TORONTO — Canada’s five biggest banks saw their profits soar by nearly two-thirds in the latest quarter as a rebound in the economy from last year’s recession and continued strength in the housing and stock markets helped their bottom lines.

The banks earned a combined $5.09 billion in the three months ended Jan. 31, compared to $2.97 billion in 2009, helped by fewer bad loans and a resurgence in mortgages.

The big banks also did well in their brokerage and investment dealer divisions, which benefited from a rebound in stock prices and a recovery in corporate financings after last year’s credit crunch.

Scotiabank (TSX:BNS) was the final bank to report earnings on Tuesday, posting a 17 per cent rise in profit to $988 million and beating analyst estimates. Its results were helped by a stronger demand for mortgages and consumer lines of credit.

With continued low interest rates, housing remains a pillar of the Canadian economy, showing growth in demand and prices in many parts of the country. As the size of the average mortgage rises, banks continue to benefit from a stable source of profit growth.

As well, consumer borrowing, some of which is used to finance home renovations, has been a bright spot for Canada’s financial sector.

In the fiscal 2010 first quarter ended Jan. 31, most banks came out with profits higher than Bay Street had expected, with Scotiabank, Bank of Montreal (TSX:BMO), TD Bank (TSX:TD), and CIBC (TSX:CM) all beating estimates.

Royal Bank (TSX:RY) was the sole exception in missing expectations, even though Canada’s largest bank posted the highest quarterly profit at $1.5 billion.

Blackmont Capital analyst Brad Smith said that while Royal Bank technically underperformed expectations, he thought the market’s negative response, which sent the bank’s stock lower after the earnings, was “overdone.”

“We’re splitting hairs on a huge number of moving parts,” he said in an interview.

Smith said investors are holding Royal to a higher standard than many of the other banks, simply because it has performed strongly in past quarters.

“A consensus is emerging amongst Canadian banks that the worst of the economic and credit crisis is behind us,” he added.

The overall banking results gave further reason for optimism in a banking industry that has fared better than those in most other countries. Unlike banks in the United States and Europe, which got into trouble through risky lending, Canada’s banking sector is considered to have been among the least affected by the 2008-9 global credit crisis.

Craig Fehr, a financial services analyst with Edward Jones in St. Louis, said that the earnings provided early signs that the quality of loans is starting to stabilize.

“We’re seeing a deceleration in the pace of impaired loan growth — meaning that less loans are going bad now relative to the past several quarters,” he said.

It is “a welcome sign for the Canadian banks because the relief that’s going to come from declining credit loss provisions over time will serve to unlock a lot of the earning power.”

Consumer confidence has been on the rise in recent months, according to the Conference Board of Canada, driven in January by the Western provinces.

The board has also pegged Ontario as another provincial economy expected to grow this year, second only to that of British Columbia.

However, the banks aren’t necessarily in a safety zone, and could still see their results impacted if the markets begin to weaken later this year, rather than continue to recover as is expected.

Other recent surveys, however, haven’t been quite as optimistic about consumer confidence, including one released by Royal Bank last month that suggested Canadians are still worried about debt and their jobs.

If the economy hits another wall then job losses could escalate, causing more Canadians to miss loan payments.

“Yes, the economy is all right, but a lot can happen in the next three quarters,” said Brenda Lum, managing director of financial institutions at the DBRS credit rating agency.

“We are optimistic in the sense that we’ve seen (loan loss) provisioning peak, and that’s reflected in the results of the first quarter.”

Lum said she’s confident the banks will continue to strengthen their Canadian franchises, which include both commercial and consumer banking.

“They continue to be conservative in terms of expense management, and I think that’s beneficial in times that are less certain,” she said.

“We’re in a better position than we were three quarters ago.”