UBS has outlined some options for how the big banks can respond to the budget's new $6.2 billion levy

Photo: Getty/ Julian Finney

Australia’s five biggest banks have three possible ways to respond to the federal government’s $6.2 billion levy, according to UBS.

In a research note today, UBS analysts Jonathon Mott and Rachel Bentvelzen outlined options ranging from confrontational to agreeable.

Last week, the two analysts said that the levy had opened a “Pandora’s Box” that created uncertainty about how the government could use the levy to raise revenue from the banks in future years.

The fact that it is open-ended is a prevailing concern that isn’t fully solved by any of the response options open to the banks.

The pair suggest that the first option is to get on the front foot and pass the levy on to customers.

Mott and Bentvelzen said the banks could target “Investment Property borrowers and Foreigners, the two groups who are regularly accused of causing the Australian Housing Bubble and ‘affordability crisis'”.

The two analysts propose a 40 basis point increase in the rate on investor loans, which would be partially off-set by discounts on current loan rates for first-home buyers.

Raising interest rates on investors would also allow them to claim larger negative gearing tax reimbursements, for which the government would share the cost.

Such a strategy isn’t without its risks though. Mott and Bentvelzen said that it could “antagonise” the government and raised the possibility of a future Royal Commission.

In a worse case scenario, the banks risk “popping the Australian Housing Bubble if ‘animal spirits’ turn”.

Turning to a less abrasive strategy dubbed “share the pain”, they said that the banks could reprice the liabilities affected by the levy and off-set the falls against cost-cutting measures — reducing staff and cutting bonuses, while passing some of costs onto shareholders in the form of lower dividends.

While viewing this strategy as the base case for the market, they said that it still left “Pandora’s Box” open.

The third and final option would be to “roll over” and accept the levy. The banks would benefit from some (rare) good PR, and direct their energies to long term cost-reduction strategies.

The pair noted, however, that adopting such a conciliatory strategy may encourage the government to return to similar budget-repair measures in the future.

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