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The bank levy is largely supported by the public, and according to the banks’ own estimates, is not going to cost that much. So is it time for the banks to move on?

Banks need to stop whinging and move on!

Paul Rickard
24 May 2017

By Paul Rickard

Australians don’t like whingers, and if you’re a bank, even less so! Their whinging over the new Bank levy needs to stop. They should recognise that they are doing more harm than good to their “cause”, and move on.

I say “cause” because they really don’t have one. The levy is supported by the public, it is not going to cost that much, and the major banks are the beneficiaries of implicit government support. There is a sound argument that Banks should pay for this.

Governments signalling out industries for specific taxes could be viewed as a dangerous precedent. Also dangerous is the precedent of a government taxing specific companies within the same industry on a different basis. And of course, once you have a tax in place, the temptation to increase the rate of tax becomes very strong.

While these are valid concerns, Governments of all political persuasions spend taxpayer dollars to support, foster and prop-up specific industries. They also prop up specific companies, particularly large employers. Look at the money splashed out on keeping Ford and General Motors Holden alive, or on steelmaker Arrium in SA or cannery SPC Ardmona. Size matters - the “too big to fail” mantra applies to many companies outside banking.

But “too big to fail” applies particularly to our major banks. This was rammed home on Monday when ratings agency S&P downgraded 23 Australian financial institutions including Bank of Queensland (BOQ) and Bendigo and Adelaide Bank. Citing “an increased risk of a sharp correction in property prices and, if that were to occur, a significant rise in credit losses”, S&P cut the rating of BOQ and Bendigo from A- to BBB+, some four notches below the major banks.

While the major banks also suffered a one notch downgrade on their stand-alone credit profile (SACP), S&P explicitly increased their “sovereign support” measure from two notches to three notches, meaning that the major banks were able to retain their AA- long term credit ratings. S&P said: ‘we are affirming our issuer credit ratings on the four major banks reflecting our expectation of likely timely financial support from the Australian government, if needed, which in our view offsets the deterioration in these banks SACPs”.

“Too big to fail” is now worth three notches for the major banks, according to S&P. This is a huge funding advantage for the major banks when accessing wholesale markets, which if translated into the cost of funds, is worth a lot more than the six basis points (0.06%) levy.

Why shouldn’t the major banks pay for the implicit government support?

The levy won’t cost that much  

According to the banks’ own estimates, the levy is not going to cost that much. Each bank has provided a pre-tax and post-tax estimate, assuming that none of the levy is passed onto customers. For Commonwealth Bank, the impact on after tax profits is around 2.4%. For NAB, the impact is around 3.7%, as the following table shows:

If dividends fall in line with the reduction in profits and payout ratios are maintained, then this would mean potential dividend cuts for shareholders of around 5c to 10c per share.

One bank implied that the full post tax cost could be applied to the dividend, conveniently forgetting to mention that banks don’t payout 100% of profits. Typically, Australian banks have a payout ratio around 75%.

A better strategy

Of course, the impact to profit and dividends assumes that none of the cost of the levy will be passed onto borrowers in the form of higher interest rates, to depositors in lower interest rates, and to other customers with higher fees. A most unlikely scenario.

But the louder the banks scream, the more Government feels compelled to involve the ACCC and other regulators to “monitor the banks behavior”, making it more difficult to pass on the costs.

A smarter strategy might have been to simply lick their wounds and move on.

The banks’ arguments don’t stack up 

Two banks have written open letters to their shareholders this week. They say its “poor public policy” or “bad public policy”, but don’t say why or provide any reasons. They don’t address the issue of the implicit government support.

One bank argues that the levy is “inefficient”, despite the fact that only five taxpayers are paying $6.2bn over four years and it can be assessed by a relatively straightforward calculation to the balance sheet. The banks also argue that foreign banks should pay. This point has merit, but just because someone else doesn’t pay doesn’t mean that you shouldn’t. At the end of the day, the foreign banks only provide limited competition to the majors in the Australian market.

Interestingly, Macquarie Bank, the fifth of the banks impacted by the levy, has chosen to keep absolutely quiet. 

Time to move on

The Government can’t back down on this, and the public doesn’t want them to. The banks’ arguments against the levy lack substance, and while they are entitled to feel a little aggrieved about the lack of consultation, it was never a realistic option for the Government to consult prior to the Budget night announcement.

The two banks who sent letters invited shareholders to share their perspective and how “we can represent you”. I am a shareholder in both banks, here is mine:  

“The community supports the bank levy. This is a fight that you can’t win.

Please focus on growing revenue, reducing your cost base and improving shareholder returns.

Time to move on”.

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