Australia Banks Warn of Cost of New Levy

By Robb M. Stewart Features Dow Jones Newswires

MELBOURNE, Australia--Profits of Australia's biggest banks will be squeezed in the coming years if they aren't able to pass on the cost of a new levy aimed at helping the federal government plug its budget deficit.

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The lenders hit back at the surprise tax introduced in the conservative government's latest budget, criticizing it as a revenue grab that threatened their competitiveness and which could mean higher interest rates for borrowers, lower shareholder returns and possibly job losses.

It's another headwind for banks that have seen lending margins contract in recent years with heightened competition and a rise in funding costs. These have left them struggling to grow revenue amid sluggish economic growth.

It also comes as banks face regulatory pressure to bolster capital buffers and cool riskier lending that has led to a frothy housing market in major cities.

The fresh impost can be absorbed by the banks, which are among the world's most profitable, said Prime Minister Malcolm Turnbull. On Wednesday, he said the levy was the cost of the implicit guarantee against failure the government provides to the industry and is needed to bring the budget back into balance.

The levy is expected to raise 6.2 billion Australian dollars (US$4.6 billion) over four years, imposing a 0.015% quarterly tax on banks with assessed liabilities of A$100 billion or more. It would cover corporate bonds, certificates of deposits and Tier 2 capital.

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It will hit Commonwealth Bank of Australia (CBA.AU), Westpac Banking Corp. (WBC.AU), Australia & New Zealand Banking Group Ltd. (ANZ.AU), National Australia Bank Ltd. (NAB.AU) and investment bank Macquarie Group Ltd. (MQG.AU). Analysts estimated it would cut earnings by between 3% and 6% a year.

"A tax cannot be absorbed," said Andrew Thorburn, National Australia Bank's chief executive, adding it would impact millions of employees, customers or shareholders.

The four largest banks are among Australia's biggest companies and have seen profits rise steadily across several years as they benefited from booming demand for home loans as the central bank ratcheted down its benchmark cash rate to help the economy transition away from reliance on mining-led growth. About A$14 billion was wiped off the value of the big banks' shares on Tuesday as rumors of the coming levy spread through the market. Shares were mixed Wednesday after initially sliding further.

"This levy is a stealth tax," said Westpac Chief Executive Brian Hartzer. "There is no 'magic pudding.' The cost of any new tax is ultimately borne by shareholders, borrowers, depositors, and employees."

Ian Narev, Chief Executive of Commonwealth Bank, similarly said every extra cost needed "to be borne by customers or shareholders or both."

Analysts at Morgan Stanley expect the levy will reduce earnings by an average 4.5%. They said banks have over the last two years shown their willingness to pass regulatory changes and higher funding costs to borrowers through increased home-loan rates.

Still, analysts have warned of late that banks' pricing power had been diminished by recent rounds of rate increases on loans to property investors. Those rate rises appear to be helped to cool home-price growth.

"They don't need to pass this on. They're very profitable," Mr. Turnbull said. The consumer and competition regulator would be monitoring banks' actions on rates very closely, and described as "nonsense" any claim that the levy threatened the stability of the banking system, he said.

The Australian Bankers' Association said the levy adds to about A$11.5 billion in income tax paid by the banks last year. The industry body said contrary to popular perception, the banks aren't unusually profitable, with the return-on-equity of the top four at just under 14% last year putting them in the middle of the top-50 listed companies.

The four largest banks collectively recorded cash earnings--a measure that excludes some costs and one-time items and is used by the banks in calculating dividends--of A$15.6 billion in the first half of their fiscal years, a rise of 6.2%. That was driven largely by a stronger markets income and lower bad-debt charges, offsetting flat net-interest income and a further weakening of their net interest margins, advisory firm KPMG said.

-Write to Robb M. Stewart at robb.stewart@wsj.com

(END) Dow Jones Newswires

May 10, 2017 01:14 ET (05:14 GMT)