Source: The Canadian Press

The Bank of Montreal’s (TSX:BMO) third-quarter profit rose 20% to $669 million, but still fell short of analyst expectations as trading activity on the stock markets hit BMO’s capital markets division.

The first major Canadian bank to report its third-quarter results, BMO reported cash earnings per share of $1.14, about seven cents lower than analysts had estimated on average, according to Thomson Reuters.

In the same period a year earlier, the bank reported net income of $557 million or 98 cents in cash earnings per share, a measure of cash-flow performance. Net earnings per share were $1.13, 16 cents higher than in the comparable period.

Revenue was down slightly to $2.91 billion from $2.98 billion.

The bank’s shares dropped 5.6% in morning trading Tuesday on the Toronto Stock Exchange, down $3.30 to $55.76.

In its specific divisions, BMO said domestic personal and commercial banking posted a 17% increase in profits to $426 million, aided by higher revenues across its personal, commercial and cards businesses.

BMO Capital Markets was hit particularly hard, with a 58% decrease in profits to $130 million as it contended with lower trading revenues affected by the economic uncertainty out of Europe. The division had also been riding high on several quarters of optimistic trading, but market activity has pulled back in recent months.

The capital markets divisions of Canadian banks are expected to face some challenges in amassing revenue, which they earn by providing capital to businesses through activities such as underwriting share offerings and financing mergers and acquisitions.

Franklin Templeton Investment Corp. president and CEO Don Reed said the $180 million drop in revenues is understandable given the thin yields available on U.S. Treasurys and bonds.

“The capital markets area isn’t a huge surprise, is it?” said Don Reed, president and CEO of Franklin Templeton Investment Corp.

“It must be difficult to make a dollar in your capital markets division of any firm today,” he said. “(With) 10-year rates around 3%, there’s not a lot of wiggle room, is there?”

On a positive note, Bank of Montreal reduced its provisions for credit losses during the quarter ended July 31 as the economy improved from last year. The provisions were $203 million lower than a year ago, at $214 million.

The bank said it will keep its quarterly dividend unchanged at 70 cents per common share.

“The focus we are maintaining on helping our customers succeed and our strategic investments in businesses with good growth potential have translated into a solid year-over-year increase in earnings, adding to our already strong capital position,” said president and CEO Bill Downe in a release.

“Our results underline the benefit of the bank’s diversified business mix.”

U.S. personal and commercial banking profits dropped 27% to US$38 million on higher provisions for credit losses, impaired loans and adjustments to its mortgage portfolio because of lower long-term interest rates, it said.

Barclays Capital analyst John Aiken said the results were “well below” his forecast of $1.27 per share.

“While we expect that Bank of Montreal’s valuation will likely be negatively impacted by the earnings miss, its shares could recover some lost ground after an initial selloff,” he said in a note.

“This is because trading is inherently volatile and, while BMO disappointed, a poor quarter was not unexpected. Further, a significant outperformance on provisions for credit losses will likely generate a lift to consensus earnings estimates.”

Bank of Montreal has more than 37,000 employees across its North American operations, which include retail banking, wealth management and investment banking products, as well as its Chicago-based Harris Bank subsidiary.