The Federal Government’s bank levy legislation passed through parliament on Monday night and the $6.2 billion charge will become law shortly, and for all the protestations from the five banks involved – Commonwealth, NAB, ANZ, Westpac and Macquarie – there’s no sympathy whatsoever for them among regulators, if the Reserve Bank’s view is any guide.
The bank levy is due to start on Saturday week – July 1, as scheduled.
The banks are resigned to the levy and the market has moved on to fret about the Moody’s downgrade which includes the big four banks, unlike the downgrade for Australian banks from the rival firm, Standard & Poor’s.
Oddly in its credit rating downgrade on Monday Moody’s didn’t give as much weight to the implicit government guarantee of the banks (especially the big five) as S&P did in may – that’s why it left the ratings of the NAB, ANZ, Westpac and CBA unchanged.
Leading the market lower (down 48 points or 0.8%) were the big four banks, with Westpac dropping 1.8%, ANZ 1.3%, NAB 1.1% and Commonwealth Bank 0.7%.Macquarie shares were off 0.7%.
Moody’s was more concerned about “elevated risks within the household sector heighten the sensitivity of Australian banks’ credit profiles to an adverse shock, notwithstanding improvements in their capital and liquidity in recent years.”
The central bank has not commented directly on the levy question, but it was discussed at some length at the board meeting earlier this month, judging a discussion of the weak sharemarket in May which was led by falls in the share prices of the big four banks who dominate the market and the ASX 200.
“Australian share prices had declined over the preceding month, to return to around their levels at the end of 2016, the RBA minutes said.” The decline had been driven by a sizeable fall in bank share prices.
"Members noted that some part of this reflected the fall in bank share prices in global markets, but that there had also been a range of domestic factors contributing to the fall, including somewhat mixed bank profit results relative to expectations and the announcement of a major bank levy in the Australian Government Budget.”
“In the days following Standard & Poor’s announcement lowering the ratings of a number of smaller Australian financial institutions, equity prices of these institutions generally fell relative to those that had not been downgraded.”
And in a single sentence that indicated the bank’s disdain for the complaints from the five banks, the minutes read “Members noted that the magnitude of the major bank levy was not particularly large compared with typical market movements in bank funding costs.” In other words, so what.
"They also noted that there was likely to be some effect of the rating downgrade on the cost of wholesale funding for smaller financial institutions, but these institutions accessed less wholesale funding than the major banks.
“More broadly, bank funding costs were estimated to have declined a little further in recent months,” the minutes added.
In fact there’s an estimate that the banks will basically pay the levy, over time by their fall in funding costs (even after Moody’s downgrade this week). It is the equivalent of 6 cents in the dollar. And the banks will be able to recover some of it (perhaps 2 cents) by lifting some fees and charges.
In an article in June quarter RBA Bulletin last week (http://www.rba.gov.au/publications/bulletin/2017/jun/), the bank said that research had found that "In 2016, domestic banking fee income from households and businesses grew at a relatively slow pace of 1.7 per cent, to around $12.7 billion (Table 1; Graph 1). Deposit and loan fee income relative to the outstanding value of products on which these fees are levied was slightly lower than in the previous year.
"Over the past five years, growth in banks’ aggregate fee income has been relatively low and stable. Fee income from businesses has grown at a modest pace over this period, while fee income from households has been little changed.
"By product, this trend primarily reflects relatively flat aggregate deposit fee income and slow growth in aggregate loan fee income. This has offset faster growth in credit card and merchant service fee income, driven by increased transaction volumes as use of electronic payment methods has expanded, “ The research paper said.
The banks can easily add a cent here or there to deposit and/or loan fees.
And at the one day Senate hearing on the levy last Friday, Federal Treasury admitted that its work on the bank levy assumes some “pass-through” to customers and shareholders.
In a response to a question on notice, Treasury said its costing took into account a range of factors such as “bank responses to the imposition of the levy, which include: some pass-through of the levy to customers, as evidenced by previous behaviour by the banks”.
That’s why regulators didn’t believe the doom and glom warnings from the banks and their lobbyists and the odd alarmist business journalist or commentator, and why the reaction was over the top – especially in the stockmarket.
