Australian banks dazed by new tax

SYDNEY: Australia’s big banks are likely to swallow a surprise new A$6.2 billion ($4.56 billion) federal tax, industry and political sources said on Wednesday, given a lack of public support for an oligopoly that has reaped years of record profits.

The tax on liabilities unveiled in Tuesday’s federal budget caught banks, which had previously enjoyed the support of the ruling centre-right government, unawares and was strongly criticised by bank executives.

“We didn’t get a chance to engage; it was a snatch and grab and that’s that,” one senior source at a major bank told Reuters.

The announcement was seen by analysts as payback for the government’s efforts to block opposition calls for a wide-ranging inquiry into banking-sector misconduct.

Treasurer Scott Morrison justified the tax as necessary to get the budget back into the black and also tapped into popular opinion, saying the charge was just a small portion of the banks’ profits.

He cautioned the so-called Big Five — Commonwealth Bank of Australia, Westpac Banking Corp, Australia and New Zealand Banking Group Ltd, National Australia Bank Ltd and Macquarie Group Ltd — against passing the costs on to consumers.

The tax resembles a charge imposed on big mining companies in 2010 that was ultimately redesigned after an industry advertising campaign that helped unseat the Labor prime minister at the time, Kevin Rudd. Banking sources said they had little leverage to mount a similar campaign, due to modest support within parliament.

“It is a done deal, I don’t think you can put a wedge in that,” said another representative of the Big Five.

The affected banks all came under immediate share price pressure late Tuesday and again on Wednesday morning before some of their losses were pared.

Westpac chief executive Brian Hartzer said on Wednesday that the government’s reforms ran counter to the prudential regulator’s objective of making bank balance sheets “unquestionably strong”.

“Higher taxes reduce the banks’ ability to generate capital that supports lending and stability in times of stress,” Mr Hartzer said in a release. “There is no ‘magic pudding’. The cost of any new tax is ultimately borne by shareholders, borrowers, depositors and employees.”

Bank chiefs received a phone call roughly one hour before Mr Morrison revealed the budget measure on Tuesday evening, four sources said, catching them off guard. The sources, from banks and political offices, declined to be identified because they were not authorised to speak publicly.

The tax is designed to prevent the banks from passing the cost on to lending customers, targeting liabilities such as corporate bonds, commercial paper, certificates of deposit and Tier 2 capital instruments, rather than mortgage books.

Commonwealth Bank chief executive Ian Narev indicated that the bulk of the cost could be passed to customers, likely through interest rate changes, and to shareholders through lower dividends. The alternative, according to Morgan Stanley analysts, is an estimated 4.5% cut to the banks’ annual earnings.

“As every business owner or employee knows, every extra cost needs to be borne by customers or shareholders, or a combination of both,” Mr Narev said in a release.

NAB chief executive Andrew Thorburn said the tax would affect 10 million customers as well as shareholders. ANZ and Macquarie said the impact was unclear.

The tax lifted stock prices of smaller lenders as investors bet it would crimp the big banks’ competitiveness.