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Category: Banking / Tax / Consumer Finance / Housing Industry / Housing

Who will bear the cost of the bank tax?

11:05 UTC+8 May 11, 2017 | Michael Janda

Opinion is divided over who will bear the costs of the Government's new bank tax, but it can only fall to some combination of shareholders, customers and bank staff.

The big four banks and Macquarie, those subject to the tax, and their lobby group, the Australian Bankers' Association, have already warned that customers will end up wearing the $1.6 billion bill, as institutions pass on the rise in their funding costs.

Historically, the big four banks have had the competitive power, due to their 80 per cent-plus mortgage market share, to do so.

However, leading banking analyst Brian Johnson has doubts that the banks will be able to pull this off again.

"The Government have flagged some fairly substantial increases in the powers and the monitoring of the Australian Competition and Consumer Commission (ACCC) and also APRA (the bank regulator) and it really remains to be seen how effective that is in basically stopping the banks passing this on," he told ABC News.

Ratings agency Moody's is of the view that the ACCC action will be effective, which would mean bank shareholders, or staff, rather than customers would wear the tax.

"The pricing inquiry to be conducted by the ACCC will likely constrain the banks' ability to undertake further rounds of mortgage loan re-pricing, resulting in them having to absorb most of the cost of the bank levy," Moody's analysts wrote.

Mr Johnson said the design of the tax will make it extremely hard for banks to pass on costs through increasing mortgage interest rates or cutting deposit rates.

"This is a very cleverly structured levy because specifically it is not a tax on lending, it's not a tax on household deposits, it's a tax on the stuff that is most liquid, which is basically wholesale funding," he added.

Wholesale funding is the money the banks raise on domestic and international markets, often from other large financial institutions, to fund their lending activities and meet certain regulatory requirements.

However, expert opinion on who will cover the cost of the tax is divided, with another top banking analyst, Jonathan Mott from UBS, still expecting the big banks to hit their customers.

"While we expect banks to pass much of this onto customers, Pandora's Box has been opened," wrote Mr Mott.

Although, he said that would come with a big risk.

"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)," he added.

Bank dividends could be cut by as much as 5 per cent

Assuming that the banks take the Treasurer's threats and ACCC inquiry seriously and do not pass the impost on to customers, Brian Johnson said shareholders will see their dividends under pressure.

"I believe that you get an earnings hit to the four major banks of something like 4-5 per cent, that's assuming that they couldn't pass any of it on," he said.

Ratings agency Moody's has estimated that the levy will reduce the affected banks' pre-tax profits by approximately 3.8 per cent, based on their latest full-year accounts.

That was certainly backed up by falling share prices on Tuesday, after news of the levy was leaked to the media on Monday night.

The Commonwealth Bank lost almost 4 per cent from its share price on budget day.

Moody's said the tax also comes at a difficult time for the big four banks.

"This levy comes at a time when bank earnings and profitability are already facing multiple headwinds from moderate credit growth,
low interest rates, strong price competition for new business, rising capital requirements and the potential for rising credit costs," the ratings agency wrote.

"The estimated levy of $1.6 billion is manageable in the context of the aggregate pre-tax profits of $41.9 billion for the affected banks."

Brian Johnson has echoed arguments by the Treasurer that such bank taxes are common practice in other parts of the world, and the bank analyst said Australia's big institutions are uniquely placed to easily afford the hit.

"The return-on-equity [a key measure of return on money invested] is somewhere between 11 to 15 per cent in a world where there 10-year bond rate is only about 2.7 per cent," he observed.

"In the stock market, these banks are so profitable that they actually trade at something like two times the book value [of the business].

"They also enjoy fairly substantial subsidisations, I would flag, from the public purse by way of the financial claims scheme - the deposit insurance - and also the committed liquidity facility."

Levy could be budget's most effective housing affordability measure

Former CBA boss David Murray predicted that mortgage interest rates could rise by between 12-25 per cent, with business groups, the banks and many analysts such as Mr Mott also warning of rate rises.

If they are right, it could place another handbrake on the previously booming property markets of south-eastern Australia.

Mr Mott goes as far as warning of the risk that a further rate rise could be the last straw that breaks the camel's back.

"If the 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," he wrote.

"While the implication on the 'animal spirits' in the housing market is difficult to predict, we see substantial risk to the Australian housing bubble."

The other bad news for mortgage borrowers is that, if big bank shareholders do end up wearing the cost of the tax, then Mr Johnson said there will be no competitive benefit to smaller institutions.

"The idea that you can have the banks basically take the pain of this and it still be pro-competitive I don't think is correct," he concluded.

 

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