The Canadian Investor - What Does TD's AML Settlement Mean for Investors?

Episode Date: October 17, 2024

In this episode of The Canadian Investor podcast, Simon and Dan dive into the September 2024 CPI numbers and what the slowing inflation means for the Bank of Canada’s rate policies.  Next, we explore the massive fallout from TD Bank’s Anti Money Laundering (AML) scandal—how it stifles their U.S. growth strategy, what the asset cap means moving forward, and the leadership shake-up at the top.  We also cover Aritzia's impressive earnings and U.S. expansion, along with BlackRock’s staggering $360 billion YTD inflows and the growing dominance of ETFs.  Tickers of Stocks & ETF discussed: BLK, TD.TO, ATZ.TO, WFC, BAC, JPM, C Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Dan’s Twitter: @stocktrades_ca Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Web player - The Canadian Real Estate Investor Sign up for Finchat.io for free to get easy access to global stock coverage and powerful AI investing tools. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.  See omnystudio.com/listener for privacy information.

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Yeah, a lot of like non-earnings related news some pretty notable situations from a couple huge companies here in here in Canada a couple of which that you know we've been talking about and kind of predicting these end results for quite some time now on TD Bank and Crestard. So it's definitely going to be an interesting podcast. Yeah, let's actually start with TD Bank. We had Canadian CPI that came out this morning. So we'll do that after just because I think it's a nice segue. And you know, it's a lot of people are invested. Like I know it's a very common holding for Canadians in general. I was actually checking out the TD Direct Investing

Index. So on their platform, right, they have this kind of bearish, bullish index. And you look at the most held stocks, obviously it's TD. So a lot of people own TD, but, you know, a lot of their holders just own Canadian banks in general. And it's always one of the top holdings. And I assume it's a lot of people own it even if they don't think they own it just uh if you have some kind of a fund that's canadian based there's a good chance you own it yeah especially any market cap way to fund because what is it td's got to be the second or third largest company in the well it's not as large as shopify i don't believe yeah it's up there it's top five for sure but if they they keep going, they'll probably go out of the top.

Yeah, this is probably it's definitely like this has to be one of the more notable things to happen to a Canadian bank in quite some time. Yeah, yeah, exactly. So obviously we're referring if you've been living under the rock and you have no idea what we're talking about. We're referring to the TDd aml investigation in the u.s i will say aml a lot so that's anti-money laundering laws or regulations they're present in canada and the u.s but this specifically is for td's operation in the u.s for the retail banking segment retail and i guess business banking over there so it happened i'll just do a recap a little bit of what they were essentially pleaded guilty to and what the Department of Justice,

so the DOJ, found them guilty of. So between 2014 and 2023, TD failed to monitor over $18 trillion in transaction properly that enabled criminal networks to move more than 670 million in illicit funds. Employees at the bank were aware of the suspicious activities. In one example, they did even mention that TD Bank facilitated over 400 million transaction to launder funds on behalf of criminals selling fentanyl and other narcotics. Merrick Garland, who is the U.S. Attorney General, said that employees would openly joke about the lack of compliance. So clearly it was something that was well known within the bank. And they even mentioned that the bank issues were known at every level of the bank, which is not surprising that Bharat Mishrani, the current

CEO, has announced his retirement and will be replaced by Raymond Chun. Now, I was really critical of him. I think you remember that when we talked about it. I think it was maybe the last earning or the earnings before when they started getting more information about what was happening with the AML investigation. And on the conference call, he was not really taking ownership of what happened. And that really bothered me because whether you knew or not, I don't care. You're the CEO. You're accountable for this. And if you didn't know, then there's an issue with your leadership because you should have known.

then there's an issue with your leadership because you should have known. And if people don't feel comfortable to bring these kind of issues up the command chain, up of the line of command, then there is another issue which is not good at all. Like there should be employees and, you know, executives should be should feel comfortable to bring these kind of issues to the CEO. And if that wasn't the case, it doesn't look good either way. I don't know if you kind of see things the same way, but for me, that's how I saw it. And what's worse is this was between 2014 and 2023. He started as CEO in 2014.

So you were there for the whole time this happened. He should have taken accountability for this way sooner, in my opinion. I think he was basically forced out the door because he didn't. It was, I didn't read the whole settlement because it's super long, right? But I would assume that I was probably part of their ass that he needed to leave. Yeah, and I'm surprised they just kind of let him ride off into the sunset and retire. How do they not just can him for something like this? You would think there'd be more, they're letting

him operate till what, middle of next year and then he's retiring or something like that. Yeah. I'm just surprised they didn't just outright get rid of him. I mean, that would probably give investors a little more confidence that they're taking it seriously, but they're letting him hang on for another, well well what is that nine months yeah i mean they have to make sure there's good succession planning in place you know he has to to let his successor uh show him uh what not to do yeah exactly yeah i mean it's it's does it's not a good look for td at all and i mean i i think the other institution this is off the top of my head but i think like

a lot of the other banks have been fined like smaller amounts for like smaller situations like this but this is definitely the the biggest one like uh yeah the the u.s doesn't mess around with that and i think the biggest issue was that they failed to monitor that 18 trillion in transactions properly i think this this is without being the shoes of the department of justice and uh you and u.s regulators i would assume this is really what pissed them off because it wasn't just some one offs here it was clearly there was some deficiencies in terms of compliance and adhering to these best practice in terms of AML so I would assume that's probably what was one of the biggest issue for them and of course in terms of the overview of what is being imposed on TD the first

one which is probably not that bad although it doesn't sound. So a fine of 3.09 billion US dollars. However, TD had set aside almost that amount, just about for 3.05 billion. So just, you know, a little bit less, but you know, at least they had said that amount already. So I'm sure they were expecting a pretty large fine. The requirements to remediate the bank's USAML program, a requirement to prioritize the funding and staffing of the remediation, a formal oversight of the AML remediation through a monitorship. So that means that they will be independent third party monitoring TD's AML practices and obviously the progress they're doing and personally haven't been part of audits, which just is probably one much more in-depth of audits and audits tend to be more specific in terms of what they are.

This will for sure be very time consuming and costly in terms of the monetary costs and the resources that they will have to assign to properly provide the information and work with this third party. The total assets of TD's two U.S. banking subsidiaries cannot exceed U.S. $434 billion in total assets. So that's their asset as of September 30th, 2024. And the limitation does not apply to DD Securities or any of the banks, Canadian or other global businesses. So this is just the US retail and business banking. And the US bank is subject to more stringent approval processes for new bank products, services, markets, and stores to ensure AML risk of new initiatives is properly considered and mitigated.

So definitely not good. I know you'll go into more detail on what this means for TD, but that's an overview of what is happening. On the bright side, there is some form of closure, but I'm sure as you'll elaborate, there's still a whole lot of uncertainty going forward as well for td yeah and i would imagine they kind of knew like where the fines would come in and that's why like the provisions are almost bang on what the fine is because like we've seen you know they were kind of steadily increasing the provisions for it and then i think it was

last quarter they booked like something like 2.6 billion canadian dollars or whatever which probably you know was an indicator that they probably told them how much the fines were going to be which is why you know there was that large increase and i'll say like even when this started resurfacing like many analysts said you know 500 million to a billion in fines and like we're like 3x that. So it's been pretty bad. I mean, it's definitely taken a big one-time hit to earnings. But I mean, moving forward, TD has pretty much used the US arm of its business to just add growth over the last couple of decades, primarily through acquisitions. I mean, it made a few notable acquisitions, you know, in the US over the years, it acquired Bancorp in 2004, Commerce Bancorp in 2008. And then in 2013, it bought all of Target's

credit card assets. So it added that to the fold. And I mean, it was pretty close to making one of its largest acquisitions. I think it actually would have been the largest in First Horizon, but the deal fell through in 2023. And there was initial rumblings that it was due to the US regional banking crisis, but it turns out that it was because of these AML issues. And I think it wouldn't have went through anyway because of that and i mean now that this asset cap is in place that area of growth is is effectively dead for the company until you know that asset cap is lifted because it's not going to be able to acquire any significant level of business because like you had mentioned they're effectively capped at the u.s retail assets they have now no you said

it was like as of their september 30th assets liketh assets. They're really not going to be able to grow that side of the business, which has fueled quite a bit of the growth over the last few years. And I mean, this is going to end up in TD Bank either growing at a much slower rate, relying pretty much solely on its Canadian retail end, or it will need to find a way to make up that US growth elsewhere. I've seen a few people mention the company could look to expand internationally or just to try and find a way to expand faster in Canada. But both of these situations are really not all that optimal. With the international expansion side of things, you're effectively taking something that a company has

been really good at which would have been it's you know the u.s retail side of the business and how fast it's it's grown it and you know expanding into something that nobody really knows if they're good at and and i mean we've seen you know companies like scotia bank kind of take this avenue expand out of north america and it has not worked out very well at all so i mean the people kind of saying that this will be you know an easy pivot for td i really don't think it will be it could work out they could take that avenue and grow well but i mean obviously you know on the international expansion side of things it doesn't really look good that they've done this either yeah exactly like i'm not sure countries

will you know jump at the opportunity to approve uh you know a td acquisition in their country after td has been slapped you know these yeah these restrictions by the u.s yeah for the cartel drugs it's yeah it's it's definitely not a good look it's not like you know they can just yeah it's it's not going to be easy on that end. And I mean, if you look at the growth of its U.S. retail assets in the U.S. over the last 13 years, it's grown them at, you know, a 5.2% pace annually. And its Canadian assets have only grown at 3.2%. So it's got a lot of work to do to make up that growth on the US. It's definitely a tough gap.

And I really expect this to impact companies' earnings over the short term with the possibility of extending into the midterm if it can't find another way to make up that growth. I know we said it quite a few times on the podcast as well. We kind of compared to the Wells Fargo type situation. They made all those fake accounts and things like that, but they had an asset cap, but the bulk of their business was in the United States. So I mean, it's a lot more impactful, whereas TD is around 30%. But it's also, I mean, this is 30% of the business. It's not a small end of the business. And you have to keep in mind too, TDs, like it's 30%, but their business is almost evenly divided.

Not quite, but between the US retail, Canadian retail, and then like, I guess wholesale, which includes both US and Canadian, but the wholesale is not impacted. And for people wondering what wholesale is, it's just essentially banking services to institutions, to large institutions. That's what wholesale is. So that's the difference between the two. So those are clearly not impacted. And in terms of assets, wholesale is the number one, at least. But I'd have to check. I can't remember where they get most of their net income from. I would imagine it's still from the Canadian retail, but I'm not 100% sure on that. But I mean, they have been one of the more aggressive growers in the United

States over the years. And now that's effectively been been taken away from them and it's not it's not all that easy to just make up that growth in canada especially when you have you know the other institutions they're all major institutions here there's not very much you know there's not very much market share that td could you know capture from these other banks because they're effectively i mean if you look at them versus the other major banks here, they're operating at a significant disadvantage. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, now. Questrade is Canada's number one rated online broker by MoneySense, and with them,

you can buy all North American ETFs, not just a few select ones, all commission-free, so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. details. That is questtrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are

still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at Airbnb.ca forward slash host. That is Airbnb.ca forward slash host. That is airbnb.ca forward slash host. So not so long ago, self-directed investors caught wind of the power of low-cost index investing. Once just a secret for the personal finance gurus is now common knowledge for Canadians, and we are better for it. When BMO ETFs reached out to

work with the podcast, I honestly was not prepared for what I was about to see because the lineup of ETFs has everything I was looking for. Low fees, an incredibly robust suite, and truly something for every investor. And here we are with this iconic Canadian brand in the asset management world, while folks online are regularly discussing and buying ETF tickers from asset managers in the US. Let's just look at ZEQT, for example, the BMO All Equity ETF. One single ETF, you get globally diversified equities. So easy way for Canadians to get global stock exposure with one ticker. Keeps it simple yet incredibly low cost and effective. Very impressed with what BMO has built in their ETF business. And if you are an index investor and haven't checked out

their listings, I highly recommend it. I bet you'll be as pleasantly surprised as I was that BMO, the Canadian bank is delivering these amazing ETF products. Please check out the link in the description of today's episode for full disclaimers and more information. The one thing I'm really curious about is, so TD typically raises the dividend in the fourth quarter. So I'm wondering how high that, you know, because they've typically been one of the faster dividend growers out of all the Canadian banks. But right now their payout ratio is, I think it's at like 86 or 87%, which is like abnormally high for a bank. It's going to normalize because a lot of that was, you know, because of those AML fines that it's so high. But I just wonder, do we see a really tiny

dividend raise in the fourth quarter or do we not see anything at all just because it's a little uncertain right now? I mean, I would imagine they still bump it just because the fines are over and done with. So they should have a relatively good idea of projected earnings. But dividend growth from these banks is typically a pretty good indicator on how they view the environment moving forward. I mean, we've saw Scotia, who hasn't raised their dividend going on two years now just because they've struggled so much. So I'm really curious on what they do next quarter. so much. So I'm really curious on what they do next quarter. Yeah, I think that's a great point. And a lot of people say, well, now they can focus on Canada. And, you know, let's remember that the Canadian economy right now is not exactly firing on all cylinders. So you have to keep that in mind, too. Yes, it's performed decently well. But TD has been like other Canadian banks, adding more and more loan loss provisions for a lot of them actually are assigned to their canadian banking business so you have to keep

in mind that it's not like things are very rosy there's a lot of competition in the canadian space as well i know some have floated i joked to you about like you know laurentian buying laurentian yeah that was a joke because laurentian bank literally put itself up for a sell i think it was like last summer right yeah nobody wanted there was no buyers yeah so are you gonna come back and clearly it's not fantastic assets it's none of the big banks were interesting in buying it especially after you see national bank you know making the offer to buy Canadian Western. I'm just, yeah, I'm just a bit skeptical when it comes to that. And I guess the last thing I'll

mention here is so Wells Fargo, they had that asset cap that you mentioned, $1.95 trillion. Clearly, their business was mostly in the US. So, you know, obviously, you have to take that into account. But what I ended up doing is this asset cap started in February of 2018, and it's still in effect now. So it just goes to show that it can go on for a very long time. And some people are speculating that it may be taken off in 2025. But again, I think typically what regulators want to see is they want to be assured that going forward, whatever they're imposing those asset caps on, whatever the reason is, they want to be assured that going forward, whatever they're imposing those asset caps on, whatever the reason is, they want to make sure that your practices have changed for good.

And that takes a lot of time. So don't expect this to take a year or two. It's not. Like Wells Fargo, I think it's a good example. And I just decided to pull since that date the returns of Bank of America, JP Morgan and Citigroup compared to Wells Fargo. So, you know, JP Morgan, which is not necessarily the same kind of bank as Wells Fargo. Wells Fargo is a more traditional kind of saving and loans bank. So the closest one is probably Bank of America. But regardless, Bank of America return total returns of 56.5 during that time period. JP Morgan 137 percent. And then you have Wells Fargo at 27 percent and Citigroup lagging behind. But Citigroup also has regulatory issues of its own for other reasons that are going on that are still ongoing. So you

get the two that are really facing regulator scrutiny that are underperforming pretty widely. The other two, JP Morgan, I think it's really outperforming in part because they have like this old wealth management business, like a much larger bank in general and different kind of services caters to different kind of people. So you have to keep that in mind. But I wanted to show that because the future is incredibly uncertain when it comes to TD specifically for I think for banks in general, but specifically TD. Yeah, I mean, it took them almost what a year to figure out what even the penalty would be. So I can't imagine the cap is going to be lifted in a year to figure out what even the penalty would be so i can't imagine the cap is going to be lifted in a year i mean i would be very surprised and in terms of wells fargo like

he said like it's effectively returned since the asset cap the dividends a little bit more than the than the dividend you've been paid which yeah it's been effectively you know from a from a appreciation i believe i did did it without dividends. And if you look at the start of 2018 until now, it's lost around 4% in share price. So, I mean, you effectively had to get the dividends and reinvest them back in the company to earn, what is it, 3.7% annually, whereas the S&P, just guessing, has probably returned 12%.

So, I mean, it's not, it's been a pretty rough go and it's, you know, it's hard to tell how it's going to work out for TD, but I really, they're at the mercy of US regulators, which is probably not somebody you want to be at the mercy with. No, that's usually not. Yeah. That's usually not a good idea. Yeah. Yeah. Like if they don't like, you know, your process, like how, you know, you've effectively, you know, they're probably going to have to spend quite a bit of money to, you know, change and, you know, put more, you know, stringent, you know, things in place. And I mean, if regulators don't like it, they'll just keep the cap. You're effectively at their mercy and um i i don't think they'd be in any any rush to to remove it until things are looking uh yeah rock solid yeah and i guess the last thing i'll mention is i've seen people say like i think people i've seen one

person say it and i think it was the dumbest comment i saw regarding this and i can't remember who it was i think it was on twitter but a person was like well i mean you know what td did is not as bad as wells fargo which were opening accounts you know fake accounts without people's like customer consent and even forging signatures i'm like i mean if that's your perception versus you know allowing know, drug money to be laundered from fentanyl. Sure. I mean, I'm going to go on a limb and say that U.S. regulators, which are, you know, AML is usually a big, big focus for them. They might disagree a little bit on that. So I think they're both bad to say that, you know, this is not as bad. I think they're both terrible looks for different reasons.

So, yeah, just i just wanted to mention that because i kind of couldn't believe when i saw that comment yeah i mean i guess that all depends on what you view as bad i would view them as like near equal i mean they're both really really poor i mean wells fargo's i guess was a little more shady from like a consumer perspective that they were doing things like that whereas like td is more of a, you know, this is like an illegal drug activity, things like that. But they're both bad. And, you know, regulators don't like either much at all. No, exactly. So I think we've touched enough for 20 minutes or so on this. So let's move on. Talk about CPI that just came on. So fresh off the press this morning. So for September 2024, headline CPI came in at 1.16% year over year. Clearly a deceleration here in the inflation rate, the headline rate.

And obviously it's the inflation rates. So prices are still increasing on the aggregate. They're just increasing at a slower rate, but that's still at a higher, you know, you know, it's still on top of all the inflation we've seen over the last four or five years. And food was up 2.8% year over year while shelter was up 5%. On a monthly basis, it was flat for food while shelter was up 0.1%. Rent prices are rising at a slower pace, but still increasing at a rate of 8.2% year over year. Food prices purchased from stores so grocery was up 2.4% while restaurants was up 3.5%. Services inflation one

that I think is really important to look at declined 0.2% on the monthly basis but it was still up 4% over the year. This one, I think it's important to keep an eye on because it's been very sticky over the last couple of years. So something to keep an eye on. Energy is definitely the component that pulled down the headline number. So it declined, this is crazy. So it declined 8.3% year over year, 4.8% month over month.

I know I probably sound like a broken record right now, but this is a big risk going forward. And if you don't believe me, all item excluding energy were up 2.4% compared to the headline number of 1.6%. So think about that for a second. So if you remove energy, things were up 2.4%. If you include energy, they were up 1.6% over a year. So this is a big risk, I think, for future inflation. And I'm sure, you know, people will be, you know, government officials from across the country will be celebrating with that number. Absolutely. That's usually the case. But once you start going into it,

Absolutely. That's usually the case. But once you start going into it, that could really be a big, big wildcard when it comes to the Bank of Canada's target of 2% or, you know, not really trending in the right direction anymore. It's just one month, so we'll have to see. So CPI common was up to 2.1% from 1.9% the month before. CPI median, which basically just looks at the kind of medium price increase, was flat at 2.3%, so the same as the previous one. And CPI trim, which removes the most volatile elements of CPI on both ends of the spectrum, was flat to 2.4%. Interestingly, it kind of lines with the all-item excluding energy. So, you know, it's just something to keep an eye on. It is, you know, I think it's a good headline print, but I think we just have to be careful because it could get very volatile, especially if we see volatility in energy prices going

forward. Yeah, when you see energy making up, what, one third of the overall inflation number, it's, yeah, I mean, it can swing the other way pretty quickly but i would imagine this would give the bank of canada a bit of uh you know incentive to maybe that's the main thing that i'm curious about is whether they go 50 basis points when is it i believe the meeting is in yes like october 22nd or 23rd or something like that they decide i was trying to look up there's not as good of forecasts you know like the fed watch like you can that stuff is I was trying to look up, there's not as good of forecasts, you know, like the FedWatch, like you can, that stuff is just, you can look it up in a second, but there's not too many. It's amazing. For Canadian, they don't really have, I mean,

the only thing I could really find is a TD story from October and they kind of predict policy rates to hit 2.5% by the end of next year. So that would be some pretty big declines. But if I were to bet, I would say we see 50 basis points down. What would it be next week? I would bet 25. The reason why I think 25 is because of the core and the energy component. I think that's going to scare them them i think that will definitely scare them that if they get too aggressive and then energy prices start spiking they are you know they've kind of you know screw not shot them not screw themselves but they shot themselves in the foot a little bit because they went down too quickly and a bit less leeway in terms of what to do going forward so i

i mean obviously it's all about probabilities. I don't think 50 basis point is off the table, but because of the core and how energy pulled down the headline number by so much and core metrics are actually flattening, we'll have to see right in a few more data points. So maybe it's just a blip and it will keep going down. But I think those are the reasons why I think they'll be cautious and do 25. Yeah, it's possible. I mean, they've done a pretty good job thus far.

And I mean, I guess if they think a 50 basis point might spur things and kind of eliminate all the hard work they've done over the last while, kind of navigating what's going on right now, maybe 25 but i'm my mortgage is renewing in a year a year and a bit so i'm hoping we get a few yeah well if you go variable sure but fixed we'll have to see you have to you'll have to do uh you know a a dance and try to hope that the bond market cooperates with you. Yeah, it's going to be interesting.

As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission-free, so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit Questrade.com for details. That is Questrade.com.

here on the show we talk about companies with strong two-sided networks make for the best products i'm gonna spend this coming february and march in an airbnb in south florida for a combination of work and vacation and realized hey my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. So not so long ago, self-directed investors caught wind of the power of low-cost index investing. Once just a secret for the personal finance gurus

is now common knowledge for Canadians, and we are better for it. When BMO ETFs reached out to work with the podcast, I honestly was not prepared for what I was about to see because the lineup of ETFs has everything I was looking for. Low fees, an incredibly robust suite, and truly something for every investor. And here we are with this iconic Canadian brand in the asset management world, while folks online are regularly discussing and buying ETF tickers from asset managers in the US. Let's just look at ZEQT, for example, the BMO All Equity ETF. One single ETF, you get globally diversified equities. So easy way for Canadians to get global stock exposure with one ticker. Keeps it simple yet incredibly low cost and effective. Very impressed with what BMO has built in their ETF business. And if you are an index investor and haven't checked out their listings,

I highly recommend it. I bet you'll be as pleasantly surprised as I was that BMO, the Canadian bank, is delivering these amazing ETF products. Please check out the link in the description of today's episode for full disclaimers and more information. Okay, so I think we've done enough about CPI. We still have a few things to do. So why don't you go ahead with Aritzia, that reported earnings. I know it's a stock company that a lot of people at least

follow, but I think a lot of people listening to the podcast actually own or at least probably buy close off of Aritzia. Yeah. It's generally like even when we write about it or talk about it on our YouTube, it generally gets some pretty high viewership and interest. I think it's a pretty heavily owned growth stock here in Canada, but they posted a pretty strong quarter, but some guidance caused it to sell off post earnings. I mean, the one important thing to keep in mind is it is up over 80% on the year. So it really shouldn't be all that surprising to see a bit of a pullback, especially on a guidance revision, which I'll get to in a bit was like borderline non-existent. But it's pretty easy to start focusing on the negatives in terms of the daily fall.

But the company has just performed so well this year overall. Revenue, $615 million. They predicted $584. So it came in ahead of that. And earnings per share of $0.21 came in well ahead of effectively $0.15 that were estimated. Same store sales grew by 6.5%. And the company's US growth is returning in a big way. It's driving most of the results right now. And it's looking to be a pretty big tailwind. US revenue grew by 23.9% year over year, and now makes up 56% of the company's total revenue. And I believe even a couple of years ago, this was at the low 40s, mid 40s. So it's definitely

the US is starting to become a big chunk of the business, and I wouldn't be surprised if you see this at north of 60% pretty shortly because the Canadian end is seeing much slower activity. I mean, this makes sense because Canadian consumers in general are in a bit of a worse position than US consumers. And I mean, in addition to this, the brand is a bit fresher in the United States and it just has much more room for expansion. I mean, they have 10 times the population. It's generally an untapped market, whereas the Canadian one, it's a bit more established. And I would imagine, I mean, maybe in the short term, if rates come down to Canada, you could see Canadian growth pick up. But if I were to guess, I would say US growth probably outpaces Canadian growth indefinitely. Yeah.

Growth margins, go ahead. Just to add to that, right? People think like, oh, interest rates coming down, people will have more money to spend. Again, these things don't happen on a dime, right? Even if the Bank of Canada lowers rate, even if you're looking at credit products that are influenced by the overnight rate that the Bank of Canada publishes, I mean, at the end of the day, a lot of this stuff has a lag effect too, right? So yes, it may spur consumption eventually, but it could take 12 months plus until we

start seeing the impacts in the real economy of people spending more because of lower rates. I just wanted to mention that. Yeah, I think probably for the foreseeable future, you're right. And I'm like I'm showing for Joint TCI here. I mean, since it was, I guess, early 2022, the US or no, mid 2022, the US kind of started outpacing the Canadianadian business yeah yeah and it like it makes sense like i said even if there's you know a recovery in canadian spending the u.s market is just so much bigger and you know it's not as established of a brand down there so i don't

expect the the canadian side of the business to to outpace the u. the US at any time soon. I mean, gross margins came in at 40.2%, which is a 500 basis point improvement year over year. We're starting to see margin recovery after a pretty rough period of time due to excess inventory, which pretty much caused them to huge markdowns on a bunch of their products to just try and move inventory. They were like struggling from even like a warehouse perspective. I mean, they had so much product that really wasn't moving. And from a retail business with stuff like this, you just have to end up marking it down a ton, which kind of kills your margins. You're making effectively no money on a bunch of product that you had to make. Online sales now make up nearly a third of the company's business, and it's still continuing to grow that segment at a double digit pace, despite it's

coming up against some pretty tough comparables through the pandemic years. So I mean, the fact that they can still grow it double digits is pretty impressive. And they issued both its Q3 and fiscal 2025 guidance. I don't really ever focus on quarterly guidance. It's, I mean, unless there's some huge changes quarter over quarter, but there really wasn't. But on a full year basis, the company expects revenue in the 2.54 to 2.6 billion dollar range for the year. And I mean, quite a few headlines had the fact that Aritzia reduced its fiscal 2025 guidance, which is accurate, but it's kind of a prime example how, like, I mean, like just the headlines are, you know, a bit clickbaity to an extent. I mean, the overall reduction in guidance was on the top end.

They reduced it from 2.62 billion to 2.6 billion. So, I mean, as a long-term investor for me, for them to mark down the guidance by, I think this is like less than 3%, it's pretty much a non-factor. I'm kind of curious as to why they even marked it down like that tiny of an amount. I don't know. They must have some pretty laser targeted outlooks on what they think is going to happen. In terms of year-over-year growth, though, that's still double digit. And when we consider the state of the economy, at least from a discretionary spending side of things, it's pretty impressive that a mid-tier retailer is still growing at this pace. Margin recovery, they expect that to continue. Gross margins should, well, they expect them to increase by 450 basis points year over year.

And I mean, just overall, it was a pretty strong quarter from the company. And I own it with the main thesis that U.S. expansion is probably going to drive most of the company. And I own it with the main thesis that US expansion is probably going to drive most of the growth. Retail stocks are crazy fickle, especially fashion companies. In 2023, pretty much all anybody could talk about was Aritzia's excess inventory buildup was a result of the company losing brand power, weakening sales, things like that. When in reality, all I think it did is kind of mess up. They made a few miscalculations based off pandemic demand. They ordered a bunch of inventory. It ended up interest rates rose from what, 0% to 5% in a matter of nine months or whatever it was.

And it just caused a huge slowdown. in a matter of nine months or whatever it was, and it just caused a huge slowdown. But they are up 117% off those 2023 lows. Yeah, I mean, it's pretty good returns, that's for sure. I mean, it succeeded. They were definitely having some issues. I think it started after, what was it, like 2022, right? Where they had to right-size everything. Yeah, 2022, I think their started after like, what was it? Like 2022, right? Where they had to like right size everything.

Yeah, 2022. I think their inventory like doubled because they couldn't keep up with the demand during the pandemic. And then they ordered a whole whack load of inventory. And then it just, they ended up having to mark a ton of it down. And then everybody started to get worried

that the products were, you know, they weren't creating enough new products. And, and you know the brand wasn't all that powerful and i mean with a retail stock especially a fashion stock like it can draw down huge based off you know stuff like that but uh it proved at least to this point to be you know a pretty good contrarian buy at the bottoms in 2023 yeah i mean it's always tricky when it comes to fashion yeah i own lululemon i'm i would say i'm a bit down overall in my position but uh i added when it was uh you know they were having some issues in the past six months to a year um now it's rebounded a little bit but yeah fashion is just so it's it's definitely tricky yeah we've seen it with

nike uh you know a little lemon struggling a bit too it seems like it's very rare to find a company that will stand the test of time i'm sure aritzia it looks like it will do pretty well in the you know probably midterm potentially long term but then you have to make sure they're able to change with how fashion is changing and that's always the hardest part yeah it's not exactly a business you can just kind of streamline one specific you always have to be changing and i mean this like a ritzy is not always the case i mean we saw with canada goose they were cruising and then they definitely did they fell out of favor heavy and just never recovered so it's never a guarantee

i mean canada goose was a little bit a little bit different they were a ton of growth in china and then there was the element that you know their you know their coats are made from animals and that's not exactly a good uh from a pr perspective so they had to get rid of that and i mean it's a different situation but it's not the rebound is is never a guarantee yeah and it's an aspirational luxury right for a lot of people so they'll you know their coats are very expensive and a lot of people may have saved up to be able to buy the coat but it's probably not something that they're gonna be buying now anytime soon especially if you're, you know, you're someone that kind of bought it for the status without necessarily, you know, thinking

about like, could you really afford it? Right. So I think that's happened to a lot of people. And I've never had a Canada goose coat, but from what I heard, they're very good quality. So they do last a long time, then you know creates that upgrade cycle you know it kind of delays it because they're you know they're well made and they last for a while so i think a different kind of category will you know we'll have to see how they do but yeah they've been uh they've been pretty crushed too yeah i mean i would have to have a lot of discretionary income to spend twelve hundred dollars on a jacket that's just me yeah yeah i mean for me the i need a new winter jacket and the one thing i think we i don't know if it

was with your brayden but we did a segment and i was looking at so they have like a reused store now yeah yeah it was with you yeah yeah i would consider that i would buy like because they were selling like probably under 500 and for them who are really in good condition like i couldn't care less that it's used like as long as it's good quality it'll last a while like and it's warm in the winter like because you know you're in calgarygary and Ottawa is the same. Like, it gets cold here. Like, it's colder than Toronto for people listening to us. Oh, yeah. I mean, even at $500, I don't know. I think a lot of people have seen me on the podcast wearing the Kirkland hoodie.

So, they know I don't spend much. Yeah, I know. And I'm waiting for the Kirkland winter jacket. Yeah. I mean, for me, I don't mind paying a bit more. But, again, I would never pay like $1,500. No. Forget that. But I don't mind paying a bit more if I know it will last a long time,

because the way I see it is, at the end of the day, it probably costs me less because I don't have to change it in three, four, five years, right? So that's how I approach things. But again, I do have a limit as well. Yeah. Yeah. My limit is very low. Yeah. So we'll move on here to BlackRock earnings. I always find it, I don't know about you, but I always find it fascinating to look at BlackRock.

It's like almost looking at that Canadian ETF, you know, fun flows. Yeah. Yeah. Fun flows, but on a much larger basis. And obviously they do more than just etfs uh well aware of that but blackrock is obviously the largest asset manager in the world so they they you know they have some money under management yes which so far this year it's been a pretty good year for blackrock you think about how the markets have been doing and clearly you know that's a big

tailwind for them so they have 360 billion in year to date inflows. As a refresher, when we did the Canadian ETFs flows, it was about to, you know, it's on track to smash the all time record for Canada. And it's 49 billion. Yes. Just gives you one asset manager is what about like a quick math here about like seven times roughly. More than that, a bit more than seven times. And it's in U.S. compared to Canadian too. So it's probably like nine times when you factor in the exchange here.

Now for the quarter, they had $221 billion in inflows. So massive quarter for them. AUM was up $2.4 trillion year over year to $11.5 trillion, so that's a 26% increase in AUM as asset under management. For those who are newer to the podcast, and I will be repeating AUM quite a bit here, $456 billion was due to inflows, while the rest was because of market appreciation not surprising pretty much all major asset classes are up pretty significantly this year including equities bonds bitcoin precious metals so you really if you're down this year you know you have to be working

pretty hard at it yeah you gotta really re-evaluate yeah your strategy because if you're down this year like yeah you're doing something wrong i'll just say it like that i don't want to laugh if that's the case for people but you know you need to be very honest with yourself like you need to look at the mirror because literally pretty much all the asset classes are up this year revenues increase 15 percent mainly driven by higher higher average aum which makes sense because a lot of their revenues comes from fees based on asset under management. So the more you have AUM, the more you have fees, even if the percentage stays the same. They repurchased $375 million worth of shares during the quarter.

Net income was up 1.7%, while EPS was up 2% to $10.90. By client type is really what I find interesting here when you start drilling down their business a little more. Institutional is still their largest pool, followed by ETS, followed by retail. Institutional and retail both lost some ground to ETFs. So ETFs went from 34% of total AUM to 37%. And institutional went down from 56% to 54% and retail from 10% to 9%. For context here, despite representing 54% of AUM, institutional only provides 30% of the fees they collect as a whole. So clearly the retail and ETF segment are more profitable. So retail was 27% of the fees come from retail while it's only representing 9% of AUM

and ETFs it's 42% of the fees while only while representing 37%. Retail, I haven't checked, but my assumption, and you can let me know if that's correct is that they're probably like retail mutual funds or kind of you know yeah kind of funds not not exchange traded right yeah whereas the like their etfs are gaining some pretty big popularity recently i mean xeqt just broke which is their all-in-one fund they're all equity all-in-one fund it just broke five billion in assets under management which is like if you think of the u.s market like i don't even know what something it's absolute peanuts like i think spy like the s&p yeah they're at 592 billion so i mean it's it's peanuts but it's for a for ETF, 5 billion in AUM is pretty notable. And they just broke that.

They're catching up to Vanguard, like the VEQT. They're all equity ETF. And I mean, I wouldn't doubt it if XEQT eventually becomes one of the larger all-in-ones. Yeah. iShares, their ETFs just kill it. Yeah, exactly. And for those not familiar, institutional would be things like, for example, if you have a defined contribution pension plan and you have investment, a fund lineup to choose from that's sponsored by your employer, the pension plan. Well, if one of those funds is from BlackRock, that would be an institutional offering because it caters to pension plans. So that's just an example here. Now, there's been a bit of a shift in terms of product type. I found that like it's not a huge shift, but I think enough to take note. So equity last year was 52% of AUM. While now it's up to 55%. Fixed income went from 28% to 26% this year. And the only other movement was in cash products where it went from 8% to 7%. And what I really find interesting here is that

equity AUM as a percentage, like I just talked about, I went back to the start of 2021, and this is the highest it has been. So highest has been since that time i thought it would have been higher with 2021 all the excesses that we saw but during that period um essentially looking back at 2021 up to this most recent quarter it's always been between like 50 and 52 percent which i found a bit surprising especially in in the zero interest rate environment that we had or very close to it. There was a lot of excess. I would have expected equities to be higher back then, but I guess a lot of people were seeing the excesses maybe and probably took some money off the table would be my best assumption. Yeah. And then you see, it's interesting,

you see fixed income declining, which, I i mean you would think it would be going increasing i mean at this point especially this would be year over year so they've declined from 28 to 26 i mean maybe it's a bit of a shift out on falling rates yeah i'm not sure yeah i could see that where now people are expecting you know a bit more you know rates to decline and that's a perception so maybe people are moving out a little bit out of fixed income products to equity, for example, that could be some of the reasoning behind it. Yeah. I mean, I just did a video on those money, what am I saying? Those HISA ETFs and just the fund flows out of them, seeing huge flows out of those. And a lot of them into, you know, US-based cash ETFs as well, just because they pay more.

I mean, it's going to be an interesting element here with fixed income moving forward as rates continue to fall. But yeah, the decline there, it's pretty surprising. But it's like, it's probably, it's nothing notable. It's only a couple percent. Yeah. like it's probably it's nothing notable it's only a couple percent yeah and even when you looked at and i think we'll uh we'll keep our last segment for another time so we can continue this conversation but even looking at you know what expectations are for the fed i was looking and there's no more 50 basis points for the next meeting i think it's early november right after

the election so now the odds are between they're still in favor of a 25 basis point cut. I think it's around like 89%. But then the remaining percentage is actually for the Fed to leave things as is. So yeah, things have changed a little bit. I think it's mostly because of the most recent job report that was better than expected. But then again, I don't know what the market is thinking and sometimes like people just see these job reports yet less than like a month before we or you know month maybe a bit more we saw these massive downside revision to all these reports because these job surveys are actually when they come out they are surveys and the response rate is not very high so there's a high degree of you know uncertainty

that these are accurate i mean it's pretty much a guarantee that they're not accurate and it's always whether it's going to be to the downside or the upside but we've seen in the recent past that it's been to the downside so i find it pretty funny that the market yeah is looking at that and thinking like oh the jobs are way better than expected. I mean, if anything, and without going into the nitty gritty on the, you know, hours worked per week, which is a good indicator to look at. If you see those hours work on a shifting down, that's that can start being problematic without even thinking about that. It's just I find it a head scratcher that the market is still like hanging on to these reports when we've seen they're not accurate. They are not accurate.

They're released too soon. They don't take the time to compile the data properly. And then they have to do revisions months down the line. You can pretty much bank on them revising it downwards. Yeah. Yeah. The trend. I mean, yeah, the trend right now would be downwards i mean when the economy

is doing well what you tend to see is the other way around where you start seeing trends revised upwards so just something to keep in mind all that to say that it's hard to say where interest rates will go from now so i'm i'm still happy even though it's like four and a half percent roughly around there for my u.s treasury bill is etfs happy to leave it there and just see where it goes because um i find it very tricky to try and go out on the um you know on the duration side of like your longer duration i just see a lot of risk with that unfortunately yeah that was one thing i was looking at was just the relation to you know how much the potential for you know know, US money market or,

or, you know, US high interest savings ETFs could pay relative to the Canadian ones. Like if we get, like you said, you're earning, I thought it was a little bit higher than four, but you own you bill. Yeah. Yeah. I mean, I'm just going on top of my head. I don't know the most recent, but it's probably around four and a half. Yeah. I think it's like 4.6 or something like post fee. But I mean, you have even something as simple as like HSAV, which is that savings ETF. It's paying 4% right now, I think. So if they cut 50 basis points, I mean, there's going to be quite a bit of spread between Canadian money market funds and savings ETFs like this and US ones. I mean, there's a bit of an added element there that you got to exchange currencies, which often would not be worth chasing a 1% added yield, exchanging currencies because there's a lot more risk there.

there but uh there's definitely i've noticed because we have the fun flows and you can see that there's a lot of money flowing out of the canadian savings etfs and into the u.s ones that trade you know in canadian dollars so it's going to be it's going to be interesting really yeah u.s one that trade or u.s ones that trade on the canadian exchange sorry yeah canadian exchange but they're still us dollars yeah yeah because i'm like how does that work do that no no us like uh i can't think of any off like you bill you bill would be one of them but they also have there is some us like pretty much high interest savings etfs that are seeing some flows in whereas you know canadian ones like huge outflows huge outflows over the last while even if your broker allows you to do norbert's gambit i mean essentially the exchange fees are close to

zero right yeah i mean it's just obviously you can get the currency risk you know depending on your timing right like there's you can still kind of lose out a little bit on the exchange is based on the timing whether the canadian dollar goes up or down versus the u.s dollar but to me i mean i think it's a fine approach i mean you know my portfolio i've said on the podcast quite a bit like i tried to save mostly in u.s dollars just because i have more confidence in it and the reality is the yield has been better than canadian alternatives and a lot of my investment are in USD anyways. So, you know, if I do trim or sell an investment, oftentimes I already have the USD, so I don't

need to exchange it once more. Yeah. And this is like another element there is just kind of shows how, you know, it can put pressure on the dollar as well. If you get, you know, those much higher rates in the US, I mean, you kind of get money flowing into the US for those higher yields and it can put a lot of pressure on the Canadian dollar as well. No, I think that's a good place to wrap it up. I think it was a great episode. We had fun talking about the unfortunate conclusion of the AML. I guess it's not a conclusion because we'll probably, you know, have to talk about it probably in years to come when we talked about TD's earnings. But, you know, some of the things we suspected, we talked about the potential asset cap and that's

what's happening. So it was an interesting episode, a bit all over the place in terms of content, but I think we're getting back to the busy season when it comes to earnings. So it's always fun from our perspective because there's a lot of choose from. So I think, yeah, something you wanted to add before we let everyone go? No, I was just going to say, I mean, the CouchTard issue, I mean, there might be something else to add to this by next week, knowing how that's going. Yeah, exactly. Bring on the drama. We'll take it after the Canadian Investor Podcast. podcast yeah there's a lot to talk about there well thank you everyone for listening we as always we appreciate the uh the support you can find us

on twitter slash x i'm at fiat underscore iceberg dan is at stock trades underscore ca and uh we're pretty responsive so i feel free to you know if you have questions or comments, we tend to respond there. But if not, we'll see you again next week. The Canadian Investor Podcast should not be construed as investment or financial advice. The hosts and guests featured may own securities or assets discussed on this podcast. Always do your own due diligence or consult with a financial professional before making any financial or investment decisions.