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Banks emerge as losers after vote

KEVIN ORLAND

The banking industry could be among the clearest losers from 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 $1 billion by three percentage points to 18 per cent.

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 $10.8 billion over the next five years, according to Trudeau's platform.

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 firms 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. “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,” Aiken said.

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 New Democratic Party, which also campaigned on raising tax rates on corporate income.

The S&P/TSX Commercial Banks Index rose 0.4 per cent at 12:50 p.m. in Toronto, trailing the 0.7-per-cent gain for the broader S&P/TSX Composite Index. Banks have trailed the broader market since Trudeau announced the tax plans on Aug. 25, falling 4.9 per cent through Monday, compared with a 2.1-per-cent decline for the larger index. For the year, the banks index is up 20 per cent, led by National Bank of Canada, Canadian Imperial Bank of Commerce and Bank of Montreal, while the broader market is up 16 per cent.

Trudeau's proposed surtax would cut per-share earnings by 1.6 per cent at Canada's six biggest banks and 0.8 per cent 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 affect trading revenue from the banks' capital-markets divisions, and increased powers for the Financial Consumer Agency that could allow it to reduce banks' fees.

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, said Mike Clare, who helps manage about $2 billion in assets at Brompton Group in Toronto.

Earnings are 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, Clare said.

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2021-09-22T07:00:00.0000000Z

2021-09-22T07:00:00.0000000Z

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