Largest banks’ ability to hike mortgage rates might be limited – observers

With Canadian Prime Minister Justin Trudeau’s re-election to a third term, the Big Six banks will likely see several of their income streams (including more expensive mortgages) restricted, industry observers said.

The banks might consider higher mortgage rates due to a likely loss of income in the near future, but any increases in this direction might be limited, as the recent elections were essentially a referendum on Canadian housing affordability, said Mike Clare of the Toronto-based asset manager Brompton Group.

Fears of income loss have stemmed from Trudeau’s promises in the lead-up to the elections, which included hiking taxes on bank and insurer profits over $1 billion to 18% – a surprise considering that banks have refrained from downsizing during the pandemic, according to Barclays plc analyst John Aiken.

Read more: Canadians’ increased savings during COVID-19 are bad news for smaller lenders

Trudeau’s pledges, which also include a Canada Recovery Dividend to be slapped on the banking industry, are estimated to raise $10.8 billion in total over the next five years. However, Aiken challenged the need for these “almost punitive” measures.

“The banks were not the only sector to do well during the pandemic, and this is a more targeted, almost rifle shot for the sector, versus some of the others,” Aiken told BNN Bloomberg. “I’m not being an apologist for the banks, but I’m just very surprised that this was the approach, and it was not broader-based to try to get more revenues from all the sectors that did benefit.”

Mike Rizvanovic, an analyst at Credit Suisse Group AG, estimated that Trudeau’s measures would cut per-share earnings by at least 1.6% among the Big Six and by 0.8% among major life insurers.

“While it remains uncertain how much of these proposals will come to fruition, it’s clear, in our view, that a Liberal Party minority victory … presents several new potential headwinds for the large financials,” Rizvanovic wrote.