Canadian banks and insurers with operations in the United States can expect two very different possible scenarios after next week’s U.S. election.

A Donald Trump victory could see the Republican introduce less regulatory oversight, lower corporate taxes and an inflationary environment that would support profits.

A victory for Democratic candidate Kamala Harris would likely preserve the stricter regulatory environment introduced by President Joe Biden and result in an increase in the corporate tax rate.

Following last year’s US banking crisis, which led to the collapse of Silicon Valley Bank and First Republic Bank, Biden introduced a series of regulations aimed at strengthening the stability of the sector and improving access to financial services. Many of these new rules have been criticized by Wall Street executives.

While Mr. Trump expects to reverse those changes and pursue a trade policy of higher tariffs, analysts and investors expect a second Trump administration to support banking firms.

The Republican presidential candidate has proposed tariffs of up to 20 percent, which his Democratic opponent said would lead to price hikes. But an inflationary environment could be a boon for banks, boosting net interest margins – the difference between what banks pay on deposits and what they earn on loans.

“A Trump presidency would be incrementally better for Canadian banks than a Harris presidency,” Philip Petursson, chief investment strategist of IG Private Wealth Management, said in an interview. “A Trump presidency could lead to a steeper yield curve and a stronger U.S. dollar. »

Mr. Biden’s reforms have swept the financial sector. In recent months, three US regulators have introduced new guidelines on bank mergers to examine the effects of any deal on financial stability, competition, communities and customers. These changes could hamper deal-making for Canadian banks seeking growth opportunities in the U.S. market.

He also increased corporate taxes. Mr. Trump announced he would cut the corporate tax rate from 21 to 15 percent, while Ms. Harris proposed increasing it to 28 percent.

Under Mr. Biden, banking regulators have proposed raising capital requirements, which would incentivize lenders to hold on to piles of excess cash to guard against bad loans. In response, U.S. banks launched a massive lobbying campaign against the proposal, saying it would hurt the economy and make them less competitive than their global counterparts.

Mr. Trump’s first administration prided itself “on removing regulations and making it easier to do business,” Mr. Petursson said. So it’s reasonable to expect a second Trump White House to do the same.

American regulators have already given in proposed capital increases, reducing them from 19 percent to 9 percent. The proposal is linked to the mandates of Basel III, an international agreement concluded after the 2008 financial crisis aimed at preventing bank failures.

The withdrawal of U.S. officials could prompt other countries to take similar steps. France, Germany and Italy have warned that major financial sector reforms could hurt the competitiveness of European banks. In July, Canada’s banking regulator – which supported the Basel III changes – delayed the implementation of higher capital requirements by a year.

“Given that our national productivity measures are poor and getting worse, we believe banking regulation needs to be recalibrated in this country – and urgently,” Scotiabank analyst Meny Grauman said in a note to the customers. “Our policymakers clearly disagree with this assessment, but policymakers in other key jurisdictions may well force their hand anyway.”

The two Canadian lenders to the largest American companies, the Toronto-Dominion Bank TD-T and Bank of Montreal BMO-Tare most likely to benefit from a Trump presidency, according to Canadian Imperial Bank of Commerce analyst Paul Holden.

BMO generates about 45 percent of its profits in the United States, according to CIBC data. BMO’s large commercial banking business could benefit from an aggressive reshoring aimed at bringing critical sector supply chains to America. An increase in financial markets activity – which some believe would be supported by lower corporate taxes and a looser regulatory environment – could boost BMO’s investment banking unit, said Mr. Holden.

While the U.S. market accounts for about 34 percent of TD’s profits, Mr. Holden said, regulators have curbed the bank’s growth there by capping assets after TD pleads guilty to conspiracy to commit money laundering. If the bank could increase the amount it charges on loans, it could increase its return on assets, a measure of profitability relative to a company’s total assets.

Its capital markets activities – which TD expanded last year with the purchase of New York investment bank Cowen Inc. – is excluded from the asset limit and could also benefit from more active markets.

Some investors attribute the recent rise in stock markets to bets that Mr. Trump would win the election. But not everyone is convinced that a Trump presidency would lead to the rise in stock markets that occurred after his 2016 election.

“You don’t have as many advantages. We were coming out of a mid-cycle slowdown in 2016, and today the U.S. economy is doing well,” Mr. Petursson said. “Stock market valuations are at very high levels, interest rates are high, so I wouldn’t bet on a rally like 2017.”

Among the largest insurers in Canada, Sun Life Financial Inc. SLF-T would benefit most from a Trump victory. Mr. Holden says Sun Life generates about 45 percent of its profits in the United States, where it has a large benefits and group insurance business that would be hit by lower taxes and higher prices. American stocks.

The Harris camp says a Trump administration would cut support for Medicaid, the public health insurance program for low-income Americans. which could affect oral care provider DentaQuest, a Sun Life subsidiary that is one of the largest providers of Medicaid dental benefits.

DentaQuest sales suffered when the pandemic hit and the government could not exclude people from Medicaid. This ended last year, causing a sharp rise in unsubscriptions.

CIBC says Canada Life generates 30 percent of its profits in the United States, with the majority coming from its retirement recordkeeping business, Empower. Mr Holden said the insurer would benefit from wage growth, rising stock markets and, to a lesser extent, rising interest rates.

At the same time, companies most exposed to countries with significant trade imbalances with the United States, including the Bank of Nova Scotia, BNS-T and Manulife Financial Corporation. MFC-Tcould face the greatest number of uncertainties.

Scotiabank’s recovery strategy is based on trade between Canada, the United States and Mexico. The bank generates roughly the same proportion of profits in the latter two countries, according to CIBC data.

“If the Trump administration were to be more aggressive in renegotiating the USMCA, then (Scotiabank’s) North American Corridor strategy would become less compelling,” Holden said, referring to the agreement. trade agreement that replaced NAFTA and expires in 2026.

Manulife, Canada’s largest insurer, could see “mixed results” from the Trump administration. Mr. Holden said 34 percent of Manulife’s net profit is generated in the United States, while 20 percent of profits come from Hong Kong and China, which could be hit by new tariffs.

Spokespeople for the three insurers, as well as TD, BMO and Scotiabank, declined to comment.

Meanwhile, Scotiabank economist Derek Holt said Mr Trump’s proposed economic policies and “extreme protectionism” could be “ruinous for the US and global economies”.

“Trump’s first term has been a total failure in my eyes,” Mr. Holt said in a report. “His trade skirmishes ranged from ineffective to costly for consumers to a lot of noise about nothing like NAFTA 2.0.”