Hello, and welcome to The Download. I'm your host, Dave Richardson, and it is everyone's favorite. It's almost like a holiday gift. Stu's Days, with Stu Kedwell, who is the global head of equities at RBC Global Asset Management. Stu, are you ready for the holiday season? You must have done all your decorating already?

We are. We do get at it early. And I like white lights. I do get some help with them because we have a tree outside our house that's probably about 40 feet tall. The whole neighborhood loves it, and I love it, too. We turned it on last Saturday night, so that's a big day.

Do you bring the neighbors in together to gather around and sing carols and all that?

Not that fancy, no. But we got some condos and apartments around, and we do get these great notes saying, thanks for lighting up your tree, which is a real treat.

Wow, that must be something. I like the white lights, too. I find the mix of colors is a little bit too much. Even though, of course, we're both big fans of diversification, you would think we'd go the other way. We just go straight with the single monotone look. But, wow, I'm going to have to drive by. I think that'd be pretty impressive. You won't call the police on me, will you? If I’m driving down your street. Hey, we want to talk about a gift that keeps giving, and that would be Canadian Bank earnings. As I often advertise, you are the foremost expert on Canadian Bank earnings and investing in Canadian banks. You modestly shake your head and say no, which people can actually see now because we're on YouTube. But we got a couple of banks out with earnings so far. It's important. We always check in on the bank earnings each quarters, too, because there's such a tie into the Canadian economy, and then in many ways, they're global firms, too. So you're getting a sense of what's going on around the world. So who's reported and what have you gotten out of what you've seen thus far?

Yeah, so three of the banks have reported, and the other three will be tomorrow. One of the questions that we often get, because they've been strong performers this year, is how can the banks have been strong when the Canadian economy still feels like it's in the doldrums a little bit and worried about trade? So first off, we've talked about this before, is that the banks set aside provisions for credit based on a view of the economy. So that has taken place. The banks have built reserves, and in their quarterly results, they're taking provisions for credit, but they're basically in line with what people expect. And even though it'll continue to bounce along for maybe two or three more quarters, the banks have got ahead of this a little bit. So that's not the same surprise or concern that it might have been, say, 12 months ago. The next thing is, we've talked about a net interest margin and the spread that exists inside of a bank's balance sheet, and that has been ticking upwards, which has provided a bit of a tailwind. And then the last part is the cyclical businesses of capital markets. Not that the wealth management is cyclical, but markets have been strong, so there's been plenty of earnings that have come out of the wealth management and the capital markets businesses, and it's driven pretty strong returns or pretty strong earnings across the group. Valuations have expanded. We've talked in the past about the way that we make money in a stock: you get rising revenue, you get widening margins, and you get improving valuations. I don't know if we're going to see all three of those necessarily repeat into the future. But the other thing that is emerging—and we can talk about this and the impact on some other sectors afterwards—there certainly is concern around getting trade settled and how that will play out in the first half of the year. But there's also some growing optimism around some of these big infrastructure projects in the country and putting that investment to work and what that could do for economic activity into the back half of 2026 and into 2027. The banks are at this place where, will valuations continue to increase? I wouldn't necessarily bank on it, but the revenue environment is looking maybe okay to slight improvements in the next year with that trade caveat. Then, of course, the other thing is the capital ratios are all very strong. We've seen some increases in dividends and things that in longer-term investors tend to focus on. So far, the three reports have all been pretty good, and the focus has been on that slightly better net interest margins and better activity from capital markets and wealth management.

Let's dig into some of these pieces because they're important more broadly than just the Canadian banks. But the valuation. I was just looking at one of the banks and looked at the PE ratio, just a simple measure of valuation. It seemed extremely stretched. Where are the Canadian banks sitting right now, compared to where they would normally be in terms of a range of upside on valuation and downside?

The story of the banks is not dissimilar to the story of the market as a whole. The valuation is above average. The other thing that has accompanied this is that the returns on equities are also expanding. When you get widening margins or you get better returns on capital, valuations can be supported at a higher level. Now, they're very dependent on those levels persisting. That's why I would go back to those three legs of what makes for a good stock. The best times to own a stock are when revenues are growing, margins are widening, and valuations are improving. We've largely seen that in the last year, and that's why you're getting returns that are well above earnings growth. Going forward, earnings growth is going to be more of the deciding factor. But each bank has come out and said, our return on equity can be a little bit better. A higher return on equity can support a higher valuation. If anything, in the case of some of the banks, people have looked at management's targets and said, well, it's a little bit higher, but could it even be a little bit better? I think that's where we're at. I think the earnings growth from here becomes the most important of those three legs.

Are we seeing any expansion of dividend payouts or stock buybacks? What are you seeing on that front?

Yes. The banks are generating excess capital, so we're seeing share buyback. We saw a couple of dividend increases. Not like taking payout ratios to levels that would be concerning or anything like that. We like to see a reasonable payout ratio. We like to see some share buyback, and we like to see capital go back into the business for growth itself. I think that dovetails into why are people a bit more excited about maybe the back half of the year. Last week we had a big agreement in principle, a memorandum of understanding between the federal government and the province of Alberta. And my colleague was telling me—and I'm going to get the exact figures offside—but in 2024, if the energy industry spent something like $50 to $55 billions of CapEx, this year it had dropped to the 40-ish range. When you think about the economy, that's a big drop in CapEx. This hope that with some certainty, if we can get this memorandum of understanding established, it can bring some certainty back. And not only could we go back to the old levels, we could probably go well through them. And that would be a big growth, a big set of infrastructure or capital spending just in Alberta alone, let alone all the other projects that have been announced. When governments spend money, you always want it to be wise. If you have a deficit for investment, that can be a good thing. So as we look forward there could be a bunch of different capital expenditure projects which could provide a much-needed boost to the economy, and there'll be ancillary loan growth and activity that would follow through to the banks. The other thing that's been interesting is the energy stocks. The price of crude hasn't been very interesting. It's been one side or the other of 60 bucks for a while, and there is plenty of supply around. But it's also a good reminder on an investment is that if we could get this memorandum of understanding, and there was carbon capture for the barrels of oil. Of course, when you put the gas in your car, everyone has the same emission. But if you could get the emissions to create the oil down to the world standard or to be amongst the best in the world, then the duration of your oil asset is going to extend. You go from being maybe one of the first barrels that might stop being used to one of the last, then you can apply a bigger multiple to the stocks because they all have 40, 50, 60 years of resource, and they trade at mid-single-digit multiples of cash flow. If you were working with the assumption, I don't know how long. That wasn't necessarily our assumption, but some people had that assumption. If you think that, well, boy, now, if they get this right and there's another 15 years of production or whatever it might be, then the multiple, even on today's cash flow, which is wishy-washy, could extend. That's why we've seen some of the Canadian energy stocks, even in a fairly flat crude price environment have been not bad performers.

Then again, that connection that the large banks in Canada have to the overall economy means that as this activity is happening, it ultimately benefits them.

Canada has a big small business economy. Small business thrives off these because you get fabricators, you get all sorts of ancillary business that flows off of it. That would be the hope for by this time next year, if there's some success on trade—which admittedly is an if—but the government has been busy working on trade deals with other people, other countries as well. Some understanding about how these infrastructure projects are going to roll out, that today where you have an economy that has been heavily dominated by housing—and the housing market just is stable, that activity is neither a deterrent nor a tailwind, but just is what it is—then you get some of this new activity that you can get overall economic growth. I think that's what people are trying to figure out.

Now, this podcast is careening in a completely different direction than I'd planned. That's pretty much the way every Stu's days is. We end up going into all different areas. If you subscribe anywhere you get your podcast and give us five-star rating. We'd appreciate it. Watch on YouTube because you should see Stu with the incredible background we have in the Stu Stu Stu Studio, as we've named it, here in Toronto. It's pretty spectacular. And again, subscribe on YouTube as well. But one of the things that we talked about in recent weeks, and I don't know if we got it recorded, is the importance of this trade deal in terms of what the government can focus on with their spending. So we see them. They want to be active. They want to drive some of these projects, want to get the Canadian economy moving again. But if you've got bad news on trade, that's going to be hard to do. Can you talk about a little bit of that?

Yeah. Thankfully, the Canadian balance sheet, so to speak, relative to peers, we've been running deficits, but our overall debt to GDP gives us capacity. So the question is, do you have to use that capacity to protect and support industry that's been impacted by trade, which they're doing today, but do you have to do that more? Or can you use a portion of that capacity for investment? It's the same thing that you might have in your house. If you have to repair something that costs money, and it just gets it back to what it was. If you can actually invest and make something bigger and improve it, then that's a different use of the money. That's what the government is trying to balance.

Exactly. Let's come back to the banks and where we did start. The provisions for credit. Are we seeing an environment that ultimately you think is improving or deteriorating in that space? What does the banks say?

In flux, I would say it's a status quo. The provisions for credit are slightly elevated. When they'll come down has been a question that we've gone through this year. Probably by the middle or the back end of 2026. They're not getting worse. Analysts will always have an expectation for the provision of credit. We've had three banks, and it was basically right in line with the expectations. But there is some unsecured credit, so that means you don't have a piece of collateral against it. It's a bit of a tougher go, but it's not a huge portion of the business. It's more than manageable by some of the other business strengths that they're seeing.

As you just said a couple of moments ago—we've got lots of real estate professionals who listen to this podcast—that the housing market is holding up fairly well, especially since we've got all of these mortgages coming due. We look at the residential housing. We've got all of these mortgages that were coming due from ridiculously low rates in the middle of COVID. Now people have to renew. It still seems to be holding up fairly well, no?

Not too bad. Even one of the banks today talked about expecting low to mid-single mortgage growth through the year. 2026 is a big year because there's a lot of the cohort of COVID mortgages. The 2021 mortgages roll over. The Bank of Canada has lowered rates, which is a help. I'm not sure they're going to lower them a whole bunch more, somewhere in the right neighborhood. Everyone can get a flavor for what's going to happen to your payment. Have you prepared for it? The bank has been working hard on this. With inflation, nominal income is a little bit higher. When we look at it all, it's a manageable situation.

Yeah. Then you mentioned the Bank of Canada has lowered rates and may do a little bit more. The Federal Reserve, we’ll find out next week if they continue their loosening and cutting of interest rates. But that's one of the things that helps to prove the net interest margin, this steepening of the curve. Because the shorter-term rates have been coming down. The longer-term rates have held pretty steady through over the last twelve months.

Yeah, that's right. I think when you look at the amount of capital investment that hopefully will be on the horizon, it will add some tension to the yield curve. It's the demand for capital versus its supply is what prices interest rates. That helps the slope of the yield curve a little bit.

So many things we learn on this podcast. It's always fantastic. By the way, we were just planning our next podcast. You're going to want to listen in next week because we're going to go deep on something that is a critical issue for Canadian investors right now and something we're hearing from not just investors, but advisors in terms of investing. We'll put that tease in for next week. Let's just finish off with the wealth management and capital markets piece. Was there anything particularly interesting out of any of the banks in that space? Is there a real difference between the different Canadian banks in terms of how much they lean on wealth or capital markets relative to each other?

Yeah, everyone's business has a different set of exposures. I think the areas that have done well, you have US capital markets. Mergers and acquisitions have picked up. So just like we talked about mortgages, but when someone buys a house, think about all the activity that takes place around buying that house. It's the same thing with M&A. The investment banks are busy doing some financing, doing some re-arranging. You buy a business, you don't want all of it. You want this piece sold off, you want to do a renovation, you want to do this and the other thing. It creates all this activity for the capital markets business. Markets have been strong. Spreads have been contained, so there's been lots of new issuance. There's new issuance, there's financing, there's all these different parts of the capital markets business, and a handful of them have been quite strong. I think many of them said deal pipelines remain strong, so this activity could persist. I think going back to the very first part of the discussion is, as you mentioned, multiples have expanded, so the pace of activity remaining or new sources emerging are more important. As an investor, we're looking at the duration of how long will these pipelines remain full and how does that play out? Then will it be new sources around commercial loan growth and things like this in the back half of 2026?

Moving away from our both liking our Christmas lights with all white lights, because our tree in the house is all white as well. Although I have an option. I can click a button and they change to the multi-colour and flashing in that.

That sounds like active management, Dave.

Well, it does, and we'll be talking about that next week. But where I was going—if you had not interrupted my train of thought, because I'm going to have to recollect it—is the idea of diversification. We've already seen the Canadian market catch up and even outperform the US market over the last 18 months. All this focus on tech, tech, tech. We had the tech guys on earlier this week talking about valuations in that area. You've talked about it a lot in your appearances here. It's a reminder that there's other areas of the market that are doing very, very well. You don't need to sit all in risky tech, or you don't have to go out and buy a bunch of Bitcoin to find good solid returns and prospects for good returns as you move forward.

In some respects, if you can find good management teams with businesses that are a little bit out of favor, those can be wonderful investments because what you're banking on there is time. Because you know that that management team is busy beavering away on your behalf so that when the cycle turns, their business is going to make even more money than they did last time. Because there's no imminent change in the cycle, investors are bored with it. They disregard it and they say, I'm going to go focus on the current flashy thing. Inside of a portfolio, you're always looking, can this business keep growing? Can the valuation hold? The answer is yes. You're riding the course. But sometimes even in those instances, you say, I'm going to harvest a little bit of that one because it's springtime over here and the bulbs haven't quite found their way to the surface. But even in the last while, some of the transport stocks have started to behave a little bit better, and they've been basically dormant for the year. Some truckers, some rails. You have artificial intelligence helping one of the big truckers. So maybe there is an efficiency angle, or maybe some of the volume activity might even be a bit better. Too early to tell, but you're always looking inside of the market. We talked last time about health care emerging. There's always an emerging bull market somewhere.

Yeah. Again, I've been out across Canada and seeing lots of advisors, but lots of investors as well. Everyone is very nervous about investing at the top of the market. Oh, I'm investing at the top. Well, you got to look at where the market's sitting right now. You've got that small collection of stocks that are very, very expensive. Then you've got a bunch of other stocks that are pretty reasonably valued. I went back to 2000. I was just running some numbers. I'm not going to be precise here. I'm going to give you directionally correct. I want to say that for all the compliance people that review this before it's released out to the final audience. But I look back at from April 2000 to October 2022, the Nasdaq, a nice measure of technology stocks. You remember back in that day, it was the dotcoms and the internet. Of course, the internet was a real thing. It wasn't anything fake. It's changed our lives. Same way we talk about AI today. Actually, I did this after you mentioned Cisco the last time we were together. Cisco, which was the NVIDIA, as you made that comparison, the lead in that space. But you look at that, that stock was down 90% from top to bottom through that period. The Nasdaq overall was down 80% through that period. Bank stocks? We put a group of bank stocks together and they were up about 60% over that two years and a bit. I know your favorite bun company—I actually looked at that one—it was up 80% over that period and paying a dividend along the way. Again, it just gets back to this idea of one of the ways you combat that fear of entering a market at the wrong time is obviously, dollar cost averaging—we don't want to forget that—but diversification. Maybe tech stocks have a rough time, but you got a bit of that, but they've been leading great returns for you thus far. But something else picks up and moves and takes it further. The best thing to be is invested and stay diversified and the market will take care of you.

Yeah, that's a great way to end today's podcast. Those are words of wisdom for sure.

Yeah, but stick with one color on the lights. Whether you like white or blue or red or green, just stay monotone. I think it's a cleaner look. But your portfolio, lots of colors, lots of diversification. Thanks, Stu, again, and we'll hopefully see you next week.

Great. Thanks, Dave.