Nice perspective from Christopher Joye in the AFR this morning.
The bank leverage tax is an interesting innovation that raises tremendous revenue ($6.2bn) and encourages the big 4 and Macquarie to use more equity and less debt (and when they do leverage, to chase sticky household deposits of less than $250k in value rather than issuing wholesale bonds). This will presumably reduce the supply of wholesale securities at the margin, which could in turn lower spreads and reduce the banks’ cost of capital. The majors and Macquarie have many levers they can use to defray this tax, including cutting their internal operating costs, which are massively overinflated, lifting loan rates and/or reducing wholesale deposit rates. The leverage tax is clearly negative for big bank shareholders and positive for creditors with our long-held position that the majors’ returns on equity will mean-revert back to 12%-13%, and converge with returns generated by smaller banks, looking more and more certain by the day;
We also expect APRA to surprise the big banks with tougher-than-expected equity capital targets in their mid-year report on the level of leverage that will ensure they remain “unquestionably strong” on a global basis. This should see their common equity tier one capital ratios move comfortably towards 10.5%-11.0% and their all-important non-risk-weighted leverage ratios lift up to around 6% on an APRA basis (and closer to 7% on an internationally harmonised basis, which is where the 75th percentile global peer currently sits). If ever there was a good time to boost equity buffers, it is right now—if only the banks had listened to our advice over the last few years to pre-emptively raise equity capital when it was much cheaper at higher prices;
There are loads of other commendable policy developments for the financial system that have Treasury’s thoughtful hands all over them, including: backing open customer data sharing between lenders (we’ve supported this for years); extending APRA’s reach to non-bank lenders for macroprudential purposes (we’ve argued for this); undertaking further independent reviews of competitive neutrality via the Productivity Commission and ACCC; allowing regulators to ping bank executives with hefty new fines; forcing bankers’ bonuses to vest over longer timeframes; expanding APRA’s powers to intervene with bank compensation policies; and much more;
The budget announced some measures to minimise tax avoidance by banks that issue hybrids out of their foreign branches, which ostensibly applies to the CBA Perls series though all outstanding securities have been granted transitional relief through to their call dates. This should not therefore impact any existing hybrids and had been long discussed with the industry (CBA will presumably now issue hybrids out of their Aussie business);
