BMO Financial Group managed to beat profit expectations in its fiscal third quarter despite setting aside more than one billion dollars for loans that could go bad and a sharp drop in earnings from its core Canadian banking division.

Net income for the three months ending July 31 was $1.23 billion compared to $1.56 billion a year earlier. On an adjusted basis, BMO earned $1.85 per share; analysts, on average, expected the bank to earn $1.73 per share.

Profit in the quarter was held back as provisions for credit losses tallied $1.05 billion. While that was more than triple year-ago levels, it was a decline from the previous quarter when BMO set aside $1.12 billion to brace for the impact of COVID-19.

BMO's personal and commercial Canadian banking operations were a drag in the latest quarter, as profit in that division tumbled to $320 million from $650 million a year earlier. Meanwhile, earnings fell almost 30 per cent in the bank's U.S. division.

The bank was able to lean on growth in other divisions to mitigate the impact of substantial provisions for credit losses and weakness in core banking operations.

BMO's profit from capital markets operations jumped 36 per cent year-over-year to $426 million, and earnings from wealth management increased 37 per cent to $341 million.

“A positive start to third-quarter earnings season with a relatively clean quarter for BMO at first look,” said Credit Suisse analyst Mike Rizvanovic in a note to clients. “However, we believe that sizable headwinds remain for the bank (and the sector more broadly) as we don’t view the outsized capital markets performance to be sustainable over the medium-term.”

In a release Tuesday, CEO Darryl White also touted BMO's cost management as expenses fell two per cent in the latest quarter.

"We are moving forward with a strong foundation and good operating momentum, and are well positioned to withstand both economic headwinds and recovery," White said. "We will continue to provide unwavering support to our customers while delivering increased shareholder value through efficiency, discipline and a strong focus on our strategic goals."