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Stu Kedwell, Co-Head of North American Equities, discusses what’s ahead for Canada’s big banks after a solid second quarter. Stu also takes a broader look across the Canadian market, and explains how other sectors, such as commodities, are contributing to strong performance and investor optimism. [7 minutes, 43 seconds] (Recorded June 1, 2021)


Hello and welcome to the Download. I'm your host, Dave Richardson, and it's Stu’s Days. And it’s a particularly special Stu's days: it’s bank result Stu's days. Every quarter we come to our super knowledgeable bank analyst type Stu Kedwell, co-head of North American Equities at RBC Global Asset Management, to take a look at the Canadian banks reporting their quarterly earnings. And Stu, like every other quarter, there's lots of things that you can glean from the results. It's a reflection of what's going on in the broader economy, both in Canada and around the world. Certainly interesting stuff to glean as we're moving, hopefully, out of this pandemic. What were some of your big takeaways from looking at the earnings that have been reported?

Yes, there are lots of interesting takeaways. Thanks for having me, as always. Definitely, I always look forward to this during the pandemic and hopefully we can keep doing this into the future. I thought what was really most interesting was, to a T, the CEOs were more optimistic about the future and that the economy was finding its footing. That the American economy had definitely found its footing and that they expected that in the back half of the year for Canada, as we come out of the vaccination period and business gets back to normal. What that eventually means for a bank is that you're going to get some more loan growth and you get some ancillary revenue around that loan growth. And then on the advisory side, that the M&A pipeline (the mergers and acquisitions pipeline) still remains pretty full. And we've seen another deal here this morning in Canada between Pembina and Inter Pipeline. But as businesses get more confidence and capital is still available to them, then some strategic combinations that have been on the drawing board for a while start to get executed on, which is a benefit to the capital markets businesses. So, really, when you go through line item by item inside of a bank, one of those questions we often ask, is business getting better or is it getting worse? And there's lots of line items that are getting better.

And analysts across the spectrum are looking pretty positively at what's going on with the banks and the future as well, in terms of their forecast, as we move forward. Is that not correct?

A hundred percent. Earnings estimates have increased. One tool that's coming in particularly handy for us, that we've talked about in the past – we've signed up for this tool called Visible Alpha. And what it does is it goes through and allows us to see consensus expectations and what different analysts are saying, line item by line item, when we go through different companies. And I think that's going to be really important in general for the next 12 to 18 months, because it's not just as the economy is getting better and estimates are getting revised upwards, we want to make sure they're happening for the right reasons. The reasons that are driving long-term share price appreciation versus what might be some one-off increases due to certain circumstances. For a bank, it's a very interesting time because, what do we know for sure? Capital levels are high and business is improving. Eventually we'll get some change from the regulator and I would imagine the banks will be allowed to increase dividends and buyback stock, which is certainly a positive. But then when we get into the nuts and bolts of each estimate, while analysts as a whole took their estimates up, sometimes it's more due to lower provisions for credit or maybe even releases, because of the provisions that have been taken in the past. And that's earnings. It's no question it's earnings and it does generate capital, but it's not the type of earnings that you want to pay high multiple for, because it doesn't necessarily recur over and over again. Versus getting into the line items like non-interest revenue growth, like fee revenue growth, wealth business growth. These are very durable streams of earnings. And we love to see them start to improve. Loan growth and net interest margin improvement also good. What you like to see from loan growth is the bank having multiple relationships with people they're making loans to. And that's something that we really want to dive into as we go forward, because when the wind is at your back, you want to make sure that the business being put on the books is profitable and that it's driving long term shareholder value.

And the strength of the banks, if you look at the other sectors that are doing particularly well, which would be energy and, really, any of the commodity-based companies, it's been a pretty good year for Canadian investors who have stayed at home. The TSX is around 20000 points right now, right around an all-time high. And a lot of Canadians do stay home, on a relative basis, or a bit of a home country bias towards staying in Canada. And it's worked out fairly well for them this year. And it kind of looks like the next little while is set up pretty well for Canadian markets and Canadian investors who invest in Canada.

Yes, I think that's fair. Any time you get a bit of a commodity move, as you point out, it does benefit the TSX. I think that these businesses have been so focused on efficiency that when they get small improvements in commodity prices, it's generating a lot of cash flow and there's a lot of pressure not to do anything with that cash flow that might get in the way of the share price improvement. And early in the cycle, management is very diligent about that. We're going to have to watch this as that proceeds. There's going to be cash flow to improve balance sheets. There's going to be some cash flow for some new projects that would be more environmentally friendly. There'll be all sorts of things that'll be up for analysis in the next 18 to 24 months. But right now, certainly small changes in commodity prices are generating a lot of incremental cash flow for these businesses.

So, here on a sunny day in June, here in Toronto, just to sort of put the bad thoughts of what happened to the Maple Leafs last night away; the Canadian dollar is up, Canadian stocks are up. So, for Canadian investors, we're moving forward with vaccinations and the pandemic and things are looking bright as we head into our beautiful Canadian summer. Stu, we couldn't do Stu's days without you. So I know you're always happy to be invited, but it's kind of a given, isn't it?

That's why we figured out such a great title, Dave.

Yes. We need to find somebody named Wendy or something to do Wednesdays. We're working on that. But we're glad you come for Tuesdays and take care of us with that. And always great to hear what you have to say on the banks because you're so in tune with what's going on there. So thanks Stu.

Great. Thanks so much, Dave, and have a good day.


Recorded: June 1, 2021

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