Our view at this stage
Based on the wording in the Budget paper, we calculate that the major banks levy will impact FY18 cash earnings of the four major banks by 2.2%-2.6%. The budget paper suggests that: liabilities sitting in banking entities outside of Australia will not attract the fee; non-debt liabilities will not attract the fee; the levy will come out of pre-tax profits.
While the Government has said that the levy will raise $6.2bn over the forward estimates period net of interaction with other taxes (principally corporate income taxes), we are struggling to arrive at a number this big based on our current understanding of the application of the levy.
Based on our understanding and assumptions, the levy will raise ~$3.5bn over the forward estimates period. If the Government's $6.2bn estimate is correct then the impact on the major banks' annual cash earnings will be more like 4-5%.
Our base case is that the banks will offset the impact of the levy on cash earnings through asset and liability repricings as well as cost management.
We believe the falls in major banks' share prices over the last two trading sessions reflect an overreaction to the levy, particularly given that we expect the impact of the levy on cash earnings to be negligible at this stage after allowing for repricing of assets and liabilities and cost management.
Key facts from the Budget paper
- The Government will introduce a major bank levy for ADIs with licensed entity liabilities of at least $100bn, from 1 July 2017. The $100bn threshold will be indexed to grow in line with nominal GDP.
- The levy will be calculated quarterly as 0.015% of an ADI's licensed entity liabilities as at each APRA mandated quarterly reporting date (for an annualised rate of 0.06%).
- Liabilities subject to the levy will include items such as corporate bonds, commercial paper, certificates of deposit, and Tier 2 instruments. The levy will not apply to the following liabilities: additional Tier 1 capital and deposits of individuals, businesses and other entities protected by the Financial Claims Scheme (FCS).
- We assume the levy will come out of pre-tax profit (resulting in lower corporate tax being paid by the banks with all else constant). This assumption is based on the Government's statement that the levy will raise $6.2bn over the forward estimates period, net of interaction with other taxes (principally corporate income taxes).
- Our understanding is that the levy will only apply to certain debt liabilities (as noted above) within the Australian licensed entities.
- The banks do not disclose the amount of deposits covered by the FCS. However, we do know that deposits eligible for coverage under the FCS were ~$850bn at 31/12/2016, which represents ~60% of system customer deposits. Based on this, we conservatively assume that 50% of Australian customer deposits for each of the major banks are not covered by the FCS.
- Based on the wording in the budget paper, we also assume that non-debt liabilities (eg insurance policy liabilities) will not attract the levy.
- Based on the above points, and assuming no asset repricings or commensurate reduction in costs, we calculate that the impact of the levy on FY18 cash earnings will be 2.3% for ANZ, 2.3% for CBA, 2.6% for NAB and 2.2% for WBC.
For more Federal Budget analysis, please view Michael Knox's blog or Morgans clients can search our financials research by applying a sector filter to the 'Browse research' section. Alternatively, please contact your nearest Morgans office for access.
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