Budget 2017: Banks brace for inter-bank funding market levy

Shares in the big banks are tumbling on rumours Canberra will introduce a new banking levy in tonight’s budget.

A composite image of signage of Australia's 'big four' banks ANZ, Westpac, the Commonwealth Bank (CBA) and the National Australia Bank (NAB). (AAP Image/Joel Carrett)

Australia’s ‘big four’ banks could be in line for a new tax on their balance sheet liabilities in the federal budget, with fears already it could be passed onto customers.

Almost $14 billion was wiped off the big four Australian banks today as investors scattered amid fears of a levy directed at the lenders in the federal budget.

The financial sector, which is the largest on the local market by far, dropped 2.4 per cent while most other sector saw solid gains.

Weighed down by the banking giants, the S&P/ASX 200 closed in negative territory for the fifth time in six sessions, giving up 0.53 per cent to 5839.9 points.

Commonwealth Bank fell 3.9 per cent on Tuesday to $82.02, Westpac gave up 3.5 per cent to $32.88, ANZ dropped 2.6 per cent to $29.16 and NAB fell 2.1 per cent to $32.42. The collective fall in dollars and cents works out to be around $13.8 billion.

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“CBA’s numbers were a little bit soft, that was the other thing, but of course the talk of taxes … the market is a little troubled on the back of all these things,” Macquarie division director Lucinda Chan told The Australian.

“All the banks have now come out with their numbers and they haven’t done too badly, really.”

When asked if the banks were overvalued and due for this pullback, Ms Chan said it all hinges on dividends.

“So long as [the banks] pay the dividends as the market expects then they are ultimately going to get the support.”

Read the full sharemarket report.

Banks would likely slug customers

A potential transaction tax or “Tobin Tax” on interbank funding to raise $6bn from Australian banks over the next four years would likely be passed on to customers, according to UBS.

UBS analyst Jonathan Mott notes that Australian Banks have a very good track record of passing on higher funding costs, credit risks and other headwinds to customers. “Although there is likely to be political pressure and further calls for a Royal Commission, we would expect the Banks to pass a potential transaction tax onto borrowers,” he says. “We believe the easiest way for the Banks to achieve this would be to reprice their mortgage books — to offset a $1.5bn headwind we estimate the Banks would need to reprice their variable mortgage books by 12-15 basis points. Alternatively, the Banks could increase owner occupied mortgage rates by about 10 basis points and investment property loans by about 25 basis points and Interest Only loans by more. This would also help the Banks meet their lending caps imposed by APRA.”

He says any such tax likely only apply to the majors, potentially lopping about $1.5bn per annum — or 5 per cent — off their net profit after tax.

Banks brace for levy hit

The major banks are bracing for the introduction of a levy on the inter-bank funding market in tonight’s budget.

While the initiative has not been confirmed, rumours are circulating that it could raise up to $6 billion over the forward estimates to help fund the National Disability Insurance Scheme.

Shares in the big four banks are trading sharply lower.

Commonwealth Bank also released its third quarter trading update this morning, reporting a net profit of $2.6bn for the March quarter.

If the levy proceeds, it is likely to provoke a furious debate about who should bear its costs — customers or shareholders.

The government would say there is no direct impact on customers so they should be spared.

However, the banks would argue that any levy on short-term funding from the wholesale market would increase costs, with customers having to bear part of the pain.

In the recent half-year profit reporting season, the sector blamed interest rate hikes, including the controversial out-of-cycle rate rise in March, on regulatory reforms leading to intense competition for term deposits.

The UK introduced a bank levy in 2011 to compensate taxpayers for the bank bailouts that occurred as a result of the financial crisis, and to encourage a move away from risky, short-term funding.

The government increased the levy nine times before it hit its revenue target of £2.5bn a year.

The country’s big four banks paid the bulk of the levy.

At 2.20pm (AEST), around $12.5bn has been wiped off the big four banks. Commonwealth Bank (CBA) had dropped 3.4 per cent to $82.42, Westpac (WBC) had given up 3 per cent to $33.06, NAB (NAB) was down 1.5 per cent and ANZ (ANZ) has dropped 2.2 per cent.

The S&P/ASX 200, meanwhile, was 0.5 per cent weaker at 5844.5 points.