Banks feel the squeeze

We have a negative stance on the Aussie banks with no buys, three sells and four neutral ratings.

We see significant risk from the bank levy announced in the federal budget (0.06% of liabilities, raising $1.55 billion a year or 5% of net profit after tax). While we expect banks to pass much of this onto customers, a Pandora’s box has been opened.

Bank repricing could easily earn the wrath of the government, which may react by increasing the bank levy rate (the UK bank levy was hiked nine times). Future governments could also raise the bank levy as an easy source of revenue to fund spending, tax cuts or the deficit, especially as none of the political parties opposes this policy.

If the banks reprice their mortgage books this would put further pressure on household cash flows, which are already suffering from near-record low income growth, higher mortgage payments (as they revert to principal and interest from interest-only loans and absorb recent repricing) and higher power bills. While the implication for the “animal spirits” in the housing market is difficult to predict, we see substantial risk to the Australian housing bubble.

Also, “subdued” was the most commonly used adjective through the banks’ first-half reporting season, with little to get excited about. Following a period of anticipation given mortgage repricing, the banks’ results were a bit of a fizzer.

Despite the recent share price pullback, we struggle to see the upside case in owning the banks in the current environment.