The banking sector could be the big loser of Trudeau’s re-election

Trudeau pledged last month to increase the tax rate on profits of banks and insurers of more than $ 1 billion by 3 percentage points to 18%

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The banking sector could be among the biggest losers in the re-election of Canadian Prime Minister Justin Trudeau for a third term.

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Trudeau promised last month that, if re-elected, he would hike the tax rate on bank and insurer profits by more than $ 1 billion by 3 percentage points to 18%. He also announced that a temporary and loosely defined Canada stimulus dividend would be taken from banks because they have rebounded faster than other industries. The measures would raise $ 10.8 billion over the next five years, according to Trudeau’s platform.

The campaign pledges represent a much more aggressive approach towards the banks than that previously taken by the Trudeau government – a surprising change given that financial firms were not the only companies to bounce back quickly from the pandemic, John Aiken said, analyst at Barclays Plc. The “almost punitive” measures are all the more surprising given that the banks have pledged not to downsize during the crisis, he said Tuesday in an interview with BNN Bloomberg Television.

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Banks weren’t the only sector doing well during the pandemic, and this is a more focused, almost rifle shot for the sector, compared to some of the others.

John aiken

“Banks weren’t the only sector to behave well during the pandemic, and this is more targeted, almost rifle fire for the sector, compared to some of the others,” Aiken said. “I am not an apologist for banks, but I am just very surprised that this is the approach, and that it has not been broader in trying to get more income from all the sectors that have benefited from it. . “

Trudeau won a third term on Monday night while failing to regain a majority government. That means he will often have to rely on votes from the left-wing New Democratic Party, which has also campaigned to raise corporate income tax rates.

The S & P / TSX Commercial Banks Index rose 0.4% at 12:50 p.m. in Toronto, behind the 0.7% gain in the S & P / TSX Composite Index as a whole. Banks have been lagging the market since Trudeau announced the tax plans on August 25, falling 4.9% through Monday, compared to a 2.1% drop for the broader index. For the year, the banking index is up 20 percent, led by the National Bank of Canada, the Canadian Imperial Bank of Commerce and the Bank of Montreal, while the market as a whole is up 16 percent.

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Trudeau’s proposed surtax would cut earnings per share by 1.6% at Canada’s six largest banks and 0.8% at major life insurers, Mike Rizvanovic, analyst at Credit Suisse Group AG, said on Tuesday in a note to customers. Other hurdles for the financial sector include possible measures to target tax evasion that could impact the trading income of banks’ capital markets divisions, and increased powers for the Financial Consumer Agency that could enable it. reduce bank charges.

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“While it remains uncertain to what extent these proposals will materialize, it is clear, in our opinion, that a minority Liberal Party victory, which appears to be the result, presents several new potential headwinds for large financial firms.” , wrote Rizvanovic.

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Banks may be able to make up some of the lost income through higher mortgage rates, although they will be limited in their ability to raise fees because these were also in the sights of politicians during the campaign. said Mike Clare, who helps manage roughly $ 2 billion in assets at the Brompton Group in Toronto, including stocks of Canada’s six largest banks.

As banks are on the verge of being affected by the election, the potential impact is not large enough to change the overall investment thesis for the sector, Clare said. Profits are still recovering from the lows of the pandemic era, valuations are in the middle of their historical ranges and returns on equity look good, he said. The main catalyst for earnings will be rising interest rates, and investors are in a “wait and see” mode on that front, Clare said.

Clare favors Royal Bank of Canada and National Bank because of their strong capital markets divisions, which have helped them weather disruptions in other parts of their business during the pandemic.

“If anyone has a positive view of banks, I don’t think this election is enough to change that,” he said. “Other factors – like perhaps a view of our overheated housing market – are more likely to motivate this investment thinking than a small additional tax.”

Bloomberg.com

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