Weekend Reading – Banking crisis looming?

Weekend Reading – Banking crisis looming?

Welcome to a new Weekend Reading edition, hopefully not too much doom and gloom, with any banking crisis looming???

First up, my updated post this week was about why I still don’t invest in any Canadian Dividend ETFs more than a decade later. 

In a recent Weekend Reading post I shared why money management is far more than math.

This is also why we are striving for life-work balance, not the other way around. 

Weekend Reading – Banking crisis looming?

“Too big to fail”.

Weekend Reading - Banking crisis looming

Yup, our own Office of the Superintendent of Financial Institutions announced that back in March 2013 – on the subject of Canada’s six largest banks, the Bank of Montreal, the Bank of Nova Scotia, the Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada and Toronto-Dominion Bank, were too big to fail.

Here is the CBC source.

(OSFI was created to contribute to public confidence in the Canadian financial system but beyond a trust factor, they are the regulator of our banks, the primary regulator of our insurance companies, trust companies, loan companies and pension plans in Canada. At the time, those six banks accounted for 90% of banking assets in Canada and those companies continue to help our economy churn to this day.)

But bad things can happen to good companies. Same goes with individuals. 

You might recall Toronto Dominion (TD) Bank was recently the world’s most shorted bank, sparking concerns of a potential banking crisis in Canada. Hedge funds bet against TD Bank, around the timing of a failed acquisition of U.S. regional lender First Horizon Corp for some $13-billion. TD already has lots of U.S. assets and they are looking for more…  The fallout from the First Horizon deal led to increased speculation about TD Bank’s existing exposure to the U.S. market, including its existing position in Charles Schwab Corp. given that company lost about $47 billion in market value this spring. Schwab’s banking arm was caught in the storm caused by the sudden collapse of the Silicon Valley Bank a few months ago. Source.

A massive interconnected financial web to be mindful of…

One of the things that Canada’s banking sector has going for it, constantly touted by financial experts, is our regulatory framework. It is true – Canada has and complies with some of the strictest banking regulations in the world, which has served us well.

Tons more details can be found here, but a good example is our capital requirements. From that source:

“”Capital” is the money that bank owners have invested in the bank, either through the purchase of shares or through retained earnings. A bank holds capital to help protect depositors and other stakeholders against losses in the event that borrowers default. Capital is a cushion against the negative impacts of bank‑specific and market‑related activities that could jeopardize a bank’s ability to stay solvent and continue to serve Canadians.”

The punchline from the most recent global regulatory rules for bank capital and liquidity forces our Canadian banks to hold “enough capital to equal at least 10.5% of their total risk-weighted assets.” Meeting that particular requirement is considered a breeze by some.

With high capital thresholds intact, I’m of the theory that our Canadian banks are likely to suffer a bit, near-term, over the next few years when it comes to stock price appreciation and in the form lower dividend payments to shareholders or potential dividend freezes.

This is because while I believe as a collective, our Canadian banks are too big to fail, Canadian banks have a higher, added, prolonged burden in our post-pandemic world of constantly safeguarding themselves from many clients/consumers that have borrowed too much money without understanding the burdensome long-term consequences of doing so. 

According to my friend Rob Carrick from The Globe and Mail, in a report earlier this year:

“People in their 40s, let’s call them young Gen Xers or old millennials, are the most likely to have mortgage debt, and they’re second-most likely to owe money on a home equity line of credit, or HELOC, a credit card and other types of borrowing such as a car loan.”

Graphically, the results are absolutely suffocating to me:

Weekend Reading - Banking crisis looming - Globe and Mail

Source: https://www.theglobeandmail.com/investing/personal-finance/article-canada-average-household-debt-generations/

“The net result is that the fortysomethings with debt in our survey owed the most on these four types of debt – an average close to $650,000. People in their 30s with debt owed an average of $644,000 or so, putting them in second place.”

Consider the following, if you are close to average and owed $650,000 on a mortgage starting right now:

The monthly payment for a $650,000 mortgage is $4,187.96 over 25 years with a 6% interest rate.

Mortgage on $650k

Mortgage Amount:
$650,000.00
Monthly Payment:
$4,187.96
Total # Of Payments:
300
Start Date:
Jun, 2023
Payoff Date:
May, 2048
Total Interest Paid:
$606,387.73
Total Payment:
$1,256,387.73

Source: https://mortgage-calculator.net/

I find this debt-service payment terrifying.

To imagine over $4,000 per month, every month, in my after-tax income going to servicing debt for 25 years would be a prison sentence. Fortunately, we’ve evolved as a society. Throughout the mid-19th century, debtors’ prisons were a common way to deal with unpaid debt. Destitute persons who were unable to pay a court-ordered judgment would be incarcerated – until they had worked off their debt via labour or secured outside funds to pay the balance. The product of their labour went towards both the costs of their incarceration and their accrued debt. Luckily today such places no longer exist. But financial hardship continues without prison. There is the chronic stress associated with servicing debt, considerable time spent on financial counselling sessions/services, work to complete, file and comply with consumer proposals and/or navigating bankruptcy.

None of these options seem very appealing to me.

The allure of significant leverage used for homes, cars or money spent on lots of material goods seems very appealing to many consumers and investors until it doesn’t. I’ve always been of the mindset that you should always spend less than you make, you should keep some cash available for a prolonged period just in case, and you should use any debt in moderation with a clear exit-plan in mind.

Within the next 12 months we’ll be mortgage free. This is not to brag – hardly – we’ve been paying down hundreds of thousands of dollars ourselves for the better part of 20 years. I have the financial records to prove it. 🙂 But thanks to years of planning, having an exit strategy, while avoiding the attractive marketing tactics from the broader consumer industry to buy this or buy that or buy now – the shackles associated with paying other people first will be off for us.

For many folks, it is my hope that rising or prolonged debt payments will be manageable. I have little doubt however that millions of Canadians are feeling the financial pinch now. 

Higher interest rates were bound to happen at some point. The signs from 2017 were there…

While our banking industry in Canada might be collectively too big to fail, that doesn’t mean individual consumers might not suffer the same fate. Never dismiss anything as too big to fail. 

What’s your take on any banking crisis or rather, consumer crisis in Canada? Do you believe like I do that too many consumers are in way over their heads? I welcome all comments on this site. 

More Weekend Reading…

Interesting special contribution on Jon Chevreau’s site related to investing your way to financial independence, that may include crypto as an asset. Not for me – but some general good points from the millennial writer. 

Barry Choi highlighted some ways to save money on travel using points – on Eat, Sleep, Breathe FI. I like using loyalty points for travel, like Barry does, but I find you can also get deals without using points as well – so there is a balance there (for us at least) when it comes to meeting our travel objectives and using points where they make sense. Worth a read.

Tawcan shared his impressive dividend income update for May as a prolific saver leveraging his good income/salary to accelerate investing for semi-retirement. 

I hope to post some answers to Ben Carlson’s quiz embedded this post:

What’s your retirement number?

A good reminder about the process of re-planning in your work or life:

“Former Fed Chair Ben Bernanke once said, “Life is amazingly unpredictable; any 22-year-old who thinks he or she knows where they will be in 10 years, much less in 30, is simply lacking imagination.”

So, yes, it’s rather pointless to figure out what you’ll need for semi-retirement or retirement if you have no idea what you’ll actually spend and when…

We’ve done the math. We’ve estimated our semi-retirement expenses (needs and wants). I put that math into this post that I need to update in a few months. Here is that article.

There are a number of things that drive entrepreneur and DIY investor Mike Heroux wild in his latest podcast… Including:

“Mike got inspired by a Twitter fight for the “Advisor thinking bashing retail investor help” one! His main thought is: “How is this making you leave the world a better place?” How should advisors help or guide retail investors then?”

Boomer & Echo highlighted one of many two-fund solutions for retirement: essentially hold an asset-allocation all-in-one ETF of your choosing along with a cash-alterative ETF that delivers higher interest. That seems reasonable to me depending on your objectives of course…

I own a cash-alternative ETF now in fact and you might consider the same vs. idle cash. 

Are Cash-Alternative ETFs Right for You?

Reader Question of the Week (adapted slightly for the site…)

Hi Mark,

It is becoming increasingly hard to ‘keep the faith’ with respect to dividend growth stocks given their overall returns over the last year or so. In particular, Enbridge has been a huge disappointment in terms of overall return, along with VDY and XEI due to poor performance of bank and energy stocks.

I am looking at replacing ENB as its outlook from a technical perspective is poor. 

Any suggestions ? (This would be for a buy and hold cash account.)

Best Regards…

Thanks for your question and readership.

Well, I can say that ENB in particular has not been great for the last 5 years for growth, or even 10 years. 

I can also say that if capital appreciation is very important to you, then ENB is not likely a stock to own. Many others fall into that camp. ENB pays a good dividend and has been paying a growing dividend over time, so that’s the tradeoff when it comes to dividends and capital gains – it’s hard to have your cake and eat it too. 

I see dividends and price appreciation therefore as two sides of the same investing coin. 

Related to VDY and XEI, again, those are dividend/distribution-focused ETFs so a similar story there. If you want steady income and some price appreciation over time, then VDY, XEI (and others) are likely good to own in Canada. 

If you want more price gains and capital appreciation over time then I believe you’re going to have to index invest more and/or own stocks that do not pay any dividends or distributions to shareholders. Rather, the companies you invest in are going to do other things with their profits such as buyback shares, pay down debt, acquire more companies, and grow their product-lines or service-offerings amongst other things that add value to shareholders beyond dividends or distributions. It’s just the way it goes IMO. 

Honest Math - Dividends

Source: Honestmath.com

Those are some quick thoughts. Would be curious to see what other readers think!?

Again, to everyone, keep your questions, comments, and emails coming my way.

Ha. Too funny, I will be watching this movie. Warning, some offensive language/swearing is in the trailer.

A reminder instead of being dumb (with money) check out my Helpful Sites page for free tools, support and should you wish – hire me to engage with you on some low-cost retirement projections reports at a fee far lower than any fee-only advisor would charge since I don’t offer advice – I’m a passionate DIY investor taking time to support other DIY investors based on their own inputs and assumptions. 

Have a great weekend!

Mark

My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.

11 Responses to "Weekend Reading – Banking crisis looming?"

  1. Hi Mark: That is correct. One I lent $230,000.00 and the other $260,000.00.Now they pay me instead of the bank and the money stay’s in the family. Interest rate is at .02% so not onerous. I had the money sitting there paying nothing so now I get something. I’ve made a del with them that when they get down to $100,000.00 they can keep the principle and just pay me the interest. As you can see I’m not one of those landlords who will force a payment (HA,HA!). Yes those transactions dropped me down to a little over $100,000.00 but now I’m well ahead.

    Reply
    1. Hi Ronald,

      I guess these loans are for their main residence and interest paid is not deductible? Otherwise, the CRA has a an “indicative” interest rate. There is some leeway to make it family member friendly, but I don’t think you can charge much above or below current mortgage rates.

      Alex.

      Reply
  2. Hi Mark,
    Enbridge and the Canadian banks being stellar dividend payers and with the banks having to reserve more capital to cover inevitable increasing loan losses, I agree they are in for some more difficult times over the next while. But, being a mostly dividend growth investor I’m more focused on dividend growth and yield than capital appreciation and these difficult times present an opportunity for such investors to buy shares at elevated dividend yields (not to mention potential future capital appreciation).

    Enbridges dividend growth rate, not surprising, has declined the last few years (3.12% last 3 yrs average versus 11.22% last 10 yrs average) but its yield is outstanding. With ENB’s long history of dividend increases and huge cash flow, I think the risk of a dividend cut, or at least a significant one, is low. The bank’s dividend growth has been pretty steady through the last 10 yrs despite the turmoil of the last couple years and a cut is the absolute last thing they would entertain in a difficult business environment. Sure, dividend growth might slow or halt for a bit, but as a group they sure made up for a brief slow down from 2020 to 2021 with large increases in 2022.

    I’m holding onto my shares and have some cash sitting in a HISA to see how things develop going forward. I suspect there are going to be some quite good buying opportunities ahead.

    Cheers

    Reply
    1. Yes, trying times for sure. So many dividend growth/dividend income stocks are down in price. Some quite a bit. Likely more declines ahead?

      ENB is not a surprise to me at all. Anything yielding over 6% is dangerzone territory to risk reducing dividend growth/increases, let alone a potenital dividend freeze.

      It will be interesting to see how the rest of 2023 shakes down…

      I’ve also got some higher-interest ETFs to churn off some income with some idle cash in my accounts and will be slowly growing my overall cash position as we consider entering semi-retirement sometime in 2024.

      Thanks for your detailed comment. Happy investing back!
      Mark

      Reply
  3. Hi Mark: We think alike. Pay for what you can afford and if you can’t afford it than wait until you can. I have two nephews who pay me a very low mortgage so they are not suffering. When it comes to the banks everything will be fine as OFSI regulates them and the last time OFSI allowed them to raise their dividends they raised them a lot. At the moment I got $1940.00 for my 2000 shares and starting 1Aug./ ’23 I will get $2040.00. I bought ENB when it was half the price it is now and don’t plan on selling it.

    Reply
      1. Hi Mark: One thing I learned while doing these transactions is that Web Broker will only allow you to transfer $100,000.00 at a time so it took two days to do the deal. It’s probably a safety measure.

        Reply
  4. Hi Mark , a great post as usual!
    Yes that interest rate is going to be a killer for millions of Canadians for sure and here I still recall how the bank of Canada mentioned during covid that the rates will stay low for a long long time 🙂 a lot of people cheered for that and went wild with their credits and mortgages , and here is an example how even some bank reps play into this game willingly or just a pure dumb act, my nephew have a mortgage with Royal bank and in October 2022 was due for renewal but the person at the bank suggested that they should go with a variable one because interest rates are “Guaranteed” to go down in fall of 2023 so he went with the “expert” and now his payment goes 100% towards interest to the bank and his amortization is a crazy 42 years!!!! Crazy really and I’m sure a lot of people are having the same issue these days, very sad.
    as for Enbridge I hold it and I know thousands of others do , I love the company and what they’re doing how big they’re and the plans for the future and it’s so essential so for myself as a income investor and the way I vision my retirement would be is just collect that growing income that comes from those companies that I hold so I kind of don’t care if she shares suffer for couple of years as long as the company is moving forward and also I have a mix of high yielders like ENB TRP PPL and low yield with high growth like MRU ATD CNR so a mix of both and they’re all solid , Yeah I hear a lot of talk about Enbridge but to me I want a growing income in retirement and I don’t foccus to much on capital growth because capital growth can be wiped out in couple of days in a down market but that steady income is way more solid and effective anyways that’s how I feel comfortable investing my money and of course others have different way and that’s totally fine too.

    Reply
    1. Yes, millions and millions of Canadians hold ENB stock either directly or indirectly.

      I also like a mix of income and growth in my portfolio but utimately, as you know, total returns matter aligned to your investing objectives. I also own CNR, CP, WCN among other lower-yield, higher growth stocks. That just makes sense to me.

      When it doubt, in Canada, ETF XIU is hard to beat. And on XAW for ex-Canada investing, keep some cash, and that’s your portfolio 🙂

      I feel for younger Canadians wishing to enter the housing market these days.

      Not easy.

      But too much debt can be suffocating IMO. I wouldn’t want that burden at any age.

      Have a great weekend, thanks for your detailed comment.
      Mark

      Reply

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