Trudeau’s ‘Rifle Shot’ Tax Leaves Banks Among Election’s Losers


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(Bloomberg) — The banking industry could be among the clearest losers from Canadian Prime Minister Justin Trudeau’s re-election to a third term.

Trudeau last month pledged that, if re-elected, he’d increase the tax rate on bank and insurer profits over C$1 billion ($780 million) by three percentage points to 18%. He also announced a vaguely defined, temporary Canada Recovery Dividend to be levied on the banks because they’ve bounced back quicker than other industries. The measures would raise a combined C$10.8 billion over the next five years, according to Trudeau’s platform. 

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The campaign promises represent a far more aggressive approach toward banks than previously taken by Trudeau’s government — a surprising shift given that financial firms weren’t the only companies to rebound quickly from the pandemic, said John Aiken, an analyst at Barclays Plc. The “almost punitive” measures are even more surprising given that the banks committed not to cut workers during the crisis, he said in an interview Tuesday on BNN Bloomberg Television.

“The banks were not the only sector to do well during the pandemic, and this is a more targeted, almost rifle shot for the sector, versus some of the others,” Aiken said. “I’m not being an apologist for the banks, but I’m just very surprised that this was the approach, and it was not broader-based to try to get more revenues from all the sectors that did benefit.”

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Trudeau won a third term Monday night while falling short of regaining a majority government. That means he’ll often have to rely on votes from the left-leaning New Democratic Party, which also campaigned on raising tax rates on corporate income.  

Trudeau’s proposed surtax would cut per-share earnings by 1.6% at Canada’s six biggest banks and 0.8% at large life insurers, Mike Rizvanovic, an analyst at Credit Suisse Group AG, said in a note to clients Tuesday. Other headwinds for the financial sector include possible measures to target tax avoidance that could impact trading revenue from the banks’ capital-markets divisions, and increased powers for the Financial Consumer Agency that could allow it to reduce banks’ fees. 

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“While it remains uncertain how much of these proposals will come to fruition, it’s clear, in our view, that a Liberal Party minority victory, which looks to be the outcome, presents several new potential headwinds for the large financials,” Rizvanovic wrote.

The banks may be able to make up some of the lost income through higher mortgage rates, though they will be limited in their ability to raise fees because those were in politicians’ crosshairs during the campaign as well, said Mike Clare, who helps manage about C$2 billion in assets at Brompton Group in Toronto, including shares of all of Canada’s six largest banks. 

While banks are poised to be hurt by the election, the potential impact isn’t large enough to change the overall investment thesis for the sector, Clare said. Earnings are still recovering from pandemic-era lows, valuations are toward 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 “wait and see” mode on that front, Clare said.

“If someone has a positive outlook on the banks, I don’t think this election is enough to change that,” he said. “Other factors — like maybe a view of our housing market being overheated — are more likely to drive that investment thinking than a small additional tax.”

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