Republican lawmakers accelerated the drive for U.S. tax reform on October 5, as the GOP-controlled House of Representatives approved a fiscal 2018 spending blueprint. The blueprint allows the Senate to pass the new tax bill with a simple majority, allowing the Republicans to bypass the Democrats.
The proposed tax reform calls for a reduction in the corporate tax rate from 35% to 20%. Administration officials have not commented on the cost of the proposed plan, but some estimates put it at over $2 trillion over the next 10 years. In any case, there is an expectation among U.S. banks that tax reform will usher in an enormous windfall of offshore holdings into the country.
Let’s take a look at three Canadian banks with the largest proportion of total revenue that comes from the United States. Could Canadian bank stocks see a surge if this massive tax reform is passed?
Toronto-Dominion Bank
Toronto-Dominion Bank (TSX:TD)(NYSE:TD) has the largest U.S. footprint out of any Canadian bank. TD CEO Bharat Masrani was upbeat when interviewed about the pro-growth agenda of the Trump administration at a conference in January this year. “The talk is that there’s going to be corporate tax reform … more infrastructure spending … less regulatory burden … All of that is stimulating for the economy,” Masrani said at the conference. TD reported a 14% growth in net income in its U.S. retail banking sectors in the third quarter.
TD stock has climbed 5.6% month over month as of close on October 5. The stock has surged past the $70 mark and regained the “Trump Trade” momentum seen in early 2017. TD also provides a dividend of $0.60 per share, representing a 3.4% dividend yield.
Bank of Montreal
Bank of Montreal (TSX:BMO)(NYSE:BMO) boasts the second-largest U.S. exposure in terms of proportion of its total revenue. In the same January 2017 conference CEO Bill Downe was similarly optimistic about the growth prospects offered by the Trump administration. “… The new administration is creating an environment in which our clients are much more comfortable in talking about capital investment,” he said. In the third quarter, BMO improved its ranking to number eight in the 2017 Survey of Bank Reputations in the U.S.
The stock has increased 8.1% month over month and boasts a dividend yield of 3.7%.
Royal Bank of Canada
Royal Bank of Canada (TSX:RY)(NYSE:RY) has the third-largest U.S. exposure in terms of revenue proportion. In late September, economists at RBC were optimistic that the Trump tax plan would increase U.S. GDP by as much as 5% more than currently forecasted and also boost stocks. CEO Dave McKay said in June 2017 that RBC would freeze U.S. acquisitions until there was more clarity concerning fiscal reform. Caribbean and U.S. banking net income was up $12 million from Q3 2016.
RBC has surged 8.1% month over month as of close on October 5. The stock boasts a dividend of $0.91 per share, representing a dividend yield of 3.7%.
