The government’s decision to impose a levy on the big four banks and Macquarie caught markets by surprise yesterday.
We’ve rounded up commentary from Australia’s leading investment banks with their initial thoughts on how the move will affect bank profitability.
Deutsche Bank described the levy on the big banks as “unusually harsh” and said that it would have a material impact on cash earnings, with ANZ hit the hardest. Analysts Andrew Triggs and Anthony Hoo wrote:
Our first estimate of the bank levy impact is a ~3%-6% reduction in cash earnings of the impacted banks, assuming no tax deductibility of the levy. We have made some simplifying assumptions, including that ~52% of Australian deposits of the major banks are covered by the Financial Claims Scheme (there are $850bn of system deposits covered by the FCS vs ~$1.8trn of system deposits ex CDs).
Given ANZ has a relatively large balance sheet but has more foreign deposits and is less profitable, we think it will be impacted the most.
The bank provided a table showing the estimated impact on the big four banks and Macquarie:
“The A$6.2 bn to be raised by the levy over the next 4 years represents 4.1% of the banks’ earnings that are impacted by the levy,” Goldman Sachs analysts Andrew Lyons and Anthony Hoo said. “However, the Budget Papers suggest this number will be netted against interactions with other taxes (i.e. corporate income tax) and subsequently notes that the levy will increase tax receipts by A$5.5 bn over the next four years, which amounts to 3.6% of earnings.”
“The Government has also announced that the Australian Competition and Consumer (ACCC) will undertake a residential mortgage pricing inquiry until 30 June 2018. We think this will largely nullify any chance the banks have to offset the impact of the levy via mortgage repricing.”
The Treasury highlighted an increase in budget revenues for the year ahead much of which will be financed by a raid on the banks.
A new levy is set raise around $1.6 billion a year and will be paid for the big four banks and Macquarie Group.
Before any offsets, this should mean an average 5% hit to earnings.
“The new levy is so big, it is also expected to weigh on ASX 200 profits,” analysts Hasan Tevfik and Peter Liu wrote in a note to clients.
“By itself the levy will reduce the profits base for our market by 1% to 2%. Tax cuts and cost cuts will help fill the void here, in time, but it is not what a fledgling earnings expansion needs.”
The analysts say the budget was the perfect opportunity for the government to show much needed economic leadership and lift the economy out its post-financial crisis, post-mining boom morass.
“It was missed,” they write.
“The cost of debt for Australia lingers around generational lows but the government refuses to use it to finance the heavy lifting our economy needs. Fiscal policy in Australia is set to tighten with the budget deficit forecast to shrink from 2.1% of GDP this year to 1.6% in 2018.
“We believe the dreary combination of sub-trend GDP growth, above-trend unemployment and near stagnant wage inflation require bigger deficits in the near term, not smaller.”
MS analysts said that the government’s decision to raise funding from the banks would materially affect share market returns, and advised clients to move out of bank holdings.
“This Budget is valuation-negative for the largest sector in Banks, and will only gradually work to turn earnings in the real economy. Our Banks analysts estimate that the proposed bank levy would reduce major bank earnings by ~4.5% before any repricing, which would strip about 1.6 percentage points off ASX 200 earnings per share. As a result, we expect downside risk to build for ASX 200 index returns from here, and recommend positioning in Non-Bank Financials, global-Earners, healthcare and materials.”
The bank levy “will take 4-5% off the major’s earnings”, analysts from Macquarie Wealth Management said.
“Furthermore, the Treasurer introduced an ACCC residential mortgage pricing inquiry, suggesting that there will be more scrutiny around mortgage repricing and further initiatives will be more difficult to implement,” the bank said.
Macquarie said the bank levy will reduce capital levels by around $1 billion for each of the big banks over the next three years, which will put extra pressure on capital levels as banks struggle to meet more stringent capital requirements from APRA.
“We have been increasingly cautious on the sector in recent months given subdued earnings outlook and full multiples. Today’s announcement puts further pressure on bank earnings outlook,” Macquarie said. The bank issued downgrades on CBA, NAB and Westpac and revised their order of preference to ANZ, Westpac, NAB and then CBA.
This chart shows Macquarie’s estimates of the bank levy’s impact on the big four bank’s full year cash earnings:
The bank levy “equates to around 5% of the combined Group profits,” of CBA, ANZ, NAB, Westpac and Macquarie. Citi analysts led by Craig Willaims said. “Measures to offset this may be asset or liability price adjustments but an intended review into competition in the banking system will make the task of recovering the cost of this levy incrementally more challenging. “
“Most of these are likely to have a negative impact upon profitability and the competitive position of the 5 largest banks. We reiterate our SELL recommendations on NAB, WBC, CBA and Macquarie but retain our NEUTRAL recommendation on ANZ, believing that most large bank share prices underestimate the extent of industry growth and profitability challenges. By contrast, we think Buy-rated BOQ should be a beneficiary. “
“After what can only be described as a qualitatively disappointing March 2017 reporting season, the release of the 2017-2018 Budget brings some pretty sobering news for the four Australian major banks plus MQG,” CLSA analysts Brian Johnson and Ed Henning said. “The imposition of a 6 basis point liability levy from July 2017 would prima facie appear to trim ANZ/CBA/NAB/WBC earnings by 3% to 5% and Macquarie by ~2.5% .”
“While the banks could yet attempt to wind back this levy, as was done to the previous mining tax, it is unlikely they would enjoy much public or political support.”