Canadian, Australian and U.S. Banks. Are Any of Them Safe?

Canadian, Australian and U.S. Banks. Are Any of Them Safe?
Why Are We Still Underweighting U.S. Financials?
 
Reading the earnings reports of banks and financial services companies is about as easy as deciphering hieroglyphics. This is intentional. However, the consequences of such opacity for Main Street investors are that bank failures come without warning. That is why it is so important to read the tea leaves before the event (and yes, there are obvious signs in the cup). When we wait for the headlines, it’s too late to protect our wealth.

We’ve been underweighting U.S. banks and financial companies in our Financial Freedom Retreats and in my books for years, with another blatant warning coming in our blog of Feb. 10, 2023. The epic bank failures of Silicon Valley Bank and Signature Bank began a month after that blog, in March 2023. There were five bank failures in 2023 and two in 2024.

Is the trouble over, or are there still phantoms in the wings of this industry, including insurance companies, brokerages, fintechs and credit unions? Why are we still underweighting U.S. financials, and how do you do that in your retirement and investing accounts? How can we divest of this industry and protect our cash? Is there a better income-producing alternative? The good news is that we can reduce risk, increase yield and add diversification in a carefully crafted plan.

Here are the things we’ll cover in this blog.
Credit Ratings and Leverage
Australian & Canadian Banks
Half-Empty Office Buildings and Long-Term Bonds
New York Community Bank and First Citizens Bancshares
Household Debt
Financial Stability Report
Underweighting U.S. Financials (Continuing for Many Years Now)
When the U.S. Sneezes, the World Catches a Cold 
The Trouble with Cash

And here is more information on each point.
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Credit Ratings and Leverage
As you can see in the chart below, there are a lot of U.S. banks that are at the lowest rung of investment grade (BBB). While there are some U.S. banks that are rated A, it‘s important to remember that First Republic Bank was downgraded from A- (investment grade) to BB+ (junk) by Fitch Ratings and S&P Global on March 15, 2023, without prior warning. The bank ultimately failed and was taken over by J.P. Morgan Chase & Co. on May 1, 2023. AAA is the highest rating and BBB is the lowest investment grade before junk status (BB, B, CCC and below).

​Australian & Canadian Banks
Many Australian and Canadian banks have a higher credit quality than U.S. banks, according to S&P Global. Both Fitch Ratings and S&P Global give Australia an AAA sovereign credit rating. Canada is rated AAA by S&P Global and AA+ by Fitch Ratings. AA+ is the credit rating Fitch and S&P Global have for the U.S. If you’re interested in an updated Bank Stock Report Card, email [email protected] with Bank SRC in the subject line.

In addition to having higher credit ratings, Australian banks pay a higher yield than U.S. banks. Australia’s Westpac Bank (AA- credit rating) offers a 4.54% yield. By comparison, Goldman Sachs (BBB+) pays 2.01% yield, while Wells Fargo & Co. (also BBB+) distributes a 2.17% yield. First Citizens Bancshares (the bank that swallowed up Silicon Valley Bank) has a BBB rating with a negative outlook and rewards that risk with just 0.36% yield to investors.

Canadian banks also offer generous dividends. TD Bank is currently paying 5.67%, while the Bank of Montreal has a yield of 4.35%. In the case of TD Bank, the yield jumped when the share price tanked on news of a $3.1 billion settlement and admission of guilt by the bank of failing to prevent money laundering. In one example, authorities said, “TD Bank facilitated over $400 million in transactions to launder funds on behalf of people selling fentanyl and other deadly drugs.” TD is Canada's second biggest bank and the 10th largest in the U.S. The small payout at TD Bank does not offset the almost -20% decline in share price.

Canada and Australia were historically more prudent in terms of risk in the banking system than the U.S. “Australia and Canada were the only advanced G20 countries not to provide a government injection of funds to the banking system” during the financial crisis of 2008 (source: U.S. Treasury). However, we have seen more risk taking and expansionary policy at Canadian banks over the past decade.

Half-Empty Office Buildings and Long-Term Bonds
Paper losses on long-term, low-yielding bonds and T-Bills (which many Main Street investors have in their wealth plan) are at the heart of the failures of banks over the last few years. Interest rates are expected to go down, which will help a little. However, there remains an elevated problem with credit risk and duration risk. For this reason, we spend one full day at our Financial Freedom Retreats learning how to protect the safe side of our portfolio from losses. It is also why we’ve been warning against long-term bonds since the Great Recession.
 
If you’ve walked around your neighborhood, you’ve probably noticed a lot of office space available for lease. Some malls and projects put up attractive advertising to divert the eye, but behind the façade lies a money pit. According to the Nov. 14, 2024 Global Banking Outlook report by S&P Global, “Large property sectors remain pressured, particularly the U.S. office market and residential sales in China. Real estate stress poses challenges especially to U.S. regional banks and the smaller Chinese lenders.” (FYI: We’re underweighting China due to geopolitical risks and the lack of investor appetite for Chinese equities.)  

Commercial real estate (empty buildings) is the bugaboo of many developed world economies, including Canada and Australia. Despite high vacancy rates, CRE prices haven’t yet tumbled. According to the Nov. 22, 2024 Financial Stability Report of the Federal Reserve Board, the reason for this is that “rather than realizing losses, many owners wait for more favorable conditions to put their properties on the market.” Regional banks are more exposed, with fewer resources to mitigate the risk of CRE. This risk can also be passed onto Main Street retirement plans in the form of bond and value funds. This is why it is so key to be an informed investor, rather than having blind faith that someone is protecting our wealth for us. We might have a lot of banks in our wealth plan if we don’t take action to underweight this industry.

New York Community Bank and First Citizens Bancshares
New York Community Bank (now Flagstar Financial, Inc.) took over Signature Bank when it failed in March of 2023. In January of 2024, the company slashed their dividend from $0.17/share to $0.05/share. On June 7, 2024, the dividend plunged again to just $0.01/share. Revenue has dropped by -40% year over year, investors have lost -72% in share price from the August 2023 high, and the company value is a mere $4.74 billion. The company must try to stay afloat amidst the New York City CRE crisis. Clearly the leaders think a name change (removing New York) will help. However, it won’t fill empty office building space or put revenue back on the books.

First Citizens Bancshares absorbed Silicon Valley Bank. Share prices almost doubled when the bank rescued SVB and are up more than four-fold from where they traded prior to March 27, 2023 (the day of the merger). However, S&P Global has the bank rated at BBB with a negative outlook. As mentioned above, the dividend is pretty small for the risk.

Household Debt
Consumer debt is at an all-time high, and Americans have burned through all of the pandemic stimulus money. The personal savings rate (amount left over after paying bills) is at a historic low. With consumers driving about 68% of the economy, this is another problematic area that economists will monitor. If consumption pulls back, the economy will slow.
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Financial Stability Report
The Federal Reserve’s Nov. 2024 Financial Stability Report revealed that insurance companies are another area of alarm. According to the report, “Life insurers continued to allocate a substantial percentage of assets to risky and less liquid instruments.” As a reminder, insurance companies and their products are not FDIC-insured. AIG was the biggest bailout in history. Broker-dealer leverage continued to be low, while hedge fund leverage was at an all-time high.

Underweighting U.S. Financials (Continuing for Many Years Now)
We’ve been underweighting U.S. financials for years due to the massive amount of leverage and low credit quality of many U.S. banks and financial services companies. The CRE and mortgage-backed securities markets are negatives with the potential to be the toxic tipping point of the economy. CRE has the potential to be a problem in Australia and Canada, too. However, the rating agencies have greater faith in the Aussie banks to weather the storm.

When the U.S. Sneezes, the World Catches a Cold 
All equities (stocks, funds) have risk, even when we diversify into an AAA-rated country like Australia. China was once the world’s star of growth and performance and has been an underperformer since the highs of February 2021. That’s why it is important to have an age-appropriate plan, with the proper amount of our wealth protected from losses. This is tricky because bonds lost even more than stocks in 2022 and haven’t made those losses up.

Again, the safe side of our plan is not supposed to go down in value, not even in “paper losses,” which are more problematic than our broker-salesman might be revealing.
Our strategy avoided the paper losses of the past few years, earned gains in the recessions and outperformed the bull markets in between. It’s as easy as a pie chart with annual rebalancing. The sooner you learn and implement it, the better off you will be now and going into the future.

The Trouble with Cash
Not only does cash give us zero return on investment, stashing it carries many risks. Under our mattress and it might be stolen, even as it loses buying power. Credit unions, brokerages and crypto exchanges are not FDIC-insured, even if they tell us they have a cash sweep program. Uninsured deposits are not guaranteed at an FDIC-insured bank. Many places don’t accept cash anymore, as the world has embraced digital payments. Finally, safe havens, such as crypto and gold, are volatile. We treat these assets as hot slices, rather than safe havens. I encourage you to read the What’s Safe sections of The ABCs of Money, 6th edition, and the blogs below.

Fintechs and Brokerages that Fail are Not FDIC Insured.
Lessons from the Failure of Silicon Valley Bank
Is Your FDIC-Insured Cash Safe? Better Double-Check.
Money Market Funds, FDIC & SIPC. Are Any of Them Safe?
 
Bottom Line
Opting for an Australian value fund offers less risk and more reward than the low credit quality, bank-heavy U.S. value funds. This will likely not be offered in your employer-sponsored retirement account, which is why it’s a great idea to have your own Individual Retirement Account, in addition to whatever your employer offers. For most of us, our wealth plan will be composed of a few different accounts, with each offering a different piece of the pie. With Wall Street at an all-time high, it’s a great idea to dollar-cost-average into any new fund, while also using our age-appropriate diversified nest egg. These strategies are taught in my books, retreats and in my private coaching. Email [email protected] to get started now.

FYI: During the bank failures of 2023, the FDIC-insurance did kick in, even (in a special event) for the uninsured deposits of Silicon Valley Bank – something that is not expected to be repeated. Many of us are also invested in banks and toxic mortgage-backed securities and commercial real estate bonds in our retirement accounts, mutual funds, ETFs and insurance plans. So, it’s important to go beyond the deposit slip and understand how to underweight financials in our wealth plan.


Join us at our online New Year, New Me Financial Freedom Retreat Jan. 10-12, 2025 (online) and our Rebalancing Masterclass (Capture Gains & Protect Principal) on Jan. 18, 2025.

Learn how to:

* Invest in hot industries, such as Nvidia and artificial intelligence,
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* Know what's safe in a Debt World.

You'll even discover how to save thousands annually with smarter big-ticket choices. Yes, it's a complete money makeover. 
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If you’d like an unbiased 2nd opinion on your current wealth plan, email [email protected] for pricing and information.

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Join us for our Online New Year, New You Financial Freedom Retreat Jan. 10-12, 2025. Email [email protected] or call 310-430-2397 to learn more. Register with friends and family to receive the best price. Click for testimonials, pricing, hours & details.

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Natalie Wynne Pace is an Advocate for Sustainability, Financial Literacy & Women's Empowerment. Natalie is the bestselling author of The ABCs of Money and The Power of 8 Billion: It's Up to Us, and is the co-creator of the Earth Gratitude Project. She has been ranked as a No. 1 stock picker, above over 835 A-list pundits, by an independent tracking agency (TipsTraders). Her book The ABCs of Money remained at or near the #1 Investing Basics e-book on Amazon for over 3 years (in its vertical), with over 120,000 downloads and a mean 5-star ranking. The 6th edition of The ABCs of Money and the 2nd edition of Put Your Money Where Your Heart Is are the most recent releases of these books. Follow her on Instagram. 
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Natalie Pace's easy as a pie chart nest egg strategies earned gains in the last two recessions and have outperformed the bull markets in between. That is why her Investor Educational Retreats, books and private coaching are enthusiastically recommended by Nobel Prize winning economist Gary S. Becker, TD AMERITRADE chairman Joe Moglia, Kay Koplovitz and many Main Street investors who have transformed their lives using her Thrive Budget and investing strategies. Click to view a video testimonial from Nilo Bolden.​​

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Important Disclaimers
Please note: Natalie Pace does not act or operate like a broker. She reports on financial news, and is one of the most trusted sources of financial literacy, education and forensic analysis in the world. Natalie Pace educates and informs individual investors to give investors a competitive edge in their personal decision-making. Any publicly traded companies or funds mentioned by Natalie Pace are not intended to be buy or sell recommendations.

ALWAYS do your research and consult an experienced, reputable financial professional before buying or selling any security, and consider your long-term goals and strategies. Investors should NOT be all in on any asset class or individual stocks. Your retirement plan should reflect a diversified strategy, which has been designed with the assistance of a financial professional who is familiar with your goals, risk tolerance, tax needs and more. The "trading" portion of your portfolio should be a very small part of your investment strategy, and the amount of money you invest into individual companies should never be greater than your experience, wisdom, knowledge and patience.  

Information has been obtained from sources believed to be reliable. However, NataliePace.com does not warrant its completeness or accuracy. Opinions constitute our judgment as of the date of this publication and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.