Bank Tax – Page 3 – Digital Finance Analytics (DFA) Blog

ANZ Estimates Bank Tax Impact

ANZ today commented on the estimated financial implications of the proposed tax on bank liabilities. The proposed enabling legislation has not yet been finalised.

The tax is expected to be paid on a quarterly basis, with the first payment to be made be for the September quarter 2017. We expect that this will be deductible for tax purposes in Australia.

Based on the current draft legislation and ANZ’s 31 March 2017 Balance Sheet, we estimate that the annual financial impact of the tax would have been approximately $345 million on a before tax basis, and approximately $240 million after tax.

We note that at this stage the financial impact can only be an estimate. ANZ’s balance sheet is also undergoing change due to our strategic initiatives that will impact the size of the tax paid.

The net financial impact, including the Bank’s ability to maintain its current fully franked ordinary dividend, will be dependent upon business performance and decisions we make in response to the tax.

ANZ will continue to update the market as the legislation is finalised and further analysis is completed.

Impact of new major bank tax on Westpac

Westpac today updated the market on the new major bank budget deficit repair levy (‘Levy’) announced in the 2017 Federal Budget.

Given the limited detail available to us it is difficult to precisely calculate the Levy. Nevertheless, given information received to date, we are able to provide preliminary estimates of the cost of the Levy for Westpac.

Based on Westpac Banking Corporation’s balance sheet at 31 March 2017, the announced 0.06 per cent (or 6 basis point) Levy would apply to approximately $615 billion of Westpac’s liabilities (‘Impacted liabilities’). Impacted liabilities would exclude certain prescribed items including approximately $174 billion of financial claims scheme eligible deposits. The Levy is expected to be tax deductible, but will not attract franking credits (Australian tax imputation credits).

As the Levy is expected to be applied from 1 July 2017, it will impact Westpac’s Full Year 2017 financial results (year ended 30 September 2017). On the basis of the above estimates, it would result in a new cost in our Second Half 2017 of approximately $65 million after tax. On an annualised basis, that represents a cost of around $370 million or around $260 million after tax. The exact cost will depend on the final form of the new legislation passed and the composition of Westpac’s liabilities.

No company can simply ‘absorb’ a new tax, so consideration is being given to how we will manage this significant impost on the bank. We plan to consult with stakeholders, including shareholders, on the Levy.

To dimension the impact of the Levy for our shareholders, the $260 million after tax cost is equivalent to around 8 cents per share (using the above estimates). Based on Westpac’s 2016 full year dividends of 188 cents per share, this represents 4.3% of dividends paid.

Westpac has strongly objected to the Levy on the grounds that it is an inefficient tax that targets just five companies; it places the major Banks at a competitive disadvantage relative to international peers; and it is a tax on growth because as lending and investment increases the cost of the Levy also rises. A further objection is that the Levy currently has no end date, so it becomes a permanent tax impost on companies that are already amongst Australia’s largest taxpayers.

CBA Reveals Impact of The Bank Tax

Commonwealth Bank Chairman, Catherine Livingstone AO, today emailed shareholders outlining the estimated impact of the Federal Government’s recently announced bank levy on the Group. We also had Government confirmation that it will be tax deductible and the impact of this is also shown in the CBA announcement.

Commonwealth Bank today sent the below communication to shareholders outlining the estimated impact of the Federal Government’s recently announced bank levy on the Group.

We have limited information on which to base our calculations, however we estimate that the levy will amount to approximately $315 million per annum, $220 million after tax. This is based on the Group’s current financial position and subject to any further amendments made through the parliamentary process.

The liability base on which the levy is calculated will exclude approximately $240 billion of deposits which are covered by the Financial Claims Scheme, as at 31 March 2017.

Shareholder communication:

Dear shareholder,

The recently announced Federal Budget included a new levy on the five largest financial institutions in the country.

We have expressed serious concerns that the new levy is a poorly designed policy, done without consultation, which impacts not just on the banks but also on our shareholders and customers.

The Commonwealth Bank paid $3.6 billion in tax in the 2016 financial year, making us Australia’s largest taxpayer.

We have limited information on which to base our calculations, but from 1 July 2017, we estimate that the new levy for the Commonwealth Bank will be approximately $315 million per annum ($220 million after tax). This is based on the Group’s current financials and subject to any further amendments made through the parliamentary process.

The budget announcement also included a number of other measures which potentially intrude into the operations of the banks and have significant implications for good corporate governance. For example, the fact that regulators will be empowered to override your Board calls into question the established fundamental governance framework which governs publicly listed companies.

Commonwealth Bank has consistently returned on average 75% of profits as dividends to more than 800,000 shareholders each year. In addition, millions of Australians have also benefitted through their superannuation funds. The remainder of your company’s profits are reinvested for future growth, so that we can serve our customers better, while continuing to deliver for shareholders and the broader Australian economy.

We are deeply concerned the new levy undermines our ability to achieve these goals.

Last Monday, Commonwealth Bank lodged an official submission to Federal Treasury outlining our concerns about the tax. You can read our full submission by clicking here.

Many questions and concerns have been raised regarding this new tax. We will endeavour to respond to as many questions as we can. To stay up to date with our comments, please check our CBA Newsroom site.

Your CEO, Ian Narev, and I would like to hear your views and respond to any questions you may have on the new tax. We therefore intend to hold an interactive telephone “Town Hall” discussion for shareholders in the lead up to our Annual General Meeting in November. Details and invitations will be issued with our full year results in August.

In the meantime, I thank you for taking the time to read about our views on the tax.

The Bank Tax Rumbles On

Interesting segment on ABC Insiders today exploring the bank tax, and highlighting some of the practical realities, and policy implications, as the legislation is developed.

Barrie Cassidy with The Guardian Australia’s political editor Katharine Murphy, Andrew Probyn from ABC’s 730 and The Saturday Paper’s Karen Middleton.

ABA says the Federal Government must open up the major bank levy for public scrutiny

The Federal Government must open up the major bank levy for public scrutiny, the Australian Bankers’ Association said today.

“The four major banks have met Treasury’s extraordinarily tight timeframe to lodge their submissions this morning under strict confidentiality,” ABA Chief Executive Anna Bligh said.

“It is now time for the Government to reveal when it will release the legislation to the public – after all, this tax will affect millions of Australians who own shares in banks or are bank customers.

“At the moment we can’t quantify the impact of this tax on banks, and the flow on effects to customers, because the legislation has not been in the public domain.

“The ABA calls on the Government to provide more clarity as to when the public will be able to see the major bank levy legislation,” she said.

The Big Four Banks Are By Far the Most Publicly Subsidised Companies in the Country

APRA’s non-bank oversight may curb mortgage risks

From Australian Broker.

Broader powers by the Australian Prudential Regulation Authority (APRA) to oversee the non-bank sector will have a positive effect on the residential mortgage market, said analysts from global ratings agency Moody’s.

The measures, announced in last week’s Federal Budget, could see APRA regulating lending by non-bank financial institutions.

This policy, if passed by the Australian government, would help curb riskier mortgage lending in the non-bank sector and thereby reduce any risks found in Australian residential mortgage back securities (RMBS).

“Non-bank lenders have significantly increased their origination of riskier housing investments and interest only mortgages over the past two years, a period over which APRA has introduced measures aimed at limiting growth of such loans by banks and other authorised deposit-taking institutions (ADIs),” analysts wrote in an article for Moody’s Credit Outlook.

“APRA currently regulates banks and other ADIs, but does not regulate lending by non-bank financial institutions. Instead, regulatory oversight of the non-bank sector is presently the responsibility of the Australian Securities and Investments Commission, which enforces responsible lending but does not have the power to implement macro-prudential policy measures.”

By extending APRA’s powers into the non-bank sector, the regulator would be able to set specific limits and ensure loan quality remains comparable to that of banks and other ADIs, Moody’s said. These broader powers would fall on top of the regulator’s March 2017 policy to monitor warehouse facilities that banks use to fund non-bank lenders.

In 2016, housing investment loans issued by non-bank lenders make up for 36% of all mortgages found in Australian RMBS, a large increase from the 16% found in 2015.

In a similar manner, interest-only loans accounted for 46% of all mortgages banking RMBS by the non-banks in 2016, compared to 21% in 2015.

Non-bank lenders write 6% of the total housing loans in Australia.

The bank levy’s critics are selling Australia short

From The New Daily.

The ‘bank levy’ that is causing such a political storm in Canberra may not be great policy in itself, but it will still be overwhelmingly good for Australia.

To understand why, it’s first necessary to ignore the silver-tongued protests of former Queensland premier Anna Bligh, now head of the Australian Bankers’ Association, and former Treasury secretary Ken Henry, now chairman of National Australia Bank.

They are using years of expertise developed on the public payroll to defend bank shareholders.

And don’t give much credence to CBA boss Ian Narev’s simplistic claim that “basically all Australians” are bank shareholders.

More than a fifth of the big four banks’ shareholders are foreign investors, and many middle- and lower-income Australians have superannuation holdings too puny to make them significant shareholders of anything.

A $100,000 super account, for instance, would likely have about $6000 in bank shares. The dividend earnings on those shares before tax would be about $300. And those earnings would, according to Treasury estimates, be reduced by 4 or 5 per cent – well under $20 a year.

Bloated banks

In Australia, banks have grown to a ridiculous size and make profits many times those of our biggest employers, Wesfarmers and Woolworths.

But it is not ‘market forces’ that have made them that way. They have grown much more than other sectors of the economy thanks to two levels of support from the federal government.

The first is the implicit guarantee provided by the government for the banks’ liabilities.

That guarantee swung into action during the GFC and became explicit, but it is always there – and the banks, and the institutions that lend to them, know it.

That means the big banks can borrow more cheaply. Even with the bank levy in place, they’ll still only be paying back a third of the benefit they receive from that guarantee.

Tax distortion

The second reason banks are so profitable is a simple matter of scale.

If property investors were not offered such generous tax concessions via negative gearing and the capital gains tax discount, they would not be able to borrow as much money to bid up property prices.

If they were unable to bid up prices, owner-occupiers would not have to borrow such large sums either – there would be fewer dollars chasing each available property.

And if those twin tax breaks were reduced, the banks’ mortgage books, and therefore profits, would be smaller.

Mr Henry himself argued to reform the housing tax breaks back in 2010 – but then he was employed by taxpayers, not a bank.

A political bind

The problem for Treasurer Scott Morrison is that the tax lurks that drive this bloated system disproportionately advantage voters in Liberal-held electorates, as a report released by the Australia Institute on Tuesday shows.

The think tank’s league table, showing the annual CGT refund averaged across all taxpayers in an electorate, is dominated by top Liberal seats.

Nationwide, the average claimed by taxpayers in Nationals seats is just $146, in Labor seats $297 and Liberal seats $672.

And therein lies the problem. The obvious and most effective way to reduce the credit bubble and bring banks back to the relative size and profitability seen in other developed countries is to reduce those concessions.

But as the Coalition can’t do that for political reasons, it is instead reclaiming some of the banks’ huge profits to shore up the federal budget.

It’s second-best policy, but it will at least help counteract the effect of not considering the first-best policy.

That said, the levy on the five biggest banks will collect $6.2 billion over four years – pretty small beer considering the government also plans to phase their corporate tax rate down from 30 per cent to 25 per cent over the next few years.

The question then will be whether people like Ms Bligh and Mr Henry complain with equal vehemence that banks again have it too easy.

ABC 7:30 Does The Bank Tax

Segments on 7:30 last night included an interview with NAB Chairman Ken Henry. He suggested there should be an inquiry into the proposed bank tax and said it was bad policy, reverting back to the behaviours of the 1980’s.

Also included is a segment which puts the bank tax into a more international context.

Research shows the banks will pass the bank levy on to customers

From The Conversation.

Studies of European countries show that bank taxes similar to the 0.06% bank levy introduced by the government in the 2017 federal budget will be largely borne by customers, not shareholders.

The levy could also make the banking system more, rather than less risky. The fact that a bank is asked to pay the levy is a confirmation that it is “too big to fail”. This could in turn encourage riskier behaviour. The levy might also trigger a higher probability of default by reducing a bank’s after-tax profitability

But it is difficult to say whether banks will pass the levy on to customers by increasing their loan rates, fees or both.

In its response to the levy, NAB confirmed it will not just be borne by shareholders:

The levy is not just on banks, it is a tax on every Australian who benefits from, and is part of, the banking industry. This includes NAB’s 10 million customers, 570,000 direct NAB shareholders, those who own NAB shares through their superannuation, our 1,700 suppliers and NAB’s 34,000 employees. The levy cannot be absorbed; it will be borne by these people.

Aware of this problem, the government has asked the Australian Competition and Consumer Commission (ACCC) to undertake an inquiry into residential mortgage pricing. The ACCC can require banks to explain changes to mortgage pricing and fees.

When banks pass on these taxes

The bank levy is similar to taxes recently introduced by some G20 economies, including the UK. These had the dual purpose of raising revenues and stabilising the balance sheets of large banks in the aftermath of the global financial crisis.

An analysis of bank taxes in the UK and 13 other European Union countries shows that the extent to which taxes are passed on to customers depends on how concentrated the banking industry is.

The more the industry is dominated by a small number of banks, the greater the share of the tax that is passed on to customers and the less that is borne by shareholders. In more concentrated industries customers have relatively fewer alternative options and therefore tend to be less mobile across banks. This in turn gives the large banks greater market power to increase interest rates and fees without losing customers.

Australia’s banking industry is quite concentrated. In fact, we’re around the middle of the pack of OECD countries, much higher than the US, but lower than some European countries. From this we can surmise that at least some of the cost of the bank levy here will be passed on to borrowers through higher loan rates, fees or both.

An IMF study of G20 countries suggests that a levy of 20 basis points (i.e. 0.2%, approximately three times higher than the Australian government’s bank levy), could lead to an increase in loan rates of between 5 and 10 basis points. This means that the monthly repayment on a loan (assuming an initial rate of 5.5%) would increase by approximately A$6 for every A$100,000 borrowed.

The IMF also found that the bank levy doesn’t just hit customers. A 0.2% levy would reduce banks’ asset growth rate by approximately 0.05% and permanently lower real GDP by 0.3%.

The impact on customers

If the banks pass on the levy to customers then it becomes just another indirect tax, similar to the GST. The question then is whether this is regressive – does it have a greater impact on those on lower incomes than higher incomes.

Lower income earners are likely to borrow less than higher income earners. However, lower income earners are also less able to bear an interest rate increase. They are also more likely to be excluded from borrowing when the cost of borrowing increases.

In this sense, then, if the bank levy is passed on to customers it could become a barrier to home ownership for some lower income borrowers.

More generally, if the value of bank transactions is a higher proportion of low incomes than of high incomes, then the bank levy would operate as a regressive tax and contribute to sharpening (rather than smoothing) inequalities.

Both of these would be unintended, but undesirable, consequences of the levy.

Authors: Fabrizio Carmignani, Professor, Griffith Business School, Griffith University; Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith University