Recently, the Australian Government determined that the banking sector is highly concentrated with major banks having significant pricing power and capability to benefit shareholders at the expense of their customers. The House of Representatives Economics Committee's 'Review of the Four Major Banks', commissioned by the government last year, concluded that Australia's banking sector is an oligopoly and this can be detrimental to all Australians and the economy as it increases systemic risk. Australia’s five largest banks are highly profitable with earning more than $30 billion a year after tax and benefit from a regulatory system that has helped to entrench their dominant position in the market. Keeping a few related aspects in mind, the Government had recently announced for a six basis-point levy on the deposits of the country’s biggest banks in its annual budget that will bring A$6.2 billion over next four years and provide a more level playing field for smaller, regional banks and non-bank competitors. With the implementation of the new levy, Australia's largest banks - Commonwealth Bank of Australia, Westpac Banking Corp, Australia and New Zealand Banking Group, National Australia Bank and Macquarie Group, will pay the charge on their liabilities including corporate bonds, commercial paper, certificate of deposits and tier-2 capital instruments. However, ordinary bank deposits, mortgages and other deposits protected by the financial claims scheme will be excluded from the levy base.
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Size of Australian banking groups (by total resident assets) (Source: Budget documents 2017-18)
Lately, treasurer, Scott Morrison said the levy was introduced to support competition in the banking sector as the cheaper cost of funding and dominant market share as advantages enjoyed by the big four banks strengthened their positions against the competitors. Further, he advised the banks not to pass on the costs to customers, while banks need to balance the needs of borrowers, savers, shareholders and the wider community. Australian taxpayers have been subsidizing five major banks since 2008 with government guarantees over bank deposits and a cheap $180 billon debt facility that has put them at a competitive advantage and boosted their earnings. On the other hand, Australian Prudential Regulation Authority (APRA) confirmed that the payment of the major bank levy will not have a material impact on the resilience of the banking system and that it does not harm its prudential policy objectives.
Banks urged for the release of the draft legislation for public consultation
However, it is alleged by the Australian Bankers Association (ABA) as the levy would be a tax on all Australians without an end until it included a sunset clause (a sunset provision or clause is a measure within a statute, regulation or other law that provides that the law shall cease to have effect after a specific date, unless further legislative action is taken to extend the law) and every Australian with a bank account, a home loan or a superannuation account would be affected by the levy. The budget announcement also included several other measures which potentially intrude into the operations of the banks and have significant implications for good corporate governance.
Impact on Big four banks
Based on the Government announcements till date, the tax could cost National Australia Bank Ltd. (ASX: NAB) approximately $350 million annually, or $245 million post tax. Commonwealth Bank of Australia (ASX: CBA) is estimated that the levy will amount to approximately $315 million per annum, $220 million after tax based on the group’s current financial position. The liability base on which the levy is calculated will exclude approximately $240 billion of deposits which are covered by the Financial Claims Scheme, as at 31 March 2017. Australia and New Zealand Banking Group (ASX: ANZ) estimates that the annual monetary impact of the tax would be approximately $345 million on a before tax basis, and approximately $240 million after tax based on its financials as on 31 March 2017. Based on Westpac Banking Corp’s (ASX: WBC) balance sheet at 31 March 2017, the levy would apply to approximately $615 billion of Westpac’s liabilities (impacted liabilities). If the levy is applied from July 2017, it will impact Westpac’s full year 2017 financial results (year ended 30 September 2017) and it would result in an additional cost of approximately $65 million after tax in H2FY2017. On an annualized basis, that represents a cost of around $370 million or around $260 million after tax.
The new levy is expected to wipe out a considerable portion of cash profits of top four banks depending on the composition of their deposits, and will impact future dividend payments to shareholders. Further, with the new norms growth prospects for regional banks (Bendigo & Adelaide Bank, Bank of Queensland and Suncorp) seems optimistic.However, the actual cost will not be known until the final legislation for the tax has been passed with full assessment of its impact on banks’ businesses.
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