Investors in big bank stocks should prepare themselves to bear some of the brunt of the Government’s new bank levy. Analysts are recommending underweight positions in the banking sector.
Macquarie Securities estimates that the levy will take four to five per cent off the big banks’ earnings.
And the scope for the banks to pass higher costs on to borrowers may be limited by the introduction of a mortgage pricing inquiry.
“We see limited upside for banking sector earnings. We downgrade our sector recommendation to underweight.” Macquarie says.
Troy Rieck, executive officer of investment strategy at Equip Super, told the Australian Financial Review the fund’s weighting to the banks was below the sector’s index weight.
Rieck says: “The challenge for the banks is that with the extra capital requirements and the levy, how will they continue to grow profits enough to grow dividends? Will the rate of dividend growth be as high? I think that is unlikely.”
Macquarie says the banks cannot expect to get a boost from reductions in bad debt charges, which are at cyclical lows. Nor can they hope to get an earnings boost from the trading businesses in the institutional baking divisions, where trading income is already above average.
The Government plans to introduce a levy of six basis points (0.06 per cent) on banks with liabilities of more than $100 billion. In the 2017/18 financial year the levy is expected to raise $1.6 billion and over four years $6.2 billion.
The $100 billion threshold will be indexed to grow in line with GDP.
Liabilities subject to the levy will include corporate bonds, commercial paper, certificates of deposit and tier 2 capital instruments. The levy will not apply to deposits of individuals, businesses and other entities protected by the Financial Claims Scheme.
Macquarie has estimated the impact on earnings per share for each of the big banks. It expects:
- ANZ’s earnings per share will fall by 5.6 per cent in 2017/18 and by 5.7 per cent in 2018/19;
- Commonwealth Bank’s EPS to fall by 3.9 per cent in 2017/18 and by 4.4 per cent in 2018/19;
- National Australia Bank’s EPS to fall by 5.9 per cent in 2017/18 and by 6.6 per cent in 2018/19; and
- Westpac’s EPS to fall by five per cent in 2017/18 and by 5.7 per cent in 2018/19.
Morningstar says the increase in costs will be passed on to customers via higher mortgage interest rates, lower deposit rates and lower dividend growth.
Morningstar has estimated that the major banks will be able to increase their dividends a little or hold them steady over the next few years. It expects that:
- ANZ will increase its full-year dividend from $1.60 a share in 2015/16 to $1.61 in the current financial year and $1.63 in 2017/18;
- Commonwealth Bank will increase its full-year dividend from $4.20 a share in 2015/16 to $4.25 in the current financial year and $4.30 in 2017/18;
- National Australia Bank will hold its 2015/16 full-year dividend of $1.98 a share steady in the current financial and next; and
- Westpac will hold its 2015/16 full-year dividend of $1.88 a share steady in the current financial year and increase it to $1.89 in 2017/18.
In addition to the levy the Government has ordered the Australian Competition and Consumer Commission to conduct a residential mortgage pricing inquiry. The ACCC will be able to require authorised deposit-taking institutions to explain changes or proposed changes to residential mortgage pricing, including changes to fees, charges or interest rates.
This may make it more difficult for banks to change rates in the way they have in recent years. Morningstar says repricing may not fully offset the levy and there could be an increase in business flow to competitors.
Morningstar says: “Further, lending growth and consumer spending will likely slow, dampening broader economic conditions.”
A likely slowdown in lending growth was one the themes in the big bank chief executive’s presentations of their half-year results earlier this month.
ANZ chief executive Shayne Elliott says: “Lower domestic credit growth will be a headwind for the business. Six per cent credit growth and two per cent wage growth, which we have had, is not sustainable. We see credit growth going lower.”
A combination of mortgage re-pricing and robust mortgage volume growth has supported banks’ earnings in recent years but that may be coming to an end.
Banks re-priced mortgages by as much as 63 basis points over the past 12 months, which will increase earnings in the current financial year.
But some analysts have expressed concern that mortgage re-pricing is turning into a zero sum game; as rates have gone up the interest burden on highly indebted households has become more serious, limiting the scope for further re-pricing.
The impact of higher rates on household incomes is likely to be reflected in reduced borrowing capacity. Macquarie sees mortgage volume growth falling to low single digits towards the end of the 2017/18 financial year.
An ongoing concern for the banks and their shareholders is that the Government might increase the levy in future. A bank levy was introduced in the United Kingdom in 2011, payable on liabilities in excess of £20 billion.
The levy was introduced at a rate of four basis points (0.04 per cent) and was increased to seven bps at the beginning of 2012.