Leading bank analysts say customers will bear at least some cost from the bank levy, fulfilling a stated aim of the policy to improve competition among the banks but ensuring they risk the wrath of the Treasurer for doing so.
Treasurer Scott Morrison said in a speech on Tuesday that the bank levy would help deliver a “more level playing field” but also said that the levy was not “an excuse to increase costs for their customers”.
The Treasurer then reiterated his budget night promise that the ACCC will be directed to investigate residential mortgage pricing among the big banks and ensure that the levy is not passed onto customers.
The competing aims place the banks in an awkward position, but the vast majority of analysis since the release of the bank levy draft legislation have looked past the posturing and simply assumed that at least some of the costs will be passed on no matter what the Treasurer says.
Veteran Citi banking analyst Craig Williams explained the pressures at play in a note to clients released late on Wednesday. While the banks have massive multi-billion profits, their dividend payout ratios are also approaching uncomfortable levels. At the same time, the ability of the banks to generate profits is being crimped by the regulator’s demands to slow down lending to investors and stop making as many interest-only loans.
“Following the introduction of the bank levy, we are expecting the major banks to implement 10 basis points of mortgage repricing across all mortgage products to attempt to offset the profitability impact,” Mr Williams said.
Mr Williams said directives from APRA to increase bank capital levels, combined with the two rounds of macro-prudential intervention, left the banks with nowhere to go. The smaller banks have emerged as price leaders in mortgages and the levy would simply serve to put the big four banks and Macquarie further behind the eight ball.
“The combination of government and regulatory intervention is likely to intensify competition in an already competitive market,” Mr Williams said, describing the act of rasing mortgage rates as being like a tonic or a well that the banks kept returning to with diminishing returns.
With analysts already concerned about the outlook for the sector following a subdued round of interim results, the levy has only heightened concerns about profitability.
UBS downgrades earnings
Leading bank analyst Jonathan Mott from UBS has downgraded his earnings forecasts for the banks twice during this period.
Late Wednesday, he unleashed his second downgrade, saying the impact of the levy would be split between stakeholders including customers, that same group the Treasurer has explicitly warned the banks not to touch.
“We expect around half of this levy to be passed through to stakeholders including: customers (repricing), suppliers (lower mortgage broker commissions are an obvious starting point) and staff,” Mr Mott said.
Mr Mott said the hit to net profit would be between 1 and 2 per cent across the big four banks and that dividends would remain unchanged. He left his forecasts for Macquarie unchanged, saying the levy would be largely absorbed by lower staff salaries.
Credit Suisse analyst Jarrod Martin had a slightly different take on how the levy could stoke competition with an eye on deposits. His view was that the big four and Macquarie might begin competing fiercely again for deposits, reducing the amount of liabilities on thier books subject to the bank levy.
Regional bank impact
This could however have unintended consequences for the regional banks.
“For regional banks, this would be a marginal negative, as they derive a greater share of their funding through household deposits. The regional banks could offset this cost through increasing their share of corporate deposits (due to enhanced comparative position compared to majors),” Mr Martin said.
Progressive think tank The Australia Institute however has said that the levy will only have minimal impact on the average Australian. It said returns from the average super fund would be lower by 60c a month, or $7 a year, and that home loan customers would be a maximum of $6000 worse off if they chose the most expensive provider.