Analysts expect the major banks to push back hard on the bank levy announced yesterday by the South Australian government.
SA treasurer Tom Koutsantonis announced the levy in yesterday’s state budget, which will be applied in the same way as the federal government’s levy announced in May.
The levy will be set at 6 basis points of applicable liabilities for the big banks and Macquarie. The SA government will recoup a proportionate amount in line with its share of national GDP, which is around 6%.
UBS analysts Jonathon Mott and Rachel Bentvelzen said that the measure is expected to raise additional revenue of $97 million for the SA government next financial year.
They said that the latest levy is likely to provoke another strong response from the banks, given that it comes just six weeks after the introduction of the federal government levy and increases the risk that other states may follow suit.
“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 12-18 months away further increases in the Federal Bank Levy cannot be ruled out, especially if the Australian Budget remains under pressure,” they said.
It’s consistent with a theme raised by Mott and Bentvelzen in May, when they noted that the federal government’s levy was open-ended in scope and had the potential to give rise to a “Pandora’s Box” of additional measures.
While the impact of the SA levy on the banks’ bottom line will be minimal, an additional levy is unlikely to help sentiment given recent price falls relative to earnings:
Deutsche Bank analysts Andrew Triggs and Anthony Hoo expressed a similar view, questioning the merits of the tax in a note titled: “South Australia’s turn for a bank tax… where does it end?”
The South Australian levy “is a left-field and in our view unjustified move which will do immaterial harm to the banks’ profits but further dents already fragile sentiment and raises the threat of increased political risk,” they said.
Mott and Bentelzen said that banks would probably start by questioning the legality of a state levy. They also outlined a series of responses that the banks could take, most of which leverage their position of market power to enforce restrictions which could damage the South Australian economy.
That includes the prospect that banks may increase interest rates on new loans and mortgages specific to South Australia, while Westpac — which owns BankSA — could reprice its current loan book.
The UBS analysts also said that the banks could also threaten to move processing and call centres out of South Australia, thus reducing employment in a state which already has the highest unemployment rate in the country.
Yet another option would be to limit South Australia’s access to credit markets, which would act as a further headwind to the state’s growth prospects.
Deutsche’s Triggs and Hoo said repricing mortgages and business loans in South Australia is now an option for the banks, and doing so would be “relatively easy to implement”.
They noted that the draft legislation introduced blocks the ability of the banks to create extra fees that would offset the effect of the levy, “however presumably this does not preclude the banks from changing their interest rates on loans and deposits”.
Mott and Bentvelzen said that they remain cautious about the outlook for the big banks, with no key driver to push share prices higher in the face of multiple headwinds from government levies, a housing market which is starting to cool, and new macro-prudential measures being introduced to decrease risk.
They said that the recent price falls for Aussie banks meant that prices no longer looked extreme, but based of current valuation ratios they still weren’t cheap.
“Although South Australia’s levy of $97 million across the Majors and Macquarie is insignificant, it is an outcome many investors had feared,” they said.
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