Big bank tax is a tax on all Australians
By Manuel Greenland, Senior Portfolio Manager, Australia
07 June, 2017
The biggest news on the back of Australian Treasurer Scott Morrison's latest Budget was an unexpected tax on the big Australian banks. The market value of the banks fell by A$14 billion as sharemarket investors anticipated the negative effect of the tax on banks' profits.
The banks themselves cried foul. Head of Australia's largest bank, the Commonwealth Bank of Australia (CBA), said "this is bad policy"; while NAB's chief executive moaned it was "very unfortunate"; and Westpac's boss declared the move "disappointing". The Treasurer remained unsympathetic, saying the interest rates at which the banks borrow depends on the financial strength of Australia, so it was only right they should pay up to support the Budget.
Earlier in the year we had noted increasing headwinds to bank profits. In addition to the cost of their deposits rising, interest rates in foreign markets — where the Australian banks borrow — had also gone up. In an effort to strengthen the banks' financial positions regulators were pushing them to take on expensive long-term debt and to hold higher levels of even more expensive share capital. So the series of mortgage rate increases that banks had recently implemented was not at all surprising; they were seeking to recover rising costs through higher lending rates to borrowers. This extra tax will now add more pressure on profits, and will likely be another reason to raise interest rates.
What does it mean for Aussies?
Rising mortgages and weak income growth have left Australian households with high levels of debt. Over the decade to 2016, Australian housing debt almost tripled to A$1.4 trillion. Borrowers have taken on this debt because of rising house prices and falling interest rates; not because they are earning more. High debt levels and weak incomes mean that household budgets will quickly feel the impact of any increase in interest rates. An important implication of this is that companies that sell products and services to Australian consumers will suffer if households have to use more of their income to service debt.
At the moment electoral polls in Australia are very close. As this tax is pretty popular with voters, it is likely to be approved by the major political parties. The tax is therefore a reality, and for all their grumbling, the Australian banks are going to have to pay it in addition to their other rising costs. In our view they will do so in part by raising interest rates on borrowers, in part by reducing service levels to customers to cut costs, and in part by reducing profits and returns to shareholders. Borrowers, customers and shareholders will all share the pain; many ordinary Australians are all three.