The impact on regional and smaller banks from the government’s decision to whack a bank levy on the big four is not clear cut and while those banks can expect inflows, challenges remain around funding costs.
As outlined by a number of analysts last week, Morningstar is also of the view that the major banks will simply pass on the impost with mortgage rates to bear the brunt of future repricing – with interest rates on investor loans likely to be hardest hit.
And while Morningstar is confident in the major banks’ ability to pass on the tax, its head of Australian banking research, David Ellis, said repricing may not fully offset the levy and new business flows to foreign, regional, small and non-bank lenders could exceed expectations following the implementation of the bank levy.
However, any impact won’t be material.
“The government stated that it would level the playing field between the major banks and smaller competitors. [The levy] is a potentially a positive for the regional banks and smaller banks, but we do not expect the relative competitive positioning to change materially,” Ellis said in client note.
According to Ellis, the changes could lead to greater competition for retail deposits as the major banks increasingly target the levy-free under $250,000 segment, thereby raising the cost of funds for the smaller banks, which are more reliant on this source of funding.
“The smaller banks, including the no-moat-rated regional banks, are price-takers and will still be at a cost disadvantage to the major banks, as evidenced by their lower returns on equity,” he said.
Back to square one, Scott
His colleague, Peter Warnes, head of equities research at Morningstar, was a little more forthcoming with his analysis. Warnes took the Treasurer Scott Morrison to task over his warning to the banks against passing the levy to customers: “If they do, take your money somewhere else, take your money to a regional or smaller bank.”
Warnes said the comments illustrated that “he does not understand how the banking system works”.
“The total mortgage loans of the four major banks at 31 March was $1.28 trillion. If the outflow from the four major banks in a “take your money elsewhere” reaction was $300 billion in mortgage loans, the smaller banks would have to raise almost $30 billion in new equity to support an additional $270 billion in borrowings.” Warnes said.
He highlighted that the regional and smaller banks do not have the credit ratings of the four majors and would therefore find it difficult to source the funds and, “if they could, the cost would be meaningfully higher and would be reflected in the rate charged to the borrower”.
“The regional and smaller bank shareholders probably don’t have the pockets to fund such a meaningful increase in capital requirements. Back to square one Scott!” Warnes quipped.
Ultimately Ellis points to a “long and successful history of the major banks in their ability to cope with profit headwinds, particularly higher funding costs and he sees no difference this time, despite government threats of increased scrutiny on potential mortgage repricing".
“The major banks’ pricing power is alive and well and despite widespread media coverage on the contrary, the major banks are not on their proverbial knees. Collectively, the targeted banks will see little negative impact from customer migration to smaller competitors," he added.