Banks are now a better buy than before the budget

When it comes to mounting a scare campaign, the big four banks’ CEOs and chairmen are more Casper the Friendly Ghost than Freddy Kruger, more Pooh Bear than Chucky.

Banks fail to scare

The Big Four banks did their best to scare shareholders over the new tax, but unlike mining companies, the banks don’t have a major political party on their side. Michael Pascoe comments.

Oh, they tried – brace yourself – they even wrote letters to shareholders! Yet the peasants show little sign of manning and womanning the barricades for two key reasons: nobody really believes the Big New Bank Tax won’t be substantially passed on; and banks are now a better buy than they were before the budget.

Westpac has identified itself as the bank that will pay the most for the levy, $370 million gross in the first year. But because the levy is a deduction, it will only cost the bank $260 million after tax.

In his letter to shareholders, chairman Lindsay Maxsted suggested the $260 million, if not passed on, would knock 8 cents off last year’s $1.88 annual dividend.

On the Monday before the budget, Westpac shares closed at $34.08. The $1.88 dividend represents a yield of 5.5 per cent, before adding franking credits.

Westpac shares finished at $30.77 on Tuesday as the market overreacted. If the dividend is cut to $1.80, that would be a yield of 5.8 per cent.

Add on the franking credits, and it’s the pre-tax equivalent of a fat 8.2 per cent with the potential upside of the dividend being better than $1.80 when at least some of the levy is passed on to borrowers.

If the bank ends up splitting the cost between shareholders and customers 50/50, a $1.84 dividend on Tuesday’s close would mean a yield of 6 per cent, with franking credits, a pre-tax yield of better than 8.4 per cent. Sweet.

And then there’s ratings agency Standard & Poors adding cream to the pudding by cutting the credit ratings of the smaller banks and credit unions, thus improving the big banks’ competitive position when borrowing.

(The S&P move is a little removed from the real world as the increased gap between the large and small regulated deposit-takers is based on the idea that the Australian government would regard the Big Four and Macquarie as too big to fail. In reality, all our deposit-taking banks, credit unions and building societies are too big for the government to allow them to fail.)

The end result is that instead of scaring the Pascoe Family Super Fund, Lindsay Maxsted and his peers convinced us to buy some more bank shares.


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