became the latest central bank to take steps to boost flagging economic growth.

Oil prices drifted lower following recent strong gains — the benchmark New York contract was down 83 cents at $95.79 a barrel.

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Soccer-Australia eye further East Asia Cups despite ASEAN move

By Patrick Johnston

April 9 (Reuters) - Australia will continue to compete in future editions of the East Asian Cup despite their impending membership of Southeast Asia's ASEAN Football Federation (AFF), officials told Reuters on Tuesday.

The Socceroos will have their AFF invite affiliation upgraded at the federation's Extraordinary Congress in August but have no plans to compete in its biennial Suzuki Cup against teams more than 100 places below them in the FIFA rankings.

"Australia was invited to participate in this year's EAFF Cup. If invited again we will continue to accept and participate in this competition," a Football Federation of Australia spokesman said.

"At this point we would not seek to enter senior national teams into the Suzuki Cup, however, Australia is committed to entering underage and Futsal teams into AFF competitions."

Australia joined the Asian Football Confederation in 2006 after moving from the less competitive Oceania Federation where they routinely racked up double-digit victories over largely amateur sides in the Pacific Islands.

The Socceroos, ranked 39th by world governing body FIFA, were then made invite members of the AFF and have routinely competed in youth competitions in the 11 nation federation.

Last week at an AFF meeting in Malaysia they had their entry 'unanimously supported' by members, the spokesman said.

Australia will make their debut in the EAFF Cup in July after coming through qualifiers against North Korea, Hong Kong, Taiwan and Guam undefeated with a largely youthful side in December.

The four team finals also feature Japan, China and hosts South Korea. (Reporting by Patrick Johnston in Singapore)

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Despite threats, risks temper Korea war tensions

TOKYO (AP) — As tensions rise on the Korean Peninsula, one thing remains certain: All sides have good reason to avoid an all-out war. The last one, six decades ago, killed an estimated 4 million people.

North Korea's leaders know that war would be suicidal. In the long run, they cannot expect to defeat the United States and successfully overrun South Korea. War would be horrific for the other side as well. South Korea could suffer staggering casualties. The U.S. would face a destabilized major ally, possible but unlikely nuclear or chemical weapons attacks on its forward-positioned bases, and dramatically increased tensions with North Korea's neighbor and Korean War ally, China.

Here's a look at the precarious balance of power that has kept the Korean Peninsula so close to conflict since the three-year war ended in 1953, and some of the strategic calculus behind why, despite the shrill rhetoric and seemingly reckless saber-rattling, leaders on both sides of the Demilitarized Zone have carefully avoided going back over the brink.

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THE SEA OF FIRE

Even without nuclear weapons, North Korea has an ace in the hole. Most experts believe its claims to have enough conventional firepower from its artillery units to devastate the greater Seoul area, South Korea's bustling capital of 24 million. Such an attack would cause severe casualties — often estimated in the hundreds of thousands — in a very short period of time.

Many of these artillery batteries are already in place, dug in and very effectively camouflaged, which means that U.S. and South Korean forces cannot count on being able to take them out before they strike. Experts believe about 60 percent of North Korea's military assets are positioned relatively close to the Demilitarized Zone separating the countries.

North Korea's most threatening weapons are its 170 mm Koksan artillery guns, which are 14 meters long and can shoot conventional mortar ammunition 40 kilometers (25 miles). That's not quite enough to reach Seoul, which is 50 kilometers (30 miles) from the DMZ. But if they use rocket-assisted projectiles, the range increases to about 60 kilometers (37 miles). Chemical weapons fired from these guns could cause even greater mayhem.

North Korea experts Victor Cha and David Kang posted on the website of Foreign Policy magazine late last month that the North can fire 500,000 rounds of artillery on Seoul in the first hour of a conflict.

Even so, not everyone believes North Korea could make good on its "sea of fire" threats. Security expert Roger Cavazos, a former U.S. Army officer, wrote in a report for the Nautilus Institute last year that, among other things, North Korea's big guns have a high rate of firing duds, pose more of a threat to Seoul's less populated outer suburbs, and would be vulnerable to counterattack as soon as they start firing and reveal their location.

"North Korea occasionally threatens to "turn Seoul into a Sea of Fire," he wrote. "But can North Korea really do this? ... The short answer is they can't; but they can kill many tens of thousands of people, start a larger war and cause a tremendous amount of damage before ultimately losing their regime."

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FIRST STRIKES, PRE-EMPTIVE STRIKES

This is what both sides say concerns them the most.

North Korea says it is developing nuclear weapons and long-range missiles as a deterrent to keep the United States or South Korea from attacking it first. The reasoning is that Washington will not launch a pre-emptive strike if North Korea has a good chance of getting off an immediate — and devastating — response of its own.

Along with its artillery aimed at Seoul and other targets in South Korea, North Korea is developing the capacity to deploy missiles that are mobile, thus easier to move or hide. North Korea already has Rodong missiles that have — on paper at least — a range of about 1,300 kilometers (800 miles), enough to reach several U.S. military bases in Japan. Along with 28,000 troops in South Korea, the U.S. has 50,000 troops based in Japan.

North Korea is not believed to be capable of making a nuclear weapon small enough to fit on a long-range missile capable of hitting the United States. But physicist David Albright, president of the Institute for Science and International Security, believes it may be capable of mounting nuclear warheads on Rodongs. In any case, Pyongyang is continuing to pursue advancements, apparently out of the belief that it needs nuclear-tipped missiles capable of reaching the U.S. to have a credible deterrent.

The United States rejects the North's claim that such a deterrent is necessary, saying it does not intend to launch pre-emptive strikes against North Korea. At the same time, Washington has made it clear that it could.

During ongoing Foal Eagle military maneuvers in South Korea, two U.S. B-2 strategic stealth bombers, flying from their base in Missouri, conducted a mock bombing run on a South Korean range. The B-2 is capable of carrying nuclear weapons, precision bombs that could take out specific targets such as North Korean government buildings, and massive conventional bombs designed to penetrate deep into the ground to destroy North Korean tunnels and dug-in military positions. One big problem, however, is determining where the targets are.

Amid heightened tensions over North Korea's nuclear weapons program in 1994, President Bill Clinton reportedly considered a pre-emptive strike, but decided the risks were too high.

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CHINA'S DILEMMA

Without China, North Korea wouldn't exist. The Chinese fought alongside the North Koreans in the Korean War and have propped up Pyongyang with economic aid ever since.

Beijing has grown frustrated with Pyongyang, especially over its nuclear program. China and the U.S. worked together in drafting a U.N. resolution punishing the North for its Feb. 12 nuclear test.

But China still has valid reasons not to want the regime to suddenly collapse.

War in Korea would likely spark a massive exodus of North Korean civilians along its porous 1,300-kilometer (800-mile) border, which in turn could lead to a humanitarian crisis or unrest that the Chinese government would have to deal with. The fall of North Korea could pave the way for the United States to establish military bases closer to Chinese territory, or the creation of a unified Korea over which Beijing might have less influence.

China, the world's second-largest economy, also has significant trade with South Korea and the United States. Turmoil on the Korean Peninsula would harm the economies of all three countries.

Patrick Cronin, an Asia expert at the Center for a New American Security and a senior State Department official during the George W. Bush administration, said Beijing is helping set up back-channel negotiations with North Korea to ease the tensions. But he warned that the U.S. isn't likely to win China over as a reliable partner against North Korea beyond the current flare-up.

"There are limits to how far China and the U.S. have coincidental interests with regard to North Korea," he said.

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Korean border open despite NKorean hotline cut

SEOUL, South Korea (AP) — A day after shutting down a key military hotline, Pyongyang instead used indirect communications with Seoul to allow South Koreans to cross the heavily armed border and work at a factory complex that is the last major symbol of inter-Korean cooperation.

Business was operating normally at the Kaesong industrial complex in North Korea, despite Pyongyang's shutting down of the hotline usually used to arrange passage for workers and goods through the Demilitarized Zone. The military communication channel, which consists of six telephone, fax and reserve lines, was virtually the last remaining direct link between the rival Koreas, which do not have diplomatic relations.

South Korean officials say North Korea has shut down the hotline but verbally approved the crossing Thursday by telling South Koreans at a management office at the factory in North Korea. Those South Koreans then called officials in South Korea. Both governments prohibit direct contact with citizens on the other side, but Kaesong has separate telephone lines that allow South Korean managers there to communicate with people in South Korea.

Technically, the divided Korean Peninsula remains in a state of war. North Korea also halted communications in 2009, creating a cross-border shutdown that left hundreds of South Korean workers stranded in the North for several days, until the line was restored.

The hotline shutdown follows a torrent of bellicose rhetoric in recent weeks from North Korea, which is angry about annual South Korea-U.S. military drills and U.N. sanctions over its nuclear test last month. North Korea calls the drills rehearsal for an invasion; Seoul and Washington say the training is defensive in nature and that they have no intention of attacking.

North Korea's threats and provocations are seen as efforts to provoke the new government in Seoul, led by President Park Geun-hye, to change its policies toward Pyongyang. North Korea's moves at home to order troops into "combat readiness" are seen as ways to build domestic unity as young leader Kim Jong Un strengthens his military credentials.

North Korea previously cut Red Cross phone and fax hotlines with South Korea, and another communication channel with the U.S.-led U.N. command at the border between the Koreas. Three other telephone hotlines used only to exchange information about air traffic were still operating normally Thursday, according to South Korea's Air Traffic Center.

North Korea said there was no need for communication between the countries in a situation "where a war may break out at any moment."

In Washington, U.S. State Department spokesman Patrick Ventrell told reporters that North Korea's "latest threat to cut off communication links coupled with its provocative rhetoric is not constructive to ensuring peace and stability on the peninsula."

Although North Korea has vowed nuclear strikes on the U.S., analysts outside the country have seen no proof that North Korean scientists have yet mastered the technology needed to build a nuclear warhead small enough to mount on a missile.

Park so far has outlined a policy that looks to re-engage North Korea, stressing the need for greater trust with North Korea while saying Pyongyang will "pay the price" for any provocation. Last week she approved a shipment of anti-tuberculosis medicine to the North.

Aside from Kaesong, other rapprochement projects created during a previous era of detente, including the reunions of families separated by the Korean War and tours to a scenic North Korean mountain, have stopped amid tensions in recent years.

But the border was still open Thursday. About 160 South Koreans traveled to the Kaesong complex from the South, according to Seoul's Unification Ministry. The total number of South Koreans at Kaesong on Thursday was more than 1,000.

"Nothing good happens when (the Koreas) are in conflict. I just hope that both the North and the South will maintain a good relationship and show a more harmonious attitude," Kim Jong-in, one of the South Korean workers, told The Associated Press in Paju, which is near the border, on Thursday before departing for Kaesong.

Since 2004, the Kaesong factories have operated with South Korean money and know-how, with North Korean factory workers managed by South Koreans.

Using North Korea's cheap, efficient labor, the Kaesong complex has produced $470 million worth of goods in 2012. Inter-Korean trade, which includes a small amount of humanitarian aid sent to the North and components and raw materials sent to Kaesong complex to build finished products, amounted to nearly $2 billion in 2012, according to South Korea's Unification Ministry.

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Associated Press writers Sam Kim and Youkyung Lee contributed to this report.

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US aids Honduran police despite death squad fears

TEGUCIGALPA, Honduras (AP) — The U.S. State Department, which spends millions of taxpayer dollars a year on the Honduran National Police, has assured Congress that money only goes to specially vetted and trained units that don't operate under the direct supervision of a police chief once accused of extrajudicial killings and "social cleansing."

But The Associated Press has found that all police units are under the control of Director General Juan Carlos Bonilla, nicknamed the "Tiger," who in 2002 was accused of three extrajudicial killings and links to 11 more deaths and disappearances. He was tried on one killing and acquitted. The rest of the cases were never fully investigated.

Honduran law prohibits any police unit from operating outside the command of the director general, according to a top Honduran government security official, who would only speak on condition of anonymity. He said that is true in practice as well as on paper.

Celso Alvarado, a criminal law professor and consultant to the Honduran Commission for Security and Justice Sector Reform, said the same.

"Every police officer in Honduras, regardless of their specific functions, is under the hierarchy and obedience of the director general," he said.

The official line from Honduras, however, is that the money does not go to Bonilla.

"The security programs that Honduras is implementing with the United States are under control of the ministers of security and defense," said Foreign Minister Arturo Corrales, who negotiates the programs with the State Department.

But the security official attributed the contradiction to the politics necessary in a country in the grip of a security emergency.

With 91 murders per 100,000 people, the small Central American nation is often called the most violent in the world. An estimated 40 percent of the cocaine headed to the U.S. — and 87 percent of cocaine smuggling flights from South America — pass through Honduras, according to the State Department.

The allegations against Bonilla, along with other concerns about police and military killings, prompted the U.S. Congress to freeze an estimated $30 million in Honduran aid last August. Most has been restored under agreements with the U.S. Department of State over the monitoring of Honduran operations receiving U.S. money.

The agreement doesn't specifically mention Bonilla, but Vermont Sen. Patrick Leahy, who has led a Congressional group that has questioned human rights violation in Honduras, said last week that he made his intentions clear:

"No units under General Bonilla's control should receive U.S. assistance without credible information refuting the serious allegations against him," Leahy said in an email to the AP.

That information so far has not been provided by the State Department, and the AP's findings have prompted more questions.

"Senator Leahy has asked the State Department to clarify how they differentiate between what they told the Congress and what is being said by those within Honduran police units under his authority," Leahy aide Tim Rieser said Friday. "Sen. Leahy, like others, made clear early on his concerns about Gen. Bonilla and the conduct of the Honduran police."

Dozens of U.S. Congressmen, Leahy chief among them, have been raising concerns for many years about abuses of authority and human rights violations by the Honduran police, a force of 14,000 officers that is considered among the most corrupt in the world.

The AP reported on Sunday that two gang-related people detained by police in January have disappeared, fueling long-standing accusations that the Honduran police operate death squads and engage in "social cleansing." It also found that in the last three years, Honduran prosecutors have received as many as 150 formal complaints about death squad-style killings in the capital of Tegucigalpa, and at least 50 more in the economic hub of San Pedro Sula.

The country's National Autonomous University, citing police reports, has counted 149 civilians killed by police in the last two years, including 25 members of the "18th Street" gang, one of the largest and most dangerous in the country.

California Rep. Sam Farr sent the AP report to every member of Congress on Friday, saying, "I share the concerns outlined in this article about the continued lack of investigations into human rights violations at the hands of Honduran law enforcement officials."

U.S. law, according to an amendment that bears Leahy's name, requires the State Department to vet foreign security forces receiving U.S. aid to make sure the recipients have not committed gross human rights violations. If violations are found, the money is withheld. The State Department in a report last August said Honduras met the provisions of the Foreign Operations and Related Programs Act, which requires that the secretary of state provide Congress proof that Honduras is protecting freedom of expression and investigating and prosecuting all military and police personnel accused of human rights violations.

The department "has established a working group to examine thoroughly the allegations against (Bonilla) to ensure compliance with the Leahy Law," the State Department report to Congress said. "While this review is ongoing, we are carefully limiting assistance to those special Honduran law enforcement units, staffed by Leahy-vetted Honduran personnel who receive training, guidance, and advice directly from U.S. law enforcement, and not under Bonilla's direct supervision."

When asked by AP if the specially vetted Honduran police units working with the U.S. Embassy report to Bonilla, the Honduran security official said: "Yes, that's how it works, because of personal loyalty and federal law."

U.S. support goes to Honduran forces working with the U.S. Drug Enforcement Administration on anti-narcotics operations, and anti-gang, anti-kidnapping and border-security units, according to an embassy official who was not authorized to speak on the record.

On Monday, the State Department announced another $16.3 million in support to Honduran police and prosecutors to battle violence and money laundering and to improve border security. Some of the U.S. money will go to the Gang Resistance Education and Training program under the director of community policing, who also told the AP that he reports directly to Bonilla.

"I only report to the director general, all of the programs of the Honduran police are directed personally by him," said Otoniel Castillo, a police sub-commissioner. "He has a personal and intense closeness to all projects of international cooperation, especially because of his good relationship with the U.S. Embassy."

Assistant Secretary of State William R. Brownfield, who appeared on Monday with the country's vice president to announce the new funding, did not answer questions.

"The United States undertakes stringent vetting procedures, as required by U.S. law, to ensure U.S. assistance doesn't go to individuals or units in the Honduran police and military if there is credible information they're linked to human rights abuses," said William Ostick, a spokesperson in the Western Hemisphere Affairs Bureau of the State Department. "We're in close communication with the U.S. Congress and Senator Leahy on this issue. Promoting human rights and the rule of law is, and will remain, central to our engagement in Honduras."

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Alberto Arce on Twitter: (at)alberarce

Katherine Corcoran on Twitter: (at)kathycorcoran

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Argentine leader wishes pope well despite clashes

BUENOS AIRES, Argentina (AP) — President Cristina Fernandez will travel to the Vatican to attend her fellow Argentine Jorge Bergoglio's first Mass as Pope Francis on March 19, and she sent him a warm congratulations letter despite their profound differences over politics.

Bergoglio and Fernandez clashed so often that his official biographer, Sergio Rubin, compared them to "oil and water." When Bergoglio urged parishioners to join a campaign he called "God's war" against gay marriage, she compared the Argentine church leader's tone to the Middle Ages and the Inquisition. In 2010, Argentina became the first country in Latin America to legalize gay marriage.

But Wednesday night, her spokesman Alfredo Scoccimarro announced that "she's going to the assumption, let there be no doubt."

In her open letter, she expressed to "your Holiness my consideration and respect."

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Canada trims growth outlook despite February jobs surge

OTTAWA (Reuters) - The Canadian government cut its forecast for 2013 economic growth on Friday, based on private sector estimates, even as new employment data for February hinted at a comeback after the two weakest quarters since the 2008-09 recession.

The weaker, near-term outlook, while expected, is another challenge for the Conservative government, which is grappling with a significant hit to revenues as it puts the final touches on its budget for the 2013-14 fiscal year.

The numbers will form the basis for Finance Minister Jim Flaherty's fiscal projections in the next budget, expected before the end of March.

"The growth projections are slightly lower in the near term, as I expected ... mainly in 2013, 2014," Flaherty said after a meeting with the 11 private sector economists surveyed by his office.

"The factors involved there are the continuing issues, challenges in Europe and the United States," he said.

Breaking with his usual practice, Flaherty did not give precise figures. But five of the economists gave reporters their individual growth forecasts for this year, ranging from 1.5 percent to 1.8 percent. The average forecast in October was 2.0 percent.

"We still expect to see at least better numbers than we saw in the last half of 2012," said Avery Shenfeld, chief economist at the Canadian Imperial Bank of Commerce.

The news came after Statistics Canada data on Friday showed that following losses in January, the job market added 50,700 net new positions in February, above the 8,000 expected by market players.

Most of the gains were in the services industries while manufacturers saw hefty layoffs for the second straight month.

The jobless rate stayed the same at 7.0 percent as more people participated in the labor market.

But the data, based on interviews with households, is very volatile from month to month and analysts have noted that the outsized job growth in late 2012 bore little relation to economic growth which slowed to a crawl.

"It would be difficult to see job gains on this order going forward, so we should see a pullback in coming months," said Sal Guatieri, senior economist at BMO Capital Markets.

On average, some 29,000 jobs were created a month over the past six months.

Paul Ferley, assistant chief economist at the Royal Bank of Canada, was slightly more upbeat.

"Certainly, it bodes well for growth to rebound in the first quarter after disappointing gains through the second half of last year," he said.

JOB-FILLED RECOVERY

Indeed, financial markets welcomed the news which coincided with an unexpectedly sturdy increase in U.S. hiring in February and the lowest U.S. unemployment rate in four years.

The Canadian dollar strengthened to a one-week high after the strong Canadian and U.S. employment data. The currency rose to C$1.0234 to the greenback, or 97.71 U.S. cents, soon after the employment data. It later pared the gains slightly to C$1.0283.

Unlike the U.S., Canada had already recovered all the jobs lost during the global downturn of 2008 by early 2011 and in the past 12 months it added another 336,000.

But the economy has struggled to gain further traction in recent months. Exports remain weak and a steep discount on the price of Canadian oil is cutting into the Conservative government's revenues.

Flaherty said that although government revenues would take "a significant hit" from lower-than-expected growth in nominal gross domestic product, Ottawa would eliminate its budget deficit, previously estimated at C$26 billion for this year, in the 2015/2016 fiscal year as promised.

"There are a number of measures we can take to do that, and you'll see them in the budget," he said.

The main opposition party, the New Democrats, urged the ruling Conservatives to focus on bolstering growth, not more spending cuts.

"The news from Canada's private sector economists is worrying and in stark contrast to what Minister Flaherty has been telling Canadians," said Peggy Nash, the party's spokeswoman on finance policy.

"What Canadians need is a real plan to spur investments and create jobs, not more reckless cuts," she said.

2013 BETTER THAN 2012

Most policy makers insist that 2013 looks brighter than last year, when the economy grew just 1.8 percent. The Bank of Canada expects annualized growth of 2.3 percent in the first quarter versus 0.6 percent in the fourth.

The central bank signaled this week it is in no rush to raise interest rates after a prolonged pause. It still said its next move would be a hike rather than a cut.

There was fresh evidence on Friday that Canada's recently booming housing market, a top concern for the government in Ottawa, was cooling.

Housing starts climbed in February from January, the Canada Mortgage and Housing Corp said, but the six-month trend level showed a continuation of a downward slope that began in the middle of 2012 when the market peaked.

The labor productivity of Canadian businesses edged up 0.1 percent in the fourth quarter after two consecutive declines, Statscan said. But overall in 2012, productivity also increased by a paltry 0.1 percent compared with a 0.9 percent gain in the United States.

(Additional reporting by Alex Paterson in Ottawa and Solarina Ho and Alastair Sharp in Toronto; editing by Jeffrey Hodgson and Leslie Gevirtz)

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Canada banks top expectations despite lending crunch

TORONTO (Reuters) - Three of Canada's top banks posted stronger-than-expected quarterly profits on Thursday as they relied on lower loan-loss provisions, cost-cutting, and stronger international revenue to offset slower growth in domestic consumer lending.

Royal Bank of Canada and Toronto-Dominion Bank, the country's two largest banks, both raised their quarterly dividend. No. 5 lender Canadian Imperial Bank of Commerce left its payout unchanged, prompting investors to pull its shares lower.

With signs emerging that a long-awaited slump in personal lending and mortgage growth began to take hold in the fiscal first quarter ended January 31, RBC relied heavily on wholesale banking revenues to fuel its profits. TD enjoyed shrinking loan-loss provisions, stronger business loan growth, and worked hard to control costs.

"We are starting to definitely feel a slowdown in the consumer lending side, and I think you'll see a gradual slowing of the (mortgage) lending number over the course of the year," TD Chief Financial Officer Colleen Johnston told Reuters.

The banks have warned of the lending slowdown for more than a year, based on signs that Canada's once-torrid housing market is cooling and on a rise in consumer debt levels to record highs, suggesting a period of deleveraging may be overdue.

Growth in TD's Canadian retail lending slowed to a meager 5 percent on the year, with loan margins narrowing because of low interest rates. RBC posted 6 percent growth in Canadian lending on the year, but growth slowed to less than 1 percent compared with the fourth quarter of last year.

CIBC saw mortgage volumes fall due to its decision to close its discount FirstLine mortgage wing last year, but the move allowed it to raise its share of higher-margin loans.

GROWTH SLOWS, BUT PROFITS SURGE

Despite this lending slump, profits beat estimates at all three banks, highlighting their capacity to wring profit growth from their various business units.

RBC's net income rose to C$2.07 billion, or C$1.36 a share, from a year-earlier profit of C$1.86 billion, or C$1.22.

The gain was driven by a 25 percent rise in capital markets income and a 24 percent jump in wealth management income. The bank has been expanding both businesses in Europe and the United States in recent years.

RBC even managed to squeeze 11 percent profit growth from its Canadian banking division, as it reduced loan-loss provisions and managed to keep interest margins steady.

Excluding special items, RBC earned C$1.38 a share, beating analysts' expectations of C$1.31, according to Thomson Reuters I/B/E/S.

"Overall, the bank reported a strong quarter and one that we view as the best in class again this quarter," CIBC World Markets analyst Robert Sedran said in a note.

TD, which has been expanding aggressively in U.S. retail banking, posted net profit of C$1.79 billion, or C$1.86 a share, up from C$1.48 billion, or C$1.55.

TD's results were clouded by litigation reserves taken in both the current and year-before quarters to cover costs stemming from its connection to a $1.2 billion Ponzi scheme run by Florida lawyer Scott Rothstein, who used the bank's accounts.

Excluding the provisions and other costs, TD earned C$2.00 a share, up from C$1.86, and topping expectations of C$1.92.

TD has about 1,200 bank branches in Canada and about 1,300 in the United States. It also owns 45 percent of TD Ameritrade Holding Corp.

Loan losses also supported TD's retail banking growth, which hit 11 percent, as did a 13 percent rise in business banking.

"We are starting to see a slowdown in terms of domestic lending volumes, but it's not impeding the profitability of the retail banks at present," said John Aiken, an analyst at Barclays Capital.

"The banks have been very good at finding offsets... The question becomes the sustainability of all these issues.

Both TD and RBC raised their dividends by 5 percent.

RBC's shares rose 0.8 percent to C$64.02, while TD gained 0.7 percent to C$84.85, helped by comments by CEO Ed Clark that poured cold water on speculation TD might purchase Royal Bank of Scotland's Citizen's Bank unit.

CIBC SHARES SLIDE

Shares of CIBC, which unlike RBC and TD lacks a significant international presence, slid 0.9 percent to C$83.14 after failing to raise its dividend.

Analysts had forecast all three banks would raise their payouts, and Bank of Montreal unexpectedly raised its dividend on Tuesday, cementing that view.

Speaking on a conference call, CIBC CEO Gerry McCaughey said the bank had decided to play it cautious on the dividend front, in part because it intends to use capital to buy back shares.

"I wouldn't read too much into our not raising the dividend this quarter," he said.

It earned C$798 million, or C$1.91 a share, down from C$835 million, or C$1.91, as profit was hurt by a C$148 million charge for a legal settlement with bankrupt U.S. bank Lehman Brothers.

Core EPS of C$2.15 topped estimates of C$1.97, while loan-loss provisions fell to C$265 million from C$338 million.

(Editing by Frank McGurty, Andrew Hay and Peter Galloway)

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