The Treasurer's proposed bank levy will fail to raise the money needed to meet the government's revenue-raising goal of at least $1.5 billion per year - with estimates suggesting it will bring in $1 billion in its first full year - making it likely that the the rate will be lifted.
“We assume that the levy will ultimately be raised to meet the government's revenue objectives, but that loan and deposit re-pricing will partly offset it,” said Morgan Stanley’s banking analyst Richard Wiles.
The four major banks have disclosed their estimates of the impact of the bank levy, which equates to between 2 per cent and 3.5 per cent of 2018 profit forecasts, with ANZ and National Australia Bank seeing the biggest earnings impact, according to Wiles.
On his numbers, the Commonwealth Bank's earnings will be the least hurt by the new tax. In a note to clients, Wiles said the banks’ disclosures confirmed the impact of the levy on the big four banks will be slightly lower than many were expecting.
CBA has estimated that the levy will amount to $220 million after tax. ANZ is looking at an post-tax hit of $240 million, Westpac $260 million while NAB claimed a $245 million impact.
On Wiles’ analysis, ANZ’s tax bill looks like being $110 million lower than expected. CBA’s earnings look to be cut by about $90 million, NAB by $40 million and Westpac by 10 million.
“While the levy equates to between 2 per cent and 3.5 per cent of 2018 profit forecasts, we think the earnings impact will depend on whether the levy is adjusted to meet budget targets, the amount of re-pricing and the nature and size of unintended consequences.”
The analyst also confirmed what the market has suspected ever since the budget was handed down a fortnight ago – that the 6-basis point tax would raise only $1 billion in its first full year.
“We therefore think the rate could be adjusted accordingly," Wiles said.
While none of the banks have stated in detail how they will respond to the levy, the analyst thinks it is inevitable some of the cost will be passed on to customers.
“In practice, we think the majors will continue to use differentiated home loan re-pricing, and we've assumed a range of 5 basis points on owner-occupied and principle-and-interest loans to 25 basis points on investor property loans with NAB and Westpac receiving the largest benefit due to the mix of their Australian housing loan portfolios.”
Wiles is very clear that the risk of unintended consequences is high especially since the levy is being introduced at a time when the banks' growth prospects and profitability are under pressure.
“This could exacerbate the risk of unintended consequences, which include: slower housing loan growth due to more re-pricing and more pressure on household finances with a flow-on impact for non-housing loss rates," he said.
Wiles also worries about incentives to reduce liquidity buffers to minimise the levy; inducements to shorten the duration of funding to offset the levy; incentives to reduce non-exempt liabilities - which could weigh on access to credit for business and institutional customers; and increased risk of further regulation, which could impact the outlook for bank profitability and demand for the banks' debt.
Last week he downgraded 2018 and 2019 forecasts by an average of 2 per cent.