South Australia bank tax ‘opens Pandora’s Box’: UBS

South Australia’s decision to introduce a state-based bank levy on the Big Four banks and Macquarie Group means “Pandora’s Box is officially open” and other states are likely to follow, banking analysts say. 

The introduction of the levy, which comes just a month after the federal government introduced a 6 basis point levy on the same five banks, has been slammed by Commonwealth Bank, Westpac, ANZ and NAB, with ANZ chief Shayne Elliott describing it as an”opportunistic and ill-considered cash grabs”.

But UBS analyst Jonathan Mott said the banks are likely to face higher taxes across the banking sector and said the South Australian levy was “an outcome many investors had feared”.

“As suspected the recent announcement of the Federal Bank Levy has already led to higher taxes on the banks. This is consistent with experiences overseas, such as in UK where the bank levy was raised on nine occasions,” Mr Mott said.

“We believe it is possible the other states may follow SA’s lead and introduce further levies on the banks.

Additionally, with the Federal election 12 to 18 months away further increases in the Federal Bank Levy cannot be ruled out, especially if the Australian Budget remains under pressure.”

Morgan Stanley analyst Richard Wiles said the South Australian levy will save 0.2 per cent off the banks’ earnings but the hit could be bigger if other states were to follow. 

“Hypothetically, if other states adopted a similar policy, we estimate an impact of around 0.5 per cent apiece for Western Australia and Queensland and closer to about 1 per cent apiece for Victoria and New South Wales,” he said in a note to clients. 

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“We’d say the states with stronger fiscal positions are less likely to adopt this policy.”

Macquarie analysts agreed the hit to the banks would be small, but said the Federal Government’s 6 basis point levy could be effectively doubled if all states followed South Australia.

The analysts also said the South Australian levy was more proof that the political environment is “as an ongoing drag on sentiment for Australian banks and the market. This uncertainty is likely to result in share-price pressures and higher cost of capital for Australian corporates.”

Shares in ANZ have fallen 9 per cent so far this year, while Westpac is down 7.2 per cent, NAB has fallen 4.3 per cent and CBA is down 0.9 per cent. 

But Mr Mott said the outlook for the stocks was negative. 

“The Australian banks remain strong, profitable, well run organisations, with the recent share price pullback removing much of the extreme valuation stretch. However, on 13.2 times price to earnings and 1.8 times book value the banking sector is not cheap.

“We remain cautious on the outlook for the banks given the myriad of headwinds. We struggle to see what will drive bank share prices sustainably higher.”

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