Investment bank UBS thinks the federal government’s bank levy poses a serious threat to house prices.
In a research note this morning, analysts Jonathon Mott and Rachel Bentvelzen also took a negative view of the big Aussie banks, and were unimpressed by the profit figures in the latest reporting season.
“While the implication on the ‘animal spirits’ in the housing market is difficult to predict, we see substantial risk to the Australian Housing Bubble,” they said.
Mott and Bentvelzen estimate that the proposed levy will raise around $1.55 billion per year, or around 5% of the big banks’ net profit after tax.
In view of that, they expect that the big banks will try to pass the costs on to customers.
“If the banks reprice their mortgage books this would put further pressure on household cash flows which are already suffering from near record low income growth, higher mortgage payments (as they revert to Principal & Interest from Interest Only loans and absorb recent repricing) and higher power bills,” they said.
The risks around passing costs on to customers are evident, in light of recent comments by RBA governor Philip Lowe about threats to domestic consumption growth as households move to address the already-high levels of leverage on their mortgages.
Last week’s poor retail sales figure does nothing to alleviate those concerns.
Mott and Bentvelzen said the levy could also could give rise to a “Pandora’s Box” of regulatory wrangling. Citing the example of the bank levy that was imposed in the UK, they noted that the UK levy was subsequently hiked 9 times after it was introduced.
“Future governments could also raise the Bank Levy as an easy source of revenue to fund spending, tax cuts or the deficit, especially as none of the political parties oppose this policy,” they said.
Looking at last week’s reporting season, Mott and Bentvelzen noted that excluding asset sales and markets & trading income, core revenue declined at all three of the major banks that reported.
ANZ fell 2.8%, NAB was down 0.2% and Westpac fell by 0.1%. Commonwealth Bank was the only major to report core revenue growth of 3.4% in March, but even that figure represented a slow-down in revenue growth.
They said that gains in pre-provision profits was driven entirely by markets & trading revenue. That was also the main driver of increases in return on equity from 13.9% to 14.2%.
The analysts provided a table showing a snapshot of the big banks’ first-half results: