18 May 2017

Banking Super Profits Tax

Mint Asset Management – Greg Fraser


In last week’s Australian Federal Budget, Treasurer Scott Morrison lobbed a tax grenade into the banking sector that, unlike the proposed mining tax of 2010, has a very good chance of surviving, much the chagrin of the big bank executives.

In 2010, Australian Prime Minister Kevin Rudd dumped a 40% resources super profits tax on unsuspecting mining executives as a unilateral attempt to redistribute mining sector profits.

Aside from the fact it was an indubitably stupid tax, poorly thought out and indiscriminately destructive to investment in the sector, it immediately raised questions about sovereign risk for investment in Australia generally.

The already heavily taxed resources industry was being told to pony up even more tax dollars to prop up the rest of the economy. The RSPT was expected to raise approximately $9 billion in the 2013-14 year but ultimately it raised nothing more than the ire of a large and important sector of the economy, which contributed to Mr Rudd’s downfall.

Unlike the mining tax however, the bank liability levy has a good chance of getting up as it hits greedy banks and helps to fix Australia’s budget problem, according to the government.

The 6 basis point liability levy, expected to raise $6.2 billion over four years, was a grab at what many have perceived to be the excessive profits of the big four retail banks plus the millionaires factory at Macquarie Bank.

Last years’ aggregate cash earnings from ANZ, CBA, Westpac and NAB totalled almost $30 billion.

There is no question that Australia’s big four retail banks are highly profitable with return on equity metrics anywhere from 11% to 15% while the ten-year government bond returns just 2.65%.

The government’s reasons for the levy actually appear valid, including a charge for the government-backed deposit guarantee (up to $250,000) that the banks currently get for free.

It is the bland inference that the large banks should surrender part of their profits to support the Budget finances that really rankles.

Since the GFC, regulators and governments across the world have sweated and toiled to make their financially important institutions “unquestionably strong”. The Australian banks were never really in much trouble but have manoeuvred their capital bases into a position where their stability cannot be questioned for now.

Shareholders have played their part in this barricading by providing substantial new equity and arguably foregoing plump dividend increases. Dividend reinvestment plans have also contributed valuable equity to satisfy regulators near and far of their good standing.

Now, bank executives are threatening to throw their shareholders under the government bus by suggesting that this new cost cannot simply be absorbed. ‘Something gotta give’, they cry.

Bank bashing is a favourite ritual of politicians of all persuasions and curries favour with an electorate that sees unworldly executive salaries, dubious corporate behaviour on occasions and gigantic company profits.

The Opposition has been baying for a Royal Commission of Inquiry into bank behaviour for some time, so the levy goes some way to circumventing that call by adding in additional strict behaviour guidelines for the banks.

Perhaps the real danger here is not that Australia’s banks will suffer an earnings hit from the levy, but that the broader signal for the government that perceived excessive profits are able to be plundered for the good of the country.

If the banks can be hit today, which sector will next fall into the sights of a beleaguered Treasurer?

Expect the banks to fight long, loud and hard against this impost although it will be interesting to see whether the public falls for its argument.