Australia’s biggest banks fell for a second day in Sydney trading on concern earnings will be hit after the government slapped them with a A$6.2 billion ($4.6 billion) levy.

The government will raise the money from the nation’s five largest banks over the next four years by imposing a 6 basis-points levy on liabilities over A$100 billion, Treasurer Scott Morrison said in the budget released Tuesday in Canberra. It won’t apply to superannuation funds or insurance companies.

The levy will reduce fiscal 2018 earnings at the five banks -- Australia & New Zealand Banking Group Ltd., Commonwealth Bank of Australia, Macquarie Group Ltd., National Australia Bank Ltd. and Westpac Banking Corp. -- by 4 percent to 5 percent, according to Morgan Stanley analysts.

The changes “are likely to have a negative impact upon profitability and the competitive position of the five largest banks,” Citigroup Inc. analysts led by Craig Williams wrote in a note to clients. Citi reiterated its sell recommendation on Commonwealth Bank, Macquarie, National Australia and Westpac.

Bank shares extended declines, having slumped Tuesday when news of the levy leaked.

Commonwealth Bank declined 1.5 percent at 10:27 a.m. in Sydney, after yesterday falling the most in 15 months. Westpac dropped 1.9 percent, ANZ Bank shares fell 1.1 percent and National Australia slid 1.4 percent. Macquarie shares fell 1.9 percent.

The tax will force banks to either take a blow to their profitability or pass the charges on to customers in the form of lower deposit rates and higher borrowing costs. Prime Minister Malcolm Turnbull said the banks can afford the impost and shouldn’t pass it on to borrowers.

Fair Contribution

“They are the most profitable banks in the world,” Turnbull told Australian Broadcasting Corp. radio on Wednesday, admitting the lenders may pass the cost of the levies on to their shareholders. “They can absolutely afford this and it is fair that they make this contribution to bring the budget back to surplus.”

The move would bring Australia into line with levies imposed in Europe, including the U.K., Germany and Sweden, a Treasury official said. Australia’s major banks have total liabilities of A$3.3 trillion, almost double the annual size of the economy, according to government figures.

The Australian Bankers’ Association slammed the tax, and blasted the government for failing to consult lenders before announcing the plan.

“This new tax is not a well thought out policy response to a public interest issue, it is a political tax grab to cover a budget black hole,” the association’s Chief Executive Officer Anna Bligh said in a statement late Tuesday. “It is naive and misguided and has already sent the wrong signals to global financial markets about the strength and stability of our banking sector.”

The levy is “so big” it could drag down earnings for the benchmark S&P/ASX 200 Index by 1 percent to 2 percent, Credit Suisse Group AG analysts said.

“It is not what a fledgling earnings expansion needs,” Credit Suisse analysts led by Hasan Tevfik wrote in a note.

Voter Anger

The move from the traditionally business-friendly coalition aims to appeal to indebted voters’ anger at banks, which have failed to pass on interest-rate cuts in full even as they posted record profits. The harsher stance from the prime minister -- himself a former Goldman Sachs Group Inc. investment banker -- comes just months after he started to force banking executives to front parliamentary inquiries about their behavior following a series of scandals.

In other measures aimed at the banks, the government announced:

Penalties of up to A$200 million for hiding misconduct

A complaints tribunal with binding rulings will be set up for disgruntled customers

Senior executives who fail to properly register face disqualification and loss of bonuses

A portion of executive bonuses, including CEOs, to be deferred for at least four years

The regulator will be given more oversight on pay

The levy and increased cost of the scrutiny may exacerbate a slowdown in profit growth, with the big banks all recently reporting a decline in interest margins.

Mortgage Hit

“The budget proposals add to emerging headwinds and signal the start of another earnings downgrade cycle,” Morgan Stanley analysts said in a note. “In our view, they will try to offset the impact of the levy via lower rates on deposits and/or higher rates on mortgages.”

The four major banks would need to raise standard mortgage rates by about 20 basis points to offset the earnings impact of the levy, Morgan Stanley said.

The charge will apply to liabilities including corporate bonds, commercial paper, certificates of deposit and Tier-2 capital instruments, and be levied on the proportion of individual customer’s deposits in excess of A$250,000. It will not apply to additional Tier-1 capital.

Source:
courtesy of BLOOMBERG

by Jason Scott

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