Surveillance: RBC Open To Tactical Acquisitions, McKay Says

is the RBC CEO himself, Dave McKay. Dave, great to catch hell you do this morning. Good morning, nice early start to the day. So let's talk about your expansion into the United States and why you're ultimately here. So many people have tried to do this and pretty much every day my co anchor Tom Keen and I will talk about European banks that have failed in their effort to expand in the United States. Why are you different? Well, I think it goes back to you, this is not

an overnight success. We've been working at this for ten years. Goes back to the early part of the last recession where we had balance sheet. Put that balance sheet to

work with clients where other banks were retreating. And therefore, when you're with a client and with a strategy over the better part of a decade, you know, clients reward you for that loyalty and being there continue to upgrade and expand our coverage environment while we're putting our balance sheet to work and we're really pursuing and originate and lending strategy where we'll put a balance sheet and cross sell r D c M E c M capability. So

it's really and it's not an overnight success. Douts your bank Curtiss RBS. There's such a long list of European players that are now retrenching into their core competency competencies that care geographies. How do you identify the right strategies that you don't make the same mistakes that others have. We're typically conserve bit of institution by nature, and we're thinking long term. Long term sustainable growth is a big part of our core strategy across all our businesses, not

just capital markets. So when we're looking at, you know, building a relationship with a client, we look at the long term sustainability that relationship. We look at the potential to drive long term returns, look at the credit risk and put it all into balance, and we're looking to

build long term, sustainable relationships. And that for us really was starting with a kind of a mid market capital market strategy across multiple sectors to diversifier book and therefore we've graduated that with you know, more bankers and upgrading bankers. We're very proud we just recently was sole advisor to b B and T on the sun Trust, a merger of equals, and that really talks to the power of our franchise consistency and ability to deliver value the clients

and be that sol advisor in a historic transaction. That way is really what we've been aiming for for the last ten years. Is we've continued to upgrade and build relationships and build trust with CEOs across America. So let's talk about that solid advantaging. Well, that you did take a lot of people were surprised by that. Have to admit, many people come on the program and talk to me about it, and they were surprised by the fact that

you did get that. Is this a moment in time or a broader consolidation story that you think you can be a key player in. I think certainly you have to. You have to hand both BB and T, Kelly King and and so trust a lot of credit for having the vision to build a larger competitive institution that will compete with the top four and bring the scale towards technology.

And I think it's caused a lot of CEOs. I've talked to you even in the last twenty four hours and since the announcement of Transaction, to reevaluate the art of the possible, the implications of scale and potentially the openness to do something more transformational. Doesn't mean we'll see something else, but I think everyone's paused to digest and real kudos to those two leaders who put the Transaction together. That's, you know, looking at the implications. I think it's foundation.

So being an advisor in the consolidation story here in the United States and the financial sector is one thing. Being an active participant in it's a different story. Are you looking at anything right now? You've made acquisitions in the possible on that big one a couple of years ago. Are you looking at anything right now? We continually evaluate the ability to grow organically and inorganically, and we we we have a team dedicated to thinking through various opportunities

to grow geographically. That would be our first presence within the United States. Can we expand into a new market, but it has to be a cultural fit with the potential acquisition or merger partner. The economics have to be there for the shareholder. We made kind of a transaction that was longer term, a platform transaction with City National. We've earned our way back into our hurdle rates very quickly, but w we've benefited from economic tailwinds, benefitted from a

rising rate environment. We've benefited from tax cuts. We accelerated our return on shareholder investment. You look at those transactions going forward. Without those tail winds, the economics are more difficult. Therefore, we're incredibly disciplined with the capital. We always look at alternative, organic or returning it to shareholders. And when you look at the platform we have, we don't need it for

a platform basis. It's more for geographic expansion and and acceleration. Therefore, the economics have to work, and the economics still are quite tough for the share All you have to you have to forecast some end of cycle, so you're you're you're you're acquiring it towards the end of a cycle. So what's gonna be the credit performance? Your cash flows could be delayed by an economic cycle turn, All those come into consideration. We are trying to drive shareholder value

in the market. Really really punishes players who over extend themselves. When you see us, somebody see guys will tell me the price isn't right. They'll say the spread between the buyer and the sounder is still too wide to come in. There's a decent chance it won't come in until the next down to the question you've got to answer Resultimately, are you're willing to extend your balance sheet in a

recession to make that acquisition? Are you? If the if the deal is right, Absolutely, there's I don't see a lot of difference between you have to delay your cash flows, but the uncertainty of doing it now before there's some type of economic credit cycle turn versus while you're in it. Maybe you have more information when you're in it. But I mean there's the sellers not as willing to sell. Certainly there's a few willing sellers right now, so all

the ingredients may not come together either. You're you're taking our risk between every constituent coming together. So it's an uncertain game. At the end of the day, we have a growth platform organically that we're really excited about. We continue to grow, add private bankers, add commercial bankers on the wealth management side. Similarly on the capital market side, we're pulling our balance sheet to work. We're adding bankers.

We just hired another star banker, Michelle Neil's joining the platform, as you reported on. So we're very excited about the opportunity to grow. If there's a tactical acquisition, well we'll look at it. But right now we're focused organically. Right to catch up with you. Good luck for the rest of the day. Day McConney. Obviously see right here at the obviously capital markets Financial Institutions conference with this Howard Ward, wonderful long term investor at gibelly a claim to say

the least. We're thrilled that he gives us opinion on use of cash and maybe on Apple. I was kidding him earlier calling him a Howard Apple off of Tim Apple, but we will. Well, let's stop with Apple now because Bowing is so centered. You own Bowing. Let's say, what do you do given the new slow Well, tom Um, I think most investors at owned Boeing will be best served by sitting tight until we have the resolution of

the cause of this most recent crash. I believe that Boweing, even in the event that this is another one of their problems associated with the software on that plane, they will be able to fix that and the orders for that plane will remain largely, if not entirely intact. So it has been an outstanding dock in recent years. Even year to date, it's been one of the leading stocks

in the TAO. Uh So it's certainly there is certainly room there for profit taking for those it might be somewhat nervous about this situation, but I think most people should sit tight. Sectors are different. How do you study a Boeing which goes project to project downs a itty biddy defense contractor no, but nevertheless they still live project to project as a general statement, versus Microsoft, which has huge persistent cash flow, or for that matter, Apple and Well,

you have to study them differently, don't you. Well, you really do. And Boeing falls under the industrial category, and it is one of the premier industrial names because there is a oligopoly and the commercial airspace business which most of their businesses commercial aviation as opposed to defense, and they have historically made the finest planes in the world bar none. Air Bus makes a fine plane, but Boeing has traditionally, you know, been the finest manufacturer rough planes

in the world and the largest producer. So uh, you know, that gives them a special place. And these are very long tail projects, these new planes which they embark upon. And you know, once a plane is in full production, the free cash flow starts to fall to the bottom.

And so bowing right now is has become, i should say, a tremendous free cash flow story, allowing them to buy back greater amounts of stock and to increase their dividend and very healthy rate for what looks like to be years to come back four years free cash flow seven billion, eight billion, twelve billion, fourteen billion, why not do fourteen

billion another time and modeled up to seventeen billions. So just over the span of Howard Award ownership, you can go from eight billion out to seven to billion on free cash flow. With that said, you have to know when to buy. How do you determine is it dividend yield?

Is it some form of ratio multiple? You know? And now so so you know, Boeing isn't industrial, it's a little bit of a unique industrial but like most industrials, uh, you want to buy them when actually the best time to buy them, I should say, is when the economy isn't doing well and when industrials are not doing well, and when the stocks have been underperforming for a period

of time and and that's not the current environment. And you know in two thousand and eight, two thousand and nine, for example, would have been an outstanding time to acquire Boeing shares. And uh so that's what you really have to do. And you have to be patient if you're going to wait for those kinds of opportunities. And otherwise you can still do fine, but the returns won't be as great. You survived December, the New York Rangers were terrible.

Then you survived January, February the New York Rangers were terrible. Now you're in March in the New York Rangers are still terrible. How the last three months been, O wise? One, Yeah, they've been. They've been brutal for actually for New York sports in general, it hasn't been a sports You guys, what do you do well we're lots, we're hockey we uh, we just focus on watching that ticket tape go by every day. And what do you see there right now?

I mean, yeah, Tom, So, you know, since the beginning of the year, we've seen negative earnings estimate revisions on the SMP. They've SMP estimates for this year have come down about seven percent from around hundred and seventy eight dollars a year about a hundred and sixty eight dollars a year. Uh. And given the trends that we see in terms of UH, increasing weakness in the global economy,

including here at home. For example, the Conference Boards Index of Leading Economic Indicators here in the US has fallen for four consecutive months. And there's you know, weakness and autos and housing and retail sales, and I think the weekly unemployment claims are bubbling high. So uh, you know, we think there's more negative earnings estimate revisions to come and that has not been fully priced in. So we're a little bit cautious on the market in their term.

And I'd also say I think the market has sort of baked in some sort of a deal with China on trade and whatever that deal is, and I'm sure there will be one. I'm sure Trump will announce it as being the greatest trade deal in history. It won't be, but uh, he'll he'll try to make that headline. Point um. But the market is sort of baked in probably something

similar to what we're going to get. China is going to agree to buy more soybeans and cars, and there'll be a few compromises here and there, but it's not going to be uh, you know, the deal that Trump's gonna want you to think it is. Howard Apple, thank you so much for being with us today. I'm doing Howard Ward of Gabelli. We're thrilled that he could attend today with major news. Let's get right to it because there's so many distractions with Boeing and Brexit and all that.

I just want to spend some time in the American economy. You can do that with Lindsay Piegs stifle uh joining us now uh dr vizzack pegs Um. I'm fascinated by the Atlanta g d P now forecast, which is not at recession levels but has come down well under one percent towards zero percent Q one growth. How do you use the forecasting model of the Federal Reserve Bank of Atlanta. Well, I think it's it's uh, it's good to use that

as a gauge of almost a sentiment. This is how the market is feeling, This is how the set is viewing the economy. Now, the Atlanta GDP model does tend to be incredibly volatile, so you do have to take it with a grade of salt. There are wild swings after each data point being released, so it doesn't necessarily give us a specific target or even a target range. But I think it does give us a general sense of the directoral momentum as well as the general feel

of the market. Is now mentioned, it's pretty dismal. Okay, it's pretty dismal. What is the vector that you see? It's Steple. Right now, our audience is riveted by the interviews we have of optimism versus some would say the reality they're feeling out there. What's the Steple vector? Well, I think the most important thing is opposed to just focusing on the first quarter, is looking at the long

term directional trend. For the look at we see the economy losing significant momentum relative to what we saw in We're looking for the economy to fall well below two percent, closer to a range of one and a half to one point eight percent for the year of so again quarter to quarter volatility aside, we're looking for a point five to one point eight percent growth rate for the year, lindsay.

Outside of this debate, there is also a big debate taking place that the headline inflation rate won't be boosted by what's happening with wages. Waste growth was really impressive last week, and there is just this comfort I think that that won't bleed into headline price pressure. Do you share that belief? Well? If, first off, I don't know if I if I agree with your characterization that wage

growth was really impressive. It certainly was improvement from the more lackluster paces wage growth that we've seen over the past couple of years, But in my opinion, it's almost too little, too late. I do think the more recent backup and wages that we've seen is going to prove very short lived, as we do fear the risk of

recession now lurking around the corner. Also, when we look into some of the wage specifics, the wage games seemed to be relatively segmented into particular areas of the economy areas where skills, specific skills are in high demand but very low supply, meaning it engineering, accounting, craft, labor. The FETES specifically noticed and noted these pockets of wage pressures, and that's pretty much what we're seeing in the data as opposed to a broad based increase across all sectors.

So certainly there are sub workers out in the labor markets that are feeling that wage pressure, but not everyone is feeling that some are being left behind. Wellndy, Certainly, the assessment is all relative, of course, and relative to the last ten years. I think it's impressive relative to what we have got, and understand that relatively speaking, the data we've had before hasn't been great going forward from here, I think there's a big, big question about being late cycle.

I've heard that so many times over the last couple of years that were late cycle. Five years ago we were light cycle. Why are we late cycle now? Well, I think we're late cycle now because when we look out and we look at the trajectory of the recovery, there's very little evidence that it will be sustained much beyond. So in fact, we are looking for a recessionist it in potentially as early as the first quarter of so we see this bleeding momentum among a number of key

sectors of the economy. The consumer are beginning to lose a little bit of momentum when we look at their spending patterns, business investment starting to wane, the FED specifically note in the moderating case of corporate dollars flooding into investment areas. Housing starting to lose ground as well. We've

seen now ten consecutive months of negative sales activity. So I think at this point it's very clear that the domestical independent of international weakness is beginning to lose momentum, and it's very clear that this advansion is coming to an end in our opinion, and Dr Pierre's I think you so much greatly appreciated UH this morning. It was a well needed update and of course very different than some of the Yeah, but it's detail what I like about her call, whether I agree that or not, as

she's granular. Try not sure what you airport you're out of. You come out of Gatwick or Standstead or whatever, and when you need to get on a jet to go up to Liverpool to root for the Liverpool Ians, whatever, they're called. Well, I'm not that's sure. It's not that you do it out of the smaller aircraft of the United Kingdom. He is expert on European transportation and all things bowing and airbus. Christopher Jasper was have you ever done that? Do you take the train to Liverpool to

see the Mighty play, Christopher? Or do you take an airplane? How do you get there? Trying? But to be honest, I have tightened the plane on the all occasion. Certainly these planes, these seven thirty seven's in this smaller airbus there the workhorse of all those short distances of Europe.

Do you assume and I know you're speaking as a journalist and that as you know, pundon expert, but we see Southeast Asia and now all mine of the Middle East combine, do you assume European announcements on the seven thirty seven Max. It's an interesting question and I think

it's probably a crucial one for Boeing as well. I mean, we might think expect the US carriers to to sort of stay in line following the FAA's advice at the moment as we understand it, Yassa, which is the European Safety Regulator, uh, you know, would would would endorse the FAA's recommendations. If ASSA was to break ranks, then that would be a huge deal and obviously the Europeans would follow. But it's it's possible that some European carriers could see

it differently. At the moment that appears not to be the case. The focus is generally in Asia and a handful of of African carriers and also something in Latin America. Why is that? Do we have a Y year? I mean, John Ferro was speculating on it. We're not, you know, I really don't want to do that. But do we have a why of this geographic band? It's an interesting one,

I mean I think I think you can see. I mean, initially we had Europe, Ethiopia itself, and Indonesia, which of course is where the Lion air plane crash last year, followed by China, which views itself as a sort of an emerging regulatory power as well as an aerospace power,

and all the rest. But in Asia, when we had today or overnight Singapore and Australia following suit, which are two administrations within the aviation world that are highly respected, then that's almost as potentially devastating for Boeing as if some of the Europeans had decided to break ranks. Is there certain as this goes to Christopher us for it's

just really expertise on uh, these different planes. Is the Baby Bowing the seven thirty seven of the Max whatever, is it substantially different from the baby air Bus the direct competition? Are they really remarkably the same? Which is it? Well, they're very similar in in some ways, but each augmentation of the aircraft has has taken them in slightly different directions. But Airbus endorsed fly by wire technology, for example, earlier

than Bowing. What does that mean, um, well, basically controlling the aircraft's flight surfaces the you know, the tail and flaps and so on, by electronic wiring rather than hydraulically. And they had real problems with that in in the early days, and certainly in the early days of the three twenty there was a crash there which was problematic for Airbus. Boeing stuck with the with hydraulic system for

longer and ad planes have still got those systems. But Bowing is is moved in that direction itself now And I mean ironically that the thing that maybe at fault with the seven three seven Marx is a system that Bowing installed on this plane which wasn't present on the previous version UH to ENHNT safety, to actually provide an override that would step in when it needed to and the pilot needed Hell yeah, I mean, I'm glad you

bring this up. And we covered it's yesterday and thanks to the blog the air Current John Astro on Seattle for a detailed article and this mc AS system to review Christopher to review this. The engines are moved forward off the wing to increase fuel consumption, but in doing that it tips the nose of the plane upwards naturally, and you have to have systems to bring them knows

backed down. Do I have that right? Well that that that may be one case where that system would would kick in, but ultimately it's intended to to step in at any point where the aircraft faces a potential store situation. We're not talking about the engine stalling, We're talking about the wing. I either plane loses lift and threats to go out of control, and the MCAST system will will step in and dip the nose to rectify that and

and increase the airflow which will keep the flying. What did we know from Lion and the Indonesian Airline of a number of months ago. Is there still a mystery as well. It's a mystery, but we've had a preliminary report, and we've also had comment from Boeing UH and both agreed really that there was a problem with that system, which can be traced to a faulty sensor. There was a faulty sensor reading that suggested that in terms of speed and airflow that the plane was about to stall.

So the MCAST system stepped in dip the nose to encourage the airflow, but unfortunately the sensor was faulty and that action in itself taken automatically jeopardized the plane. The pilots attempted to override that on a dozen occasions, but were unable to do so. Now Boeing says, well, it was in the manual. They should have really known how

to do that. Plus the sensor itself was possibly incorrectly installed, So they say they then issued further advice on you know what to do in such a situation, and that's why they argue that the plane is safe if you follow the flying manual to the letter. If you're just join this Christopher Jasper with us with Bloomberg News in London, just just definitive on not only airlines, but the engineering of all these different systems. Let me ask you and

beyond like a question. I'm sitting in our New York studios with Paul Sweene and John Tucker, and we all have a perception of the gradient of doctors that we see, the gradient variance of dennis that we see in lawyers. Are all pilots the same from Christopher Jasper's view or is there a variance in commercial pilot quality? But we used to say that there's a variance, you know, a few decades ago, I think to be fair that that, you know, it was clearer um certainly in terms of

some of the safety data. But there's a much more global industry now. For example, you know there are pilots small over the world, flying all over the Middle East, all over Asia, and if you look at Ethiopian Airlines in particular, you know they've been a get ahead airline for decades now. They're one of the first planes to introduce the seven six seven many years ago, and of course they were a very early customer for the seven

eight Dreamliner. UH seven eight seven Dreamliner. They've ordered the ables A three fifty and and they've got the Max so they've got a very new fleet. It's a big fleet. They're the biggest carry in Africa. They're the only consistently profitable carrier in Africa. They're fighting their way against the big three golf carriers. So you know, if the Open is not an airline that you'd expect to see an event like this, if it was pilot related, this has been hugely valuable. I hope to get this out on

our podcast today on Apple podcast Spotify as well. Christopher Jasper from our London studios. He is with Bloomberg. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.