Why Canada’s big banks might be the next AI winners
Where the banks are adding AI
Sattich sees AI being adopted by the banks across a host of business lines. That includes credit underwriting, marketing, and notably in wealth management where AI is being used to try and maximize advisors’ client-facing time. Sankalp Sachdeva, Portfolio Manager and Partner at Letko Brosseau Global Investment Management in Montreal, adds that AI is now being used in the improvement of banking apps, with some banks reporting they can use AI to derive 600 insights per client. Call centers, too, are ripe for AI chatbots and other AI-powered automations. AI can also be used for fraud detection, to make the kind of monitoring work that used to require hundreds of people more streamlined.
Three of the banks, RBC, TD, and BMO, have outlined long-term targets of what to expect from AI adoption in terms of overall enterprise value. Sattich says they have committed to ongoing disclosures of performance against those targets. Sachdeva and Sattich noted that there will be a host of ROI measures applied to the banks internally and externally. Those include measures of headcount as AI allows for certain roles to be automated. On the whole, however, both PMs argue that the banks should see their AI adoption improve employee productivity, rather than see significant reductions in headcount.
“it will be very hard for them to pinpoint like the exact headcount reduction or you know, the exact revenue increase because of this one tool that, that the new employee is using. I think in the longer term what we’ll see is more revenue per employee like we have seen in the past with the other productivity improvements,” Sachdeva says. “I don’t know if you can pinpoint X number less headcount overall. But I’m sure as we grow further into the mature applications of AI and more widespread applications of AI, we’ll see higher productivity per employee.”
What AI adoption means for bank stocks
The S&P/TSX Composite Index Banks (Industry Group) is up over 30 per cent year to date and up over 60 per cent in the past 12 months. Some of that performance, Sattich and Sachdeva acknowledge, can be attributed to this AI adoption. Sattich argues, though, that it has not been the primary driver of stock performance. Canadian banks have exceeded earnings forecasts thanks to strong results in capital markets and fee income. Greater economic investment by the Federal Government, too, has driven more positivity in investor sentiment. That upward revision in earnings is the fundamental story, with AI adoption growth a more long-term driver. Sattich acknowledges, however, that bank earnings multiples are currently high relative to historic levels.
Sachdeva believes that there is a key unresolved question around whether the banks’ AI adoption has already been baked into their stock prices or not. While he also notes the high multiples that banks now carry, he believes that the AI adoption process is still so early, and many of its results are still not realized. That should give the banks runway to enjoy higher returns from AI if they can find success in their adoption.
