Canada’s restaurant industry is bracing for the biggest jump in the country’s alcohol excise duty in more than 40 years, spurring warnings the tax hike could force some bars and restaurants out of business.
Business
First Republic getting $30-billion infusion from U.S. banking giants to avert crisis
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A pedestrian walks by a First Republic Bank office on March 16, in San Francisco. A week after Silicon Valley Bank and Signature Bank failed, First Republic Bank is considering a sale following a dramatic drop in its stock price over the past week.Justin Sullivan/Getty Images
The United States’ largest financial institutions have agreed to deposit US$30-billion in First Republic Bank, an unconventional private-sector rescue designed to shore up confidence in the financial system and contain an emerging crisis.
The agreement was brokered by the U.S. government, but is funded by 11 of the country’s largest lenders and investment banks. Bank of America, Citigroup, JP Morgan Chase and Wells Fargo, known as the Big Four U.S. banks, are leading the effort with US$5-billion each.
San Francisco-based First Republic is caught in the fallout from Silicon Valley Bank’s collapse last Friday. Its shares have plummeted as much as 70 per cent over the past week. Much like SVB, First Republic has not reported any sudden loan losses or writedowns. But clients nervous about its stability have been pulling deposits and transferring them to larger institutions, something known as a flight to quality.
With First Republic looking like the next domino to fall in a cascade of bank failures, the larger lenders and investment banks are hoping their deposits will keep it standing, and prevent the situation from spiralling out of control.
It is an unusual approach. The banks appear keen on testing mechanisms that aren’t as extreme as full-blown takeovers.
Opinion: No one will replace Silicon Valley Bank and that’s a big problem for tech
Such takeovers were necessary during the 2008 global financial crisis, and they included the buyouts of investment banks such as Bear Stearns and Merrill Lynch at cut-rate prices. While they helped to stabilize the system, the deals proved to be headaches for their buyers for years after.
Thursday’s private-sector rescue follows central bank intervention on both sides of the Atlantic. The U.S. government has already insured all deposits at SVB and Silvergate Bank, which also failed last week. And the U.S. Federal Reserve has provided fresh liquidity for banks that need to swap bonds for cash at full value. Early Thursday in Switzerland, the Swiss National Bank offered up to 50 billion Swiss francs in liquidity to support the ailing Credit Suisse.
The interventions helped to calm investors Thursday, with major Western stock markets climbing higher. But the situation is very volatile, and banks are likely to keep getting tested. In the U.S., deposits may keep flowing to larger institutions, and it is unclear if the banks involved in First Republic’s rescue package will step up to support a second lender, or a third, should that be required.
In Europe, Credit Suisse, Switzerland’s second-largest bank, has been troubled for years. While it embarked on a restructuring before the latest drama, current financial market conditions will make it harder for it to emerge from the revamp in better shape.
Credit Suisse and First Republic must find ways to shore up investor confidence in a rapidly changing operating environment. Central banks are hiking interest rates – the European Central Bank raised its own by another 50 basis points Thursday – and higher rates change lenders’ operating calculus.
Until very recently, banks had been able to pay depositors next to nothing, then lend the deposits out at much higher rates. This spread, known as the net interest margin, is likely to shrink, especially at troubled lenders. In its funding announcement Thursday, First Republic disclosed that over the past week it had borrowed tens of billions of dollars from the Federal Reserve and the Federal Home Loan Bank at rates ranging from 4.75 per cent to 5.09 per cent.
First Republic currently pays 0.01 per cent in interest annually on its business chequing accounts. The Fed funding is much more expensive. The bank did not disclose what interest rate it will pay on the US$30-billion worth of deposits from rivals.
New data released from the Fed late Thursday showed a major jump in borrowing from the central bank over the past five days, as multiple lenders struggled with fleeing deposits and an uncertain market. The amount borrowed from the Fed through its regular line of credit jumped US$148-billion, to US$153-billion, in one week, and lenders also borrowed $US12-billion under the Fed’s newly created Bank Term Funding Program, which was set up on Sunday.
First Republic’s shares gained 10 per cent Thursday, clawing back some of their losses from the previous week, but then sank over 20 per cent in after-hours trading once details of the private sector rescue package were announced. Despite getting US$30-billion in deposits, First Republic also announced it will suspend its dividend, and it revealed plans to reduce its debt burden. Details on the latter are still to come.
Credit Suisse announced a similar measure early Thursday, saying it has plans to buy back US$2.5-billion worth of U.S.-dollar-denominated debt and another €500-million worth of euro-denominated debt.
The 11 financial institutions contributing uninsured deposits to First Republic include Goldman Sachs Group Inc. and Morgan Stanley, which pitched in US$2.5-billion each. PNC Financial Services Group Inc., Bank of New York Mellon Corp., Truist Financial Corp., U.S. Bancorp and State Street Corp. will each add in US$1-billion.
The banks said their contributions demonstrate their confidence in the U.S. banking system.
“The banking system has strong credit, plenty of liquidity, strong capital and strong profitability. Recent events did nothing to change this,” the group said in a joint statement. “Together, we are deploying our financial strength and liquidity into the larger system, where it is needed the most.”
In a joint statement by the U.S. Department of the Treasury, Federal Reserve Board Chair, Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, the agencies said the industry collaboration demonstrates the financial system’s stability.
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Chapter Two Brewing Company in Windsor is celebrating a milestone this weekend.
“Five years! We’re pretty pumped that we got this far and we’re still going strong,” said brewery co-owner and general manager, Cheryl Watson. “It’s good news, I mean, we’ve gone through a lot.”
From the impact of lockdowns during the pandemic to recent inflationary pressures and wage increases, Watson notes the cost of doing business has been steep.
And that anniversary celebration will clouded by a looming alcohol excise tax increase on all alcohol producers.
“I think everything is just, it’s been unpredictable for suppliers and buyers alike,” Watson said. “We have to look at and figure out what part of it you’re going to cover and what part of it you’re going to ask your customer to cover.”
That question will get harder on April 1 when the 6.3 per cent federal excise tax goes into effect on beer, wine and spirits producers.
Taxes already make up 50 per cent of the cost of beer, 65 per cent of the cost of wine and 75 per cent spirits, according to the Canadian Taxpayers Federation.
“The screws are tightening and we don’t have as many places to play anymore,” said Watson.
The increase on the table is triple the usual jump — a number tied directly to inflation — and has alcohol manufacturers wondering who is going to pick up the tab.
“You’re going to see probably a six to 10 per cent increase on the price of your beer,” said Shane Meloche, the owner of Frank Brewing Company in Windsor. He’s weathered the storm that is the past few years in the hospitality industry and doesn’t want to raise prices but worries this time, he may have no choice.
“We’re here to make money. We’ve got 20 to 30 people that work here. We need to stay in business,” Meloche said. “We want to keep everybody employed. So the only way to do that is to pass along that price to the consumer.”
Restaurants who sell alcohol will also feel the effects. A recent Restaurants Canada survey found about half of Canadian restaurants are operating just at or below profitability levels, noting the tax increase will cost Canada’s food-service industry about $750 million a year.
“Their profit margins are very slim. And then when you have a six per cent increase, it’s slimmer,” said Paul Boots, who along with business partner John Conlon launched Suds Runner just a few months back.
It’s a licensed manufacturing representative retailer for nine different Breweries in Ontario where customers can go online and order flights of beer from them that you can’t get at the LCBO or Beer Store — and they bring it to your door.
They started the venture to support local breweries and give their less popular brews more exposure for customers who can’t make it out to craft breweries as often as they’d like.
They hope the increase doesn’t crush their suppliers, customers, or them.
“It’s important, I think, for people to understand that if the price is going up a little bit, it’s not because they’re making more money,” said Conlon.
“They’re just trying to work, trying to make it work.”
Tumbling stocks dragged down other major banks across Europe, fuelling fears about a banking sector crisis.
Shares in Deutsche Bank have fallen sharply, dragging down other major European banks and reigniting fears about a widening banking sector crisis.
Germany’s biggest lender dropped more than 14 percent on the Frankfurt Stock Exchange in Friday morning trading before clawing back ground in the afternoon to trade 9.5 percent lower, at 8.43 euros ($9.07) a share.
Tumbling bank stocks dragged down markets across Europe on Friday with Germany’s Commerzbank down 7.5 percent, France’s Societe Generale off 5.9 percent and Austria’s Raiffaisen down 5.9 percent.
Deutsche Bank is one of 30 banks considered globally significant financial institutions, so international rules require it to hold higher levels of capital reserves because its failure could cause widespread losses.
The long-troubled bank has become the focus of investor concerns after the collapse of three regional US lenders and the Swiss government-brokered takeover of Credit Suisse by rival UBS triggered market turmoil this month.
The cost of insuring the bank’s debt against a risk of defaulting, known as credit default swaps, has surged as investors fret about the banking sector’s health.
Rising costs on insuring debt were a prelude to Credit Suisse‘s rescue by UBS. That hastily arranged takeover on Sunday and jitters about Credit Suisse’s long-running troubles led its shares to tank and customers to pull out their money.
Asked whether Deutsche Bank could be the next Credit Suisse, German Chancellor Olaf Scholz said, “There is no reason to be concerned.”
Scholz expressed confidence in Deutsche Bank, saying it had “modernised and organised the way it works. It’s a very profitable bank.”
Speaking in Brussels after a summit of EU leaders, he also said the European banking system was “stable” with strict rules and regulations.
Deutsche Bank said on Friday that it would redeem $1.5bn in tier 2 bonds early. Such a move is normally aimed at boosting confidence in a bank although its shares plunged regardless.
The bank was hit by a string of problems linked to its attempts before the 2008 global financial crisis to compete with Wall Street investment banking giants.
But it launched a major restructuring, which involved thousands of job cuts and a greater focus on Europe, and has returned to financial health. Last year, it booked its highest annual profit since 2007.
European officials said banks in the European Union’s regulatory system, which does not include Credit Suisse, are resilient and have no direct exposure to the failed California-based Silicon Valley Bank and little to Credit Suisse.
Efforts to strengthen banking regulation in recent years “puts us all in a position to say that European banking supervision and the financial system are robust and stable and that we have resilient capitalisation of European banks”, Scholz said.
European leaders, who played down any risk of a possible banking crisis at their summit on Friday, said the financial system is in good shape because they require broad adherence to tougher requirements to keep ready cash on hand to cover deposits.
International negotiators agreed to those rules after the 2008 financial crisis, triggered by the failure of US investment bank Lehman Brothers. US regulators exempted midsized banks, including Silicon Valley Bank, from those safeguards.
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Bar and eatery operators across Canada have endured lockdowns, labour shortages, supply chain mayhem and soaring costs for everything from payroll to cooking oil. Rising inflation has also softened demand as some consumers stay home to save money.
“Many of us haven’t recovered from the pandemic and now they want to raise this tax,” she said. “It’s hard to get blood out of a turnip. We’ll see more restaurant closures if this goes ahead.”
The federal beverage alcohol duty is set to increase 6.3 per cent on April 1.
While the duty is separate from provincial liquor board fees and sales taxes, it ultimately filters down to higher prices for consumers, said CJ Helie, the president of Beer Canada.
“It’s imposed at the point of production and paid by the manufacturer, which means it’s built into the price of the product and magnified as it goes through the supply chain from the distributor to the retailer,” he said.
The automatic annual tax increase is a long-standing irritant for the beverage industry, but was “digestible” when inflation was around two per cent, Helie said.
But this year’s adjustment is more than triple the usual increase and should be reconsidered given the state of the industry, he said.
Some brewers may try to absorb the higher cost by delaying investment plans like new hiring but he said there’s only so much they can do before passing the tax hike along.
“They’ll try to recoup what they can through the wholesale price but it could impact demand and end up costing them in lower sales volumes anyway,” Helie said.
Alcohol excise duty rates are adjusted by law on an annual basis to account for inflation, Adrienne Vaupshas, press secretary of Finance Minister Chrystia Freeland, said in an email.
The increase next month works out to less than a penny on a can of beer, she added.
But industry group Restaurants Canada said it will cost Canada’s food-service industry about $750 million a year, with the average casual dining restaurant expected to pay an extra $30,000 towards alcohol.
At the retail level, the impact may be more subtle. Though added on top of other price increases, consumers may notice higher prices.
The Liquor Control Board of Ontario said customers may experience a price increase on select products by the end of April if manufacturers pass along the federal excise tax increase.
A spokeswoman for the Nova Scotia Liquor Corp. said beverage alcohol prices are increasing by just over three per cent overall next month.
But these increases are due to a number of factors, including higher excise taxes and the rising cost of raw goods such as bottles, cans, barley, and labels, NSLC spokeswoman Allison Himmelman said in an email.
In British Columbia, a spokesperson for the BC Liquor Distribution Branch said it’s not possible to confirm what level of price increase consumers may or may not see.
“Each liquor supplier will decide whether or not to increase its wholesale price to account for the increase it must pay in excise duty,” Robin Fraser said in an email.
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“Then retailers will make the decision on whether to adjust the prices for consumers for those products,” Fraser said. “It is up to each retailer to determine if, and by how much, to raise its prices.”
Alcohol beverage prices rose 5.7 per cent in February compared with a year before, according to Statistics Canada.
While that’s only slightly higher than the overall inflation rate of 5.2 per cent last month, the tax hike in April along with other increases could see the alcohol inflation rate rise faster than general inflation later this spring.
“Our industry is struggling and we can’t absorb more increases,” said Olivier Bourbeau, vice-president of federal affairs with Restaurants Canada. “Restaurant margins are always thin but right now they’re around two to three per cent.”
This is in part because restaurants are absorbing some of the higher costs due to inflation, Bourbeau said.
Indeed, while grocery prices recorded a 10.6 per cent year-over-year increase in February, restaurant food prices only rose 7.7 per cent, Statistics Canada figures show.
Also, alcohol beverages purchased from stores rose 6.0 per cent in February, while alcoholic beverages served in licensed establishments increased only 4.3 per cent, the agency said.
“Restaurants can’t absorb any more price increases,” Bourbeau said. “But if they pass those costs to customers it could hurt their business.”
“At the end of the day, consumers will only pay so much before they start to cut back.”
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