UBS just cut the 2017 earnings estimate for Australia's big four banks

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UBS cut the 2017 earnings estimate for the four major Australian banks by up to 0.7% and slashed the following two years profit forecast by as much 1.7% to account for the hit from the bank tax.

While the levy introduced in the federal budget this month will slice 3% off pre-tax profits, UBS analysts led by Jonathan Mott estimate the drag on earnings, as the table below suggests, to be lower as the lenders will pass on part of the levy to customers, mortgage brokers and staff.

Federal treasurer Scott Morrison this month unveiled a six-basis point charge on the big banks’ liabilities aimed at raising $6.2 billion over four years. The tax starts from July 1 and will only affect lenders with assessed liabilities of $100 billion.

While the earnings downgrade by UBS is small, the analysts said the risk to earnings looms large for the following four reasons.

  • Higher capital requirements expected over the next month to meet global rules
  • Lower credit growth from the lending curbs and correction in house prices
  • Potentially higher bad debt charges given the fall in consumer confidence
  • Potential changes to the Bank Levy if it raises less than Treasury estimates or if the Budget remains under pressure.

While the correction in bank stocks this month has wiped out the “extreme valuation stretch”, the banks — ANZ, CBA, NAB and Westpac– aren’t cheap and given the hurdles, there’s little reason for bank shares to move higher, the analysts said.

The banks are trading at 13.1 times forward earnings and 1.8 times their book value, according to UBS.

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