Wealth advisor on unexpected events and how to protect portfolios
While most Canadian banks were able to shake off the volatility stemming from the implosion of three American banks last week, they and their clients can still learn valuable lessons from it to better protect themselves in the future, according to a National Bank advisor.
“When our team had a call yesterday, we noted this wasn’t even on the radar at the beginning of the week. So, there’s a lesson to be learned that, when we look at forecasts, we shouldn’t get caught up in predictions because there are always going to be unexpected events,” said Zach Davidson, a wealth advisor and portfolio manager with National Bank Financial Wealth Management.
“You want to be prepared and have a good diversification. You don’t want to be too concentrated and you want to have a portfolio that can withstand different events that are always going to occur.”
When it collapsed last Friday, Silicon Valley Bank (SVB) was the 16th largest U.S. bank and largest bank for tech start-ups. Its demise sent shockwaves through global markets, prompting a sell-off of bank stocks worldwide and some of the largest rallies in government bond prices since 2008. While the U.S. Treasury Department and Federal Deposit Insurance Corporation (FDIC) quickly stepped in to ensure depositors did not lose their money, it still left many skittish about their financial safety.
“I think this is going to be something that causes clients to think twice about the strength of their financial institution. They’re going to be asking questions going forward to ensure that we have a stronger system,” said Davidson, whose team sent clients a note this week, but received few calls.
While this situation might be reminiscent of 2008, he said there are some key differences. The system responded to the failure much faster this time, developing a plan and taking control of the bank within three days. The banking sector’s capitalization in both Canada and the U.S. has also improved since 2008, so there is less leverage and banks are better managed now. They don’t have the same risks they had then.
Even though the Canadian banks’ stocks took a small hit, he noted that there is not the same concern about them as there is about the numerous regional U.S. banks. In fact, this situation may allow Canadian banks with strong U.S. businesses – BMO, RBC, and TD - to help the technology companies that were impacted by SVB’s failure.
“In Canada, the capital ratios for the banks went up last year. They’re expected to move up again this year. They were already at a very conservative level, so there’s really no concern from that standpoint,” said Davidson.
“This was a bank that had exposure to the venture capital system and a very focused segment of clients, and they had a bond portfolio where the assets didn’t meet the liabilities to have the liquidity requirements that they needed. So, there were some poor management decisions that directly impacted this situation and caused their collapse at the speed that happened.”
While it’s a wake-up call for the industry to ensure it has adequate capital and liquidity and proper diversification, Davidson said, “when you look at the Canadian banks, they really are diversified, both geographically and in sectors.”
He expects more regulation with stricter liquidity requirements and bank oversight to come, but hopes that the Federal Reserve realizes that it’s gone far enough with interest hikes to fight inflation. Advisors, meanwhile, need to ensure that their clients’ portfolios can weather any type of event while keeping a level head and not reacting emotionally to either these events or the markets.