Barlow’s Research Roundup: Bank earnings preview, top picks from a BMO analyst

BMO’s Sohrab Movahedi expects Q2/26 Canadian bank earnings to benefit from diversified business models, with cash operating EPS growth of 19% year over year and dividend increases at BNS (+9%), NA (+5%), RY (+4%) and TD (+3%). He remains constructive on the sector but more selective, citing premium valuations, muted loan growth and ongoing trade/geopolitical uncertainty. TD Economics also argued Canada’s high personal taxes are contributing to a brain drain, while Morgan Stanley turned bullish on nickel as Indonesia supply cuts, sulphur shortages and higher costs tighten the market.

Analysis

The bank setup is still constructive, but the dispersion matters more than the headline EPS prints. The market is already paying for “good enough” earnings, so the next leg of relative outperformance will come from franchises that can keep ROE elevated without leaning on credit releases or one-time fee lines. That favors institutions with stronger deposit mix and capital return flexibility, while lenders with more rate-sensitive funding or weaker operating leverage are more exposed to a second-half margin giveback if deposit beta catches up faster than loan repricing.

The key second-order risk is not credit this quarter; it is duration. If management teams talk up muted loan growth and only modest reserve normalization, investors may start to question whether current premium valuations are being underwritten by a transitory macro backdrop rather than durable revenue power. That creates a narrow window where beat-and-raise can still work for the highest-quality names, but any miss on net interest income or non-interest expense likely gets punished harder than usual because the sector is already de-risked on losses.

The Canada talent/tax discussion is more relevant for small-cap growth and domestically scaling businesses than for the banks directly, but it reinforces a slow-burn handicap on loan demand quality. A weaker domestic scaling ecosystem means less high-beta business formation, fewer capital markets fee opportunities over time, and a lower mix of credit-favorable corporate growth. Over a 12-24 month horizon, that is a subtle headwind to the broad bank complex’s earnings durability, even if it does not show up in near-term PCLs.

On commodities, the nickel setup looks more actionable than the bank commentary. Supply disruption from Indonesia and input-cost inflation can tighten the market faster than end-demand data improves, which is usually the phase where spot-exposed producers re-rate before visible inventory drawdowns show up. The bigger implication is that battery supply-chain volatility can compress margins for downstream consumers even if stainless demand remains steady, making the move a tactical long for nickel price exposure but a more nuanced read-through for industrial users.

Key Decisions for Investors

• Stay long RY and TD into earnings on a 1-3 week horizon, but size modestly: these have the clearest path to sustaining ROE and capital return, while the tape is likely to reward stability more than beats. Trim on any sign of deposit-cost pressure or expense creep, as the downside re-rating risk is asymmetric if guidance softens.
• Fade weaker-quality bank rallies via a pair: long RY / short BMO or CM for the next 1-2 earnings cycles. The trade works if investors keep paying a premium for durable fee income and lower funding sensitivity while compressing names whose ROE depends more on near-term macro support.
• Use BNS earnings as a catalyst trade only if management reinforces dividend growth and reserve discipline; otherwise sell strength. The risk/reward is better on a post-print fade than pre-earnings positioning because valuation is already assuming benign credit and stable margins.
• Express the nickel view through MS on the commodity call side or a basket of nickel-linked equities/ETFs over 1-3 months. The trade has favorable convexity if supply headlines persist, but cut it quickly if Indonesian policy noise reverses or sulphur prices normalize, because the move is supply-led rather than demand-led.
• Avoid broad domestic growth exposure in Canada for now; prefer companies with global revenue and high intangible scaling efficiency. The structural tax/talent overhang is a slow-moving headwind, so the better trade is to own international compounders rather than Canadian small-cap growers that need labor and capital formation to accelerate.