Hello and welcome to the Download, I’m your host, Dave Richardson. I’m joined, as I am most weeks, by Stu Kedwell. We had (S)tuesdays go on, but we’ve sort of given up on that. This is a very busy man. And Stu, before we get into today’s topic, you had a nice line about the start of hockey season yesterday and market optimism.
Yes. I was just watching my tech stream last night as the Leafs played their opening game. I just said that the stock markets are as optimistic as the Leafs stand on opening night. And this morning, the parade that’s being planned after the first victory…
I know I’m pretty excited, as we all are here in Toronto. But let’s get to something much more serious. And this is where I’m glad that you do what you do; and I do what I do. You got to attend a bank conference this week, I believe the RBC Capital Markets banking conference. It sounds crazy. Was it exciting?
It was very good. At the conference, they have the broad market stage presentations, but we also get the opportunity to sit down with CEOs on their own. And then we get to sit down with a bunch of the group business leaders as well to get a flavor for what’s going on in some of the businesses. And I would say that the tone was reasonably constructive, which is not surprising. The stocks have recovered to some degree. There was a lot of epidemiology about how the next two, three, four, six, eight weeks is going to play out. There’s no question it’s going to be a little bit tougher on the near term of the economy. But a couple of key takeaways in my mind. The first was, we’ve talked a lot about the amount of provisions for credit that the banks have taken and I think to a T, all the banks still felt that even with this lockdown, it was trending slightly above the case that they have in the provisions for credit; maybe a little bit more. So that’s a good sign as far as the earnings and capital is concerned. The second thing was, just rolling forward the clock on what happens when the businesses recover inside of a bank. The first is, all the banks have been carrying extra liquidity during a crisis period, so you let some of that liquidity run off, which helps your net interest margins. Eventually, loan growth starts to pick up, maybe on the consumer side first, then commercial. Interest rates are up a little bit from where they were last year and will probably continue to tick higher. So, the net interest income line within a bank can start to improve. Then as activity picks up the fee side of the business, the non-interest revenue side also picks up as advisory picks up and all sorts of things. So, I think it was pretty much in line with our expectations, but it was nice to hear how the movie rolls forward. When you start to see earnings expectations that are higher going into next year particularly, you can begin to get a feel for how they could be delivered. So that was good. I think we talked about on the last call about corporate activity, I think to a T, most bank CEOs said that, about the M&A pipeline, the mergers and acquisitions portion of their business, you don’t know if all the deals will get done but that was quite buoyant, which bodes well. We’ve seen some of them in the marketplace this week. And bank CEOs also said that when they can see some activity in certain parts of their business, they felt the economy was primed to reflate come the other side of this vaccine.
Yes, and that’s something I’d like to delve into a little bit more in future conversations we have, Stu. I know that the US banks are reporting tomorrow. That was a nice view of what’s going on in Canadian banking, but have you any expectations about what we’re going to see and hear from the US banks that start reporting earnings tomorrow morning?
Well, I think it will be quite similar. The one meaningful difference in the United States versus Canada is that the regulator in Canada, out of caution and conservatism, is not letting the banks buy back stock or increase dividends. That will probably be a post-vaccine event in Canada. In the United States, before Christmas the regulators said you can commence share buybacks with excess capital. So in addition to similar themes within the businesses themselves, there is the added bonus of share buyback in the United States as well. So that’s likely begun and that will proceed through the year. But it’s a way of returning excess capital to shareholders above and beyond dividends.
So from your perspective, looking at that and based on what you’ve heard from the Canadian banks, does that make US banks more attractive? Because you’re the co-head of North American Equity at RBC Global Asset Management, when you look on either side, does one look more attractive than the other? Or is it a case of a whole industry that perhaps is about to see some better days ahead of it?
I think it’s a whole industry. Like in the North American oriented funds, we’ve certainly had a healthy weight to US financials. They have done better than Canadian banks in recent times. So ever since the buyback announcement and the move in interest rates, which US banks are more sensitive to interest rates and the buybacks help, they have performed better. I would say at these levels we’re a little bit more agnostic between the two. In both cases, in a market that’s done extremely well when we look at the dividends that we’re receiving, the possibility for maybe some share buyback in Canada at the end of the year, but a resumption of dividend growth likely in 2022, you can still see a reasonable total return potential from these banks as we move forward.
Terrific. Well, thanks Stu. You’re about as good an expert to consult when it comes to Canadian banks and North American banks. Really. So always interested to hear what you have to say around this sector. And we will talk to you next week.
OK, great. Thanks, Dave, and thanks everyone for listening.
Enjoy your Leafs!