When Scott Morrison, the Federal Treasurer, capped the Bank Levy at six basis points, the banks saw this as a big win since they had been fearful that Canberra would follow the UK and hike the rate further.
But one leading analyst believes that, despite the cap, there is more to come from the Treasurer, who introduced the Major Bank Levy Bill 2017 to the House of Representatives on Wednesday.
With so few amendments from the initial proposal, UBS analyst Jon Mott said he still struggles to reconcile the estimated impact of the Levy on the major banks' earnings. On his analysis, the $1.1 billion raked in from the tax is at complete odds with the Federal Treasury forecasts of $1.5 billion.
“As a result, we still see room for changes to the Levy in the future (eg. higher rate or tax deductibility) to raise the targeted revenue, especially if the Budget outlook continues to be challenged,” Mott argued.
UBS has consequently downgraded forecasts across the big four banks to incorporate the Bank Levy. But to Mott, the numbers don’t stack up. The analyst has incorporated his estimate of the six basis point levy through the Interest Expense line in his models.
These numbers are broadly consistent with the initial estimates from the banks and leads to a 3 per cent (gross) reduction in Pre-Tax Profits for the 2018 full year.
“However, we expect around half of this Levy to be passed through to stakeholders including: customers (repricing); suppliers (lower mortgage broker commissions are an obvious starting point); and staff," said Mott.
“As a result the impact on net earnings and earnings-per-share is smaller at between 1 per cent to 2 per cent across the majors. We have left our dividend forecasts unchanged, but payout ratios are becoming increasingly stretched.”
Strong, profitable, well run
Mott’s Macquarie Group forecasts are unchanged as the impact of the Bank Levy is smaller for the Sydney-based merchant banker and is likely to be absorbed by staff.
While these downgrades are not large, he added, downside risk to forecasts remain given APRA's upcoming interpretation of 'unquestionably strong' and higher mortgage risk weights, expected over the next month and lower credit growth as the impact of macro-prudential changes and a correction in house prices are felt.
The banking specialist is expecting potentially higher bad debt charges given the fall in consumer confidence and, controversially, potential changes to the Bank Levy if it raises less than Treasury estimates or if the Budget remains under pressure.
The Australian banks remain strong, profitable, well run organisations and the recent share price pullback has removed much of the extreme valuation stretch.
However, in his opinion, the banking sector is not cheap.
"We remain cautious on the medium-term outlook for the banks given the myriad of headwinds. We struggle to see what will drive bank share prices sustainably higher," added Mott.