SILICON VALLEY BANK
The collapse of Silicon Valley Bank, the 16th largest bank in the United States, has been big news. In short, in pursuit of higher interest rates, they were using their clients’ deposits to invest in longer-term bonds. But what happens when the value of those bonds drops dramatically because interest rates continue to rise?
That was a possibility that SVB did not carefully consider. Because the bonds in question did in fact plunge in value, meaning that SVB was suddenly short of cash to meet clients’ withdrawal needs. Therefore, the bank said it needed to raise $2.25 billion, triggering a sudden drop in confidence among the banks’ depositors, who rushed to withdraw their money. It was a classic “bank run,” in other words, causing the stock price of SVB to drop almost 70% in two days before the bank was shut down by regulators.
SVB was using risk management strategies that we would never consider acceptable. We see risk fundamentally differently. Many investors define it as volatility – the unpredictable ups and downs of the market. In contrast, we see volatility as the opportunity to buy assets on sale, so to speak, at prices we believe are below their intrinsic value.
WE SEE RISK DIFFERENTLY
How, then, do we define risk? As part of our investing philosophy, we define it as the risk of permanent loss of capital. Of losing money forever. Which is why we always buy assets with a considerable margin of safety, i.e. at prices below intrinsic value. And which is why, in alignment with our fixed income philosophy, we have a strict focus on credit quality and never buy GICs for our clients at sums in excess of CDIC limits, being the amounts the Canada Deposit Insurance Corporation will fully insure in the very unlikely event of a bank run here in Canada.
Please note that we are very confident in the Canadian banking system. More on that below.
We do not take unnecessary risks with our clients’ money and the SVB fiasco is a perfect example of why. We always, always make our primary objective the preservation of your capital, we always ensure that your investment strategy is consistent with your time horizon, and we would never invest shorter-term funds in longer-term assets that are subject to volatility.
Clearly, the strategies employed by SVB never would have survived our scrutiny.
CANADIAN CONFIDENCE
The SVB collapse has had a ripple effect, creating volatility (opportunity, as we see it) in the stock prices of other banks in the United States and around the world, including here in Canada. But: we remain very confident in the stability of the Canadian banking industry. Unlike some of the U.S. regional banks, the Canadian banks have advantages including high levels of liquidity, high levels of capital, and a deposit, asset, and customer base that are all very well diversified. While scrutiny from Canadian federal regulators over the past few years may have limited the Canadian banks’ profitability, it has left them better positioned to deal with periods of stress.
IMPLICATIONS
We believe there are two main short-term implications of the SVB crisis. First, the banks are likely to place a priority on maintaining strong liquidity and capital positions, which will make it more challenging for some consumers and businesses to access credit – which may slow growth in the economy.
The second implication is that central banks like the U.S. Federal Reserve may think more carefully about future policy moves, specifically interest rate policy, as they now have to balance the stability of the financial system along with inflation and growth. That said, on March 22nd the Fed raised interest rates for the ninth time since March of last year.
BOC HOLDS STEADY
In contrast to its American counterpart, the Bank of Canada held interest rates steady this month, the first time in a year that it declined to raise them. In 2022, we took advantage of high interest rates to buy individual longer-term bonds for the first time in 15 years – to lock in the higher interest rates available before interest rates started to go lower, which they have. We have long (and as recently as January of this year), anticipated that the window of opportunity would be closing to buy bonds on such favourable terms and now, with the BOC’s stand-pat position this month, we continue to see it happening.
THE FIRST HOME SAVINGS ACCOUNT
Do you know someone who wants to save money for a home – a family member, friend or colleague?
The First Home Savings Account should be of interest. Introduced in the 2022 federal budget, the FHSA, which provides tax benefits to help first-time home buyers is now available.
What is an FHSA?
The FHSA is a new registered account to help Canadians save up to $40,000 on a tax-free basis towards the purchase of their first home. The FHSA combines features of an RRSP and a TFSA.
What are its benefits?
-Tax benefits: Like an RRSP, contributions made to an FHSA are tax-deductible; like a TFSA, withdrawals made to purchase a first home (including the investment income earned) will not be taxable. With an FHSA, unlike the RRSP Home Buyers’ Plan (HBP), the funds do not need to be paid back.
-Multiple accounts: Individuals can hold more than one FHSA, but the total amount you can contribute to all your FHSAs cannot exceed your annual ($8,000) and lifetime ($40,000) contribution limits.
-Complements the RRSP HBP: A FHSA can be combined with an RRSP HBP withdrawal for the purchase of the same property.
What are its limitations? What are the pros and cons of using a TFSA or RRSP vs an FHSA? Contact us to discuss the strategy that makes the most sense for you, or someone you care about.
2023 FEDERAL BUDGET
A new federal budget was released on March 28th. We were especially watching for any increase in the capital gains inclusion rate, which is the percentage of capital gains that are taxable at your marginal tax rate. Since 2000, the rate has been 50%. There had been talk about possibly increasing this percentage on high income earners – but we are pleased to see this did not come to pass.
However, the budget revises the Alternative Minimum Tax (AMT) regime to further focus on high income taxpayers. The government estimates that under the AMT reforms, more than 99% of the AMT paid by Canadians would be paid by those earning more than $300,000 per year, with 80% of it coming from Canadians earning more than $1,000,000 annually. If we expect you may be affected by the AMT, we will contact you to discuss strategies.
Another significant change we see in this budget is a new tax on dividends that Canadian banks and insurance companies receive from shares they own in other Canadian companies. All things being equal, this could have a small negative impact on the earnings per share of Canadian banks and insurers and therefore put downward pressure on their stock price – something we will be watching very closely.
The budget also calls for a new tax of 2% on share buybacks. A buyback occurs when an entity purchases its own shares or units from existing shareholders. Repurchasing equity is one way for public entities to return value to their shareholders. However, the government recognizes this may result in the diversion of an entity’s resources away from investment in Canadian workers and businesses.
The budget also contains a great deal of spending, growing the federal deficit to $40.1 billion in 2023-2024, which is almost $10 billion more than the government forecast last fall. Deputy Prime Minister and Minister of Finance Chrystia Freeland had been forecasting Canada would be back in the black by 2027-2028, but now estimates the deficit will be $14 billion at that time.
And so we remain concerned that we are hampering the futures of our young people by continuing on a path that will keep them significantly indebted.
THE REAL BOTTOM LINE
When it comes to wealth management, the bottom line we watch most carefully is what you earn after taxes and inflation. That’s why tax season is so important. It is not exactly a favourite time of year for most people, but it allows us to identify opportunities to tighten up your tax planning in order to minimize taxes for you and your family moving forward.
By now, all clients and/or their accountants should have received all forms and information needed to file 2022 tax returns. That said, if you have any questions about the preparation of your taxes, please do not hesitate to contact us.
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We don’t speak jargon. We’re all about uncomplicating your life, so we speak plain English. If there is someone you care about – someone who would appreciate this simple and straightforward approach – please feel free to share this message with them or put us in touch.
Want to discuss any aspect of this month’s blog, or any other issue on your mind? Have a story idea? I am always happy to receive your call or email.
Tyler Marche, MBA, CFP, FCSI
Your life, uncomplicated
tyler.marche@rbc.com
1-416-974-4810
www.tylermarche.com
WHO WE ARE
Tyler Marche, MBA, CFP, FCSI – Senior Portfolio Manager and Wealth Advisor
Tracy McClure, CPA, CA, CFP – Financial Planner
Joy Loewen – Associate
Jean Jeevaratnam – Administrative Assistant
Karen Snowdon-Steacy, TEP – Senior Trust Advisor
Steve Mogdan, CPA, CA – Financial Planning Specialist
Andrew Sipes, CLU, CFP – Will and Estate Planning Specialist
Alleen Sakarian, LL.B., TEP – Will and Estate Specialist
**To learn about our unrivalled team of experts, delivering Canada’s widest array of wealth management services to our clients, visit our website, here and here.
WHAT WE DO
