Budget 2017: bank levy a potential 4pc hit to big five profits, dividends

Glenn Freeman | 10/05/2017

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Glenn Freeman: I'm Glenn Freeman for Morningstar, and I'm joined here by David Ellis, our senior banking analyst, to discuss Budget 2017 and the potential implications for Australia's banking sector.

David, thanks for your time today.

David Ellis: It's a pleasure, Glenn.

Freeman: Just first up, what does this mean for the banks in terms of, we've heard this new levy that is going to be introduced as a part of the Budget, what sort of impact will it have for the bank, for its customers, for its shareholders and to the overall value of these institutions?

Ellis: Sure. Well, I was very disappointed with the announcement. It was a surprise, a 0.06 per cent levy on bank deposit balances. If the banks are unable to recoup the additional levy, it would have an approximate 4 per cent to 5 per cent negative impact on profits, and following that would be similar sort of decrease on dividends.

However, and this is a big however, I think the major banks will exercise their pricing power, as they have over many years and they will either fully or partially recoup this additional impost and unfortunately, for bank customers, particularly, residential borrowers, the banks will likely, over time, increase mortgage rates.

I'd probably also see that investor mortgage rates would probably be increased more than owner-occupied rates. But overall, it's not positive. It is a surprise. I'm disappointed in it. It's cumbersome and it's a costly--I expect--it will be a costly tax to administer. And in this day and age of improving productivity and simplification and business efficiency, this is really a backward step for the banks.

Freeman: And David, would it actually affect each of these four banks equally and what of the likes of Macquarie Bank and also, the community banks, the likes of Bendigo and Adelaide Bank?

Ellis: Sure. Well, this proposed bank levy is only on the five biggest banks, so the four major banks, plus Macquarie Group. It doesn't apply to banks with liabilities less than $100 billion. So, the regional banks, the smaller banks, the community banks, are all excluded from this proposed levy.

Freeman: And what are the, sort of, potential flow-on effects for other parts of the financial services sector, so for the likes of Suncorp, for some of the other institutions?

Ellis: Well, theoretically, this is a positive for the non-major banks, so the regional banks and smaller banks.

If as I expect the major banks increase pricing on home loans and reduce interest rates on deposits, in theory, it should lead to greater flows, business flows, to the regional banks and smaller banks. So, it is a mild positive for those institutions. But we'll have to wait and see. I mean, the major banks have dealt with these types of regulatory headwinds for many years and still retained significant market share in the Australian financial services industry.

Freeman: And just lastly, are there any other potential flow-on effects that could be material for the banks from this budget? So, we've seen this other – the banking Executive Accountability order that's been proposed?

Ellis: Well, there's a couple of things. One, there was an announcement that the ACCC will be mandated to take a more active role in investigating the major banks for price increases in the mortgages over the next 12 months or so. So, that's a big uncertainty and I'm not sure how that's going to unfold. But it will put pressure on the major banks increasing pricing.

The second one was the announcement of a productivity commission reviewing to the competition within the banking industry and particularly, the relationship between--with the major banks' wealth businesses. So, that could also have some negative consequences or impacts for the banks.

And as you mentioned, there were further changes in the Budget announced for senior executives of the banks and that will have to be carefully managed by the banks, because the panel is significant for executives going forward. These are sort of the three key ones in addition to the bank levy.

There were a number of other changes relating to superannuation, but I don't think, really they have a material impact or they're likely to have any material impact on bank profitability and dividends going forward.

Freeman: Great. Thank you very much for your time today, David.

David Ellis: It's a pleasure, Glenn.

Freeman: I'm Glenn Freeman for Morningstar. Thanks for watching.

This report appeared on www.morningstar.com.au 2017 Morningstar Australasia Pty Limited

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