Bank of Montreal likely to benefit most from Republican’s proposed tax cuts and focus on reshoring, say analysts
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A second term for Donald Trump as president of the United States could potentially impact Canada’s banking sector more than a win by Kamala Harris due to his proposed tax cuts for corporations and his aggressive focus on re-shoring, some analysts say.
In such a scenario, Canadian banks that have most exposure in the United States are likely to benefit the most in case of a Trump presidency, said CIBC Capital Markets analyst Paul Holden, but vice-president Harris wouldn’t change the banks’ current outlook as much.
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“When thinking about which Canadian financials would benefit from a Trump presidency and which would not, the analysis is relatively straightforward: what companies have the highest proportion of employees who celebrate Thanksgiving in November versus October,” he said in a note on Oct. 24. “And what proportion live in countries that do not celebrate Thanksgiving at all?”
A Trump presidency is likely to benefit the Bank of Montreal the most since it generates the highest proportion of earnings from the U.S.
“BMO has both a large U.S. commercial bank that would benefit from U.S. reshoring and a large U.S. investment bank that would benefit from more capital markets activity,” Holden said.
Toronto-Dominion Bank is expected to be the second-biggest beneficiary despite an asset cap placed on the lender by U.S. authorities for issues linked to money laundering, he said.
Both banks underperformed and missed analysts’ expectations in the last quarter due to their exposure to the U.S.
BMO had to keep significantly more money aside to cover potential losses on impaired loans, stemming mainly from its U.S. segment, while TD posted a rare loss due to the US$2.6 billion it kept aside to resolve anti-money laundering issues in the U.S.
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Bank of Nova Scotia, which earns roughly the same from its businesses in Mexico as it does from those in the U.S., is likely to benefit the least, Holden said, since there’s a chance the Trump administration might get more aggressive while renegotiating the free trade agreement between Canada, the U.S. and Mexico that expires in 2026.
This could make Scotiabank’s North American corridor strategy less compelling, he said. As part of the strategy, the bank is looking to recycle capital from its Latin American businesses to North America.
“We do not want to conclude that a Trump presidency would be a net negative for BNS, but we believe it would present some risks that are not applicable to the other Canadian banks,” Holden said.
He doesn’t believe the election outcome is likely to impact the other banks in a meaningful way.
Basel III reforms
The U.S. election could also influence Canada as it tries to fulfil its commitments to the 2017 Basel III reforms, Scotiabank analyst Meny Grauman said in a note on Oct. 28.
These reforms were created by central banks and bank regulators from 28 countries after the great financial crisis. Published in 2010, they promised common standards for measuring, reporting and managing financial risks across 28 jurisdictions by imposing higher capital charges — the money a bank reserves to cover bad loans and losses.
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Canada has been leading in terms of implementing the reforms, he said, but others, including the U.S. and Europe, have questioned them and may look to implement a modified version of the reforms.
“There is a clear acknowledgment that Canadian capital rules cannot live in a vacuum and will need to be revisited if other key banking jurisdictions don’t institute similar rules,” Grauman said. “In our view, this is an outcome that’s becoming increasingly likely, especially if Trump wins the White House.”
Overall, the policies proposed by both Harris and Trump are expected to increase the debt south of the border. Harris’s plan would add US$3.95 trillion over a 10-year period, while Trump’s plan would add US$7.75 trillion, according to the Committee for a Responsible Federal Budget.
Harris has proposed to significantly expand the Child Tax Credit and other individual tax credits, increase support for housing and health care, expand Medicare, lower taxes on tips and strengthen border security.
She has also called for spending and tax breaks for child care, education, long-term care, preschool, paid leave, domestic research and manufacturing, and small businesses.
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Trump has proposed to further cut taxes for corporations and small businesses, increase military spending, strengthen border security, expand deportations and immigration enforcement and increase support for housing, health care and long-term care. He has also proposed to end taxes on tip income, overtime pay and social security benefits.
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To offset the costs of her plan, Harris has proposed increasing taxes on corporations and high-income households and reducing prescription drug prices. Trump would impose new tariffs on imports, repeal spending, tax cuts and regulations for green energy and environment-related companies, and cut fraudulent spending.
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