Signs Markets Might be Peaking and Mixed Results from Canadian Banks

[00:00:01] [SPEAKER_00]: This is The Canadian Investor, where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Braden Dennis and Simon Belanger.

[00:00:14] [SPEAKER_01]: Welcome back to The Canadian Investor Podcast. I'm back here with Dan Kent. We are recording for our Thursday earnings. It is Monday, December 9th. So if some things do happen, we're recording a little earlier than usual.

[00:00:27] [SPEAKER_01]: Just remember, we're recording this on December 9th. So Dan, how good of a year has it been for you so far from the investing front?

[00:00:37] [SPEAKER_02]: It's been pretty good. I've had a pretty good year over and above the S&P, but I mean, we'll have to see what it closes out at the end of the year.

[00:00:46] [SPEAKER_02]: I mean, the one thing I'm noticing, and we'll talk about whether we're at the top right now, but there's a lot of people who,

[00:00:52] [SPEAKER_02]: I've seen a lot of people posting some pretty impressive returns on the year. A lot of people talking about how much money they've made with options.

[00:01:00] [SPEAKER_02]: A lot of people, you know, it's given 2021 vibes for sure. Just the overall, you know, markets thus far in 2024. But yeah, it's been a pretty solid year.

[00:01:12] [SPEAKER_01]: Yeah, exactly. I mean, it's hard to disagree with you in terms of, you know, it's been a very good year as well.

[00:01:18] [SPEAKER_01]: I can't, can't complain there either. But a lot of stuff right now that we're seeing, it does bring back some memories from 2021.

[00:01:27] [SPEAKER_01]: Like, and one of the things we were chatting about and it's what's happening with like in the crypto space specifically, but not obviously Bitcoin has had a good run this year and especially in the last month.

[00:01:40] [SPEAKER_01]: But when you start looking outside of Bitcoin, especially these meme coins, right, which are just launched oftentimes for no purpose outside of making a quick buck or it's funny.

[00:01:53] [SPEAKER_01]: Well, a good example of that was the Octua token. And for those who are not familiar with it, you can just Google it.

[00:02:01] [SPEAKER_01]: It's a meme that started back in June, if I remember correctly. And the name of the girl who kind of said the, you know, Octua for the first time is Hayley Welsh.

[00:02:12] [SPEAKER_01]: And she's become pretty famous, right, just because of this meme. And she's gained 2.6 million followers on Instagram and several hundred thousands on Twitter.

[00:02:23] [SPEAKER_01]: Now, what why I'm talking about this and again, like just just Google it if you're not familiar with it. I think most people will be.

[00:02:31] [SPEAKER_01]: But on December 4th, she actually I guess her and a group of people launch a Hawk token, I think it was called.

[00:02:41] [SPEAKER_01]: And it tanked with like it basically lost 90 percent of its value within a couple hours.

[00:02:47] [SPEAKER_01]: So people that expose crypto scams like Coffee Zillow is pretty well known on YouTube and mainly focuses on that said that it looked he looked into this and it has all the appearance of being a rug pole, especially for fans, because people have been in the crypto space for a little bit.

[00:03:04] [SPEAKER_01]: You know, they've been familiar with these kind of doings by influencers.

[00:03:08] [SPEAKER_01]: So I think it was mostly people that were fans of hers.

[00:03:12] [SPEAKER_01]: Now, I won't get into that part more here, but like you just said, it does bring some vibes back of 2021.

[00:03:18] [SPEAKER_01]: One of the other things we saw a lot in 2021 was SPACs, right, that were very popular and there was a lot of hype around that.

[00:03:27] [SPEAKER_01]: And SPACs are special purpose acquisition companies.

[00:03:30] [SPEAKER_01]: I don't know if we're seeing as many right now, but definitely, you know, there's a lot of risk on.

[00:03:35] [SPEAKER_01]: And you can tell with that is that, you know, something like that, that obviously if you look at it, even if you you're not in the space a lot, you have to think that there's something pretty fishy about it.

[00:03:48] [SPEAKER_01]: And I won't go into detail.

[00:03:49] [SPEAKER_01]: You can look up Coffee Zillow.

[00:03:51] [SPEAKER_01]: He did a good video just going over on why, you know, it was likely a rug pull and just the the way that the token was launched, the tokenomics that people call it.

[00:04:02] [SPEAKER_01]: And so it just has it just has a feeling for me like what?

[00:04:07] [SPEAKER_01]: Well, not a feeling, but an indicator amongst a lot of other indicators that are showing that we're probably close to the top.

[00:04:17] [SPEAKER_01]: It's obviously very hard to figure out.

[00:04:19] [SPEAKER_01]: But what are your thoughts on that?

[00:04:21] [SPEAKER_01]: Aside from what I said?

[00:04:22] [SPEAKER_02]: Yeah, I mean, I would I would agree.

[00:04:25] [SPEAKER_02]: I don't know, understand, like if it was actually her who got involved with this or if just somebody maybe wanted to launch a token and use the brand to kind of, you know, take advantage of it.

[00:04:35] [SPEAKER_02]: Like she did some promotional stuff for.

[00:04:38] [SPEAKER_01]: Oh, did she?

[00:04:38] [SPEAKER_01]: Yeah.

[00:04:39] [SPEAKER_01]: Yeah.

[00:04:40] [SPEAKER_01]: Yeah.

[00:04:40] [SPEAKER_01]: Exactly.

[00:04:41] [SPEAKER_01]: And she hasn't posted on social media since doing a Twitter space where they got just clobbered by Coffee Zillow amongst other people.

[00:04:50] [SPEAKER_01]: Yeah.

[00:04:51] [SPEAKER_02]: Yeah.

[00:04:52] [SPEAKER_02]: I mean, there's obviously a lot of liquidity right now if coins like this are going like what was do you know what the market cap was at the at the peak of it?

[00:04:59] [SPEAKER_02]: I think it reached like 500 million.

[00:05:01] [SPEAKER_01]: Oh, God.

[00:05:03] [SPEAKER_01]: I know.

[00:05:04] [SPEAKER_01]: I mean, it's sad for people that and a lot of people lost.

[00:05:08] [SPEAKER_01]: Oh, yeah.

[00:05:08] [SPEAKER_01]: People a lot of savings because they they bought into it, too.

[00:05:12] [SPEAKER_02]: Yeah.

[00:05:13] [SPEAKER_02]: I mean, it's just pure degenerate gambling.

[00:05:15] [SPEAKER_02]: I mean, that's that's all it is when you're buying things like this.

[00:05:18] [SPEAKER_02]: And I mean, even if even like particular stocks, I mean, just over the last the last like couple of weeks or so, I don't know if anybody's heard of Soundhound.

[00:05:27] [SPEAKER_02]: Have you heard of Soundhound?

[00:05:29] [SPEAKER_02]: Yeah, it's pretty old, isn't it?

[00:05:31] [SPEAKER_02]: Oh, they've gone up like.

[00:05:33] [SPEAKER_01]: No, I mean, but just Soundhound like the brand.

[00:05:37] [SPEAKER_01]: Like, I feel like that's pretty old, right?

[00:05:38] [SPEAKER_02]: Well, they it looks like they IPO'd in 2022, but they kind of went like a bit flat for a while.

[00:05:45] [SPEAKER_02]: But apparently they I'm not exactly sure why, but apparently they signed a reasonable deal and they're up like 300 percent over the last month.

[00:05:54] [SPEAKER_02]: Like I've had so many text messages about Soundhound over the last the last while.

[00:06:00] [SPEAKER_02]: And I mean, just there's a you know, there's no doubt that, you know, the markets are are overvalued.

[00:06:07] [SPEAKER_02]: I think a lot of people do understand that.

[00:06:09] [SPEAKER_02]: I mean, I continue to buy on a weekly basis.

[00:06:11] [SPEAKER_02]: I would I would consider the, you know, stocks that I buy not to be egregiously overvalued.

[00:06:17] [SPEAKER_02]: But the markets overall, I think we're getting getting to a point where it's, you know, investors should should definitely be cautious.

[00:06:25] [SPEAKER_01]: Yeah, exactly.

[00:06:26] [SPEAKER_01]: And I guess I'll finish on this here.

[00:06:28] [SPEAKER_01]: So there's a bunch of charts that show this like market cycle investing guide.

[00:06:33] [SPEAKER_01]: I mean, there's different phases of kind of market euphoria.

[00:06:38] [SPEAKER_01]: And I think right now it kind of starts with the one I'm looking at and they're all pretty similar.

[00:06:43] [SPEAKER_01]: Maybe they use the term a bit differently.

[00:06:45] [SPEAKER_01]: So first stage is hope, then optimism, then believe, then thrill, then euphoria, then complacency after a small pullback.

[00:06:52] [SPEAKER_01]: And then it starts going down anxiety, denial, panic, capitulation, anger, depression, disbelief.

[00:07:00] [SPEAKER_01]: So I'm going to go on a limb that we're probably in the euphoria phase right now because you're seeing market sentiment through the roof.

[00:07:09] [SPEAKER_01]: A lot of people asking about, you know, stocks, crypto that I never heard talking about in terms investing.

[00:07:17] [SPEAKER_01]: Right. So just kind of people coming out of the woodwork.

[00:07:20] [SPEAKER_01]: So there's definitely a lot of optimism, bullishness right now.

[00:07:24] [SPEAKER_01]: And that's one of the reasons, like I talked on the last podcast with Brayden, like I am putting some money into U.S.

[00:07:32] [SPEAKER_01]: Treasury bills as cash to have a bit more of a cash cushion.

[00:07:36] [SPEAKER_01]: Again, I'm not selling everything.

[00:07:37] [SPEAKER_01]: It's a 15 to 20 percent allocation I'm looking to build.

[00:07:41] [SPEAKER_01]: I'm getting pretty close right now to finish building that.

[00:07:44] [SPEAKER_01]: And just the reason is to give myself some hedging in place.

[00:07:49] [SPEAKER_01]: And, you know, if markets continue going like this, then I'll still benefit from it pretty well.

[00:07:54] [SPEAKER_01]: But if they go down, I'm kind of, you know, increasing my floor, I would say.

[00:07:58] [SPEAKER_02]: Yeah, I mean, we've had, you know, there's a lot of history, probably, you know, 100 years of history that suggests, you know, the markets will return anywhere from 8 to 10 percent.

[00:08:07] [SPEAKER_02]: And over the last five years, I think we're at 14 and a half.

[00:08:10] [SPEAKER_02]: So, I mean, it's eventually going to get back to that 8 to 10 percent.

[00:08:15] [SPEAKER_02]: How it does that is anyone's guess.

[00:08:17] [SPEAKER_02]: You know, you could get a few flat years or, you know, you could get a big correction.

[00:08:21] [SPEAKER_02]: But either way, I mean, 14 and a half percent annualized returns over the last five years or, you know, it's probably unsustainable.

[00:08:30] [SPEAKER_02]: It's been very good if you've been invested over the last five years for sure.

[00:08:33] [SPEAKER_02]: I mean, it's been like game changing levels of returns.

[00:08:38] [SPEAKER_02]: But I think at some point it's going to normalize.

[00:08:40] [SPEAKER_02]: Yeah.

[00:08:40] [SPEAKER_01]: And I guess I'll finish on this.

[00:08:42] [SPEAKER_01]: I haven't looked at it in a couple of weeks, but someone was saying I read someone.

[00:08:46] [SPEAKER_01]: I think it was on Twitter.

[00:08:47] [SPEAKER_01]: But, you know, when you start seeing stuff that, you know, Warren Buffett has lost it or Warren Buffett doesn't know what he's doing anymore or something like that.

[00:08:56] [SPEAKER_01]: Can't remember the exact wording they were using, but it pretty much came before like all the big correction, like before the financial crisis.

[00:09:05] [SPEAKER_01]: And before I think 2000 as well, like a lot of people will start mentioning that, you know, he doesn't know or he's passed his time.

[00:09:15] [SPEAKER_01]: And then obviously with hindsight, usually I mean, he doesn't have the timing exactly well.

[00:09:21] [SPEAKER_01]: But whenever we see his cash grow in terms of percentage of assets above 25 percent, he usually does pretty well, you know, five, 10 years down the line.

[00:09:32] [SPEAKER_01]: Of course, it's hard to pinpoint when it actually happens, whether Buffett is a bit early or not.

[00:09:37] [SPEAKER_01]: We'll have to see.

[00:09:38] [SPEAKER_01]: But I think, you know, it's always interesting seeing those headlines because whenever that, you know, it's just another thing that you start seeing.

[00:09:45] [SPEAKER_01]: They're like, OK, markets are getting a bit ahead of himself and saying that this time is different.

[00:09:51] [SPEAKER_01]: That's always a dangerous phrase, I find.

[00:09:53] [SPEAKER_02]: Oh, for sure.

[00:09:54] [SPEAKER_02]: It was the same in like late 2021.

[00:09:57] [SPEAKER_02]: They were saying he's kind of he's lost his touch.

[00:10:00] [SPEAKER_02]: And and I looked up just returns from late 2021.

[00:10:03] [SPEAKER_02]: Berkshire is at 67 percent while the S&P is at around 29.

[00:10:08] [SPEAKER_02]: So he's done OK.

[00:10:09] [SPEAKER_01]: He's done OK.

[00:10:10] [SPEAKER_02]: He has not lost his edge.

[00:10:12] [SPEAKER_01]: Yeah, no, exactly.

[00:10:15] [SPEAKER_01]: Well, now we'll move on to some earnings, you know, some good and bad.

[00:10:19] [SPEAKER_01]: And we said we would talk about the Canadian banks.

[00:10:23] [SPEAKER_01]: So we won't touch on all of them.

[00:10:25] [SPEAKER_01]: We've kind of taken a sample of them just to to have a look how it's going.

[00:10:29] [SPEAKER_01]: So I'll start off with National Bank.

[00:10:31] [SPEAKER_01]: So the smallest of the big six here revenues increased 15 percent for the quarter.

[00:10:36] [SPEAKER_01]: Net income on an adjusted basis was up 9 percent for the quarter to nine hundred and twenty eight million.

[00:10:43] [SPEAKER_01]: Most of their segments performed very well on an end income basis.

[00:10:48] [SPEAKER_01]: This earnings per share was up eight percent to two dollar fifty eight.

[00:10:52] [SPEAKER_01]: The CT one ratio was up 20 basis point versus last last year.

[00:10:58] [SPEAKER_01]: And the CT one is just a way of measuring how banks can absorb kind of a financial shock or any kind of adverse market conditions.

[00:11:08] [SPEAKER_01]: So the higher typically the better.

[00:11:10] [SPEAKER_01]: So it just sits the capital they have readily available to absorb those shocks.

[00:11:16] [SPEAKER_01]: Deposit excluding wholesale funding were up nine percent year over year.

[00:11:20] [SPEAKER_01]: Their net interest margin, which is just a difference between what they pay out in terms of, you know, if you have money deposited with them and what they get in terms of the loans was zero point seven one percent, which was slightly down from last year.

[00:11:33] [SPEAKER_01]: A couple of basis points.

[00:11:34] [SPEAKER_01]: Now, where it gets a little, I would say, tricky for National Bank is the provision for for credit losses.

[00:11:44] [SPEAKER_01]: We were talking about that then.

[00:11:46] [SPEAKER_01]: Right.

[00:11:46] [SPEAKER_01]: So they've really they've really increased those provisions, at least in the most recent quarter.

[00:11:52] [SPEAKER_01]: And I'm trying to pull it up here for our joint TCI listeners.

[00:11:57] [SPEAKER_01]: Okay.

[00:11:58] [SPEAKER_01]: Unfortunately, we can't see it well, but and I'm having trouble sharing here.

[00:12:03] [SPEAKER_01]: So I'm just going to continue.

[00:12:04] [SPEAKER_01]: So they were up 41 percent year over year to one hundred and sixty two million.

[00:12:08] [SPEAKER_01]: Now, it's a bit of a catch up for them and it's been increasing for them just steadily for, I think, about like six quarters in a row now.

[00:12:16] [SPEAKER_01]: Yeah.

[00:12:16] [SPEAKER_01]: Where they've yeah, they've really been increasing that now to put things into context.

[00:12:21] [SPEAKER_01]: Like they were not provisioning as a percentage of their loans as much as the other banks.

[00:12:26] [SPEAKER_01]: Right.

[00:12:26] [SPEAKER_01]: So they're just playing a little bit of catch up here.

[00:12:29] [SPEAKER_02]: Yeah.

[00:12:29] [SPEAKER_02]: And they still have the lowest total PCL ratio out of any of the other banks.

[00:12:35] [SPEAKER_02]: So like that would be, you know, the the their entire loan book, you know, compared to the amount of provisions they have.

[00:12:41] [SPEAKER_02]: They're still at only 27 basis points.

[00:12:44] [SPEAKER_02]: I think the next closest would be CIBC.

[00:12:46] [SPEAKER_02]: But I mean, it was like a larger than normal uptick.

[00:12:51] [SPEAKER_02]: Compared to what it is reported, you know, over the last year or so.

[00:12:54] [SPEAKER_02]: So, I mean, that's always going to spook investors a bit, especially when you see a company like like CIBC, which is reporting like big declines, like quarter over quarter declines in provisions, which is mainly why it was the best bank in the country this year.

[00:13:09] [SPEAKER_02]: I think it was up something like 55 percent.

[00:13:11] [SPEAKER_02]: It was they had a heck of a year.

[00:13:13] [SPEAKER_02]: But I think National seen a little bit of a slowdown in its Canadian personal and commercial banking as well, which is like that's been what's fueled a lot of these banks over the last while.

[00:13:24] [SPEAKER_02]: I think people were pretty bearish on the Canadian economy, but the banks have done quite well in Canada.

[00:13:29] [SPEAKER_02]: And I think National had a bit of a a bit of a slowdown overall.

[00:13:33] [SPEAKER_01]: Yeah.

[00:13:33] [SPEAKER_01]: And I was able to pull it here so you can see for joint TCI subscribers how the provision for loan losses have really ramped up for National Bank.

[00:13:42] [SPEAKER_01]: Now, I think we have to put things on context because their loans, their gross loans.

[00:13:47] [SPEAKER_01]: So basically, their loan book has grown pretty substantially as well.

[00:13:50] [SPEAKER_01]: So I think you have to just keep that in mind and be fair.

[00:13:53] [SPEAKER_01]: And that's why we look at it a lot of the time you talked about percentage and their allowance for loan loss ratio, which is essentially all the money they have on their balance sheet.

[00:14:03] [SPEAKER_01]: So not just looking at one quarter, what they're setting aside for provisions, but all the money they've set aside on their balance sheet minus what they've recovered and minus a couple of other things.

[00:14:15] [SPEAKER_01]: Well, that was that ratio was 0.55 percent and only up one basis point compared to last year.

[00:14:21] [SPEAKER_01]: And that compares it to their total loan book.

[00:14:24] [SPEAKER_01]: So it just goes to show, yes, it has increased.

[00:14:26] [SPEAKER_01]: But putting into perspective, it's it's not too bad, especially when they're still quite much, much lower than the other big banks.

[00:14:34] [SPEAKER_01]: I don't think any of them is that low in terms of the loan loss ratio.

[00:14:39] [SPEAKER_02]: No, they definitely have one of the lower ratios.

[00:14:42] [SPEAKER_02]: And I think that was just because in 2023, they just weren't, you know, increasing as much as the other banks.

[00:14:49] [SPEAKER_02]: So, I mean, it'll be interesting to see if they if they do play catch up, because, I mean, a lot of these, like I said,

[00:14:54] [SPEAKER_02]: a lot of these situations are, you know, banks are this is all like completely complete predictions.

[00:15:00] [SPEAKER_02]: I mean, they're just kind of planning what they set aside.

[00:15:03] [SPEAKER_02]: So some in some situations, like you seen CIBC in 2023 was booking huge provisions.

[00:15:09] [SPEAKER_02]: So that really hurt them.

[00:15:11] [SPEAKER_02]: But then in 2024, you can kind of tell, you know, they're not playing catch up.

[00:15:15] [SPEAKER_02]: They're doing the reverse.

[00:15:16] [SPEAKER_02]: They're actually saying, OK, it wasn't as bad.

[00:15:18] [SPEAKER_02]: And now you're seeing not recoveries and provisions, but lower quarter over quarter numbers and provisions.

[00:15:24] [SPEAKER_02]: Whereas, you know, national is kind of doing the opposite right now.

[00:15:27] [SPEAKER_01]: Yeah, no, exactly.

[00:15:29] [SPEAKER_01]: And I think one thing that probably is playing in their favor is that when you look at their mortgage book, which is roughly, I think, a third.

[00:15:37] [SPEAKER_01]: I'm just doing kind of rough math here of their total loan portfolio because they have 95 billion and I think they have 300 or close in the high twos in terms of their gross loan books.

[00:15:48] [SPEAKER_01]: If I remember correctly, but I'd have to look that up.

[00:15:51] [SPEAKER_02]: I'm pretty sure it's over 300.

[00:15:52] [SPEAKER_01]: Yeah.

[00:15:53] [SPEAKER_01]: Anyways, I think it's probably roughly a third.

[00:15:55] [SPEAKER_01]: Right.

[00:15:55] [SPEAKER_01]: Just kind of looking at that.

[00:15:57] [SPEAKER_01]: And 54% of their loans or sorry, 52 is in Quebec.

[00:16:03] [SPEAKER_01]: So the reason why I say that is Quebec is definitely different than Ontario and BC in terms of, you know, how, you know, crazy prices got.

[00:16:13] [SPEAKER_01]: I know it got pretty high in Montreal, but it's not the only place.

[00:16:17] [SPEAKER_01]: Right.

[00:16:17] [SPEAKER_01]: So Quebec's a pretty big province.

[00:16:19] [SPEAKER_01]: And even Montreal, it wasn't as bad as it was in Toronto, for example.

[00:16:23] [SPEAKER_01]: So in the GTA.

[00:16:25] [SPEAKER_01]: So they do have some exposure to Ontario, but it's in the 30%.

[00:16:30] [SPEAKER_01]: So it's not it's definitely not as bad.

[00:16:33] [SPEAKER_01]: So something to to keep in mind there.

[00:16:36] [SPEAKER_02]: Yeah, this is going to be the reverse of pretty much every other Canadian bank.

[00:16:41] [SPEAKER_02]: Like you're going to see the bulk of them have exposure to Ontario.

[00:16:44] [SPEAKER_02]: That's going to be like their top province.

[00:16:47] [SPEAKER_02]: Whereas national is a bit different just because it's like more of a like a reasonable regional player, I guess,

[00:16:53] [SPEAKER_02]: in Quebec.

[00:16:53] [SPEAKER_02]: But now with with Canadian Western, that's probably going to change a bit, but it's still going to be heavily concentrated in Quebec,

[00:17:02] [SPEAKER_02]: which kind of creates a bit of a different dynamic because, yeah, it's not it's not as exposed to those, you know, massive real estate markets.

[00:17:10] [SPEAKER_01]: Yeah, exactly.

[00:17:11] [SPEAKER_01]: So the numbers I was sorry, a little bit off 54% for Quebec, 30% for Ontario.

[00:17:16] [SPEAKER_01]: And then the rest is like Alberta, BC, other provinces are just between four and seven percent.

[00:17:22] [SPEAKER_01]: So just give people an idea.

[00:17:24] [SPEAKER_01]: But overall, I think it was a no kick order for national bank, probably not what markets wanted to see in terms of provisions for credit losses.

[00:17:33] [SPEAKER_01]: So I think that was higher than expected.

[00:17:35] [SPEAKER_01]: But I mean, it's been one of the better performing banks, I think, over the last several years.

[00:17:40] [SPEAKER_01]: And from what I've seen, the acquisition with Canadian Western Bank is supposed to close, I think, towards the back half of next year.

[00:17:48] [SPEAKER_01]: Something like that still sounds like it's in the works.

[00:17:51] [SPEAKER_01]: It's just regulatory approval and stuff, but pretty good quarter.

[00:17:56] [SPEAKER_01]: And now we'll shift on from the smallest to the biggest one.

[00:17:58] [SPEAKER_01]: So you'll go over Royal Bank.

[00:18:00] [SPEAKER_02]: Yeah, so Royal Bank reported pretty strong earnings yet again.

[00:18:05] [SPEAKER_02]: So earnings per share came in at $3.07 when $3 was expected.

[00:18:10] [SPEAKER_02]: So this is the sixth straight quarter in which Royal has posted earnings over and above estimates.

[00:18:17] [SPEAKER_02]: So loan growth remains pretty strong across pretty much all segments.

[00:18:21] [SPEAKER_02]: Personal loans grew by 4%, commercial by 12%.

[00:18:24] [SPEAKER_02]: The company is also seeing 8% plus growth in deposits across personal and commercial accounts.

[00:18:30] [SPEAKER_02]: And just with me going over a lot of the big banks last week, I mean, this seems like the highest rate of deposits among the major banks, which is definitely a good sign as well.

[00:18:41] [SPEAKER_02]: I mean, when we look to the underlying growth of the company, not including HSBC, which will kind of give investors a better indicator of organic growth.

[00:18:49] [SPEAKER_02]: So net income is up 9% year over year and revenue grew by double digits.

[00:18:54] [SPEAKER_02]: So, I mean, while many of the other banks are struggling to report earnings growth in 2024 just because of the macro environment or whether it be other particular struggles.

[00:19:04] [SPEAKER_02]: I mean, with the case of TD, it's the anti-money laundering.

[00:19:07] [SPEAKER_02]: Royal just, you know, they continue to perform just fine.

[00:19:11] [SPEAKER_02]: The company's PCL ratio, which again would measure, you know, the amount of PCLs the company has relative to their entire loan book.

[00:19:19] [SPEAKER_02]: That came in at 35 basis points, which is only up, you know, one point year over year.

[00:19:24] [SPEAKER_02]: But it's kind of, it's up eight points quarter over quarter.

[00:19:27] [SPEAKER_02]: So provisions for credit losses came in 27% higher than the third quarter of 2024.

[00:19:32] [SPEAKER_02]: So I'm pretty surprised, you know, that the company reacted so positive or that the market reacted so positively to Royals earnings.

[00:19:40] [SPEAKER_02]: I mean, it must, it must just be because the underlying growth is so strong.

[00:19:44] [SPEAKER_02]: Like after all the company's pre-provision pre-tax earnings, they grew by 31% year over year.

[00:19:50] [SPEAKER_02]: So, I mean, they're, you know, more than offsetting a lot of those provisions with just strong underlying growth.

[00:19:56] [SPEAKER_02]: The company's gross impaired loans ratio came in at 59 basis points, which is one of the ratios, the better ratios among major banks.

[00:20:05] [SPEAKER_02]: I mean, if you listen to the episode last week, we went over Scotiabank, they came in at 88 basis points.

[00:20:10] [SPEAKER_02]: So that's a huge, huge difference when it comes to, you know, total impaired loans.

[00:20:15] [SPEAKER_02]: And the company attributes most all of the increase in gross impaired loans to either Canadian residential real estate or Canadian commercial real estate.

[00:20:24] [SPEAKER_02]: And I mean, Royal does have the most exposure to the Canadian economy out of any of the other banks.

[00:20:31] [SPEAKER_02]: So this isn't really all that surprising.

[00:20:34] [SPEAKER_02]: Gross impaired loans in both the capital markets and wealth management segments actually decreased.

[00:20:39] [SPEAKER_02]: So the bulk of the increase in Royals provisions were in the Canadian banking segment and particularly Canadian commercial banking.

[00:20:47] [SPEAKER_02]: So when we look to year over year provisions, personal banking PCLs are up only around 11%, whereas commercial is up 52%, which, you know, a huge chunk of that being reported in this quarter.

[00:20:58] [SPEAKER_02]: So the company settled for medium term targets, that being 7% earnings growth, 16% returns on equity, CET1 ratio, which you had mentioned before, explained what it was of 13% and dividend payout ratios in the 40 to 50% range.

[00:21:13] [SPEAKER_02]: So it hit the CET1 and the dividend payout ratio and the return on equity target, but it missed the earnings by about a percent.

[00:21:21] [SPEAKER_02]: But I mean, overall, it was it was a really strong year for Royal.

[00:21:24] [SPEAKER_02]: And I think now the main question is valuation.

[00:21:27] [SPEAKER_02]: I mean, the company, the company is expensive.

[00:21:31] [SPEAKER_02]: I actually think I did, you know, a trailing earnings history for Royal Bank, and this is pretty much the highest valuation it's traded at in over 20 years.

[00:21:41] [SPEAKER_02]: So they're trading north of 15.5x earnings with the with 10 year averages being around 12.2.

[00:21:48] [SPEAKER_02]: So, I mean, you know, the market clearly thinks that this is going to be the best institution to move to own moving forward.

[00:21:56] [SPEAKER_02]: And it's going to be interesting to see if they're right.

[00:21:58] [SPEAKER_01]: Yeah.

[00:21:59] [SPEAKER_01]: The P as I had the trailing earnings.

[00:22:01] [SPEAKER_01]: Definitely the P is, as people can see here, I'm sharing it for joint TCI.

[00:22:06] [SPEAKER_01]: So you can see at least over the last 10 years, it's pretty much at the highest.

[00:22:11] [SPEAKER_02]: Yeah.

[00:22:12] [SPEAKER_02]: And I mean, like, I don't use trailing price to earnings much in terms of like absolute valuations.

[00:22:18] [SPEAKER_02]: But I do think like, especially when you compare it to what, you know, the market has historically paid for the company over the last 10 to 15 years.

[00:22:25] [SPEAKER_02]: It does come in handy quite a bit.

[00:22:27] [SPEAKER_02]: And you're looking at, you know, a big, big premium relative to what Royal is typically traded at.

[00:22:34] [SPEAKER_02]: But again, when you look to the results, it's also been, you know, well, it has been the best performing bank, in my opinion.

[00:22:43] [SPEAKER_02]: I mean, CIBC has returned more, but that's mostly from, you know, a lower provision basis, whereas Royal Bank.

[00:22:50] [SPEAKER_02]: Yeah, very low sentiment too.

[00:22:51] [SPEAKER_02]: Yeah.

[00:22:52] [SPEAKER_02]: Royal Bank has, on the other hand, just been, you know, killing it in terms of results over the last while.

[00:22:57] [SPEAKER_01]: Yeah.

[00:22:58] [SPEAKER_01]: I mean, the only thing, and we were talking about RBC, right?

[00:23:01] [SPEAKER_01]: For me, I'm definitely cautious because there's been a lot of people that are connected in the real estate industry.

[00:23:07] [SPEAKER_01]: And I'll focus on that as well.

[00:23:09] [SPEAKER_01]: Like RBC seems to have a lot of exposure with the pre-construction condos going up in Toronto, being finished and having, you know, exposure to these builders that are having trouble selling these condos.

[00:23:25] [SPEAKER_01]: Because they were being sold at 20, 30%, whatever it is, higher than the value that they're actually worth right now.

[00:23:32] [SPEAKER_01]: When you're looking across the street, the same condo is selling for 20, 30, 40% less in terms of price per square foot.

[00:23:39] [SPEAKER_01]: So, you know, I've read on quite a few people, whether it's Steve Saretsky, I think there was also Ron Butler, Dan Foz from the Canadian Real Estate Investor podcast, that RBC is one of the banks that has a lot of exposure there.

[00:23:54] [SPEAKER_01]: And it's still not out in the mainstream media, whether they've been trying to hide that or not, I don't know.

[00:24:01] [SPEAKER_01]: But it is something that I would keep an eye on, especially given, you know, RBC is a big bank, so they can probably absorb a decent amount of, you know, losses if it were to happen.

[00:24:12] [SPEAKER_01]: But my point is, like what you were saying is that it's priced almost perfection here.

[00:24:18] [SPEAKER_01]: And there are some potential underlying issue that they could face in the next couple of years where a lot of these condos are coming up for completion, I think, in 25 and 26.

[00:24:28] [SPEAKER_02]: Well, I mean, then you get the bit of the, wasn't there the increase in insured mortgages allowance and they were allowing these companies to go back?

[00:24:41] [SPEAKER_02]: It was like a back-end bailout, I think, in my opinion, of the banks.

[00:24:46] [SPEAKER_02]: I mean, to allow them to go back and insure a bunch of these pre-construction homes so that they probably...

[00:24:52] [SPEAKER_01]: I don't know if they, yeah, I don't know if they can go back.

[00:24:54] [SPEAKER_01]: I know we had talked about that, but I had seen stuff afterwards that I'm not sure if they were able to go back.

[00:25:00] [SPEAKER_01]: But nonetheless, even if they're not allowed to, it will allow some people that, you know, above a million to actually get insurance and also requiring less of a down payment now for the mortgage.

[00:25:13] [SPEAKER_01]: Because it's 5% under the first $500,000 of your mortgage and then 10% for anything above up to $1.5 million.

[00:25:22] [SPEAKER_01]: Of course, you still have to qualify technically.

[00:25:25] [SPEAKER_01]: Yeah.

[00:25:25] [SPEAKER_01]: And that's another kind of issue that's been happening here.

[00:25:29] [SPEAKER_01]: There's been like a lot of blanket approvals apparently happening in the condo space.

[00:25:34] [SPEAKER_01]: So, but nonetheless, I mean, you're changing the down payment from, you know, if it's a million to one from being $220,000 that you need for a down payment.

[00:25:45] [SPEAKER_01]: Because right now you need 20% versus, you know, needing, you know, I'm trying to think about the math quickly, but probably around like $90,000, $85,000, $90,000.

[00:25:56] [SPEAKER_01]: So, it's a big difference where it will probably allow some people to close.

[00:26:00] [SPEAKER_01]: But again, now you get into the fact that they will be paying more interest over the long run.

[00:26:05] [SPEAKER_01]: So, it is kind of a way to bail out potentially financial institution and put that on the back of the consumer.

[00:26:13] [SPEAKER_01]: So, yeah.

[00:26:13] [SPEAKER_02]: I mean, I can't even imagine the mortgage payment on one of those places at that cost.

[00:26:19] [SPEAKER_02]: It would just be.

[00:26:20] [SPEAKER_01]: And you're talking about condos too, right?

[00:26:23] [SPEAKER_01]: So, buying a house is one thing because there's like, there's not as many houses that are being built like single family homes.

[00:26:30] [SPEAKER_01]: When they are, it's usually in suburbs, right?

[00:26:33] [SPEAKER_01]: So, if you buy a house in a neighborhood that's relatively central, you can make a case that it, you know, it can still go down.

[00:26:41] [SPEAKER_01]: There can still be bear markets.

[00:26:42] [SPEAKER_01]: But because there is such a limited supply that, you know, there's going to be kind of still some kind of a floor for demand for those properties, right?

[00:26:52] [SPEAKER_01]: So, it's the condos that are definitely tricky.

[00:26:54] [SPEAKER_02]: Yeah.

[00:26:55] [SPEAKER_02]: They're slapping them up pretty fast, especially around the Calgary area.

[00:26:58] [SPEAKER_02]: So, I mean, and I mean, I can't imagine it's going to continue.

[00:27:02] [SPEAKER_02]: I mean, it's probably more appealing for people to be building condos than it is like detached homes just because of pricing, things like that.

[00:27:10] [SPEAKER_02]: But yeah, I mean, with Royal being the largest Canadian bank, it's obviously going to have the most exposure to something like that.

[00:27:17] [SPEAKER_02]: But it also does like its loan book is gigantic.

[00:27:21] [SPEAKER_02]: I mean, it probably has the ability to absorb those costs.

[00:27:27] [SPEAKER_01]: Yeah.

[00:27:27] [SPEAKER_01]: But again, I think it is definitely tricky in my view right now because of the valuation.

[00:27:32] [SPEAKER_01]: It is priced like to perfection.

[00:27:34] [SPEAKER_01]: I think that's the main point I'm making.

[00:27:36] [SPEAKER_01]: I'm not saying, you know, you know, RBC is going down or anything like that.

[00:27:41] [SPEAKER_01]: Like first, we know that governments would never let that happen.

[00:27:43] [SPEAKER_01]: Like it is clearly too big to fail, not only in Canada, but on a global basis.

[00:27:47] [SPEAKER_01]: It is a GSIB bank along with TD.

[00:27:50] [SPEAKER_01]: So that would never be allowed to happen.

[00:27:53] [SPEAKER_01]: But I think it may be, you know, I wouldn't be surprised if you see RBC trading kind of sideways for the next couple of years just based on the valuation and how the stock is priced.

[00:28:33] [SPEAKER_01]: So, yeah.

[00:29:05] [SPEAKER_01]: They didn't come with the exception of capital markets, which was flat.

[00:29:08] [SPEAKER_01]: So that's, again, very good for CIBC.

[00:29:10] [SPEAKER_01]: Their net interest margin was up six basis point year over year to 1.5%.

[00:29:16] [SPEAKER_01]: Deposits increased 6% year over year.

[00:29:18] [SPEAKER_01]: Again, always something you want to see.

[00:29:20] [SPEAKER_01]: And it seems like most banks are seeing like deposits inflows, right?

[00:29:25] [SPEAKER_01]: You talked about RBC as well.

[00:29:27] [SPEAKER_01]: So I guess that's good.

[00:29:29] [SPEAKER_01]: People are putting their money in the bank.

[00:29:31] [SPEAKER_02]: Yeah.

[00:29:32] [SPEAKER_02]: I mean, huge, huge, huge saving rates from Canadians as well.

[00:29:36] [SPEAKER_02]: I mean, it's not really all that surprising, but it's definitely CIBC and RBC, I think are two of the highest because I'm pretty sure Scotia was like three or 4%.

[00:29:46] [SPEAKER_02]: So there's a pretty big difference there.

[00:29:48] [SPEAKER_01]: Well, even Scotiabank, not Scotiabank, but National Bank did quite well.

[00:29:53] [SPEAKER_01]: Yeah.

[00:29:54] [SPEAKER_01]: Yeah, I think I was saying earlier, I think it was like eight or 9% excluding wholesale.

[00:29:59] [SPEAKER_01]: I think it was even higher when including wholesale.

[00:30:02] [SPEAKER_01]: But yeah, definitely something pretty good when you're looking at that because at the end of the day, deposits are the live blood of banks.

[00:30:11] [SPEAKER_01]: Yeah, you never want to see them going down.

[00:30:13] [SPEAKER_01]: Exactly.

[00:30:13] [SPEAKER_01]: We saw them in the US and when deposits go down and people start fleeing the bank, there's a lot of trouble that can happen.

[00:30:23] [SPEAKER_01]: Now, going to the provisions for credit losses.

[00:30:26] [SPEAKER_01]: So PCLs were 519 million.

[00:30:28] [SPEAKER_01]: Again, that's a decrease of 22% year over year and 13% quarter over quarter.

[00:30:34] [SPEAKER_01]: So again, kind of talking to what we're saying.

[00:30:36] [SPEAKER_01]: CIBC, I think, was putting a lot of provisions early on.

[00:30:41] [SPEAKER_01]: And now I think they're scaling back a little bit.

[00:30:44] [SPEAKER_01]: But again, when you start looking at the PCL for 2024 as a whole, they're actually the same that they were in 2023.

[00:30:51] [SPEAKER_01]: So they put aside the same amount last year than they did this year.

[00:30:55] [SPEAKER_01]: It's just starting reducing a bit more now towards the end of the year.

[00:30:59] [SPEAKER_01]: Now, the allowance for loan loss ratio.

[00:31:01] [SPEAKER_01]: So it's the total allowance on the balance sheet compared to the loan book.

[00:31:05] [SPEAKER_01]: So that was down 4% at four basis points, I mean, year over year and is now sitting at 0.69%.

[00:31:12] [SPEAKER_01]: So if we remember National Bank, it was 0.55%.

[00:31:16] [SPEAKER_01]: For that, it just goes to show that, yes, National Bank increased their PCL, but they're still pretty behind some of the banks.

[00:31:25] [SPEAKER_01]: Whether their loan book is just better and they won't need to put aside as much or they're just behind and it's going to catch up, we'll have to see.

[00:31:32] [SPEAKER_01]: But I wanted to bring that context.

[00:31:35] [SPEAKER_01]: Anything else you want to add before I keep going here?

[00:31:38] [SPEAKER_02]: No, I mean, I guess the one thing I'll say is I think CIBC in 2023 was probably a result of its mortgage exposure and just how much it had to set aside.

[00:31:47] [SPEAKER_02]: And it's probably seeing, you know, I mean, I would bet now with the jobs report that we see 50 basis points on Wednesday.

[00:31:55] [SPEAKER_02]: I think they might cut 50 basis points again.

[00:31:58] [SPEAKER_02]: I guess people will be listening to this after the fact.

[00:32:01] [SPEAKER_02]: But yeah, exactly.

[00:32:03] [SPEAKER_02]: If that's the case, I mean, they're going to see more, probably more relief, you know, on the mortgage end of their portfolio, which is a huge segment of their portfolio.

[00:32:11] [SPEAKER_02]: So that's probably why the provisions are coming in a little bit easier.

[00:32:15] [SPEAKER_01]: Yeah, yeah, exactly.

[00:32:17] [SPEAKER_01]: So we'll have to see.

[00:32:19] [SPEAKER_01]: That's the trend I've been seeing as well as more people are saying like 50 basis points that are in the no there.

[00:32:24] [SPEAKER_01]: I mean, yeah, the jobs report wasn't good.

[00:32:29] [SPEAKER_01]: The economy is clearly slowing in Canada.

[00:32:31] [SPEAKER_01]: But again, if you start doing a 50 and then the U.S. does 25 and then pauses like we've seen the Canadian dollar being super pressured right now.

[00:32:40] [SPEAKER_01]: So how low will they let it go?

[00:32:44] [SPEAKER_01]: So I guess that's the question.

[00:32:45] [SPEAKER_01]: If they're willing to let it go a decent amount lower than, yeah, I think 50 is in the cards and some more cuts next year.

[00:32:53] [SPEAKER_01]: But I don't know what they're thinking.

[00:32:55] [SPEAKER_01]: I think they've been saying that, you know, it's a free floating currency.

[00:32:59] [SPEAKER_01]: I get that to some extent, but there are some there are some tradeoffs, right?

[00:33:04] [SPEAKER_01]: There's some repercussion, whichever way you want to go.

[00:33:07] [SPEAKER_01]: And coming back to CIBC, just showing here for our joint TCI listeners.

[00:33:12] [SPEAKER_01]: So they have their investor presentation and they always do a good job.

[00:33:16] [SPEAKER_01]: I love CIBC.

[00:33:17] [SPEAKER_01]: They always have like a nice little breakdown of their loan portfolio here.

[00:33:20] [SPEAKER_01]: So right now it's 53 percent for real estate secured lending.

[00:33:24] [SPEAKER_01]: So you have, well, real estate lending.

[00:33:27] [SPEAKER_01]: So 50 percent is, I guess, traditional mortgages type of lending and three percent is HELOC.

[00:33:33] [SPEAKER_01]: And then the next biggest part for the loan book is business and government loans and then commercial real estate.

[00:33:41] [SPEAKER_01]: And so 26 percent for business government, commercial real estate 10.

[00:33:46] [SPEAKER_01]: And then you get into the, I guess, credit card lending.

[00:33:49] [SPEAKER_01]: That is four percent on the next on the list.

[00:33:53] [SPEAKER_01]: So, yes, they are very, very exposed to real estate.

[00:33:56] [SPEAKER_01]: They have 558 billion of their own portfolio.

[00:33:59] [SPEAKER_01]: So let's just say half of that.

[00:34:00] [SPEAKER_01]: So it's about like 275, 280 billion worth of real estate exposure, roughly.

[00:34:08] [SPEAKER_01]: Yeah.

[00:34:08] [SPEAKER_02]: Yeah.

[00:34:09] [SPEAKER_02]: And then you look at the HELOCs, which would kind of be.

[00:34:12] [SPEAKER_02]: Yeah.

[00:34:12] [SPEAKER_02]: I mean, I guess those are backed by home.

[00:34:14] [SPEAKER_02]: So, I mean, they're not as risky.

[00:34:16] [SPEAKER_02]: And then commercial real estate.

[00:34:17] [SPEAKER_02]: I mean, it's a very real estate heavy bank.

[00:34:20] [SPEAKER_02]: Yeah.

[00:34:22] [SPEAKER_01]: Yeah, that's right.

[00:34:23] [SPEAKER_01]: Yeah.

[00:34:23] [SPEAKER_01]: If I forgot to include in their commercial real estate.

[00:34:26] [SPEAKER_01]: But yeah, if you include that, it's like essentially two thirds of their portfolio is somehow tied to real estate.

[00:34:32] [SPEAKER_02]: Which I think Royal is around 50 percent like everything.

[00:34:36] [SPEAKER_02]: That's just number off the top of my head.

[00:34:38] [SPEAKER_02]: But you can kind of get, you know, the differing degrees of exposure there.

[00:34:43] [SPEAKER_01]: Yeah.

[00:34:43] [SPEAKER_01]: And like you said, there's a good chunk, right, that is insured.

[00:34:46] [SPEAKER_01]: And the loan to value here is not, you know, not the worst for their uninsured mortgages.

[00:34:54] [SPEAKER_01]: So, it's around like 50 percent for Ontario in Canada.

[00:34:59] [SPEAKER_01]: And then for Vancouver, it's a bit lower at 45 percent.

[00:35:02] [SPEAKER_01]: So, yes, there is some leeway there.

[00:35:04] [SPEAKER_01]: The reason why you want to see the loan to value is if things comes to worse, then they still have a decent buffer if they need to, you know, get the, sell the property to recoup their loan.

[00:35:14] [SPEAKER_02]: Yeah.

[00:35:15] [SPEAKER_02]: Get their money back, essentially.

[00:35:16] [SPEAKER_02]: You don't want to see like 90 percent, you know, because there's.

[00:35:18] [SPEAKER_02]: No.

[00:35:19] [SPEAKER_02]: Because banks don't like to hold on to those assets very long either in that type of situation.

[00:35:23] [SPEAKER_02]: And, you know, with if it's 90 percent, they might end up taking a loss or something like that.

[00:35:28] [SPEAKER_02]: But I mean, I guess that would be that would be insured.

[00:35:30] [SPEAKER_02]: Yeah.

[00:35:31] [SPEAKER_01]: And they're not.

[00:35:31] [SPEAKER_01]: Yeah.

[00:35:32] [SPEAKER_01]: And they're.

[00:35:32] [SPEAKER_01]: Yeah.

[00:35:32] [SPEAKER_01]: Insured.

[00:35:33] [SPEAKER_01]: Exactly.

[00:35:33] [SPEAKER_01]: Those would be the higher loans.

[00:35:35] [SPEAKER_01]: I mean, they could have like, you know, uninsured would be 20 percent down.

[00:35:40] [SPEAKER_01]: So they could have, you know, if they'd be in a tough spot, they could be like in the 70s.

[00:35:45] [SPEAKER_01]: Right.

[00:35:45] [SPEAKER_01]: For their uninsured portfolio.

[00:35:46] [SPEAKER_01]: You know, if they would be like in the 60s and 70s, then I would start getting a little

[00:35:52] [SPEAKER_01]: worried because these are typically going to be higher valued properties.

[00:35:56] [SPEAKER_01]: So they could get, you know, a pretty, you know, there's a smaller pool of buyers.

[00:36:01] [SPEAKER_01]: So you can make a case how it can get pretty bad.

[00:36:04] [SPEAKER_01]: But when you start digging into their impaired loan, it's a bit more of a mixed bag.

[00:36:08] [SPEAKER_01]: So what stood out was Canadian residential mortgages, which had a jump of essentially it went from

[00:36:16] [SPEAKER_01]: 0.21 percent impaired ratio to 0.28 year over year.

[00:36:21] [SPEAKER_01]: So not crazy, but definitely something to keep an eye on because like we just talked about

[00:36:26] [SPEAKER_01]: the very heavy real estate here.

[00:36:29] [SPEAKER_01]: Canadian personal lending wasn't great either.

[00:36:31] [SPEAKER_01]: Went up from 0.48 percent to 0.57 percent.

[00:36:35] [SPEAKER_01]: One of the good news was business and government loans fired much better.

[00:36:40] [SPEAKER_01]: The ratio actually dropped 29 basis points to 0.73 percent.

[00:36:46] [SPEAKER_01]: However, the reported net write-offs were less than 0.01 percent for residential mortgages.

[00:36:52] [SPEAKER_01]: So it's a bit like we were just talking, right?

[00:36:55] [SPEAKER_01]: Whether it's insured by CMHC and there's a couple of other companies that insure that

[00:37:00] [SPEAKER_01]: or whether the loan to value is low enough for the uninsured.

[00:37:04] [SPEAKER_01]: So clearly they're able to recoup their money when there are impaired mortgages.

[00:37:08] [SPEAKER_01]: You know, it could get tricky if we get into a massive correction for real estate, right?

[00:37:13] [SPEAKER_01]: I don't know if that will happen or not, but that's where it could get tricky is when

[00:37:17] [SPEAKER_01]: banks start having to, you know, write off some actual amounts of money.

[00:37:23] [SPEAKER_01]: Right now we can just say that they're able to recoup most of it.

[00:37:27] [SPEAKER_01]: And that's the one thing to keep in mind.

[00:37:29] [SPEAKER_01]: The last thing here is the net write-off for credit card.

[00:37:33] [SPEAKER_01]: I was interested in that.

[00:37:34] [SPEAKER_01]: That went from 2.64 percent last year to 3.45 percent this year.

[00:37:40] [SPEAKER_01]: So in the span of a year, it increased 79 basis points.

[00:37:43] [SPEAKER_01]: That's a big increase.

[00:37:44] [SPEAKER_01]: Yeah, that's a very big increase.

[00:37:46] [SPEAKER_01]: Now, to be fair, like I mentioned, it's only 4% of their business, but that is something

[00:37:50] [SPEAKER_01]: that you want to keep an eye on.

[00:37:53] [SPEAKER_01]: Even if it's 4%, I feel like I think it's a business they are trying to grow a little bit.

[00:37:59] [SPEAKER_01]: CIBC, I think you saw with the deal that they have with Costco amongst other things in Canada.

[00:38:04] [SPEAKER_01]: So something to keep in mind.

[00:38:07] [SPEAKER_01]: It's also a sign that we're seeing increased stress from consumers, right?

[00:38:12] [SPEAKER_01]: Whether it's personal lending or credit card lending, you're seeing those net write-offs going up.

[00:38:20] [SPEAKER_02]: Yeah, I mean, I would put the credit cards, credit cards being like the least important payment.

[00:38:26] [SPEAKER_02]: Like if you have an auto loan or a mortgage or something, you're going to pay those before your credit card.

[00:38:31] [SPEAKER_02]: Which, I mean, there's a reason they're 20% APRs.

[00:38:34] [SPEAKER_02]: I mean, they're not something you want to be utilizing all that much, but clearly a lot of people are.

[00:38:38] [SPEAKER_02]: But that is a pretty big, big increase.

[00:38:41] [SPEAKER_02]: But I mean, it's still like, I think if we look to Canadian Tire, aren't they at like 6% plus?

[00:38:47] [SPEAKER_01]: Yeah, I think they're higher than that.

[00:38:49] [SPEAKER_01]: Yeah.

[00:38:50] [SPEAKER_01]: I mean, it all depends, right?

[00:38:51] [SPEAKER_01]: It always depends with credit card.

[00:38:52] [SPEAKER_01]: It is like who their consumer base is.

[00:38:55] [SPEAKER_01]: So you will see some varying degrees.

[00:38:57] [SPEAKER_01]: For me, it's not necessarily how high they are.

[00:39:01] [SPEAKER_01]: It's more the rate of increase and how quickly up it's going.

[00:39:04] [SPEAKER_01]: Because if they have, you know, consumers in general, the big banks probably have more stable income earners as consumers.

[00:39:12] [SPEAKER_01]: So I would expect to see that a bit lower for them.

[00:39:16] [SPEAKER_01]: But something to keep an eye on if it starts kind of creeping up pretty quickly.

[00:39:20] [SPEAKER_01]: And like if a year from now, it's like above 4%, that's definitely some warning signs.

[00:39:25] [SPEAKER_01]: Not necessarily for CIBC, but for the Canadian economy for sure.

[00:39:29] [SPEAKER_02]: Yeah, definitely.

[00:39:31] [SPEAKER_02]: Well said.

[00:39:32] [SPEAKER_02]: Well, do you want to move on to TD?

[00:39:34] [SPEAKER_02]: Yeah, the shit show that is TD.

[00:39:36] [SPEAKER_02]: So yeah, have at it.

[00:39:38] [SPEAKER_02]: Yeah.

[00:39:39] [SPEAKER_02]: So I would argue, and I don't think a lot of people would contest it, that TD Bank reported the weakest quarter out of all big six banks.

[00:39:48] [SPEAKER_02]: Actually, by quite a wide range.

[00:39:52] [SPEAKER_02]: So although the company had mentioned that the AML issues like the anti-money laundering would be kind of a one-time cost.

[00:39:59] [SPEAKER_02]: It's pretty clear they're going to linger for quite a while.

[00:40:03] [SPEAKER_02]: So much so that the company pretty much said it will be challenging to post any sort of earnings growth in 2025.

[00:40:09] [SPEAKER_02]: And as a result, they even suspended their guidance.

[00:40:12] [SPEAKER_02]: I mean, maybe I'm just, I haven't been paying attention all that much.

[00:40:15] [SPEAKER_02]: But I can't remember the last time a Canadian bank, first off, not all of them issue guidance.

[00:40:20] [SPEAKER_02]: And if they do, like I can't remember the last time a bank has suspended it.

[00:40:26] [SPEAKER_02]: Which, I mean, ultimately, the suspension of guidance effectively tells me that they have no idea how bad it's going to get.

[00:40:33] [SPEAKER_02]: And not only would that be AML issues moving forward, but also the asset cap.

[00:40:37] [SPEAKER_02]: Because that's something that they're currently dealing with right now.

[00:40:42] [SPEAKER_02]: And I mean, the initial comments on earnings growth lead me to believe that flat earnings in 2025 would probably be the best case for TD moving forward.

[00:40:51] [SPEAKER_02]: They missed estimates.

[00:40:53] [SPEAKER_02]: This is the fourth time in the last seven quarters.

[00:40:56] [SPEAKER_02]: The company has come in below market estimates.

[00:40:58] [SPEAKER_02]: And I mean, this goes to show you how difficult the AML issues and costs have been to predict.

[00:41:04] [SPEAKER_02]: Because, I mean, Canadian banks are usually, they can, you know, analysts have a fairly easy time predicting their earnings from them.

[00:41:12] [SPEAKER_02]: They're so stable.

[00:41:12] [SPEAKER_02]: They're so reliable over the last while.

[00:41:14] [SPEAKER_02]: So to miss it that often, you know, it's becoming quite an issue.

[00:41:18] [SPEAKER_02]: The company has a remediation plan that extends to 2028.

[00:41:22] [SPEAKER_02]: So, I mean, if you go to their investor relations, like their slideshows.

[00:41:26] [SPEAKER_02]: So, I mean, they expect to be still working on this in 2028.

[00:41:31] [SPEAKER_02]: So it's not going to be an issue that's going away anytime soon.

[00:41:35] [SPEAKER_02]: I mean, they raised the dividend by 3%, which is a little puzzling to me.

[00:41:39] [SPEAKER_02]: But it's not entirely unexpected.

[00:41:41] [SPEAKER_02]: The raise, I mean, in my opinion, it's nothing.

[00:41:43] [SPEAKER_01]: Got to keep that streak going, Dan.

[00:41:45] [SPEAKER_01]: Yeah, that's what it is.

[00:41:46] [SPEAKER_02]: It's because, like, TD, prior to these anti-money laundering issues, like, TD typically used to raise the dividend 8% to 9% a year.

[00:41:53] [SPEAKER_02]: So, I mean, 3% raise.

[00:41:55] [SPEAKER_02]: They just want to keep their dividend growth streak alive.

[00:41:57] [SPEAKER_02]: With payout ratios, they're north of 80% right now.

[00:42:00] [SPEAKER_02]: And more AML costs expected to hit earnings in 2025.

[00:42:04] [SPEAKER_02]: I mean, the prudent move would have been not to raise.

[00:42:06] [SPEAKER_02]: However, I mean, you know, not raising may have rocked a boat on a stock that's already struggling quite a bit.

[00:42:12] [SPEAKER_02]: I mean, there is room there, but you typically never want to see these banks with 80%.

[00:42:17] [SPEAKER_02]: They consulted with BCE on what to do with the dividend before they did it.

[00:42:23] [SPEAKER_02]: I mean, I would expect, like, the thing is, is costs.

[00:42:26] [SPEAKER_02]: It's probably a safe bet to say that costs in 2025 will not be as large as 2024.

[00:42:32] [SPEAKER_02]: So the payout ratio should normalize.

[00:42:35] [SPEAKER_02]: But right now, like, if you're just, like, looking at it, it's 82% or 83% just because of the huge costs they've had to incur this year.

[00:42:42] [SPEAKER_02]: But, I mean, they should be fine with that level of raise.

[00:42:46] [SPEAKER_02]: But, I mean, we'll see.

[00:42:48] [SPEAKER_02]: If earnings continue to take a hit, I mean, over the last year, they're down 1%.

[00:42:52] [SPEAKER_02]: So they fell 1% in 2024.

[00:42:55] [SPEAKER_02]: Revenue is up 9.9%.

[00:42:57] [SPEAKER_02]: Return on equity fell by around 60 basis points to sit at 13.6%.

[00:43:02] [SPEAKER_02]: So the company's Canadian arm is doing quite well, but obviously its U.S. arm is struggling quite a bit.

[00:43:08] [SPEAKER_02]: So the company has actually had to reduce its U.S. assets on its balance sheet in terms of restructuring

[00:43:16] [SPEAKER_02]: to make sure they have a bit of a buffer against the asset cap.

[00:43:21] [SPEAKER_02]: So it's been selling off mortgages.

[00:43:23] [SPEAKER_02]: It's been selling off commercial auto dealership lending, things like that.

[00:43:27] [SPEAKER_02]: So on the year, revenue fell by 1% in the U.S. segment and earnings came in 14% lower.

[00:43:33] [SPEAKER_02]: However, this actually includes the proceeds from its Schwab sale.

[00:43:38] [SPEAKER_02]: So it sold off a bunch of shares in its Schwab position to pretty much pay for those anti-money laundering fines.

[00:43:45] [SPEAKER_02]: So, I mean, if you isolate those numbers out, it gets even worse.

[00:43:49] [SPEAKER_02]: First, the company's gross impaired loans came in at 52 basis points, which is an 8 basis point jump from last year.

[00:43:55] [SPEAKER_02]: But it really isn't all that bad when we compare it to the other banks.

[00:43:58] [SPEAKER_02]: It's relatively in line.

[00:44:00] [SPEAKER_02]: In terms of total PCLs, they came in at $1.109 billion.

[00:44:04] [SPEAKER_02]: Most of them are impaired loans, performing loans.

[00:44:08] [SPEAKER_02]: They reduced, which again is probably some overly cautious loans they were putting on provisions.

[00:44:16] [SPEAKER_02]: Now that rates are coming down, they can probably remove those loans or those loans have also moved into the impaired portion.

[00:44:23] [SPEAKER_02]: This $1.109 billion is only around $30 million more than last quarter.

[00:44:27] [SPEAKER_02]: So it's a pretty good sign of stabilization.

[00:44:30] [SPEAKER_02]: I mean, overall, it's been the weakest performing Canadian bank because of the whole AML issue, which I think is, you know, it's going to severely impact its ability to grow unless it shifts its overall strategy.

[00:44:41] [SPEAKER_02]: Like as we've seen with Wells Fargo, I mean, they still have that asset cap.

[00:44:46] [SPEAKER_02]: I mean, they haven't removed it yet.

[00:44:47] [SPEAKER_02]: They don't really know when it's going to go away.

[00:44:49] [SPEAKER_02]: And I mean, I moved on from this one as soon as I seen these issues.

[00:44:54] [SPEAKER_02]: So I sold it because I just think like, you know, back then my thinking was, I mean, where there's smoke, there's fire.

[00:45:01] [SPEAKER_02]: The initial reporting, you know, analysts initially expected, oh, this is only going to cost them around $500 million.

[00:45:07] [SPEAKER_02]: And I think they're sitting at like $4 billion in total costs right now.

[00:45:12] [SPEAKER_02]: And, you know, that doesn't even include the expected hit to earnings.

[00:45:16] [SPEAKER_02]: So, yeah, it's been a pretty rough few years for TD Bank.

[00:45:22] [SPEAKER_01]: Yeah, exactly.

[00:45:22] [SPEAKER_01]: And right now I'm sharing for joint TCI listeners.

[00:45:26] [SPEAKER_01]: I showed prior to this, I showed the dividend that was paid on the trail in 12 months and every year compared to an income.

[00:45:34] [SPEAKER_01]: And, yeah, they still have some wiggle room there.

[00:45:38] [SPEAKER_01]: Was that the best idea to raise it?

[00:45:40] [SPEAKER_01]: I don't know.

[00:45:40] [SPEAKER_01]: We'll have to see.

[00:45:41] [SPEAKER_01]: But in terms of total assets, right, so you're seeing it hovering around $1.92 billion.

[00:45:49] [SPEAKER_01]: It'll be, I think you're just going to have to get used to those total assets to be around that level.

[00:45:56] [SPEAKER_01]: And, you know, I can't remember what the asset cap was, but I know we had talked about when it came down.

[00:46:01] [SPEAKER_01]: I think it was a few months ago, right?

[00:46:04] [SPEAKER_02]: Wasn't it like $234 billion or something?

[00:46:07] [SPEAKER_02]: Let me check.

[00:46:08] [SPEAKER_02]: No, it would be more than that.

[00:46:09] [SPEAKER_01]: Oh, it was, yeah, that's right because it was specific to their U.S.

[00:46:14] [SPEAKER_02]: Yeah, it's not their total.

[00:46:16] [SPEAKER_01]: So, yeah, so you'll still see, yeah, that's correct.

[00:46:18] [SPEAKER_01]: So the asset, you'll still see probably some growth in total assets, but the U.S. is going to stall.

[00:46:25] [SPEAKER_01]: Yeah.

[00:46:26] [SPEAKER_02]: Yeah, and I think like what they're effectively doing is because they capped it.

[00:46:29] [SPEAKER_02]: And again, I don't know the exact numbers.

[00:46:31] [SPEAKER_02]: I'd have to look it up.

[00:46:32] [SPEAKER_02]: But they were, when they placed the cap, they only had a couple billion dollars in room.

[00:46:36] [SPEAKER_02]: So ultimately, you got to create a bit of a buffer or else you're effectively going to be completely stalled out in terms of, you know, doing anything in the United States.

[00:46:45] [SPEAKER_02]: So, I mean, I would imagine they're going to go through and kind of strategically pick, you know, assets and loans they want in the United States and maybe sell off the rest just kind of to give them a little bit of a buffer so they can still, you know, operate and offer new products down there, things like that.

[00:46:59] [SPEAKER_02]: But I mean, it doesn't look good.

[00:47:01] [SPEAKER_01]: Yeah, which is pretty common, right?

[00:47:03] [SPEAKER_01]: Like some people might be wondering, yes, it's pretty common that you'll have like banks issue the loans or financial institution and then they'll turn around and sell it to another lender.

[00:47:15] [SPEAKER_01]: So that's not that unusual, but obviously they need to do it for strategic reasons at this point because they don't really have a choice.

[00:47:23] [SPEAKER_02]: Yeah, $434 billion was the cap.

[00:47:25] [SPEAKER_02]: So I missed it by $200 billion.

[00:47:28] [SPEAKER_02]: But I mean, they were close.

[00:47:29] [SPEAKER_02]: And I think they like when the cap was put in place, I think TD had like $431 billion.

[00:47:35] [SPEAKER_02]: So they effectively said you are not growing at all, which it's pretty harsh.

[00:47:41] [SPEAKER_01]: Yeah, I mean, we've been pretty, I mean, you know, we don't always get things right, but we were very right on this one that people should be very careful.

[00:47:49] [SPEAKER_01]: I think ever since this started coming out, I think it started happening.

[00:47:54] [SPEAKER_01]: I think it's been over a year now, right?

[00:47:56] [SPEAKER_01]: The rumblings?

[00:47:57] [SPEAKER_01]: Oh, yeah.

[00:47:58] [SPEAKER_01]: Yeah, the First Horizon or was it First Horizon?

[00:48:02] [SPEAKER_01]: Yeah.

[00:48:02] [SPEAKER_01]: They were trying to buy?

[00:48:03] [SPEAKER_01]: That deal like fell apart.

[00:48:05] [SPEAKER_01]: Nobody really knew why it did.

[00:48:07] [SPEAKER_01]: Yeah, it was right around the Silicon Valley Bank.

[00:48:10] [SPEAKER_01]: I remember.

[00:48:11] [SPEAKER_01]: And then people were speculating, were like, oh, maybe they just kind of, you know,

[00:48:16] [SPEAKER_01]: they just pulled out of the deal because there's so much volatility and they're just going to pay the breakup fee.

[00:48:21] [SPEAKER_01]: But then, yeah, so early thing in the spring of 2023, it started to come out.

[00:48:27] [SPEAKER_01]: And then I think they revealed later that year that they were under investigation for AML, like officially.

[00:48:34] [SPEAKER_01]: Yeah.

[00:48:34] [SPEAKER_02]: Yeah.

[00:48:34] [SPEAKER_02]: It's, they've had, so, I mean, just over the last three years, the Canadian Banking Index has returned 30%.

[00:48:41] [SPEAKER_02]: Well, TD has lost nearly 12%.

[00:48:43] [SPEAKER_01]: Yeah.

[00:48:43] [SPEAKER_01]: Well, in our year review, that is one thing I was looking at.

[00:48:48] [SPEAKER_01]: Even year to date, I think the financial sector, which includes more than banks in Canada,

[00:48:54] [SPEAKER_01]: but the financial sector was up like something like 30% total returns this year.

[00:48:59] [SPEAKER_01]: And I know TD is down total returns.

[00:49:01] [SPEAKER_01]: I don't know by much.

[00:49:02] [SPEAKER_01]: I think it's down in the mid to low single digits.

[00:49:05] [SPEAKER_01]: 9.6%.

[00:49:06] [SPEAKER_01]: Total return.

[00:49:07] [SPEAKER_01]: Yeah.

[00:49:07] [SPEAKER_02]: I think four out of the six banks this year have even outperformed the S&P.

[00:49:13] [SPEAKER_02]: So, I mean, to see that and then to see TD down 10%.

[00:49:17] [SPEAKER_02]: And the thing is, is like TDs, they're handicapped effectively moving forward as well with that asset cap.

[00:49:24] [SPEAKER_02]: It's definitely, you know, I think a lot of the times people choose, you know, the weakest performing Canadian Bank moving forward,

[00:49:32] [SPEAKER_02]: which, I mean, might still work, but I think this asset cap, it's going to impact them moving forward, no doubt.

[00:49:39] [SPEAKER_01]: Yeah.

[00:49:39] [SPEAKER_01]: And I mean, you know, people can do whatever they want with their money, but I think Wells Fargo is the best, you know, example of this.

[00:49:47] [SPEAKER_01]: Unfortunately, I don't think it's going to be great for TD and you better hope that they grow well in Canada.

[00:49:54] [SPEAKER_01]: Yeah.

[00:49:55] [SPEAKER_01]: But again, is that that great?

[00:49:58] [SPEAKER_01]: I mean, we're seeing the economy at least struggle right now in Canada a lot more than in the US.

[00:50:04] [SPEAKER_01]: So, you know, how many good loans can you actually use in Canada?

[00:50:08] [SPEAKER_01]: That's another question.

[00:50:09] [SPEAKER_01]: And then, you know, I've seen people even saying they could expand, you know, to other countries and grow to other countries.

[00:50:16] [SPEAKER_01]: But again, other countries will see what happened in the US.

[00:50:20] [SPEAKER_01]: And do you think they'll be that, you know, keen on giving banking licenses to TD in their country?

[00:50:28] [SPEAKER_01]: They may be.

[00:50:29] [SPEAKER_01]: But again, I don't think it's, you know, you have to assume that it'll be super easy for them to do that.

[00:50:35] [SPEAKER_02]: Yeah, I think, you know, it's not a guarantee that they're just going to be able to because they got to shift their strategy fast because I really don't think they'll be able to grow all that fast in Canada.

[00:50:45] [SPEAKER_02]: First off, the competition here is, I mean, you got major players like Royal who just are just dominating in Canada.

[00:50:52] [SPEAKER_02]: Like, how is TD going to come in and, you know, make up for their US growth here in Canada?

[00:50:58] [SPEAKER_02]: I don't even think it's possible, to be honest.

[00:51:00] [SPEAKER_02]: I think you're going to see a slowdown.

[00:51:01] [SPEAKER_02]: And I mean, they even said it themselves.

[00:51:03] [SPEAKER_02]: Earnings are not going to grow in 2025.

[00:51:08] [SPEAKER_02]: They're effectively expecting flat earnings.

[00:51:10] [SPEAKER_02]: Whereas you look to pretty much every other Canadian bank, and it's never a guarantee, but most banks are expected to grow earnings at, you know, a mid to high single digit pace.

[00:51:21] [SPEAKER_02]: So, I mean, that's a drastic difference.

[00:51:23] [SPEAKER_01]: Yeah.

[00:51:24] [SPEAKER_01]: So, you know, anyways, it'll be interesting to follow this story.

[00:51:28] [SPEAKER_01]: I think, unfortunately, I think it's going to drag on the company for several years.

[00:51:32] [SPEAKER_01]: So, I think it's just the beginning and until you know for sure that they can come out of it and the stigma for, like, you know, the stigma as well, right?

[00:51:42] [SPEAKER_01]: Like, there's going to be a stigma on TD because they did business with criminals and they didn't follow AML rules.

[00:51:49] [SPEAKER_01]: There's going to be a stigma and how will that affect potential business?

[00:51:53] [SPEAKER_01]: That's one as well.

[00:51:54] [SPEAKER_01]: But I think it's a good point to wrap it up here.

[00:51:58] [SPEAKER_01]: We did have some more earnings, but we had a feeling with all the banks and, you know, talking about market exuberance at the beginning.

[00:52:07] [SPEAKER_01]: It may take most of the episodes.

[00:52:08] [SPEAKER_01]: So, that's okay.

[00:52:09] [SPEAKER_01]: We will be planning to do an earnings episode probably in the next week or the week after.

[00:52:15] [SPEAKER_01]: That's a bit of a recap for earnings that we missed during the latest earnings season as things are starting to slow down a bit more.

[00:52:23] [SPEAKER_01]: So, we'll be able to catch up.

[00:52:25] [SPEAKER_01]: I know you had BRP, Lululemon for me, Canadian Tire is another one.

[00:52:29] [SPEAKER_01]: I'm sure there's going to be a few other names that will stick in there as well.

[00:52:33] [SPEAKER_01]: Yeah.

[00:52:34] [SPEAKER_01]: Thanks for listening, everybody.

[00:52:35] [SPEAKER_01]: Yeah.

[00:52:35] [SPEAKER_01]: Thanks for listening, everyone.

[00:52:37] [SPEAKER_01]: And, oh, before I forget, make sure you give us a review if you haven't done so on the podcast player that you're listening.

[00:52:44] [SPEAKER_01]: It helps people discover us and, you know, it just, you know, gives us a great feeling as well.

[00:52:50] [SPEAKER_01]: So, if you can give us a like, a review, a positive review, that would be really appreciated.

[00:52:56] [SPEAKER_01]: Thanks, everyone.

[00:52:58] [SPEAKER_01]: The Canadian Investor Podcast should not be construed as investment or financial advice.

[00:53:03] [SPEAKER_01]: The hosts and guests featured may own securities or assets discussed on this podcast.

[00:53:09] [SPEAKER_01]: Always do your own due diligence or consult with a financial professional before making any financial or investment decisions.