Treasurer Scott Morrison delivers his post-Budget address in the Great Hall at Parliament House in Canberra on Wednesday 10 May 2017. fedpol Photo: Alex Ellinghausen If the Turnbull government’s primary aim in slugging the banks with a levy is to raise $6.2 billion over four years, then it may have miscalculated.
The new tax could fall well short of this amount, according to experts who have now digested Monday’s statements by the big banks on the impact to their profits.
This raises the spectre that the government could move to increase the tax down the track.
“The banks’ disclosures seem to confirm our view that a levy of 6 basis points would not raise enough to meet the government revenue-raising objective of at least $1.5 billion per annum. In fact, we believe the levy may only raise about $1 billion in its first full year. We therefore think the rate could be adjusted accordingly,” according to Morgan Stanley.
It is a view echoed by Deutsche Bank, which sent a note to clients on Tuesday saying the banks’ statements about the effect the tax would have on their profits “suggest that the aggregate amount to be collected by the government is likely to fall short of the $6.2 billion targeted in the budget over the four-year period, hence we see a risk that the 6 basis point levy could be lifted.”
The prospect that the government could lift the tax is what bank insiders are really sweating about and it creates a serious dilemma for the banks grappling with how to fight back against the new tax.
If the banks engage in all-out warfare against the government now, they risk an even bigger punitive response later.
For its part, the government has found comfort and support in the fact that the community is solidly supportive of hitting the banks up for part of the bill for budget repair.
The banks have little ammunition other than to warn Australians that, in the end, they will be slugged with the bill, primarily through increased interest rates, lower interest rates on deposits, or lower dividends – and lower dividends result in lower bank share prices.
The community is less moved by bank arguments that the government’s decision undermines the strength of the financial sector and therefore the nation.
Morgan Stanley reckons interest rates will go up by between 5 basis points for owner-occupier borrowers paying interest and principal, and 25 basis points for investors with interest-only loans.
Thus those borrowing to fund investment properties will receive a disproportionate slug to their financing costs, having already been hit with bigger borrowing rates over the past year.
Deutsche Bank agrees the repricing of various portfolios, on loans and/or deposits, may provide some offset, but notes that the Australian Competition and Consumer Commission’s monitoring will make this a little more difficult.
The government continues to warn it will look very unfavourably on banks that respond by passing the cost on to customers and seems less concerned about shrinking dividends.
(Westpac took the step of quantifying the impact to dividends, saying the tax would shrink dividends by 4.3 per cent).
The notion that banks will reduce costs is less likely because they have been taking costs out for years and there are probably limitations to how much further they can go.
Additionally, raising interest rates could perversely lead to additional risks if it reduces demand for new loans or, just as importantly, pushes some existing borrowers into financial stress and increases default rates on loan portfolios.
Even before factoring in the levy, bank profit growth is under pressure as the housing market is increasingly viewed as having peaked.
So who among the banks gets hit the hardest?
According to Morgan Stanley: “All else [being] equal, the levy equates to between ~2 per cent and ~3.5 per cent of our FY18E group profit forecasts, and we continue to believe that it will have the most earnings impact at ANZ and National Australia Bank,and the least impact at the Commonwealth Bank.”
Deutsche agrees that based on a percentage hit to profits, CBA will be the least affected, followed by Westpac, while NAB and ANZ will be hit hardest.
Bank shares continued to fall in Tuesday morning trading.