Tax to benefit big banks

THE big banks will be more profitable – not less – as a result of the federal government’s new bank tax despite their fierce hostility to it, new research shows.

And the government is wrong to claim the levy, which only applies to the big banks, will give a leg up to smaller lenders, debt market experts say.

Instead, the experts claim the tax will give the banks still more power over their smaller rivals by effectively reducing their costs.

ADCM Services, a consultancy group that specialises in Australia’s debt capital markets, says the levy crystallises the “protected status” of the big banks. It means the implicit guarantee that the government provides to the major lenders is now “all but ironclad”, the group says.

As a result, it says, the big banks will likely have to pay less for the money they borrow in global markets to lend to consumers and businesses in Australia, allowing them to fatten their profit margins.

The government announced in May that it would hit the Commonwealth Bank, Westpac, National Australia Bank, ANZ and Macquarie with a 0.06 percentage point levy on their liabilities – a tax that took effect this month.

Federal Treasurer Scott Morrison has forecast the tax will raise $6.2 billion over four years, although the likely amount has been disputed by industry experts.

ADCM principal Philip Bayley noted Standard & Poor’s had since downgraded 23 financial institutions operating in Australia but left the big four alone, citing “rising economic imbalances”.

In late May, the ratings agency said it believed the major banks would receive “timely financial support from the Australian Government” if there was a crash in the housing market.

“This explicit recognition of the protected status of the major banks should now see the cost of the banks’ senior unsecured debt fall, and fall by more than the cost of the ... bank levy,” Dr Bayley said.

In the case of banks, senior unsecured debt refers broadly to money raised by issuing bonds to institutional investors around the world.

“Bank profits have been preserved and the banks owe S&P a debt of gratitude,” Dr Bayley said.

“The major banks can now look forward to a lower cost of funds, but the downgraded (regional and other lenders) will see their cost of funds increased by more than the rate of the bank levy.”

After unveiling the levy, Mr Morrison said it would “help create a more level playing field for smaller banks”.

But Dr Bayley said S&P’s move after the levy was announced had increased the competitive strength of the four major banks relative to smaller lenders.

“When the bank levy was announced, it was said that the levy would level the playing field by increasing the major banks’ cost of funding while leaving other (lenders) unscathed,” he said.

“But S&P has tilted the playing field in favour of the major banks once more.”