The latest federal budget represents a net negative for Canada’s large financial institutions, according to Moody’s Investors Service in a new report.
The rating agency said that between tougher taxes on financial sector profits and efforts to chill the housing market, it views the budget as a credit negative for Canada’s big banks and life insurers.
On the plus side, the efforts to curb speculation — including foreign ownership restrictions, taxes on unoccupied housing, and plans to end blind bidding and to require home inspections — are credit positive, Moody’s said, “because they will add stability to residential mortgage collateral values.”
However, the rating agency said this is “more than offset” by the increased taxes — including a one-time surtax and an increased tax rate on the financial sector profits.
“The new tax burden is credit negative for these companies because it will reduce their profitability,” Moody’s said.
Nevertheless, in a separate report, Moody’s noted that the rating outlook for the Canadian banking system over the next 12 to 18 months is stable, as “overall credit and operating conditions for Canada’s banks remain favorable.”
It said that continued economic growth and higher interest rates should boost bank profits.
“The improving U.S. economy will also benefit operating conditions for Canadian banks in 2021 because of the strong trading relationship between the two countries,” said Jason Mercer, vice-president at Moody’s, in a release.
“Also, we expect headline inflation rates in Canada will fall by the end of 2022,” he added.
Moody’s also noted that the banks’ capital levels “are set to modestly decline” in the year ahead, as the limits on capital distribution have relaxed.