TORONTO - The Bank of Montreal's (TSX:BMO) third-quarter profit rose 20 per cent to $669 million, but still fell short of analyst expectations as volatile trading activity on stock markets dragged down its capital markets division.

The first major Canadian bank to report its third-quarter results, BMO reported Tuesday 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.

"There is a credit recovery underway and we have confidence in an overall continued positive trend," said president and CEO Bill Downe in a conference call with analysts.

"We expect credit performance to continue to improve with some quarterly variability. Our balance sheet is strong, and we're committed to growth."

The bank's shares dropped 5.1 per cent in afternoon trading on the Toronto Stock Exchange, down $3.03 to $56.03.

BMO said its domestic personal and commercial banking division saw a 17 per cent increase in profits to $426 million, aided by higher revenues across its personal, commercial and credit card businesses.

BMO Capital Markets was hit particularly hard, with a 58 per cent 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 three per cent, 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.

U.S. personal and commercial banking profits dropped 27 per cent 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.