Indianapolis - Circa June 2017: Signage and Logo of BMO Harris Bank. BMO Harris is one of the Largest Banks in the Midwest V

BMO Financial Group wrapped the Big Six earnings season with a drop in earnings as a pullback in capital markets more than offset gains from loan growth and improved returns on interest income.

The bank reported earnings of $1.37 billion for the quarter ending July 31, down from $2.28 billion in the same quarter a year earlier, as it took a $945-million charge related to its acquisition of Bank of the West.

Adjusted earnings of $2.13 billion were still below last year’s take of $2.19 billion as its wealth management division saw a 15% income dip and its capital markets income was about half of where it was a year earlier.

“BMO Capital Markets results this quarter were impacted by the market conditions and lower client activity,” said chief executive Darryl White on an earnings call Tuesday.

Want more immediate, memorable insights? Listen to this Soundbites episode, featuring Garrett Norman of J.P. Morgan Asset Management.

The numbers reflect trends seen across Canadian bank earnings for the quarter: continued loan growth as the overall economy, including the unemployment rate and GDP growth, remained strong, while earnings were hit by a pullback in markets that led to lower capital issuing and trading.

Earnings have also been dominated by future concerns for the economy as central banks raise rates to tame inflation, with all banks setting more money aside for potentially bad loans ahead. BMO’s provisions for credit losses of $136 million in the quarter, compared with a $70 million reversal last year, was, however, more modest than analysts had expected.

BMO also got a boost to earnings on net interest margins, a key indicator of profitability on interest income, reporting a bank-wide boost of a tenth of a percentage point and double that in its U.S. personal and commercial division.

The boosts from some areas wasn’t enough to meet analyst expectations, though, as the bank’s adjusted earnings of $3.09 per diluted share for the quarter was below expectations of $3.14 per share, according to financial markets data firm Refinitiv.

Overall, half of Canada’s Big Six missed the average analyst earnings forecast, while those that beat did so only modestly, noted Edward Jones analyst James Shanahan.

“The culprit was fee income, which was soft within most markets-related categories, including investment banking and securities trading, as well as wealth and asset management.”

Shanahan said, going forward, he was closely watching operating expenses that have been creeping higher as banks focus on future growth, with expenses rising for salaries and technology investments.

Many of the banks reported expenses up around 10%, while BMO reported expenses up 5%. The bank has lagged its peers in its efficiency ratio, though, which measures how well banks turn expenses into profits.

The bank is narrowing the gap but sees more room for improvement, White said on the call.

“I would say that number used to be several hundred basis points and now it’s pretty narrow. And at the same time, it’s a little higher than the average. So I think we continue to have a little bit of opportunity there.”

Canadian banks also continue to have a fair bit of extra cash, noted Shanahan, giving them significant room to absorb potential losses ahead.

“In addition to loss reserves, capital levels remain quite strong.”

BMO is at the top end of capital on hand as it prepares for its US$16.3 billion acquisition of Bank of the West, announced in December. White said the bank still expects the deal to close around the end of this year.

Overall revenue for BMO totalled $6.10 billion in the quarter, down from $7.56 billion in the same quarter last year.

For its third quarter, BMO’s Canadian personal and commercial banking business earned $965 million, up from $828 million in the same quarter last year, while its U.S. personal and commercial banking arm earned $568 million, up from $550 million a year earlier.

BMO’s wealth management business earned $324 million, down from $379 million a year ago, and BMO Capital Markets earned $262 million, down from $553 million in the same quarter last year.