A Trump election win could give a boost to Canada’s largest financial institutions, analysts say

Canadian banks and insurers with businesses in the United States can expect two very different possible scenarios after next week’s U.S. election.

A Donald Trump victory could see the Republican usher in less regulatory scrutiny, lower corporate taxes and an inflationary environment that would prop up profits.

A win by Democratic candidate Kamala Harris would likely preserve the tougher regulatory environment introduced by President Joe Biden and see an increase in the corporate tax rate.

In the wake of the U.S. banking crisis last year, which saw the failures of Silicon Valley Bank and First Republic Bank, Mr. Biden introduced a flurry of regulations aimed at reinforcing the stability of the sector and improving access to financial services. Many of those new rules were criticized by Wall Street executives.

With Mr. Trump expected to dial back those changes and pursue a trade policy of higher tariffs, analysts and investors expect a second Trump administration would bolster banking businesses.

The Republican presidential nominee has proposed tariffs of as much as 20 per cent, which his Democratic opponent has said would cause price hikes. But an inflationary environment could be a boon for banks, bolstering net interest margins – the difference between what banks pay on deposits and earn on loans.

“A Trump presidency would be incrementally better for the Canadian banks than the Harris presidency,” IG Private Wealth Management chief investment strategist Philip Petursson said in an interview. “A Trump presidency could see a steeper yield curve and a stronger U.S. dollar.”

Mr. Biden’s reforms have swept across the financial sector. In recent months, three U.S. regulators introduced new guidelines for bank mergers to scrutinize any deal’s effects on financial stability, competition, communities and customers. The changes could crimp deal making for Canadian banks seeking growth opportunities in the U.S. market.

He also raised corporate taxes. Mr. Trump has said he would lower the corporate tax rate to 15 per cent from 21 per cent, whereas Ms. Harris has proposed increasing it to 28 per cent.

Under Mr. Biden, banking regulators proposed hiking capital requirements, which would prompt lenders to hold on to piles of excess cash as a cushion against bad loans. In response, U.S. banks launched a major lobbying campaign opposing the proposal, saying it would harm the economy and make them less competitive than their global peers.

Mr. Trump’s first administration prided itself “on removing regulations and making it easier to do business,” Mr. Petursson said, so it’s reasonable to expect a second Trump White House to do the same.

U.S. regulators have already relented on the proposed capital hikes, slashing them from 19 per cent to 9 per cent. The proposal is linked to mandates from Basel III, an international accord struck after the 2008 financial crisis and aimed at preventing bank failures.

The pullback from U.S. officials could influence other countries to take similar measures. France, Germany and Italy have warned that major reforms in the financial sector could harm the competitiveness of Europe’s banks. In July, Canada’s banking regulator – which has backed the Basel III changes – delayed the implementation of higher capital requirements by one year.

“Given the fact that our national productivity measures are bad and getting worse, we do think that banking regulation needs to be recalibrated in this country – and urgently,” Scotiabank analyst Meny Grauman said in a note to clients. “Our policy-makers very clearly don’t agree with this assessment, but policy-makers in other key jurisdictions may very well force their hand anyway.”

The two Canadian lenders with the largest U.S. businesses, Toronto-Dominion Bank TD-T and Bank of Montreal BMO-T, are the most likely to benefit from a Trump presidency, according to Canadian Imperial Bank of Commerce analyst Paul Holden.

BMO generates about 45 per cent of its profit in the U.S., according to data from CIBC. BMO’s large commercial banking business could benefit from aggressive reshoring aimed at bringing supply chains in critical sectors to America. A rise in capital markets activity – which some believe would be bolstered by lower corporate taxes and a looser regulatory environment – could boost BMO’s investment banking unit, Mr. Holden said.

While the U.S. market accounts for about 34 per cent of TD’s earnings, according to Mr. Holden, regulators reined in the bank’s growth there with an asset cap after TD pleaded guilty to conspiracy to commit money laundering. If the bank could boost the amount it charges on loans, it could increase its return on assets, a measure of profitability relative to a company’s total assets.

Its capital markets business – which TD expanded last year with its takeover of New York-based investment bank Cowen Inc. – is excluded from the asset cap and could also benefit from more active markets.

Some investors are attributing the recent stock market rally to bets that Mr. Trump will win the election. But not everyone is convinced a Trump presidency would lead to the stock-market bump that occurred after he was elected in 2016.

“You don’t have as much upside. We were coming out of a mid-cycle slowdown in 2016, and today the U.S. economy is doing well,” Mr. Petursson said. “Stock valuations are at very lofty levels, interest rates are high, so I wouldn’t bet on a 2017-type rally.”

Among Canada’s largest insurers, Sun Life Financial Inc. SLF-T would benefit the most from a Trump victory. Mr. Holden says Sun Life generates about 45 per cent of its earnings in the U.S., where it has large operations in group benefits and insurance that would be affected by lower taxes and higher prices in U.S equities.

The Harris camp says a Trump administration would gut support for Medicaid, the public health-insurance program for low-income Americans, which could affect oral health provider DentaQuest, a Sun Life subsidiary that is one of the largest providers of Medicaid dental benefits.

DentaQuest sales suffered when the pandemic hit and the government could not disenroll people from Medicaid. That came to an end last year, causing a major spike in disenrolment.

CIBC says Canada Life generates 30 per cent of its earnings in the U.S., the majority of that from its retirement recordkeeping business, Empower. Mr. Holden said the insurer would benefit from wage growth, rising equity markets and, to a lesser extent, higher interest rates.

Meanwhile, companies with greater exposure to countries that have large trade imbalances with the U.S., including Bank of Nova Scotia BNS-T and Manulife Financial Corp. MFC-T, could face the most uncertainty.

Scotiabank’s turnaround strategy hinges on trade between Canada, the U.S. and Mexico. The bank generates about the same proportion of profit from the latter two countries, according to data from CIBC.

“If a Trump administration were to get more aggressive with renegotiation of the USMCA, then [Scotiabank’s] North American corridor strategy becomes less compelling,” Mr. Holden said, referring to the trade agreement that replaced NAFTA and expires in 2026.

Manulife, Canada’s largest insurer, could see “mixed results” from a Trump administration. Mr. Holden said 34 per cent of Manulife’s net income is generated in the U.S. while 20 per cent of earnings come from Hong Kong and China, which could be affected by new tariffs.

Spokespeople for all three insurers, as well as TD, BMO and Scotiabank, declined to comment.

Meanwhile, Scotiabank economist Derek Holt said Mr. Trump’s proposed economic policies and “extreme protectionism” could be “ruinous to the U.S. and global economies.”

“Trump’s first term was a total failure in my books,” Mr. Holt said in a report. “His trade skirmishes ranged from ineffective to costly to consumers to much ado about nothing much at all like NAFTA 2.0.”