Royal Bank of Canada beat profit expectations in its fiscal third quarter amid a sharp drop in provisions for credit losses and as its trading desks flexed their muscle.

Net income for the three months ending July 31 was $3.20 billion from $3.26 billion a year earlier. On an adjusted basis, RBC earned $2.23 per share; analysts, on average, expected the bank to earn $1.85

The bank set aside $675 million in the period for loans that could go bad, approximately 76 per cent less than the $2.83 billion that RBC provisioned in the prior quarter as the COVID-19 pandemic took hold.

In a report to clients, Credit Suisse analyst Mike Rizvanovic described the third-quarter provisions as “surprisingly low.”

“Included in Royal’s third-quarter total was [$280 million in provisions] for performing loans, which amounted to a significantly smaller reserve build than what we’ve seen so far for [its] large peers that have reported results. We believe that is attributable to Royal’s more sizable reserve build last quarter.”

RBC's capital markets business was the star performer in the bank’s third quarter, as profit in that unit soared 45 per cent year-over-year to $949 million. RBC credited the growth primarily to gains in fixed-income trading operations.

The lender's other core units didn't fare nearly as well.

RBC's bread and butter personal and commercial banking operations saw profit slide 18 per cent, while earnings from wealth management dropped 12 per cent.

In a presentation Wednesday, Royal Bank said it has approved payment deferrals for more than half a million clients globally who are struggling amid the pandemic; approximately 70 per cent of those deferrals have been for Canadian clients.

RBC noted that it currently has a balance of $55 billion in loans on deferral in its Canadian banking operations, representing 12 per cent of the division’s total loans.

"While we are seeing early and encouraging signs of an economic rebound from the depths of March, uncertainty remains over the timing and shape of the recovery," said RBC President and CEO Dave McKay in a conference call with analysts Wednesday. "The real test of the recovery will come once government support programs start to wind down. We anticipate the fall will be a challenging time."

With files from The Canadian Press