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Canadian Bank Stocks: Bubble about to Burst? Q&A w/Bank Expert — Transcript

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0:00Disclaimer, this video is for
0:01educational entertainment purposes only.
0:04It is not financial advice. We are not
0:06registered financial adviserss.
0:09Hello everyone. I have the absolute
0:12honor and pleasure to have a legend back
0:15on the channel. I am joined with Rob
0:18Wessle who is the executive chairman and
0:21co-founder of Hamilton ETFs. How's it
0:24going, Rob?
0:25>> It's going very well. No, thanks for
0:27having me back. coming back uh coming
0:29out of semi-retirement
0:31uh I know that you're very busy and I
0:34really just want to start off by saying
0:36you're a legend in the community number
0:37one number two
0:39>> I really appreciate you you doing this
0:41this is a just a non-sponsored video or
0:43anything like that because I wanted to
0:46talk to an expert uh or someone who
0:50really knows the Canadian banks really
0:52well because the Canadian banks have
0:54been running and running running up and
0:56and they're you know very hot topic and
0:58are they going to crash and there's a
0:59lot of chatter going on. So I said who
1:02better to ask than Rob Wessle who in a
1:05past life was literally a Canadian bank
1:07analyst. So is that that's correct,
1:09right? So what did you do in your past
1:11life that make you such an expert?
1:13>> Huh? Well, I have about 31 years of
1:16experience um uh involved in the
1:18Canadian banking sector. I first started
1:20out in investment banking and then uh
1:22actually corporate finance uh at a large
1:25corporation then investment banking. I
1:26was an equity research analyst for for
1:28quite a long time and then uh and then
1:30in my current life. So yeah, it's uh 31
1:34years with the sector. So I'm um it's
1:38it's been it's been a long time.
1:39>> Yeah, I I think I got the the right
1:41person. You were also an accountant in a
1:43past life. And when we say bank analyst,
1:45I mean you're the guy that literally
1:46goes through the quarterly that's gone
1:48through the quarterly reports and the PE
1:50ratios and valuations or the bank
1:52expenses versus other times. are they
1:55cheap versus other times? So, you're
1:57really the guy uh to talk to. And
1:59another little point that I have to
2:01mention, you are the legend behind the
2:04creation of HD as well, which is a very
2:08I would say pivotal/important
2:12amazing ETF in in the community for for
2:14various reasons because, you know, I
2:16always say that it kind of started it
2:17all. started at 25% leverage trend, but
2:20so you're an absolute legend and I can't
2:23wait to have this discussion with you.
2:25So, thanks again for your time, Rob.
2:27>> Um, let's get into it right away. So,
2:30the banks, the Canadian six banks have
2:32done really, really, really well. So, in
2:34terms of valuations, um, I see that,
2:37okay, they're, uh, they're they're
2:38they're they're too frothy. In terms of
2:41valuations, what can you actually tell
2:43us about the truth? Are they expensive?
2:46Are they still cheap in your opinion and
2:48compared to the past? I know that
2:50typically they use the PE ratios.
2:54>> So, go ahead. The floor is yours.
2:56>> Yeah. So, you know, there's there's
2:58there's a few different metrics that
3:00people use to evaluate the Canadian
3:01banks depending on the environment, but
3:02generally speaking, uh the price
3:04earnings multiple is is the most
3:06important and and thinking about price
3:08earnings multiples generally speaking
3:10the next 12 months. So, what we like to
3:12call PE forward.
3:14>> Okay. Um, so you know back when I was in
3:17equity research and I have a comp table
3:19to my left just uh so you might see me
3:21looking to my left for a moment moment
3:23in time and you know back in the day you
3:26know for a very very long period of time
3:27literally decades
3:30if you know things were relatively
3:32normal or benign and and the sector was
3:34you know plugging along doing well they
3:37would probably trade at 11 times give or
3:39take 11 times uh the next four quarters
3:42earnings And if things were doing really
3:45really well, you know, ROIs were
3:47expanding, earnings per share growth was
3:49seen to be higher than the market was
3:51forecasting or the analysts, excuse me,
3:53they would maybe trade at 12. And if
3:55people started to get really, you know,
3:57worried about the outlook and they
3:58thought things were slowing down, maybe
4:00they would trade at 10. And then if you
4:01were in a big severe downturn like, you
4:04know, COVID or the global financial
4:05crisis, they might go to seven. So that
4:07would give you that's not perfect, but
4:10if you're thinking back three decades,
4:11I'd say that's a pretty good starting
4:13point. So interestingly enough, uh in
4:18the last 12 months, you've actually seen
4:21these PE multiples rise to over 15
4:25times.
4:27So, I don't know what the Canadian X
4:29traded at in uh uh 1860
4:34uh or you know 1910,
4:37>> right?
4:38>> These would and are likely the highest
4:41PE multiples ever recorded by the
4:44Canadian banks. So, there's, you know,
4:48they they are they're definitely at very
4:51high multiples. Now, it's it's it's not
4:54clear and we I know we're going to talk
4:56about this. It it's not clear what that
4:58means, but sorry, over to you.
5:00>> No, that that's really a good
5:02indication. Uh I like I love
5:04>> that's your starting point.
5:06>> Good starting point. So, just to sum up,
5:08>> cheap COVID disaster stuff, seven.
5:12>> Uh normal, regular, everything's humming
5:14along 10. Frothy maybe a little bit
5:17higher, 12, 13, 14. And right now are
5:21you like what about right now? Right now
5:23are we at the 14? We're 14 15 because I
5:25know there was a little pullback.
5:27>> 14 and a half. Yeah. So 14 and a half.
5:29>> Normal would be 11. Really good. You
5:32know back in the, you know, back over
5:33the past several decades would be 12.
5:35And if they were struggling a little
5:36bit, maybe they'd be 10. I'd say that's
5:38a pretty good rule of thumb. And right
5:39now, you know, they're 14.6.
5:42Um I'm looking right now, this is as a
5:44Friday, using Bloomberg as a source. Um,
5:47and so yeah, they are and and these are
5:50the highest multiples I've seen in my
5:52over 30-year career. And you know, I I
5:54know for sure that these are higher
5:56definitely higher than what they were
5:57say in the in the 1970s. So suffice to
6:00say, I think you can say these are the
6:02highest multiples in at least 50 years,
6:05probably the highest multiples they've
6:06ever achieved.
6:07>> So people might interpret that as frothy
6:10>> right now or bubble or whatever, however
6:12they want to call it. So
6:13>> Oh, yeah. They're elevated for sure.
6:15>> Elevated. Yeah. Yeah. Um, so the
6:18million-dollar question, of course, Rob,
6:20>> is why? So, I know we're going to go
6:22through some potential reasons. So, if I
6:25could just throw out some some maybe of
6:27my theories out there or what I've been
6:29asking myself,
6:30>> uh, because, you know, if you look on
6:32the news, which I don't, which I rarely
6:34look at, and maybe I'll see some
6:35headlines [clears throat] by accident
6:37because I'm scrolling through some some
6:38some funny cat videos or something.
6:41>> Um,
6:42>> the Canadian economy is not doing that
6:44well. Lagging. G7.
6:47Um, but the Canadian banks are doing
6:50really, really, really well. So, is it
6:52because they're just amazing banks? Is
6:54it because Canadians that that own
6:57assets pile money in there? Is it an
7:00explosion of ETF access? Is it
7:02>> because they're so well-run and they're
7:05expanding international operations? So,
7:08in terms of why are some potential
7:10reasons, what can you tell us of why
7:12this is happening right now? So, so the
7:14first thing I will tell you is I don't
7:16think anybody knows, right? So, I think
7:18in if if you had a private conversation
7:21with the CEOs of any of the individual
7:23Canadian banks and I've um over the
7:25[clears throat] years I've I've spent a
7:26lot of time with Canadian bank CEOs, uh
7:28I don't think any of them would be able
7:30to say exactly why. And I think what's
7:32interesting right now is there's no
7:34single identifiable reason for them to
7:37be trading where they're trading. So
7:38what I think what we all have including
7:40myself or our firm I should say is we
7:42have theories. So why don't I give you
7:44some of my theories
7:46>> please.
7:46>> Um the first one is um what I call the
7:49Australia effect uh which is that the
7:52Australian banks which are equally good
7:54to the Canadian banks. We have an
7:55Australian bank ETF ticker HBA. Uh the
7:58market you know it's a smaller country
8:00more successful than Canada GD higher
8:02GDP growth much wealthier than we are.
8:04uh they have world-class banks but the
8:06market is has lacks breadth. So what has
8:10happened over the years is the
8:12Australian banks trade at much high have
8:14historically traded at much higher
8:15multiples than say the Canadian banks or
8:17indeed any global banks and yet they
8:20didn't fall in price. They I mean they
8:22were very very strong performing banks.
8:23They just traded at higher multiples.
8:25But a function of I I I surmise or I I
8:28submit to you was the lack of breadth in
8:30the markets. the investment alternatives
8:31in the publicly equity markets. You
8:34know, there was not as many things that
8:36were as high quality as the banks and so
8:38people were prepared to bid them up.
8:39They obviously had higher payout ratios
8:40and higher dividend yields and that's
8:42variable too. There's also a unique
8:43aspect of Australia about their pension
8:45system. But nevertheless, what you've
8:48seen in Canada is there's been basically
8:49no IPOs of any consequence for many,
8:52many years and a lot of foreign
8:54takeovers over time. And what you've
8:56seen is the Canadian equity markets, the
8:57lack of breadth is becoming more and
8:59more evident. So I I I submit to you I
9:02think one of the reasons they trade at
9:03higher PE multiples is the investment
9:05alternatives within the Canadian public
9:07markets has has thinned. Also I think
9:09it's fair to say that the quality of
9:12some of the other sectors or the outlook
9:14you know maybe isn't quite as strong as
9:16it has been in the past. You can energy
9:18is is up for debate but bottom line is I
9:20think that's one theory. The second
9:22theory relates to fund flows and there's
9:25two dimensions to it. So, you know, back
9:28in the day, you know, 25 years ago, the
9:31active portfolio managers at the mutual
9:33fund companies, they were the ones who
9:34set the prices for Canadian bank stocks,
9:37right? So, if they got high, they got
9:39inflows, they just wouldn't buy Canadian
9:40banks. They'd reallocate to utilities or
9:42energy or consumer products or some of
9:44the other sectors, tech, uh, mining, and
9:47so on. But, as time has gone by and the
9:50ETF sector has gotten bigger and bigger,
9:52you know, the ETF sector not that long
9:53ago was only 300 billion in Canada. Now,
9:55it's over a trillion. So take us for
9:58example, you know, our firm has done
9:59very well. Uh we have inflows roughly
10:0295% of trading days. We are buying
10:05Canadian banks every single day. Every
10:07single day pretty much we are buying
10:10Canadian banks regardless of what
10:11they're trading at. So is so is
10:13Vanguard. So is BlackRock. So are all of
10:16the large providers. So you have all
10:18this money going into ETFs and they're
10:20buying Canadian banks either directly or
10:22indirectly. Mostly indirectly. We are
10:24the number two provider of Canadian
10:26financials and Canadian bank ETFs as it
10:28as it happens. We're behind Beimo. We're
10:30below Beimo but above Black Rockck. So
10:32the other part of fund flows would be
10:35quant funds. So momentum funds. So
10:38that's also something that's largely
10:40valuation indifferent. Instead their
10:41criteria are things like ROE accretion,
10:43EPS growth. And so the Canadian banks
10:46screen very well because they have been
10:47doing very well fundamentally. So you've
10:49seen incremental we I submit to you we
10:52one theory is that the constant and
10:54regular buying from quant and and
10:56momentum funds. The other one on the
10:59fund flows which is three-dimensional is
11:01they're all buying back stock. So you
11:03know there's a natural buyer every
11:04single day. So not that any of those are
11:07necessarily determinative but the fact
11:09that there's buying and there's natural
11:11large buyers every single day of
11:12Canadian meto irresective what they
11:15trading at is a variable. I think the
11:17other critical one is AI and there's a
11:22two-dimensional you know two theories as
11:25part of AI. One is that
11:29the Canadian bank CEOs have been
11:30relatively optimistic in communicating
11:32what they think expense synergies could
11:34be from um the the greater usage of AI.
11:38So some of them I are talking like 10
11:4120% of expenses. Those are monstrous
11:43numbers. So, you know, there is probably
11:46some idea that um you know, the uh um
11:50analyst estimates are too low or maybe
11:52you're not pricing in some of this and
11:53that the real earnings per share is
11:55quite a bit higher than what the
11:56analysts are forecasting and therefore
11:58the multiples aren't as high as they
12:00look on a um when when you just look at
12:02Bloomberg. So, and then you know lastly,
12:06if you believe there's an AI trade going
12:08on in the market where where investors
12:11are moving from away from industries and
12:15businesses they think could be disrupted
12:16by AI and putting money into businesses
12:19that will be less likely to be disrupted
12:21from AI. You know, the banks would be in
12:23that category. So, I I nobody really
12:26knows how they got to these multiples.
12:28And by the way, I I am saying it's not
12:31obvious that they're quote unquote
12:33overvalued and it's not obvious that
12:34they're going to fall in price. I know
12:35we're going to talk about that in a
12:36little bit, but I I think what is
12:38interesting is that they came to these
12:42multiples very very quickly and like
12:45this happened over a fairly short period
12:46of time. You had very large multiple
12:48expansion. Uh it took place, you know,
12:50in less than a year. And you know, not
12:53that long ago, I just have a I have a
12:54comp table here to my left. you know, a
12:57year ago they traded at 12 and a half,
12:59give or take because 31st they traded 12
13:01and a half and you know, here they are
13:03at at 14 and a half. They picked up a
13:04couple over over two multiple points in
13:06a fairly short period of time. You go
13:08back even a little bit further and that
13:09multiple expansion is even higher. So,
13:11it's it's really interesting. And then
13:13the last thing we'll talk about or I'll
13:15mention before I I'll seed the floor is
13:18what's also interesting is the PE
13:20multiples within the banks have become
13:23very wide. So there's significant
13:25dispersion. It used to be, you know,
13:27back in the day, one bank would trade at
13:2911.3 and one be at 11.5, but here I look
13:33and RBC is trading at 15.9 times and
13:37Scotia's 13.6. So you got like two
13:40multiple point differences. So not only
13:42is are we in this weird situation where
13:44the banks are trading at multiples
13:45they've never seen before, but the
13:47multiples between the banks have never
13:49been wider. So it presents a really
13:52interesting conundrum for investors.
13:54Yeah. Well, this is this is exactly what
13:56I hope for honestly.
13:58>> Uh this great insight, Rob. Thanks so
14:00much. Uh whenever someone starts the
14:02conversation with to be honest, uh we
14:04don't know or I don't know. I
14:06automatically trust them. I
14:07automatically know, okay, I'm dealing
14:08with a an honest person here and uh you
14:11know, and you're always fully honest and
14:13transparent and and this is synonymous
14:15with with your firm Hamilton ETFs, which
14:17we all love. So, thank you for that. But
14:19it's interesting what you said. I
14:21particularly like the the what you said
14:23where there's constant flows. It kind of
14:25reminds me a lot of what's going on the
14:27US market as well where there's, you
14:30know, S&P 500, NASDAQ 100 where you got
14:33Nvidia, Apple, Microsoft at the top and
14:35the PE ratios are expanding and
14:37expanding. It's because there's there's
14:38forced buying because the SM it's so
14:40popular and the Canadian banks are the
14:43top stocks in Canada. So if you're
14:44buying even like
14:46>> like you said a Hamilton ETS which has
14:48the banks or bank ETF or even an XIU
14:52right a TSX60 you're constantly buying
14:54and buying the banks right
14:56>> yeah and it's valuation indifferent we
14:58you know people like us um you you
15:01decide you know we we have HCA or Mosley
15:05Canadian bank ETF we have HB which is
15:07our lowcost equal weight Canadian bank
15:08ETF people you know that's they're both
15:11over a billion dollars you know the
15:13people who buy them. They've made the
15:14decision that they want exposure to the
15:16Canadian banks. We take the money uh we
15:18we take the cash and we do exactly what
15:20we promised to do, which is we bought
15:23the six banks equal weight.
15:24>> Yeah.
15:25>> And or we bought them with with modest
15:27leverage, but you the investor have
15:29decided that you want exposure and we're
15:32valuation neutral. We're not active
15:34managers. Uh you decided that this is
15:36the structure and and exposure that you
15:38would like. we provided it for you and
15:40uh but it's it's not something where we
15:42can say well you know what the multiples
15:44are high so we're not going to buy today
15:46uh that's not how ETFs work as you know
15:48>> yeah yeah for sure no that makes
15:50complete sense we'll take a look at some
15:52Hamilton bank products as you guys are
15:54you know you actually started
15:55specializing in in financials and you
15:57have the Australian bank we're going to
15:59take a look at in a second
16:00>> to continue the conversation
16:03>> um I think that's pretty much what's
16:05happening it's uh I would say the rise
16:07of the retail investor
16:09>> is causing this as well because retail
16:12investors like you mentioned earlier
16:14they're not like professional fund
16:16managers where if they see some
16:18frothiness in the bank like you said let
16:19me trim a bit and put it in utilities
16:21and
16:22>> they don't retail investors like you
16:24said they could do what they want for
16:25example for me I don't care about
16:27trimming and going to utilities I want
16:30the the assets that invest over time
16:33>> and if you have long-term time horizon
16:34you might think it all works out and
16:36maybe you maybe your taxable, you know,
16:38maybe you don't want to pay commissions.
16:39There's all sorts of things that
16:41>> Exactly. My my I don't have any
16:42quarterly targets. I have 10 20 year
16:45targets like unlike those fund managers.
16:47Another thing I will mention is I think
16:48in it all kind of ties into inflation as
16:51well.
16:52>> I personally think well I I think it's a
16:54fact inflation is actually accelerating
16:57and that also inflates asset prices
17:00higher and common things like S&P,
17:02NASDAQ, TSX60,
17:04Canadian banks. I think that will
17:06accelerate as well and that's why you
17:07have the the PE ratios expanding and I
17:11don't I'm not in the camp where people
17:13say oh it's frothy there's going to be a
17:14bubble to me it's it's kind of normal
17:17it's like any asset price. So that's
17:20that's pretty much my opinion I think in
17:22what you said which correlates.
17:24>> Yeah I mean certainly you know money
17:26supply easy money low interest rates
17:28[clears throat] have had a big impact.
17:29We'll we'll see what happens if the Fed
17:32has to raise rates over the next couple
17:34meetings. I mean, it's a mug's game to
17:37predict uh interest rates and uh how the
17:40Fed will react. But I I think what I
17:42would say is also interesting is that
17:46this multiple expansion is
17:49is not completely specific to Canada,
17:53but it's pretty Canada. The Canadian
17:55it's Canadian centric, which I I think
17:58is interesting. The other thing that I
17:59think is really interesting is it's not
18:03like, as you alluded to, the Canadian
18:05economy is on fire. Yeah, we had a good
18:06print recently, but in the last four
18:09quarters, GDP growth has by many object
18:12has been very mediocre. Unemployment is
18:14still quite elevated. There's tons of
18:16macro risk. So, it's just such a weird
18:19situation that we're in where we have
18:21these higher multiples. This multiple
18:22expansion was very abrupt. But it's also
18:24true that it's not that it's taken place
18:26in this really favorable macro backdrop.
18:29The the the macro environment is, you
18:31know, there's there's lots of potential
18:33areas of risk.
18:35>> H Okay. Interesting. Um Okay. So, you
18:40kind of alluded it before where there's
18:44different PE ratios for the different
18:46banks. So some [clears throat] is it a
18:48would you say out of all your years of
18:51of of um
18:53>> looking at the Canadian banks analyzing
18:54the Canadian banks there's pretty much
18:56six of them. It's a fool's errand to
18:59really choose the banks you know cuz RBC
19:02maybe is higher and Scotia Bank is a bit
19:05lower. So do you feel like over time
19:08they kind of balance out? Is there any
19:11>> what are the differences between the
19:12actual banks? Do you think some banks do
19:14some things better than other banks or
19:16do you think that it's a waste of time
19:17for a regular investor? Let me just get
19:19all them and that's it.
19:20>> Yeah. So, so I think that's a that's a
19:23really good question. Um, not one I
19:25planted by the way for the audience. Um,
19:28so I think that's an excellent question.
19:29Obviously, as a former bank analyst, you
19:31would expect me to say that, you know,
19:35back back in the day when, you know, had
19:36huge financial models and you went to
19:38lots of meetings and visited foreign
19:40subsidiaries and talked to all these
19:42different executives and did your own
19:43industry research, you know, the idea 25
19:46years ago was that if you were good at
19:47estimating earnings and pretty good at
19:49anticipating changes in relative
19:50multiples, uh, that you could add value
19:52as as an analyst and and or if you were
19:55a buyside investor. Fast forward, I
19:58would say post global financial crisis
20:00and with the rise of algorithmic
20:02training, I would say the ability of the
20:05average bank analyst and institutional
20:07portfolio manager, investment advisor,
20:09retail investor to say, I'm going to
20:12actively manage my Canadian bank
20:14portfolio and I have the skills to
20:16generate alpha and and and not do that
20:19once, but do it consistently time and
20:22time again.
20:22>> Yeah.
20:23>> Has mostly gone away. I even in my own
20:26background, while I I wouldn't say it's
20:28a fool's errand, I would say the ability
20:31right now for the average investor or
20:34even quite frankly the most senior
20:35institutional portfolio manager to add
20:37value by picking their favorite three
20:39and having them outperform over a 1 2
20:423ear period is very very low. And that's
20:45because they're not really trading as
20:48much on fundamentals and the individual
20:50differences that you know we've spent
20:53time debating over the past 25 years.
20:55It's there's just so much macro. And
20:58then you know because you know back in
21:01the day the main driver of of share
21:04price performance was EPS growth. We
21:06were very good at estimating EPS. you
21:08know, you had a big model, you know,
21:09that was you could add real value, but
21:11now changes in pees are are very very
21:14difficult and outside of the core
21:16competency of an analyst. So, not only
21:19are are PE multiples higher and this but
21:21the spread, as I alluded to earlier, you
21:24know, there's when you're this high, you
21:27know, RBC trades at 15.9 times the next
21:3012 months earnings or fiscal 27.
21:33Um, Scotia trades at 13.6 six using
21:37Bloomberg Commerce CIBC at 13.9, TD at
21:4015. Who knows? Why can't TD, you know,
21:43in the next 3 months trade at 14? Why
21:45can't Scotia trade at 14.6? You just
21:47don't know. But if they move, that's 8%.
21:50If Scotia went up a half a multiple
21:52point or a full multiple point, that's
21:53like 7%. And the changes in multiples
21:56are just I I think it's I don't want to
21:59say random, but I would say for the
22:01average investor, one of the things that
22:03we've talked about is there's never been
22:06a better time or a more appropriate time
22:09to say, listen, I I can't very easily
22:12pick the three best banks. So on a
22:15prospective basis, obviously a lot of
22:17people in Canadian banks and they're,
22:18you know, the cost base of Royal Bank
22:20for a whole bunch of people is like $12.
22:22So you're kind of stuck. you can never
22:24sell it for capital gains reasons. But,
22:26you know, I think HB, you know, that uh
22:29Hamilton Canadian Bank Equate Index ETF
22:31is just 19 basis points. Yeah.
22:33>> You know, that's a very quick and easy
22:36uh fund to own.
22:38>> And you don't have to think about it.
22:39You don't have to try to pick anything.
22:41But I I would say a product like this is
22:44a good product because the current
22:46environment means it's extremely
22:47difficult for you to pick your own
22:49stocks.
22:49>> Yeah. Yeah, that that makes sense.
22:53Uh,
22:56all right, Rob. So, uh, lots of great
22:58information there. So, if you currently
23:00own Canadian bank stocks,
23:03>> just hold and just say, you know, this
23:06is obviously my opinion. They're always
23:08a great investment 5, 10, 15, 20 years
23:11out. I'm a buy and hold investor. Do
23:13that. Should they be worried? I mean
23:16specifically for a retail investor who
23:18doesn't need to have corally targets
23:21what would be your I don't know top
23:23advice obviously it's not financial
23:25advice but some top wisdom uh from a
23:28legend
23:29>> yeah so I I think it's it's a very
23:31interesting period right now so yes they
23:34trade at very high multiples um
23:36ordinarily in in a regular normal course
23:39you would say okay now's the time to
23:41sell um what I what I would say is
23:44there's a couple things going on if you
23:47are comfortable with the sector right
23:48now what do you need to believe and I
23:51would say what you need to believe if
23:53you are along the Canadian banks and you
23:55you're you're worried should I hold them
23:56should I sell them um you have to
23:59believe you literally have to believe
24:02that earnings estimates are too low
24:05which is to say and and by the way
24:06that's a perfectly reasonable investment
24:08thesis so for example and I I I want to
24:12say for six quarters in a row basically
24:15ally something like that. The Canadian
24:17banks are all beating every quarter. Uh
24:20they're all rising and so and you're
24:22getting upward earnings revisions.
24:24>> Yeah. And the dividends are rising
24:25consistently as well, like non-stop
24:27dividend increases, which
24:29>> confirms that thesis that they're
24:31growing their revenues, right?
24:33>> Yeah. And earnings per share growth was
24:34over 20%. What's interesting is, okay,
24:37but that's all behind you and now you're
24:39now you're at much higher multiples. So,
24:41I think that's the first thing you need
24:43to believe. The second thing I think you
24:45need to believe if if you're comfortable
24:46just holding them for let's say 5 years
24:49um I I think you need to believe that
24:52they're not going to go back to 12 times
24:55anytime soon. They're just this is a
24:58fundamental revaluation because if you
25:00don't believe that, you know, they have
25:01like 25% downside. But I think there was
25:05this last quarter uh Q3 was actually
25:08very encouraging. I think if you own
25:09Canadian bank stocks and you've been
25:11worried and let's face it, we've all
25:12been talking about valuations for a
25:14while, this last quarter was actually
25:15pretty encouraging because what you had
25:19was you had all the Canadian banks beat
25:21and you had a muted stock price
25:23reaction. So, there's either two ways to
25:25think about that. Um, you can be happy
25:28because you ended up with multiple
25:30compression, multiples came in, a full
25:32multiple point, but you as the holder of
25:34Canadian meto stocks barely noticed
25:36because they didn't really change in
25:37price.
25:38>> Yeah. So you got multiple you got
25:40painless multiple compression is what I
25:42would say. Now you know you need if you
25:45get that for two more quarters then this
25:47conversation largely becomes moot. So
25:50now that's the that's the glass is half
25:51full approach. The glass is half empty
25:54is that if you hold them for 6 months
25:55and you care about a six or ninemonth
25:57period it could be that the stocks
25:58really don't move all that much over the
26:00next 9 months.
26:01>> Yeah. So, I think at minimum, you're
26:03probably looking for a period where and
26:05and listen, if you're a long-term
26:06investor or you're highly taxable, you
26:09know, no, it's no big deal. It's no no
26:11skin off your nose if they're flattish
26:13for 8 months, 9 months, and earnings
26:16growth continues to move ahead and then
26:17your multiples end up coming in without
26:20you, you know, having any real pain.
26:22That that's the that's the that's the
26:24best case scenario. you know, the worst
26:26case scenario would be there's some sort
26:27of macro event or the bond market
26:30interest rates back up, stock prices
26:32come in and the banks end up with um you
26:35know, falling more than the market,
26:36which they don't normally do or they
26:38don't often do, but they can't of credit
26:42then the not that I just want to keep
26:44going on and on and on. But what's also
26:45interesting right now is that loan
26:48losses are largely falling. So you have
26:51all this macro risk and you have all
26:52this stuff going on and there's
26:54obviously trade tensions but credit is
26:57actually doing pretty well and the
26:58accounting has changed. So they have a
27:00ton of capital, a ton of reserves. So
27:03you know the the you know the axiom that
27:05this time is different is the most
27:07dangerous phrase in in investing is true
27:10uh 100% and and the Rogoff book is
27:13brilliant. Uh but it it is different
27:16now. Uh I don't know that we're I don't
27:18think we're going to stay at 14.6. I
27:20just don't know that it's going to be
27:21painful to go back to normal. I think
27:23it's it's quite possible that this is
27:25somewhat of a, you know, staggered
27:27orderly reversion, but I don't think
27:29you're going to 12 times. That that's a
27:32that's a really really big correction. I
27:33think there's been some structural
27:34changes to the market that will just
27:36keep them higher. How high? I don't
27:37know. Nobody knows. But, you know, I
27:40don't think there's 25% downside.
27:42>> Yeah. Yeah. I I uh I cringe at that that
27:45expression, this time it's different
27:46because
27:46>> Yeah. Yeah. Yeah. I I always think this
27:48time it's different, but this but it's
27:51always the same. Like it's like, you
27:53know, to me it's all whatever. And it
27:56certainly helps, you know, when these
27:57are like dividend aristocrats and it's
28:00obviously easier to hold something when
28:01you're generating dividends in income.
28:04Before we get into some Hamilton
28:05products, uh, that are, you know, really
28:07focused on the banks and and stuff like
28:09that, I have more of a curious question
28:12that I I started asking myself more and
28:14more when I visited Toronto uh a month
28:17ago because when you walk around, you
28:20walk around downtown Toronto, you look
28:21at you look up and it's just the six
28:23banks logos. They have the nicest
28:26buildings. Every ETF fund manager I
28:29talked to spoke about the the the power
28:33and the the oligopoly, the monopoly that
28:35these institutions have, [clears throat]
28:37>> not just for like customer deposits but
28:40for multiple like capital in general. So
28:44my question to you is versus the US
28:46banks versus you know you'll see a JP
28:49Morgan uh city and whatever but then
28:52you'll see like uh investment bank like
28:55Goldman Sachs and then you'll see like
28:56Morgan Stanley which is more of a
28:58wirehouse. It seems like each
29:00institution has like a a little bit of a
29:02different function or more specialty,
29:04but the Canadian banks, I think they
29:06just do. Is it because they just do
29:08everything like from A to Z in terms of
29:10the capital structure? Is that Do you
29:12think that makes them a little bit more
29:14special versus the US banks for example?
29:17I was just curious about that.
29:19>> Yeah. Know um well, I don't know if I'd
29:20use the term special, but without
29:22getting into too much history,
29:26um a lot of history. So yeah. No, me
29:29too. Me too. Um, so the US banking
29:33sector was designed, policy makers
29:36emphasized fragmentation. Uh, in
29:38particular, they wanted to avoid uh New
29:41York City becoming too powerful. This is
29:43back in the 1800s. That's one of the
29:45reasons why you have regional Fed
29:46presidents. That's um and there was
29:48often uh legislation depending on the
29:50state that didn't let you have a bank
29:52branch across state lines. So the system
29:55was was really the one of the primary
29:58policy objectives at its inception and
29:59for for you know couple hundred years
30:02after that was for a fragmented banking
30:04sector and to spread out that economic
30:07power and Canada by the way wasn't all
30:10that different but we definitely had
30:12larger banks but you know there was a
30:15period of time where they you know they
30:16were consolidating much faster call it
30:19in you know in the first uh 50 years of
30:21of the 20th century uh and then there
30:24has a a law after the great depression.
30:27Um there's a great book by Andrew Rossin
30:29called 1929. Um back in the day
30:33um banks were cross dealing with each
30:35other. The investment bank and the and
30:37the banks were um you know obviously
30:40basically unregulated. Uh there was
30:42quite a few scandals and so in in uh
30:45coming out of the the Great Depression
30:47they enacted a law called GlassSteagall
30:49uh two senators together and that was to
30:52keep the pillars apart. So there were
30:54four aspects of the financial services
30:56sector that weren't allowed to co-ingle.
30:58Uh investment banks, mortgage lenders,
31:00insurance companies, and commercial
31:01banks.
31:02>> Okay?
31:02>> And that persisted for a very long
31:04period of time. And that fell away. But
31:07in Canada, um you may or may not know,
31:10but the investment banks were actually
31:12partnerships. This is into into the 80s.
31:16Uh they were corporations, but they, you
31:17know, they were partnerships and then
31:18they become corporations. And then there
31:20was a great concern. I think the the
31:24story of the rumor was that Morgan
31:25Stanley tried to buy Dominion
31:26Securities. Uh the government got very
31:29very worried about an American takeover
31:31of our investment banking industry. So
31:33they dropped that that those that pillar
31:36the and they allowed the Canadian banks
31:38to buy the investment banks. Now those
31:41investment banks also had full service
31:42brokers. So in a very short period of
31:45time in 198788
31:48you had Royal Bank of Canada by Dominion
31:50Securities. You had uh um CIBC by Wood
31:54Gundy. Um you had Scotia by um Scotia
31:57Mloud and or Mloud Young Weir and and
32:00Nesbbit Burns got bought by Beimo and so
32:02on and then TD was left out uh and they
32:04they built their own investment bank. So
32:06that's not quite your question, but that
32:08was when the integration started. And
32:10then as things progressed, the Canadian
32:14banks took that control that they had
32:17over investment banking and full-ervice
32:19brokerage and commercial banking and
32:21then they bought the trust companies
32:23which were the mortgage lenders part of
32:25the of the and they just ended up being
32:28basically financial supermarkets and
32:30then they took over the and then they
32:31just they either bought mutual fund
32:33companies or crushed the independent
32:34ones. So here you are, fast forward to
32:372026. The Canadian banks have complete
32:39dominance over every aspect of the
32:42financial services sector with the
32:43exception of life insurance, which they
32:45don't really want to do. Uh they do have
32:48some have property and casualty, but not
32:50life. So when you go and meet all of the
32:52people, what they're what they're
32:54explicitly telling you is, you know, the
32:56Canadian banks have massive power over
32:59the market because they control
33:01distribution and they have millions of
33:02customers.
33:03>> Yeah. Now, what's interesting from our
33:04perspective is because these mutual
33:07funds have such high fees and they get
33:10sold to older people at the branch at
33:13huge mess, the Canadian banks haven't
33:15been all that interested in ETFs. So,
33:18two things have happened. The pace of
33:20ETF adoption in Canada has been much
33:22slower because the banks and their
33:25control over the mutual fund se not
33:27control their dominance of the mutual
33:28fund sector and their lack of interest
33:31in having you have a Canadian equity
33:34fund by offered by Canadian make a 2%
33:37and not wanting anybody to have a you
33:39know an index product that was you know
33:4110 basis points they didn't really want
33:43to facilitate that trade.
33:45>> I can understand why.
33:46>> Yeah. Exactly. So, so they've not really
33:48gone into yet. So, that's been great for
33:49people like us because independence can
33:51thrive. There's more innovation and all
33:53the rest. Um, but that that um ballast,
33:57if you want to call it, is melting. So,
34:00two things are happening and you're part
34:02of it. Uh, one of it is is an explosion
34:06of financial information and people like
34:08yourself providing financial information
34:11um, you know, and helping educating
34:13investors outside of we'll call it the
34:15the the primary financial media and also
34:19uh, demographics,
34:20>> right? as technological innovation
34:22happens, you know, people trade online
34:23more and so and less people are buying
34:28mutual funds, uh they're buying ETFs,
34:30you know, maybe the person passes away,
34:32they inherit it, they sell all the two
34:342% me bank mutual funds and then they
34:36buy ETFs. So, you have this pretty big
34:40movement of of of AUM moving out of
34:42mutual funds uh into ETFs. So, it's true
34:45that they're are very very powerful
34:47dominant competitors, but it's also true
34:50as it relates to ETFs. Um, you know,
34:52that power is melting, but they still
34:55absolutely have a hammer lock on full
34:57service brokerage, investment banking,
34:59commercial banking, mortgage lending,
35:00credit cards, you know, they're the
35:03dominant Yeah. They're the dominant
35:04players across all of that.
35:06>> Yeah. Interesting. It's interesting to
35:08see the difference between the US and
35:09and and it kind of reminds you. It makes
35:11sense now cuz let's just say you you you
35:13look up a US financials cover call ETF
35:17or any ETF for that [clears throat]
35:18matter. You'll see 15 20 25 companies.
35:20You'll see the big boys, you know, the
35:22big five, you know, City, Bank of
35:24America, JP Morgan, but then you'll see
35:26like investment banks and Morgan
35:27Stanley. Then you'll see a bunch of
35:28regional banks. Canada, look at look at
35:31the ETF. It's always the big six. And
35:33maybe you'll get a couple of life
35:34insurance, you know, Sunlife Manual,
35:36Great West Life, maybe a Power Corp or
35:37Power Financial, whatever.
35:39>> Sure, they have hundreds of midcap
35:41banks, small cap banks if you want to
35:43bank, you're if you're an investor, you
35:44want exposure to only Tennessee, you
35:46know,
35:47>> credit unions. I think there's credit
35:48unions as well that you could do. So,
35:50it's more more local, more regional. So,
35:54>> now the US market has been consolidating
35:56at a pretty rapid rate. Yeah. So it is,
35:59you know, I would I would suggest that
36:00in the next, you know, 15 years, it will
36:03look closer to Canada than it does now.
36:05>> Interesting.
36:06>> But there will still be because it's
36:08such a giant country, there's still
36:09going to be be lots of midcaps. One
36:11thing I was going to mention is that,
36:14you know, the regulatory environment
36:15here is very prob. So the regulators,
36:18you know, very much very much want to
36:21create and keep the banks as powerful as
36:23possible. They have prepared to accept
36:25that financial products, mortgage
36:27lending, credit cards might be more
36:28expensive, a bit like telecom. They've
36:30kind of accepted that, you know, um, you
36:32know, cell phone fees will be higher.
36:34They're trying to keep it domestically
36:35owned and controlled. Uh, but for
36:37example, you know, you cannot go into a
36:39US bank, you can't go into a JP Morgan
36:41branch and buy a JP Morgan mutual fund.
36:44Like, they're not allowed to tell you,
36:46hey, here's here's my three favorite
36:47funds, and oh, by the way, I don't you
36:49can't buy anybody else's funds in my
36:51branch. So they have an open ar what
36:54they what what they call open
36:54architecture here and in Canada it's we
36:57do not have open architecture. So if you
36:58go to a BIMO branch I shouldn't name a
37:00particular bank. You go to a Canadian
37:02bank branch uh you know you're not
37:03buying Fidelity mutual funds. You're
37:05buying that bank's mutual funds and
37:07that's not something that's allowed in
37:08almost every other jurisdiction. So that
37:11regulatory favor is also contributes to
37:14at least in wealth management the the
37:16dominance of the banks. And then
37:17obviously their investment advisors who
37:20are more independent obviously can still
37:23uh market and sell the the mother ships
37:26mother banks uh mutual funds. They don't
37:28really but as much as they used to but
37:30they did in the past. So your iRock or
37:33investment advisory channel would still
37:35have a lot of your own mutual funds in
37:36that channel.
37:37>> Okay.
37:38>> Bottom line is they're everywhere.
37:40>> Yeah, they definitely are. Uh they
37:42definitely are. So Rob, this was
37:43extremely insightful. I really
37:45appreciate your time, my friend.
37:47You know, people give us money. They
37:48trust us.
37:49>> Yeah. I I asked them that live in in
37:51front of the audience and with Jennifer
37:53and we we discussed that too at the
37:55event as well. Hopefully next time
37:57you'll be there.
37:58>> Uh we love for you to make an
37:59appearance.
38:00>> Yeah. Um and we take that we take take
38:02the people's trust in us seriously. Um
38:05and so we're we're we we you know we say
38:07all the time to your audience, you know,
38:09we really appreciate and are and are
38:11honored by the you know, the faith and
38:13trust that you give us. And you should
38:15know that we, you know, we care and take
38:17that seriously. And and kudos to you,
38:19Adrian, for uh, you know, just running a
38:22great channel with all sorts of
38:23different views and
38:25>> uh, different videos. There's just tons
38:27of material as you and I have talked
38:28about. We don't always agree on
38:29everything, but there's tons of mutual
38:31respect and I think you're uh, just
38:33doing great work.
38:35>> I really appreciate that, Rob. And uh,
38:37same for you guys. I I really hope you
38:39definitely, you know, I know you're kind
38:40of semi-retired now,
38:42>> but I hope you'll come on uh again in
38:44the future. It's amazing talking to you.
38:46Uh
38:47>> I owe you. So
38:49>> Oh, well, I owe you too. So, uh really
38:51appreciate it and and um it's always a
38:53pleasure, Rob. So, I think we'll end it
38:55here. I think you spent quite a bit of
38:56time. Really appreciate it. See you next
38:58time, my friend. See you soon.
39:00>> Okay. No, thanks for having me.
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