Canberra could slug banks with higher levy

ANZ and Commonwealth Bank’s move to fall in behind Westpac and raise home loan rates is not without its costs given the degree of scrutiny on the nation’s lenders from both sides of politics as well as the antitrust regulator.

CLSA banking analyst Brian Johnson says there is a genuine risk that Canberra will slug Australia's five biggest banks with a higher federal bank levy -  increasing the tax from 6 basis points to something a lot higher. 

Johnson reminded clients in a note that UK imposed a levy of 22 basis points on its banks compared with France’s 25 basis point levy and a US bank tax of 15 basis points.

Says Johnson: “Every 5-basis point increase in the levy cuts Australian bank earnings by between 2.2 per cent and 3.6 per cent and return on equity by between 0.34 per cent and 0.43 per cent.

To him the big risk is that levy will increase significantly - despite both the Labor party and the Liberals promising not to touch the bank tax.

Further, the analyst even argued a small hike in the levy  - from the existing 6 basis points to say, 7.2 basis points -  would knock out the benefits of the mortgage rate rise.

“Given the banking royal commission a looming Federal Election (before 18 May 2019), plunging polls for Government versus a surging opposition Labor Party with policies that don’t look bank-friendly, an increase in the bank levy looks increasingly likely,” he said.

Votes in bank bashing

These policies include removing negative gearing tax deduction on investment properties and the 50 per cent capital gains tax discount on investment property as well as the cash tax refunds on franking credits.

“There are votes to be had in bank-bashing,” he said.

Westpac, CBA and ANZ will increase mortgage rates by 0.14, 0.15 and 0.16 percentage points respectively.

With the entire industry, with the exception of National Australia Bank now having repriced everyone assumes that NAB will follow shortly with a similar level of repricing.

Although the banks have attributed the rate hike to basis risk, Johnson says the quantum looks like basis risk plus interest-only switching.

Given the current high level of scrutiny, most analysts did not think any of the Australian banks had sufficient pricing power to reprice up back-book home loan benchmark rates.

Specifically, banks have recently been increasingly discounting front book housing pricing given insipid system credit growth,” said Johnson.

Further, rising funding costs, return-on-equity for housing products is still well above Group return-on-equity and the cost of capital.

The analyst noted too that ANZ has a stated priority to grow housing share and is over-reliant on broker origination which could  shrink.

Holding up cash rate increases

For its part, CBA has been losing housing share and needs to restore business momentum and exploit its superior deposit franchise.

Further, rising funding costs, return-on-equity for housing products is still well above Group return-on-equity and the cost of capital.

Moreover, Johnson went on to say rising housing back book rates crimp the ability of the Reserve Bank of Australia to increase the official cash rate. 

"That’s bad for the Aussie dollar and repricing transfers discretionary consumption capacity in the economy from retailers to banks. 

“Further upwards repricing creates more stress for highly indebted households.”

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