Canadian bank stocks fell on Thursday as better-than-expected quarterly earnings reported this week were overshadowed by a promise by the ruling Liberal Party to increase financial corporate income tax if re-elected.
On Wednesday, the Liberals announced they would increase the rate from 15% to 18% on all profits over $ 1 billion and impose a special dividend payable by companies. The increases are designed to pay the cost of the COVID-19 recovery.
“There is some digestion going on in the market with what happened yesterday,” said Brian Madden, portfolio manager for Goodreid Investment Counsel.
“The market takes (the announcement) and… thinks about the seriousness and likelihood of it being enacted into law,” he said. “It would very very significantly reduce bank profits if it were adopted. “
Federal elections in Canada are held on September 20. Prime Minister Justin Trudeau’s Liberals have a slight lead over opposition Conservatives in opinion polls.
The banks index closed down 1.4 percent on Thursday after minimal moves after Wednesday’s announcement. Toronto’s broader benchmark fell 0.4 percent.
Shares of the Royal Bank of Canada ended the day down 0.4 percent, the Toronto-Dominion Bank lost 2.4 percent and that of the Canadian Imperial Bank of Commerce (CIBC) lost 2.1 percent.
National Bank of Canada financial analyst Gabriel Dechaine said in a note that the bank’s average profit this year would have been 2% lower due to the proposed change, based on annualized results for the year. 2021, equivalent to a cumulative notional tax increase of $ 1.3. -billion for the six largest banks.
The proposed special dividend could rise to more than $ 1 billion per year over the next four years, he said.
CIBC CEO Victor Dodig, the first executive to comment on the proposal, on Thursday urged governments to refrain from intervening in individual sectors
Along with the focus on improving education and access to health care, “what governments should really be obsessed with is making sure they create the conditions for the private capital helps everyone develop and prosper, ”he said.
Part of the decline in stocks may also be due to investors who bought before the banks’ results taking profits, Madden said.
CIBC and TD closed their third quarter results Thursday, with the nation’s six largest banks posting better-than-expected earnings.
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