FidelityConnects: Inside the Vault: North American banks and financials today

00:01.001 --> 00:06.573
<b>Subtitles are AI Generated</b>

00:07.507 --> 00:09.909
Hello, and welcome to Fidelity Connects.

00:09.909 --> 00:13.580
I'm Lauren Gardy, Vice President of Strategic Partnerships.

00:13.580 --> 00:17.884
The big six Canadian banks posted robust first quarter results

00:17.884 --> 00:21.721
marking the first time all have exceeded earnings estimates.

00:21.721 --> 00:25.892
In total the banks reported approximately $19 billion in

00:25.892 --> 00:30.063
profit, an increase in about $14 billion in the first quarter of

00:30.063 --> 00:34.234
last year. But delinquency data shows that more consumers are

00:34.234 --> 00:36.336
struggling to pay off their debts.

00:36.336 --> 00:40.273
At the same time early AI volatility is creating sharper dispersion

00:40.273 --> 00:44.544
across financials worldwide leading our next guests towards risk

00:44.544 --> 00:48.815
preservation and selective opportunities in areas like insurance,

00:48.815 --> 00:51.418
North American banks, and Japan.

00:51.418 --> 00:54.187
What does this ultimately mean for investors right now?

00:54.187 --> 00:57.891
Joining me to break it all down is Global Financial Services fund portfolio

00:57.891 --> 01:02.695
manager, Lee Sotos, and equity research analyst, Thomas Goldthorpe.

01:02.695 --> 01:06.599
Welcome, Lee and Thomas, thank you so much for joining us today.

01:06.599 --> 01:08.802
Lee, why don't we start our conversation over with you?

01:08.802 --> 01:12.205
What a week this has been, so much volatility, geopolitically in the Middle

01:12.205 --> 01:16.276
East, tariff uncertainty, back and forth inflation prints, how are

01:16.276 --> 01:20.213
you breaking this all down really and does this look like a expectation

01:20.246 --> 01:27.220
change for growth in 2026 or just noise that the market is digesting.

01:27.220 --> 01:31.691
I think that's a good place to start because over

01:31.691 --> 01:35.795
the last number of months I think if you look at

01:35.795 --> 01:40.800
the industry we've had a number of different

01:40.800 --> 01:45.105
observations or concerns kind

01:45.105 --> 01:50.443
of come up, whether it is tariffs, as you mentioned,

01:50.443 --> 01:55.482
worries about private credit, worries about AI's

01:55.482 --> 02:01.221
impact on different sectors, and most

02:01.221 --> 02:04.824
recently war with Iran.

02:04.824 --> 02:08.895
I think what we're looking at right now is

02:08.895 --> 02:13.833
more kind of a consolidation phase where

02:13.833 --> 02:17.937
the banks and insurance companies that we look at

02:17.937 --> 02:24.110
have performed quite well through 2025.

02:24.110 --> 02:28.014
I think we're at this point where things have traded off a little bit but at

02:28.014 --> 02:32.252
the same token I don't think investors quite know

02:32.252 --> 02:36.222
sort of what to make about the situation in Iran yet.

02:36.222 --> 02:40.727
When we see days of high volatility I think

02:40.727 --> 02:44.764
investors have a tendency to always look at the tail risk

02:44.764 --> 02:48.768
so you get a lot of sort of stagflation

02:48.768 --> 02:52.772
narrative that people will jump to and then it

02:52.772 --> 02:57.243
sort of clears out the next day and things settle down a little bit.

02:57.243 --> 03:01.714
The space has done quite well and has been pretty resilient,

03:01.714 --> 03:03.650
if you think about it.

03:03.650 --> 03:07.687
Over the last three months most geographies

03:07.687 --> 03:11.391
and most subsectors are still up.

03:11.391 --> 03:15.361
We've seen a bit of a trade-off in some of the subsectors over this past

03:15.361 --> 03:19.299
month but overall valuations

03:19.299 --> 03:23.102
haven't changed that much.

03:23.102 --> 03:27.307
When we kind of look forward I think the bigger

03:27.307 --> 03:31.311
question is sort of how long the Iran

03:31.311 --> 03:35.281
situation plays out and that will kind of

03:35.281 --> 03:38.585
inform decision making going forward.

03:38.585 --> 03:40.954
That's a good reminder for our audience.

03:40.954 --> 03:44.924
Looking back over history in your tenure and careers at Fidelity is there a

03:44.924 --> 03:48.962
time in the past where we've lived through something similar or a story that

03:48.962 --> 03:52.165
sticks out to you that really you would leave with our listeners on the line in

03:52.165 --> 03:55.868
terms of advice for looking through the noise and what's more important to look

03:55.868 --> 03:59.005
at from a portfolio perspective.

03:59.005 --> 04:03.743
I think for myself I still look at this more

04:03.743 --> 04:08.948
akin to a 1999, 2000,

04:08.948 --> 04:13.186
2001 where there

04:13.186 --> 04:17.357
was a lot of hype about the internet and how that was

04:17.357 --> 04:20.026
going to impact things.

04:20.026 --> 04:23.997
You see a lot of that as far as AI or

04:23.997 --> 04:29.168
artificial intelligence and its impact on different industries.

04:29.168 --> 04:33.306
There's a lot of capital going into different parts

04:33.306 --> 04:35.508
of AI.

04:35.508 --> 04:39.445
Right now there's a lot of concerns about it

04:39.445 --> 04:43.483
but at the same token the world found a

04:43.483 --> 04:48.121
way to adapt and I think we're

04:48.121 --> 04:52.225
looking at most of our industries and

04:52.225 --> 04:56.262
viewing AI as basically an

04:56.262 --> 04:59.832
enhancer and enabler.

04:59.832 --> 05:02.568
I would probably put it more akin to that.

05:02.568 --> 05:03.569
Thomas.

05:03.569 --> 05:06.973
I would generally agree with that. I think in these situations of high

05:06.973 --> 05:11.210
uncertainty, high volatility, you want to look at

05:11.210 --> 05:15.214
different scenarios and try to see, oaky, what are

05:15.214 --> 05:19.352
upside, what are downside, kind of really understand the risks, and

05:19.352 --> 05:23.990
make sure you're in positions where you get positive asymmetry

05:23.990 --> 05:27.260
returns, and really understand kind of the downside.

05:27.260 --> 05:31.230
At the same time, to Lee's point, I think a lot of this technological

05:31.230 --> 05:35.535
innovation, a lot these geopolitical events impact companies

05:35.535 --> 05:39.605
differently and oftentimes the

05:39.605 --> 05:44.644
first reaction by the markets, not the correct reaction, oftentimes

05:44.644 --> 05:48.614
the whole sector trades down in parallel, where

05:48.614 --> 05:51.818
in actuality there's real winners and losers.

05:51.818 --> 05:55.822
Whether it's the AI, whether it's the Iran War, whether it's

05:55.822 --> 06:00.159
some other stuff coming out, I think the key is

06:00.159 --> 06:04.297
there is actually a lot of opportunity to pick stocks

06:04.297 --> 06:08.901
and a lot of opportunity to not

06:08.901 --> 06:13.373
necessarily get too caught up in the consensus narrative because

06:13.373 --> 06:17.810
oftentimes in these situations where there's max uncertainty, everything sells,

06:17.810 --> 06:23.149
and then if you give it six months, one year, two years,

06:23.149 --> 06:27.487
the reality of the situation plays out on the true fundamental

06:27.487 --> 06:32.892
impact and you often get rewarded for having

06:32.892 --> 06:35.228
a differentiated view.

06:35.228 --> 06:39.365
A great thing with Fidelity, and I'm sure Lee can attest to this as well,

06:39.365 --> 06:43.503
is we have a structure in place where you can take these longer

06:43.503 --> 06:47.540
term views. We don't have to worry about what my next 12

06:47.540 --> 06:51.811
hours of performance is gonna be or my next month of performance is gonna be,

06:51.811 --> 06:54.714
I can take that one to two year view.

06:54.747 --> 06:58.785
What generally happens in these situations is on

06:58.785 --> 07:02.755
a one to two year basis you go into a

07:02.755 --> 07:06.559
position expecting it's gonna take that long to resolve but the market's

07:06.559 --> 07:10.696
generally smart, they figure it out, they often get that return in only

07:10.696 --> 07:12.432
a couple of months.

07:12.432 --> 07:15.668
Yes, it's a good reminder for our audience so thank you for sharing that.

07:15.668 --> 07:19.172
Another theme we haven't touched on yet would be policy divergence, looking on

07:19.172 --> 07:23.276
a global scale. For the past decade or so, seemingly, a lot of main countries

07:23.276 --> 07:26.012
have moved their rates in similar direction.

07:26.012 --> 07:30.116
Now we're seeing divergence amongst US, Japan, ECB.

07:30.116 --> 07:33.286
How does this play into your portfolio allocation specifically when you're

07:33.286 --> 07:38.191
looking at, say, financial institutions that have a global presence?

07:38.191 --> 07:42.228
I think for the global portfolio, and

07:42.228 --> 07:46.299
I've mentioned this in past conversations, we

07:46.299 --> 07:50.236
really try to take the

07:50.236 --> 07:55.174
portfolio and make it as rate agnostic as we can.

07:55.174 --> 07:59.245
We don't feel like we have necessarily an edge in

07:59.245 --> 08:01.514
predicting global rates.

08:01.514 --> 08:05.518
When you look at the portfolio it's very well balanced between those

08:05.518 --> 08:09.956
names that would benefit from cuts in interest rates or

08:09.956 --> 08:13.993
those names that would benefit from higher for longer.

08:13.993 --> 08:19.232
When we go into sort of our quarterly risk meetings

08:19.232 --> 08:23.269
one of the smallest factors impacting the portfolio is actually global

08:23.269 --> 08:27.540
interest rates. We try not to really make an explicit

08:27.540 --> 08:32.011
call, although we may have some tilts from geography to geography

08:32.011 --> 08:35.748
but not necessarily at a portfolio level.

08:35.748 --> 08:40.019
That's great. Let's focus in on the US for a minute, curious

08:40.019 --> 08:43.055
best guess what your expectation of US rate cuts in the future would be and if

08:43.055 --> 08:47.226
they're somewhat limited based on sticky inflation and strong consumer

08:47.226 --> 08:49.595
data that we continue to see.

08:49.595 --> 08:53.833
I think there are definitely puts and takes on where

08:53.833 --> 08:58.404
the rate cut path will take.

08:58.404 --> 09:02.775
The forward curve is still predicting rate cuts and I think that's a reasonable

09:02.775 --> 09:06.812
outcome but timing around geopolitical events will

09:06.812 --> 09:11.417
definitely have some impact on that.

09:11.417 --> 09:14.220
Let's pivot to global deregulation as well.

09:14.220 --> 09:17.056
This was a really big theme through 2025.

09:17.056 --> 09:19.959
I believe we're still seeing this play out through 2026.

09:19.959 --> 09:24.363
Looking at US financials specifically where do you see areas of deregulation

09:24.363 --> 09:28.601
being, say, the biggest beneficiaries and maybe the more least impacted sectors

09:28.601 --> 09:32.705
or areas within your coverage through this year.

09:32.705 --> 09:36.776
First off, I think the thematic around deregulation

09:36.776 --> 09:40.212
is powerful for the banks.

09:40.212 --> 09:44.383
Background is we had the global financial crisis, everyone identified

09:44.383 --> 09:48.754
the banks as being evil

09:48.754 --> 09:52.725
and creating a lot of the systematic risk that we saw in the

09:52.725 --> 09:57.563
world. Then for roughly 15 years after

09:57.597 --> 10:02.134
2009 the regulators year after year punish

10:02.134 --> 10:05.805
the banks, whether with higher capital, more control, more qualitative

10:05.805 --> 10:12.645
controls, more, more, more regulation, de-risking

10:12.645 --> 10:17.450
the balance sheets. Ut was viewed as, okay, banks are a problem,

10:17.450 --> 10:20.953
they need more regulation, they need more control.

10:20.953 --> 10:25.925
Then we had this kind of complete 180 shift

10:25.925 --> 10:30.096
in the regulatory view starting kind of

10:30.096 --> 10:34.100
late '24, early '25 in that there's

10:34.100 --> 10:38.037
this growing consensus, not just in the US but in Canada and

10:38.037 --> 10:42.308
Europe and a lot of areas in the world that we

10:42.308 --> 10:47.713
just went through a decade of kind of low growth, low stagnant growth.

10:47.713 --> 10:51.684
There's this increasingly amount of debt in

10:51.684 --> 10:55.721
society, productivity being really poor, something needs

10:55.721 --> 10:59.925
to change. One idea that's come up is let's get

10:59.925 --> 11:03.863
growth higher, let's focus on productivity, let's focus on

11:03.863 --> 11:05.264
economic growth.

11:05.264 --> 11:09.435
And one solution that came from that was, hey, let's actually

11:09.435 --> 11:15.274
deregulate the banks, the banks are now our friend, and

11:15.274 --> 11:18.477
going from a world of, okay, every year we're going to make it harder for you

11:18.477 --> 11:22.581
to lend, every year we are going to make it less profitable for you to

11:22.615 --> 11:26.052
lend, we're going to keep going deeper and deeper in your organization, putting

11:26.052 --> 11:30.222
more and more controls on what you can and can't do to, okay,

11:30.222 --> 11:34.326
we actually want banks to lend more, we

11:34.326 --> 11:38.497
want banks help fuel this potential

11:38.497 --> 11:42.201
economic recovery.

11:42.201 --> 11:46.172
In a Canadian context that comes through an idea, okay, want to build these big

11:46.172 --> 11:50.342
national infrastructure projects so the banks

11:50.342 --> 11:54.413
could be a solution to provide the financing required to finance

11:54.413 --> 11:58.918
these multi-billion dollar projects.

11:58.918 --> 12:03.355
That is a big transition from

12:03.355 --> 12:07.426
every year your kind of returns would go down a

12:07.426 --> 12:09.495
bit or you would have to post more capital.

12:09.495 --> 12:12.865
There's all this restriction and it would just get a little bit worse every

12:12.865 --> 12:16.869
year. Now we're in a world where at

12:16.869 --> 12:21.373
absolute worst it's not getting worse and it's actually getting better

12:21.373 --> 12:23.375
in cases.

12:23.375 --> 12:27.580
So seeing some signs that potential capital could go lower,

12:27.580 --> 12:32.618
potential various liquidity rules, various non-financial

12:32.618 --> 12:36.589
restrictions could be loosened.

12:36.589 --> 12:40.793
All those things are generally a positive driver on

12:40.793 --> 12:44.363
both bank earnings but also on bank returns.

12:44.363 --> 12:48.501
Even just the perception around the banks that you don't have to worry

12:48.501 --> 12:51.704
about, okay, what's the next thing that's coming.

12:51.704 --> 12:54.840
That's the other thing. It's coming and then it's like, okay, what's next?

12:54.840 --> 12:57.877
Is there gonna be a special tax on banks, is there gonna be even more

12:57.877 --> 13:01.914
restrictions on growth, in their next round of

13:01.914 --> 13:05.084
audits are they going to find even more bad stuff?

13:05.084 --> 13:10.156
Now it's more, okay, what's the good thing that is going to come, It

13:10.156 --> 13:14.126
does very much change both the financial but also kind of the

13:14.126 --> 13:16.228
sentiment around the space as well.

13:16.228 --> 13:20.132
Very fascinating. I'm curious how this translates into investment themes within

13:20.132 --> 13:23.936
the portfolio. Is this a good case for investment banks specifically if there's

13:23.936 --> 13:26.105
more M&A activity happening?

13:26.105 --> 13:30.075
Also curious, regional banks, if that changes your view on how you're viewing

13:30.075 --> 13:33.245
smaller banks in the US.

13:33.245 --> 13:37.616
I think the US in general is probably

13:37.616 --> 13:42.855
out in front most as far as deregulation.

13:42.855 --> 13:47.026
When you look at the various measures, as Thomas

13:47.026 --> 13:51.297
had mentioned, you've got Basel

13:51.297 --> 13:55.434
III endgame or new capital rules coming out, those should be released

13:55.434 --> 13:58.103
for comment sometime in March.

13:58.103 --> 14:02.441
Now the Fed is talking about liquidity rules

14:02.441 --> 14:06.579
and allowing banks to

14:06.579 --> 14:10.549
use prepositioned collateral at

14:10.549 --> 14:14.753
the discount window and utilize that as liquidity

14:14.753 --> 14:18.190
where historically they have not been able to.

14:18.190 --> 14:22.962
You've also seen the guardrails or

14:22.962 --> 14:27.199
the stepping off points of 100 billion for

14:27.199 --> 14:32.137
certain regulations being moved up to 150 billion.

14:32.137 --> 14:36.842
The next step is moving the next category up to

14:36.842 --> 14:39.078
370 billion.

14:39.078 --> 14:43.015
You actually have certain things that benefit

14:43.015 --> 14:47.386
different parts. The capital rules are definitely more favourable

14:47.386 --> 14:51.323
for, say, the investment banks or the large

14:51.323 --> 14:57.062
G-SIBs like a JP Morgan or a Bank of America.

14:57.062 --> 15:01.233
Some of the other rules, there's also new mortgage rules coming out

15:01.267 --> 15:04.904
that would lessen capital for mortgages.

15:04.904 --> 15:08.941
Those would benefit probably more via regional banks that are more

15:08.941 --> 15:13.279
interested in getting back into mortgage.

15:13.279 --> 15:17.449
M&A is certainly a topic.

15:17.449 --> 15:21.720
We've seen M&A, different deals

15:21.720 --> 15:25.858
that have already been done have been approved much

15:25.858 --> 15:29.895
quicker than they have versus the last 15 or

15:29.895 --> 15:31.964
20 years.

15:31.964 --> 15:36.302
I think the US banking industry in

15:36.302 --> 15:39.004
particular really needs consolidation.

15:39.004 --> 15:43.142
There's still 3,000 banks out there and right now

15:43.142 --> 15:47.579
I think there is a window in which consolidation can actually happen.

15:47.579 --> 15:50.783
Hello, investors. We'll be back to the show in just a moment.

15:50.783 --> 15:54.119
I wanted to share that here at Fidelity, we value your opinion.

15:54.119 --> 15:57.156
Please take a few minutes to help us shape the future of Fidelity Connects

15:57.156 --> 16:01.627
podcasts. Complete our listener survey by visiting fidelity.ca/survey,

16:01.627 --> 16:03.996
and you could win one of our branded tumblers.

16:03.996 --> 16:07.299
Periodic draws ending by March 30th, 2026.

16:07.299 --> 16:10.903
And don't forget to listen to Fidelity Connects, the Upside, and French

16:10.903 --> 16:14.940
DialoguesFidelity podcasts available on Apple, Spotify, YouTube, or wherever

16:14.940 --> 16:18.410
else you get your podcasts. Now back to today's show.

16:18.410 --> 16:22.514
Three thousand is a big difference from what we have here in Canada, for sure.

16:22.514 --> 16:26.085
Both of you cover global, especially Lee, let's zoom out from the US a little

16:26.085 --> 16:29.788
bit. Considering all these themes we've talked about, policy divergence, global

16:29.788 --> 16:34.193
deregulation, US dominance, how are you considering valuations

16:34.193 --> 16:37.096
being a little bit higher in the US and North America versus those in

16:37.096 --> 16:40.666
international markets, and are you focused on any geographies outside of North

16:40.666 --> 16:45.437
America specifically?

16:45.437 --> 16:49.575
I think valuations in Europe have largely caught up

16:49.575 --> 16:54.313
to the US, particularly if you look at price-to-tangible book

16:54.313 --> 16:57.416
which we do tend to look at in the banking sector.

16:57.416 --> 17:01.754
Insurance is

17:01.754 --> 17:04.656
fairly comparable as well.

17:04.656 --> 17:08.894
I don't think the valuation discrepancies are

17:08.894 --> 17:10.963
quite as large as they have been in past.

17:10.963 --> 17:15.200
When we

17:15.200 --> 17:19.271
kind of are looking at the portfolio now we do have a

17:19.271 --> 17:23.542
tilt towards North America and

17:23.542 --> 17:27.746
part of that right now is advantageous just because of

17:27.746 --> 17:31.817
kind of the energy security where

17:31.817 --> 17:37.089
we look at Europe or we look at portions of Asia and

17:37.089 --> 17:40.159
net energy importers.

17:40.159 --> 17:44.296
Right now we sort of see a little more insulation within kind

17:44.296 --> 17:49.101
of North America, whether it's insurance or

17:49.101 --> 17:51.537
banks or whatever.

17:51.537 --> 17:56.742
There is a bit of a tilt to the portfolio towards that right now

17:56.742 --> 18:00.846
but we also like Asia for certain growth

18:00.846 --> 18:05.150
dynamics and we do believe that

18:05.150 --> 18:10.255
what is going on in the Middle East is transitory

18:10.255 --> 18:14.193
so we've positioned the portfolio

18:14.193 --> 18:18.263
relatively heavily in Japan which is also going

18:18.263 --> 18:22.401
through its own deregulatory phase trying to become more sort

18:22.401 --> 18:27.573
of shareholder friendly, other

18:27.573 --> 18:31.877
areas like Singapore which is heavy in wealth management.

18:31.877 --> 18:36.348
We're finding opportunities on a global basis with

18:36.348 --> 18:41.186
right now maybe a slight tilt towards North America.

18:41.186 --> 18:45.524
Just on that point I would add that in these times of elevated

18:45.524 --> 18:49.761
uncertainty, elevated volatility, opportunities

18:49.761 --> 18:52.131
do present themselves between these markets.

18:52.131 --> 18:56.135
Being able to watch these different markets, a lot of the participants are just

18:56.135 --> 19:00.105
focused on one market, but being able to see, okay, this market, this market,

19:00.105 --> 19:04.042
this market, this market, seeing different kinds of dislocations, especially in

19:04.042 --> 19:08.480
these times of high uncertainty you can have pretty outsized

19:08.480 --> 19:12.885
relative moves that don't necessarily reflect the long term

19:12.885 --> 19:17.122
intrinsic value or relative intrinsic value of these companies so

19:17.122 --> 19:21.360
it does present opportunities to be flexible and take advantage of

19:21.360 --> 19:23.162
being an active manager.

19:23.162 --> 19:26.431
And very helpful, I'm sure, that you're able to rely on Fidelity's global bench

19:26.431 --> 19:28.200
and actually being in these countries as well.

19:28.200 --> 19:32.571
Yes, without a doubt. Having sort of the global analyst

19:32.571 --> 19:36.675
profile that we do gives us

19:36.675 --> 19:40.846
not only the ability to understand different

19:40.846 --> 19:45.184
markets better just with their input but also

19:45.184 --> 19:47.252
not just buy national champions.

19:47.252 --> 19:51.323
We can buy and invest in different

19:51.323 --> 19:55.661
companies that our analysts find more interesting than just

19:55.661 --> 20:02.100
sort of buying the biggest bank in each country.

20:02.100 --> 20:06.104
Find countries that have gone through similar type transitions

20:06.104 --> 20:10.442
and being able to study how those transitions impact the financial institutions

20:10.442 --> 20:14.246
before other markets are also going through it.

20:14.246 --> 20:17.816
You can kind of see the analogies, you can see the patterns, and kind of take

20:17.816 --> 20:21.720
advantage of that learning. We, obviously, have the big note system seeing,

20:21.720 --> 20:25.757
say, hey, this regulation happened or they got hit by this or

20:25.757 --> 20:30.262
such and such happened, let's go back, let's do our research.

20:30.262 --> 20:34.333
You have these on the ground experts as well through the specialized analyst

20:34.333 --> 20:38.837
team, all that plays into helping

20:38.837 --> 20:40.472
to find the best opportunity.

20:40.472 --> 20:43.642
Yeah, tremendous expertise that you all have access to.

20:43.642 --> 20:46.144
Let's spend some time focusing in on AI.

20:46.144 --> 20:50.182
Now, there's a lot of investor debate about CapEx versus ROI, what we're

20:50.182 --> 20:52.584
seeing with companies implementing it.

20:52.584 --> 20:56.421
Curious what you've seen within financial services, if there's specific regions

20:56.421 --> 21:00.525
or areas within financial markets where you've seen AI really add value or

21:00.525 --> 21:02.094
have a use case.

21:02.094 --> 21:06.365
I think within the Canadian context what you've

21:06.365 --> 21:11.036
seen is AI is used to kind of increase productivity

21:11.036 --> 21:15.407
but a lot of the productivity increases are a lot of the mundane tasks

21:15.407 --> 21:17.442
that people need to do.

21:17.442 --> 21:21.747
You see a lot in private wealth that now you can have AI

21:21.747 --> 21:25.684
just take notes of the calls that are being done.

21:25.684 --> 21:29.688
They help populate your CRM

21:29.688 --> 21:34.393
software and stuff. A lot of it is

21:34.393 --> 21:38.096
not necessarily rocket science but a lot the data entry.

21:38.096 --> 21:41.900
You receive data on mortgage applications, you can just auto enter it into the

21:41.900 --> 21:45.203
computer as opposed to having someone manually having to do it.

21:45.237 --> 21:47.506
It's a lot of stuff like that.

21:47.506 --> 21:54.446
It has had a visible increase in productivity.

21:54.446 --> 22:00.319
Now I think the banks are taking a twofold approach on it. On one hand

22:00.319 --> 22:04.523
it clearly has slowed down hiring, not necessarily laying off people per se

22:04.523 --> 22:08.560
but it's more they're managing the

22:08.560 --> 22:10.862
employment count through attrition.

22:10.862 --> 22:15.067
The other hand is now your front office staff

22:15.067 --> 22:18.904
is more productive so they can go and do more selling and spend more time with

22:18.904 --> 22:21.440
their customers.

22:21.440 --> 22:23.942
That's been like the two dynamics.

22:23.942 --> 22:27.879
More on the programming side, productivity of

22:27.879 --> 22:31.850
programmers has gone up 20, 30% so, again, you have

22:31.850 --> 22:35.854
to hire less developers but also you can accelerate the pace

22:35.854 --> 22:39.891
of innovation of your product. What we've seen so far

22:39.891 --> 22:44.496
is a lot of

22:44.496 --> 22:47.432
the productivity gains both the customer wins, they get a better product that's

22:47.432 --> 22:51.603
updated quicker but also

22:51.603 --> 22:53.705
your cost increase has gone down.

22:53.705 --> 22:57.676
You get to increase, generally, profitability but also your

22:57.676 --> 23:00.479
customers are also happy because they're getting a better product.

23:00.479 --> 23:02.414
Yes, it's a win-win.

23:02.414 --> 23:04.349
Lee, are you seeing any trends outside of Canada?

23:04.349 --> 23:08.286
Would Canada be ahead of the curve or is this common across a few countries?

23:08.286 --> 23:12.357
I would say from my experience looking on a

23:12.357 --> 23:17.262
global basis Canada and the US are probably

23:17.262 --> 23:21.099
ahead of the curve.

23:21.099 --> 23:25.270
You look at a bank like a JP Morgan

23:25.270 --> 23:29.508
or a Bank of America or Wells Fargo, they're investing very heavily

23:29.508 --> 23:33.745
in AI tools.

23:33.745 --> 23:37.816
You're also seeing it kind of within the investment

23:37.816 --> 23:42.120
banks as well. Morgan Stanley is using it now

23:42.120 --> 23:48.427
for wealth management.

23:48.427 --> 23:52.397
Thomas and I were joking that there's a lot of

23:52.397 --> 23:57.669
use cases out there but right now they're still kind of ethereal.

23:57.669 --> 24:02.541
You're listening to banks and a lot of it is productivity enhancing

24:02.541 --> 24:06.578
but you are starting to see some areas where

24:06.578 --> 24:11.383
it's becoming more customer facing and maybe moving

24:11.383 --> 24:16.288
more towards revenue generation or idea generation.

24:16.288 --> 24:20.258
Outside of the US and Canada, a little bit in

24:20.258 --> 24:24.429
Asia but there's only a couple banks that I would say are

24:24.429 --> 24:30.836
kind of leaders, maybe DBS in Singapore.

24:30.836 --> 24:34.573
Generally, you're seeing a little bit less in Europe.

24:34.573 --> 24:38.543
I think some of that has to do with the fact that

24:38.543 --> 24:42.714
you have fairly self-contained countries with

24:42.714 --> 24:47.285
maybe one or two champions that have kind of their own competitive moats

24:47.285 --> 24:51.256
that don't feel kind of maybe the need to

24:51.256 --> 24:55.627
lead but can be kind of the fast followers

24:55.627 --> 25:00.165
and buy the technology and adapt it sort of

25:00.165 --> 25:02.067
behind everyone else.

25:02.067 --> 25:06.271
There are still banks in Europe that are at the forefront

25:06.271 --> 25:10.609
but maybe not quite as much as we're seeing in North America.

25:10.609 --> 25:12.777
Interesting. Well, it'll be a good space to keep an eye on. I'm sure next time

25:12.777 --> 25:16.147
we have you on the call we'll have a new update on that as well.

25:16.147 --> 25:18.216
I wanted to touch on crypto before we wrap up.

25:18.216 --> 25:21.953
Obviously, we're seeing different regulatory restrictions on cryptocurrency but

25:21.953 --> 25:24.789
it's still an emerging asset class, if you will.

25:24.789 --> 25:29.961
How do you see it playing into mainstream financial markets?

25:29.961 --> 25:31.530
Do you want to start?

25:31.530 --> 25:36.668
Sure.

25:36.668 --> 25:40.639
I think there's two things. One, the banks have done a lot of work

25:40.639 --> 25:46.044
on it and I think they're prepared for

25:46.044 --> 25:49.414
innovation as it comes.

25:49.414 --> 25:53.418
I think right now as we sit here today there's a lot of

25:53.418 --> 25:57.389
interesting things that can be done with crypto.

25:57.389 --> 26:01.793
There's a lot of innovation that will come on the back of the new technology

26:01.793 --> 26:06.631
but there's also a lot of debate around the regulatory side of it.

26:06.631 --> 26:10.569
A lot of the 1.0 applications are really just circumventing the

26:10.569 --> 26:14.573
existing regulatory system and I don't think that's really what the regulators

26:14.573 --> 26:16.675
want.

26:16.675 --> 26:21.012
At the same time there's clear efficiencies in certain areas like cross-border

26:21.012 --> 26:25.250
FX, trade settlement, stuff like that where

26:25.250 --> 26:28.987
there is a real use case there.

26:28.987 --> 26:32.924
The way I would think about it is it's probably ultimately

26:32.924 --> 26:38.163
going to be productivity enhancing for the banks, and the banks will adjust,

26:38.163 --> 26:42.100
more so than a true disruptor

26:42.100 --> 26:46.071
that is gonna kill all the banks or some more

26:46.071 --> 26:50.442
dramatic stuff you hear about because ultimately I think the regulators will

26:50.442 --> 26:54.613
put regulation around crypto so it won't

26:54.613 --> 26:59.484
be as maybe transformative for new entrants as

26:59.484 --> 27:02.087
it may initially look when you first consider it.

27:02.087 --> 27:06.157
I would agree. I think when we talk about crypto we're really talking

27:06.157 --> 27:09.628
about stablecoins.

27:09.628 --> 27:13.898
Stablecoins within the US framework right

27:13.898 --> 27:17.936
now, you had the Genius Act, the Clarity Act, and those are

27:17.936 --> 27:22.407
being held up by sort of

27:22.407 --> 27:26.611
will stablecoins be able to to pay rewards

27:26.611 --> 27:31.783
or some form of interest  which I

27:31.783 --> 27:34.552
think the banks are obviously against.

27:34.552 --> 27:37.656
The banks already have a competing product.

27:37.656 --> 27:41.826
You've got tokenized deposits which would essentially

27:41.826 --> 27:44.829
do the same thing.

27:44.829 --> 27:48.900
I think Thomas has a good point

27:48.900 --> 27:52.937
in that a lot of cross-border solutions could

27:52.937 --> 27:57.275
come into being through stablecoins

27:57.275 --> 28:01.246
but the regulation of stablecoins still needs to be figured

28:01.246 --> 28:03.014
out at this point.

28:03.014 --> 28:05.417
Niche applications for now.

28:05.417 --> 28:08.687
Before we wrap up, looking at current positioning in the portfolio and really,

28:08.687 --> 28:11.756
I guess, leaving our listeners with final thoughts on Canadian financials.

28:11.756 --> 28:14.893
We started the conversation by pointing out how profitability of the banks has

28:14.893 --> 28:18.730
increased but so have delinquency rates so I'm curious how the two of you are

28:18.730 --> 28:20.532
looking at this space.

28:20.532 --> 28:24.569
I think in Canada, as you

28:24.569 --> 28:27.105
said, there's competing factors.

28:27.105 --> 28:31.509
On the more positive side, reported reasonable earnings and

28:31.509 --> 28:36.881
should have a reasonable earnings setup going forward on credit normalization,

28:36.881 --> 28:40.885
this deregulation theme, and the ultimate benefits of

28:40.885 --> 28:45.724
some of the policies that the Prime Minister is putting in effect.

28:45.757 --> 28:50.161
At the same time, those have to be balanced by effectively

28:50.161 --> 28:52.363
peak valuations.

28:52.363 --> 28:56.501
Credit, as you noted, is more kind of stabilizing, housing prices are

28:56.501 --> 29:00.905
still coming down.

29:00.905 --> 29:04.843
Carney is saying a lot of the right stuff, and I think he's trying to do a lot

29:04.843 --> 29:08.346
of the right things, but when you actually look on the ground, how many new

29:08.346 --> 29:12.617
projects have really been announced

29:12.617 --> 29:16.821
since he's become prime minister, how many have been approved, how

29:16.821 --> 29:20.291
many shovels are in the ground? It's just the timing of when that could come

29:20.291 --> 29:24.529
and the handoff from kind of this muted growth environment we're in today to

29:24.529 --> 29:27.632
kind of potentially an acceleration.

29:27.632 --> 29:31.636
I think in that way, there's both positives and negatives to

29:31.636 --> 29:35.073
be weighed. If you kind of look outside the banks there's obviously been a lot

29:35.073 --> 29:39.944
of volatility in the remaining financials.

29:39.944 --> 29:44.048
Again, that presents opportunity to trade

29:44.048 --> 29:47.986
these different themes off against each

29:47.986 --> 29:52.223
other. It's very much everything

29:52.223 --> 29:56.728
is sold off so there's times where you can find

29:56.728 --> 29:59.297
real dislocations here.

29:59.297 --> 30:06.638
For our model where we cover these companies no matter what

30:06.638 --> 30:09.107
these kinds of volatility has generally been a good thing.

30:09.107 --> 30:11.843
Yes, volatility can create opportunity.

30:11.843 --> 30:14.846
Looks like we're at time but thank you both very much, Lee and Thomas, for

30:14.846 --> 30:17.816
joining us today. Appreciate your insights, as always.

30:17.816 --> 30:20.451
Thanks for watching or listening to the Fidelity Connects

30:20.451 --> 30:24.756
podcast. Now if you haven't done so already, please subscribe to Fidelity

30:24.756 --> 30:28.126
Connects on your podcast platform of choice.

30:28.126 --> 30:30.962
And if you like what you're hearing, please leave a review or a five-star

30:30.962 --> 30:34.933
rating. Fidelity Mutual Funds and ETFs are available by working with

30:34.933 --> 30:38.303
a financial advisor or through an online brokerage account.

30:38.303 --> 30:42.006
Visit fidelity.ca/howtobuy for more information.

30:42.006 --> 30:45.844
While on Fidelity.ca, you can also find more information on future live

30:45.844 --> 30:49.981
webcasts. And don't forget to follow Fidelity Canada on YouTube, LinkedIn,

30:49.981 --> 30:51.282
and Instagram.

30:51.282 --> 30:54.152
We'll end today's show with a short disclaimer.

30:54.152 --> 30:57.989
The views and opinions expressed on this podcast are those of the participants,

30:57.989 --> 31:01.926
and do not necessarily reflect those of Fidelity Investments Canada ULC or

31:01.926 --> 31:05.930
its affiliates. This podcast is for informational purposes only, and should not

31:05.930 --> 31:08.466
be construed as investment, tax, or legal advice.

31:08.466 --> 31:10.768
It is not an offer to sell or buy.

31:10.768 --> 31:15.106
Or an endorsement, recommendation, or sponsorship of any entity or securities

31:15.106 --> 31:19.911
cited. Read a fund's prospectus before investing, funds are not guaranteed.

31:19.911 --> 31:23.481
Their values change frequently, and past performance may not be repeated.

31:23.481 --> 31:25.817
Fees, expenses, and commissions are all associated

31:25.817 --> 31:27.619
with fund investments.

31:27.619 --> 31:30.221
Thanks again. We'll see you next time.