Bank levy: will repricing incur government wrath?

The new $6.2 billion levy on the banks has opened a 'Pandora’s box' as if the banks respond with a rate hike, Canberra might raise the tax even higher.

“Bank repricing could easily earn the wrath of the Government who may react by increasing the Bank Levy rate - the UK Bank Levy was hiked 9 times,” UBS analyst Jon Mott warned clients. “Future governments could also raise the bank levy as an easy source of revenue to fund spending, tax cuts or the deficit, especially as none of the political parties oppose this policy.”

While the big four bank heads were quick to condemn the surprise tax revealed in the May Budget handed down Tuesday, National Australia Bank chief executive Andrew Thorburn warned that other industries are in the firing line.

"I think this is one of the consequences," he said during a radio inerview. "You wake up and all of a sudden there's a big tax slammed on the banks which shareholders and customers pay for.

"Who is next? This is the point that there's going to be other companies, listed companies, who are profitable. Is it miners, is it retailers – who is it going to be? Anybody who's profitable could be in line for a random tax. And once again, that tax will be paid for by people who are their shareholders and their customers."

Sharing the pain

Mott sees significant risk from the bank levy as it will wipe 5 per cent from the major bank’s bottom line earnings.

While he expects banks to pass much of this onto customers, he predicted that, if banks reprice their mortgage books, this would put further pressure on household cash flows which are already suffering from near record low income growth, higher mortgage payments (as they revert to principal and Interest from Interest-only loans and absorb recent repricing) and higher power bills.

Ratings agency Moody’s has also warned that the Australian banking sector faces “headwinds” following the announcement of the new levy and argued that, while the levy may be “manageable”, the banks' bottom lines are weakening at a time when growth is already constrained.

“The introduction of a residential mortgage pricing inquiry means banks may not be able to pass the additional costs of this levy to bank customers,” the ratings agency said.

Moordy's argued that this a challenge to the traditionally-very-strong pricing power enjoyed by major Australian banks. Referring to the first-half bank results, Mott said 'subdued' was the most commonly used adjective through the reporting season with little to get excited about. 

“Following a period of anticipation given mortgage repricing, the banks' results were a bit of a fizzer. While the implication on the 'animal spirits' in the housing market is difficult to predict, we see substantial risk to the Australian housing bubble.”

Revenue falls

In a client note, he recapped why the reporting season was so disappointing. All three of the major banks that reported in May - ANZ, Westpac and NAB - saw revenue fall if trading sales are excluded.

“If we back out ANZ's property sales, revenue fell 2.8 per cent; NAB was down 0.2 per cent; and Westpac was down 0.1 per cent,” Mott wrote. “Only Commonwealth Bank delivered a good number at 3.4 per cent, excluding the Visa shares sale, but revenue slowed sharply in the third quarter for the three months to March.”

Expenses were the highlight, up 0.5 per cent, despite a seasonal jump at NAB, and debt charges came down to 18 basis points from 21 basis points with the biggest fall at ANZ.

Cash earnings grew 3.6 per cent and Return-on-Equity was 14.2 per cent - up from 13.9 per cent - mainly due to stronger trading revenue.

Common equity tier one capital rose 40 basis points to 9.9 per cent as banks ran down unused facilities and optimised models.

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