TORONTO — Royal Bank of Canada (TSX:RY) shares tumbled nearly three per cent on Thursday after its third-quarter earnings fell 18 per cent, affected by a major drop in profits from its capital markets division.

Stock in Canada's largest bank slipped $1.49 to $49.20 on the Toronto Stock Exchange shortly after the opening bell.

Royal said it earned $1.28 billion in the three months ended July 31, down from a record $1.56 billion last year.

Diluted earnings per share dropped to 84 cents from $1.05, while return on equity -- a broad measure of bank efficiency -- fell to 14.3 per cent from 19.4 per cent.

The bank reported cash earnings of 87 cents per share, falling short of analyst estimates for a profit of $1.02 per share, according to Thomson Reuters.

Royal is one of four big banks to report third-quarter earnings this week. Bank of Montreal (TSX:BMO) missed expectations on Tuesday, while CIBC (TSX:CM) outperformed analyst estimates Wednesday.

National Bank also announced third-quarter results Thursday, reporting net profit fell to $271 million from $303 million for the same period last year. The Montreal bank says it earned $1.56 a diluted share for the third quarter ended July 31, down from $1.78.

All the banks have revealed erosion at their capital markets divisions, which trade and invest in bonds and stocks and help underwrite company financings, mergers and other transactions.

At Royal, the bank's capital markets net income fell to $201 million from $562 million a year ago, largely reflecting a decline in trading revenue from record levels last year.

Skittish investors have kept stock market trading restrained in recent months as economic uncertainty -- particularly in Europe -- wore down their confidence and often left returns at a minimum.

President and CEO Gord Nixon told analysts in a conference call Thursday that the bank's broad operations and strong retail banking presence helped offset weaker capital markets businesses, but that lower trading margins -- particularly in Europe -- weighed on results.

"If you go back to 2009 and the early part of 2010 there were exceptional positives with respect to trading revenues," he said, noting that on the flip side the past quarter experienced "exceptional volatility."

He suggested the capital markets business will right itself, rather than sink back to the dismal levels seen last year.

"I think from a run-rate perspective we're quite comfortable that it's not likely to be where we (were) in 2009 but it certainly feels better, and should feel better, than where we are this quarter," Nixon said.

In Royal's other divisions, profits from Canadian retail banking jumped 14 per cent to $766 million, driven by strong volume growth and lower provision for credit losses.

The wealth management division's net income rose 10 per cent to $185 million, while insurance profits fell eight per cent to $153 million.

Meanwhile, the net loss from international banking tightened to $76 million in the quarter from $95 million last year, reflecting improved credit losses at its U.S. banking division in the southeastern U.S. states.

Barclays Capital analyst John Aiken wrote in a note that despite declining provisions for credit losses and a strong performance in Royal's domestic retail banking, the erosion of capital markets profits is his focus.

"Needless to say this came in well below our expectations and will likely still be a surprise to the market, even after BMO's poor results," Aiken wrote.

"While we believe that much of the lost trading revenues will be recovered in future quarters at a higher run-rate, this will mean little in the near term."

Royal Bank is the country's largest bank by assets and market capitalization, and has 77,000 employees serving more than 18 million personal, business, public sector and institutional clients. The bank has operations across North America and 52 other countries.