Key Takeaways
- National Bank and BMO posted stronger‑than‑expected Q2 earnings, driven by capital‑markets activity, wealth‑management growth and lower‑than‑anticipated credit losses.
- Jim Thorne suggests the banks may be “over earning” due to temporary tailwinds such as mortgage refinancing and robust capital‑markets revenue, which could fade after 2025.
- Outlook for 2027‑2028 remains uncertain; higher interest rates could pressure consumers and businesses, potentially undermining bank profitability.
- Thorne warns that a Bank of Canada rate hike prompted by geopolitical energy shocks (e.g., Strait of Hormuz tensions) would be a policy mistake that could deepen a private‑sector recession.
- Alberta’s referendum debate on separation and broader energy‑security concerns are influencing long‑term investment decisions in Canadian energy infrastructure, creating both risk and a potential catalyst for policy re‑centering.
Overview of the Interview
Jim Thorne, chief market strategist at Wellington‑Altus Private Wealth, appeared on BNN Bloomberg to dissect the recent second‑quarter results of Canadian banks and to place those results within the wider macro‑economic and political landscape. The conversation began with a focus on National Bank and BMO, whose earnings beat expectations and prompted dividend hikes, before expanding to discuss the sustainability of those gains, the role of Bank of Canada policy, and the implications of Alberta’s referendum on energy security and national investment inflows.
National Bank’s Earnings Quality
When asked to rate the quality of National Bank’s earnings beat, Thorne described it as a “really nice top‑line beat” rooted in strength in capital markets and investment management. He echoed Jamie Dimon’s U.S. commentary that banks may be “over earning” because current capital‑market conditions are flattering profitability. Thorne noted that while loan‑loss provisions show a mixed picture, the real question is what the Canadian economy will look like in 2027‑2028, a period that will test whether today’s earnings are sustainable or merely a cyclical boost.
BMO’s Performance and Over‑Earning Concerns
Turning to BMO, Thorne highlighted similar takeaways: high‑quality earnings, a dividend increase, and a trading multiple of tangible book not seen in decades. He pointed out that BMO, like its peers, is benefiting from a wave of mortgage refinancing as borrowers re‑price loans originated during the COVID‑low‑rate environment. This refinancing tailwind is expected to wane next year, reinforcing the view that current bank profitability may be inflated relative to underlying economic fundamentals.
Loan‑Loss Provisions and Future Outlook
Thorne expressed modest surprise at the divergence in loan‑loss provisions among the reporting banks—some increasing, some decreasing—suggesting a lack of consensus about future credit conditions. He argued that the capital‑markets segment is currently interpreting signals as supportive of further rate hikes, while the real‑economy side shows signs of strain. Using a Monty Python “dead parrot” analogy, he warned that pretending the economy is robust while underlying indicators falter could lead to a painful correction when the temporary boosts disappear.
Bank of Canada Policy Risks
A significant portion of the dialogue centered on the Bank of Canada’s potential response to geopolitical energy shocks, specifically tensions in the Strait of Hormuz. Thorne cautioned that raising rates in reaction to such external events would constitute a classic Keynesian policy mistake, especially given that the Canadian private sector is already showing signs of recession. He argued that premature tightening would exacerbate private‑sector distress, undermining the very growth the central bank seeks to support.
Alberta’s Referendum and Energy Security
The discussion then shifted to Alberta’s ongoing referendum debate on separation and its impact on Canada’s ability to attract investment for energy infrastructure. Thorne argued that the uncertainty generated by a possible Alberta split creates a “forcing function” that pushes the federal government to reconsider its energy and industrial policies. He noted that while he does not believe separation will ultimately occur, the debate is already prompting a structural reassessment—particularly regarding where LNG terminals should be sited to serve domestic and international markets efficiently.
Policy Re‑Centering and Industrial Strategy
Thorne praised Prime Minister Mark Carney’s efforts to allocate more capital toward productive projects, describing him as a “reluctant pragmatist” who must manage a progressive‑leaning cabinet while addressing legitimate western grievances. He suggested that the Alberta separatist sentiment provides Carney with political cover to shift policy back toward the centre, balancing climate ambitions with the need for reliable, secure energy supply—a move he views as essential for rebuilding investor confidence in Canadian energy projects.
Long‑Term Implications for Investors
Summing up, Thorne advised investors to view current bank strength as a product of transient factors—mortgage refinancing, robust capital markets, and low credit losses—that are unlikely to persist through 2027‑2028. He recommended caution when allocating capital to banks today, emphasizing that any investment decision implicitly bets on the future trajectory of interest rates, economic growth, and policy stability. Meanwhile, energy‑security considerations and the outcome of Alberta’s referendum will remain pivotal in shaping the flow of private‑sector capital into Canada’s infrastructure over the next several years.