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Canadian banks hope for boost from Trump’s ‘pro-growth’ plans

Toronto's financial district.

Galit Rodan/The Globe and Mail

Chief executives at Canada's largest banks are voicing cautious optimism about their prospects for growth in the U.S. under a Donald Trump presidency, but are waiting for clearer signals from the incoming administration.

Promises of deregulation, large-scale infrastructure spending and rising interest rates have driven a sharp run-up in bank stocks, and Canadian bank executives have eagerly anticipated a friendlier U.S. environment.

The uncertainty dogging Mr. Trump's transition to power comes at a moment when some of Canada's largest banks, including Royal Bank of Canada, Toronto-Dominion Bank, Bank of Montreal and Canadian Imperial Bank of Commerce, are eager to grow south of the border. As Canadian operations face headwinds from a sluggish domestic economy, executives are eyeing a more favourable U.S. business climate as a catalyst for growth. Yet with few specifics to latch on to and inauguration day approaching, expressions of hope come with disclaimers about the wisdom of taking a wait-and-see approach to the president-elect's sometimes vague plans.

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"We do anticipate pro-growth policy coming out of the new administration – the impact unknown, obviously. We're all trying to quantify that," RBC CEO Dave McKay said Tuesday at his bank's annual conference hosting fellow CEOs, held in Toronto.

"But that would be a boost, it would potentially lead to higher rates, which is very good for our franchise in the United States."

A December hike in U.S. interest rates was an early positive sign. If rates climb by 100 basis points, or one percentage point, CIBC would reap more than $100-million in net interest income. And a rise of just 25 basis points is worth $50-million in net income to RBC's U.S. wealth management franchise alone.

The president-elect's transition team has also pledged to "dismantle the Dodd-Frank Act" and replace it with new policies encouraging "economic growth and job creation," providing few specifics, even as some leading figures in U.S. banking urged the new administration to stop short of scrapping the rules entirely.

Perhaps no one has felt the rapid change in sentiment more acutely than CIBC, which announced a $4.9-billion deal to buy Chicago-based PrivateBancorp Inc. last July, only to have a shareholder vote on the deal postponed in December after regional bank share prices soared after the U.S. election.

On Tuesday, CEO Victor Dodig said "aberrations" in the market forced CIBC to take "a pause" and wait for markets to settle.

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"What's happened with the new incoming administration is they've telegraphed certain policies. What actually gets implemented and how it'll look and what kind of economic benefit that will deliver is yet to be seen," he said. "I think that there's some inconsistencies in terms of some of the messaging."

Widespread uncertainty around trade rules threatens to dampen the prevailing optimism. Mr. Trump's threats to tear up the North American free-trade agreement and slap punitive tariffs on China and Mexico have spurred fears that a full-blown trade war could erupt.

"Obviously you build that into your risk strategy, into your thought process in the short term," Mr. McKay said. In late 2015, RBC completed its $5-billion (U.S.) acquisition of Los Angeles-based City National Corp., and is looking at geographic expansion in California and New York, Mr. McKay said. But Mr. McKay expects to be "more cautious" about growing its commercial loan portfolio for now.

Bank of Nova Scotia is also watching trade developments closely given its large footprint in Mexico – one of Mr. Trump's favourite rhetorical targets.

"They're adapting to the rhetoric out of Washington, and we'll see what happens in terms of some revised negotiation on NAFTA, or whatever happens," CEO Brian Porter said. "But, look, the long-term economic prospects of Mexico remain intact."

TD, which recently tempered its outlook for overall profit growth, owns 40 per cent of TD Ameritrade Holding Corp., and the two institutions joined forces last fall to acquire discount brokerage Scottrade Financial Services Inc. for $4-billion. Bharat Masrani, the bank's CEO, would like TD to grow faster in the southeast United States, and raised the prospect of buying "a smallish type of bank" in the region.

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Now, apparent "tailwinds" in the U.S. market offer TD's best hope to boost earnings faster. "If things do sustain themselves, then we have a fighting chance of hitting [a 7- to 10-per-cent] medium-term growth target," Mr. Masrani said.

At BMO – which has more than 600 U.S. bank branches under its BMO Harris Bank brand, mostly in Midwest cities such as Chicago and Milwaukee – CEO Bill Downe expects an uptick in U.S. business from the back half of 2016 will continue in the new year, as policy shifts to emphasize fiscal stimulus.

"Clearly, the new administration is creating an environment in which our clients are much more comfortable in talking about capital investment, about expanding their businesses," Mr. Downe said. "There's a lot of political noise, but underneath it I think there's some pretty clear thinking going on."

Globe Talks: The Canadian economy under Trump. Join us on Jan. 19 for a live event. Get tickets here.

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