Liberal surtax on banks, lifecos would have minor impact on sector

The Liberals’ promise to implement a 3% corporate surtax on banks and life insurance companies would have a minimal to slightly negative effect on the financial sector, according to investment strategists.

“My outlook hasn’t changed materially. The tax proposal was minor, and corporations will find a way to minimize the impact,” said Daniel Gonzalez, a wealth analyst with California-based Javelin Strategy & Research.

“Like the election outcome, our view on the sector is status quo,” said Kurt Reiman, chief investment strategist for North America with BlackRock Inc. “The more powerful forces that we should be watching are how the banks emerge from the pandemic.”

The Liberals’ platform included a pledge to raise the corporate income tax rate for banks and insurance companies from 15% to 18% on all earnings above $1 billion. Those institutions would also contribute to a Canada Dividend Fund.

If the pledge comes to pass, “it would be slightly negative to earnings, and the banks that have more profit would be impacted more,” said Scott Chan, managing director of equity research – financials, with Canaccord Genuity Corp. Though he said modelling the effects of any potential legislation is premature, the proposal could have “a few percent [negative] impact to our annual earnings estimates.”

Gonzalez estimated the proposal would cost the Big Five banks collectively about $1 billion per year in extra taxes paid, but said the sector at large would find ways to mitigate the damage, such as through reducing costs or by raising fees for customers.

The latter might be easier for banks than insurance companies. “The banks have a more diverse product set than insurers — chequing accounts, savings accounts and mortgages. They have options to blend in [hikes to] those fees if they want to recoup the [tax] cost,” Gonzalez said, adding that higher life insurance premiums are less expected by consumers than higher bank fees. “Banks can get away with it a bit easier than insurance companies.”

Banks and insurers “have a lot of levers behind the scenes, because of their scale, to offset some of their profitability,” Chan said.

Chan questioned the Liberals’ choice of sector, however. “It seems odd that they really focused on banks and lifecos, specifically, rather than other sectors that have done well too during the pandemic,” he said. “But at the same time, the government has supported the banks and lifecos through a lot of crises.”

Reiman said he’ll be watching for legislation.

“What we’d be following is, does that legislation arrive in Parliament? And does it arrive by itself, or are there other tax increases that are included in order to gain the necessary votes from other parties to get the legislation over the line?” he said.

As proposed, the corporate surtax would raise $5.3 billion between 2021–22 and 2025–26, according to costing from the Parliamentary Budget Office.

South of the border, Reiman noted that U.S. bank stocks have shrugged off the spectre of corporate tax hikes, at least thus far. “The market has just continually pushed higher,” Reiman said, attributing that to cyclical factors and the fact that many bank stocks offer better yields than government bonds.

In general, Reiman said investors have good reason to be bullish on Canadian financials. The banks are “delivering high dividends relative to the broader market, and [there’s] potential for those dividends to increase, and for the loan-loss provisions to be supportive to earnings because of the economic restart.”

And while he warned that dividend yield isn’t the be-all and end-all, he said dividends are a good indicator in the current environment.

“When there’s powerful economic forces and companies are growing their earnings consistently, and you’re in an environment of generally reduced default risk — to say nothing of the supportive fiscal and monetary policies — that’s when the dividend yield can be looked at as a more favourable signal for which companies to own,” Reiman said.

Selected net incomes for fiscal year 2020

All years ended Oct. 31 unless otherwise indicated.

• Toronto-Dominion Bank: $11.6 billion
• Royal Bank of Canada: $11.4 billion
• Bank of Nova Scotia: $6.9 billion
• Bank of Montreal: $5.1 billion
• Manulife Financial Corp. (Dec. 31): $5.7 billion
• CIBC: $3.8 billion
• Sun Life Financial Inc.: $2.4 billion
• National Bank of Canada: $2.1 billion
• iA Financial Corporation Inc. (Dec. 31): $611 million
• Canadian Western Bank: $272 million
• Laurentian Bank of Canada: $114 million

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.