Darko Mihelic:
This podcast was recorded on January 6th, 2026.
Hello everybody. My name's Darko Mihelic from RBC Capital Markets. I am the Canadian bank and insurance analyst, and I'm being joined here with Gerard Cassidy, the lead bank analyst out of the US. Thank you very much, Gerard, for joining us, by the way.
Gerard Cassidy:
Thank you for having me, Darko. I appreciate it.
Darko Mihelic:
We are doing this podcast immediately after the RBC Canadian Bank CEO Conference. And so this is our first attempt at doing this. And what we're essentially trying to do here is give you the first read, our first reaction after sitting through a day of fireside chats with the Canadian bank CEOs. And so I've invited Gerard here because I thought it would be really interesting to juxtapose what the Canadian bank CEOs are saying versus Gerard's universe and what we're hearing out of the US.
So Gerard, thanks again. I'm really happy to be doing this. This is a first cut. So we're going to try and do this without any editing. Everybody listening, this is going to be almost like it's live. I promise I won't try and go back and edit.
So Gerard, I'm going to start with a few themes that I think I heard today that were rather interesting. And I'm going to funnel this towards the US so that you and I can have a discussion back and forth. The first thing I would say is from a macro perspective, I got the sense from the CEOs today that we're looking for modest amounts of rate cuts, maybe 50 basis points from the Fed in 2026, and that that would result in loan growth that might pick up a little bit towards the back half of the year, but essentially not an aggressive view on loan growth out of the US. How does that compare to your views and what you're hearing on the US side?
Gerard Cassidy:
Sure. And it's interesting on the rate cuts, we're in the camp that the Fed is likely to cut 25 to 50 basis points. Between now and June, a steeper yield curve is very positive for the American banks because it's been 20 years, Darko, that we've had a Fed funds rate around 3% or 3.25% with a positive slope to the curve of 75 to 100 basis points. Most people don't remember those days. Now you and I do, but the point is that's very profitable for the banks. And we think that's going to benefit net interest income growth for the American banks in 2026.
What's interesting about the loan growth, I'm with you, your Canadian banks were a little more reserved on loan growth. And when we look at the Federal Reserve H.8 data, which comes out every Friday afternoon, and last Friday it came out, and the year-over-year growth was 6%. And we have data going back in the States that shows you that loan growth going back 75 years is really linked to nominal GDP growth. And the American banks have been under-punching nominal GDP growth for the last three or four years. '26 could be the breakout year where we start to see loan growth accelerate for the American banks. And we're starting to see that with the H.8 data. So we think that the American banks are probably going to be more optimistic about loan growth on their earnings calls, which start January 13th, than what we heard today at your conference.
Darko Mihelic:
And what's interesting about that too, I just had this thought just crossed my mind because one of the other interesting things that we'd heard from the Canadian banks was they're actually interested in deposit growth in the US. And a lot of this is commercial deposits. So over to you, is this something that you're seeing, and how do you think about that?
Gerard Cassidy:
Sure. In fact, a couple of your CEOs talked about, even Dave McKay from RBC talked about the real value of a banking franchise are those consumer deposits. And that's what the Canadian banks are looking for in the US.
And I would suggest the really high-quality banks in the US have known this for quite some time, and consumer deposits are critical to profitability. And I think you're going to hear ... It's interesting you bring this up because we haven't really had to worry about deposit growth in the US due to the fact that loan growth has been very mild. So the loan to deposit ratios, which is a measure we use about how stressed the system is, are very low. But if we're right, that loan growth picks up in 2026 and 2027, deposit growth is going to take on a new, I think, approach, or the banks are going to look at it more aggressively because right now they really haven't had much competition for deposit growth, believe it or not, in the US.
Darko Mihelic:
So it's interesting, in a world of falling interest rates, we could see increased competition for deposits in the US.
Gerard Cassidy:
Absolutely. And it's interesting because in rising rates, the money was pushed into the money market mutual funds. And now in the United States, I think they total about $7 trillion, but because of what happened during the pandemic and the Federal Reserve flooded the system with deposits by printing the money, our US banking system is still at record deposits, even though the money market mutual funds are at record levels too.
Darko Mihelic:
I think a part of that too is that the Canadian banks are relatively new players in some of these deposit places. And so they're really growing from a very low rate, and therefore, the growth rates are pretty high.
Gerard Cassidy:
Yeah. No, no, that's fair, very fair.
Darko Mihelic:
The other area that I thought was pretty interesting was, wow, they were upbeat about cap markets. And obviously last year was a great year, but they still sounded relatively upbeat. What's the view from your account?
Gerard Cassidy:
Yep. I would say we were just looking at the geologic numbers yesterday, and the debt capital markets broke a record last year in issuance. ECM, not as strong, an improvement in '25 over '24, but nowhere near record levels. And advisory, M&A advisory, was basically the second-best year going back 30 years. So as we go into '26, and we heard it from one of the speakers at lunchtime about monetizing a lot of these private equity investments that the alternative asset managers have, we anticipate that you're going to see a very strong year in capital markets and partly due to this administration too.
When you look at this administration, they are not only deregulating the banking industry, they're deregulating other industries, and they're very much more supportive of mergers than the prior administration, which I think adds. And everybody knows, you better get it done soon because this administration may not be around after 2020, or it won't be around after 2028, so you got to get your deals done. So we're in that camp. You're going to see strong capital markets.
Darko Mihelic:
And so it's interesting, speaking about the administration, one of the things that obviously comes up in these discussions here is the USMCA and potential ... And that was a risk that was discussed today, not in depth. We didn't really dive into it too much. We are sort of adjusting to it here. But interestingly enough, the view on credit quality, with just that one caveat being the USMCA negotiation, the view on credit quality was relatively benign, I would say, and not too many areas that anyone was really focused on. I mean, you had a little bit of some focus in Latin American countries and some weakness there, but otherwise, a fairly benign outlook on credit quality. Do you expect improvement in the US?
Gerard Cassidy:
It's interesting because I also heard at your conference resiliency. Every CEO mentioned how the economy is more resilient. In fact, I think it was the Bank of Montreal CEO said it was recently as three months ago he thought it was going to be weaker, and it hasn't turned out that way. And so credit is, as we all know, linked to economic health. And as long as the economies are healthy, credit generally is healthy. So what we anticipate in the US is something very similar to what you heard here, it's a benign environment for credit.
And we're actually seeing some improvement on the consumer side, which goes contrary to some of the headlines you're seeing. When you look at the Federal Reserve data and they give us the delinquency data, that's from all lenders, not just banks. So many of the non-bank lenders on the consumer side in the US, that's where we're seeing some issues on credit.
But the bank portfolios, knock on wood, there will be some idiosyncratic probably one-offs like we saw in the third quarter, but overall credit, we expect to be very benign and improve possibly on the consumer side when we see the numbers later this month.
Darko Mihelic:
And so that leads me to an interesting question then, if we've got growth, we've got cost control, which we didn't really talk too much about, maybe credit improvement. The Canadian banks are all promising higher ROEs. So as we're going to dive into this, this is an interesting topic, is that the same in the US, and how aggressively are US banks talking about higher ROEs?
Gerard Cassidy:
It's interesting you bring that up because it seems like everybody is now racing higher to outdo their competition in lifting the ROEs. In the US, they focus more on ROTCE, Return on Tangible Common Equity, whereas here in Canada, as you know, it's ROEs. And part of the reason is that our banking system, when you go back to 1980, we had 14,000 banks and thrifts in the United States. We have had massive consolidation over the last 40 years, and we currently have about 4,300. So in doing that consolidation, goodwill was created to do it. And that's why the banks use ROTCE rather than ROE because the returns obviously are much higher.
And it's debatable which is the better one to use, but lo and behold, both of them should be going higher. But the banks now in the US, they're all racing to who can outdo one another for a higher ROTCE. So the answer is similar to what I heard today at your conference, everybody is pushing the profitability up, and the question is it coming from the numerator or the denominator on that equation? But yes, they are certainly pushing them up in the US.
Darko Mihelic:
That's an interesting point there because I got the impression today that very little is expected to come from the denominator here, whereas in the US, I know there's some regulatory rollback. So I mean, do you have a rough range? How much of this is coming from the denominator effect in the US?
Gerard Cassidy:
I think you've put your thumb on it very well because the US is mostly coming from the denominator effect, assuming the regulatory rollback, which is known as Basel III Endgame, as you're familiar with, we expect that to come in the first quarter, the proposal, because in the summer of 2023, when the first proposal came out, it frightened the banks about how much capital they were going to have to carry. So the banks started to move in anticipation that proposal was going to pass. It obviously did not pass. So they're all sitting on excess capital. And some banks who are currently required to carry 8.5% CET1 ratios by the regulators are up at 11, and they're already starting to bring down from 11 to 10 what they're comfortable in carrying.
So I think it's going to be a bigger impact than for the Canadian banks is the denominator effect is definitely a contributor, could be as much as 100 ... If you reduce your CET1 ratio by 100 basis points, the impact on ROTCE is about equivalent to 100 basis points.
Darko Mihelic:
Yeah, it's about similar math up here as well. And that leads me to the final topic, which is one that we often are asked a lot about and gets a lot of interest, acquisitions and growth. And a lot of Canadian banks have US businesses. They've often gone in there inorganically. And I would say the message today was very little interest in inorganic growth, very little interest in acquisition, which I'm sensing is not the same, and your banks are very different. But correct me if I'm wrong.
Gerard Cassidy:
No, no, you're right. In fact, Darko, that's what really surprised me was here, the Canadian banks that have done so many deals in the US over the last 10 years, that was not a focal point for any of them, it was all organic growth. And in the US, with the new deregulation that the banks are experiencing, for example, under the old administration, it would take 12 to 18 months to close a bank deal. We have bank deals closing now in less than four months. So this administration is very supportive of consolidation. We will see more.
And one of the advantages the Americans have over maybe one of the Canadians coming down into the US is the efficiency and cost savings. When you buy a bank in your existing market, you can garner 40%, maybe even 50% cost savings of the targets overhead. So those efficiencies give the US buyers maybe a pricing advantage over the Canadian buyers, plus you can use stock in the US where most of the deals up here from Canada come in cash.
Darko Mihelic:
So that's our first knee-jerk reaction here to the CEO conference, fresh off the tapes. Gerard, last thoughts here. I mean, it sounds to me like it's a constructive environment for US banks. I know your positive valuations often where I trip up with investors. We're trading at 14 times forward. How do you think about valuation in that context?
Gerard Cassidy:
Sure. When we look at the ... We are very positive on the banks, and we're often asked ... as bank investors, we're always looking over our shoulder because that's just the way we're programmed, and we're not AI investors who probably don't ever look over their shoulders. But anyway, looking over your shoulders, see what's potentially ... there's nothing there. So that's the risk for the banks we find in the US is that it's so good, it may not last. So that's our worry.
But getting to your valuation question, it's a good one because on a PE basis, when you look at '26 estimates and '27 estimates, the regional banks are less expensive than the money centers and investment banks. And you can find regional bank PE multiples 10 to 11 times, which is reasonable. So it's not terribly expensive, but they're not super cheap, I don't disagree with that, but boy, the structural profitability improvement we see could justify the higher valuations. But again, credit is critical, it's benign, and the credit cycle is ... We still will have a credit cycle, but it could be a while away before we get to worry about it.
Darko Mihelic:
Gerard, thank you so much for joining me today here in Toronto at the Canadian Bank CEO Conference, thanks so much. It's been a great conversation.
Gerard Cassidy:
Same here, Darko, my pleasure. Always enjoy my time with you.
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