By Nichola Saminather
TORONTO (Reuters) - Canadian bank stocks dropped on Thursday as better-than-expected quarterly earnings reported this week were overshadowed by a promise by the ruling Liberal Party to raise corporate income taxes on financial firms if re-elected.
On Wednesday, the Liberals said they would hike the rate to 18% from 15% on all earnings over C$1 billion ($793 million) and impose a special dividend to be paid by the firms. The increases are designed to pay for the cost of the COVID-19 recovery.
"Some digestion is occurring in the marketplace with what happened yesterday," said Goodreid Investment Counsel Portfolio Manager Brian Madden.
"The market is taking (the announcement) and ... thinking about the severity and probability of it getting enacted into law," he said. "It would clip the banks’ earnings very very significantly if it were enacted."
Canada's federal election is Sept. 20. Prime Minister Justin Trudeau's Liberals have a slight lead over the opposition Conservatives in opinion polls.
The banks index closed down 1.4% on Thursday following minimal moves after the announcement on Wednesday. The broader Toronto benchmark index was down 0.4%.
Royal Bank of Canada shares ended the day down 0.4%, Toronto-Dominion Bank lost 2.4% and Canadian Imperial Bank of Commerce's (CIBC) dropped 2.1%.
National Bank of Canada (OTC:NTIOF) financial analyst Gabriel Dechaine said in a note that the average bank's earnings this year would have been 2% lower as a result of the proposed change, based on annualized fiscal 2021 results, amounting to a cumulative theoretical tax increase of C$1.3 billion ($1.02 billion) for the six biggest banks.
The proposed special dividend could amount to over C$1 billion a year over the next four years, he said.
CIBC Chief Executive Victor Dodig, the first executive to comment on the proposal, urged governments on Thursday to refrain from intervening in individual sectors
Alongside a focus on improving education and access to healthcare, "what governments should be really obsessed with is making sure that ... they create the conditions for private capital to help everybody grow and to help everybody prosper," he said.
Some of the decline in shares may also be due to investors who had bought ahead of the banks' results taking profits, Madden said.
CIBC and TD on Thursday closed out third-quarter earnings reporting, with all of the country's six biggest banks posting better-than-expected profits.
($1 = 1.2683 Canadian dollars)