A contentious policy from the 2017 federal budget was the impost of a 0.06 per cent levy on the liabilities of banks with deposits of more than $100 billion.
Politics aside, is there an intellectual basis for the imposition of such a levy? Is it likely to change the game for the banks in the long run? And, as investors, should we care?
Levies on banks are not unusual around the world. Here in Australia, we used to have the Financial Institutions Duty (FID) and the unfortunately abbreviated BAD (Bank Accounts Debit) taxes that were abolished when the GST was introduced. There was also talk of a bank levy after the global financial crisis, tabled as a protection scheme for depositors. The former Abbot government took the 0.05 per cent levy off the table in August 2015. It has now been re-introduced to generate revenue, rather than protect deposits.
It is difficult to suggest that given the history of bank duties, the introduction of the levy blindsided the banks. Just as requirements to raise Tier 1 capital ratios in the wake of the Basel III regulatory reforms were taken in their stride, we anticipate the levy will be absorbed through restructuring of bank offerings.
Now let’s turn to the investment case. Early estimates are that the profit impact for the banks will be between $300 million and $400 million. Those who have been watching bank shares and earnings will understand the challenges these institutions face in generating sustained earnings growth, and will know that they are not growth stories.
Bank investors who have ridden though the flat earnings cycle have done so because of the stocks’ strong financial health, the perceived security, and of course, the prized dividend. This is why the banks continue to be a mainstay in most income-seeking investors’ portfolios and, at Lincoln, remain star income stocks.
You may ask whether the earnings hole cause a cut to dividends. In the latest reporting season, all the banks maintained a steady dividend. This has been a consistent trend. National Australia Bank’s 99¢-a share dividend has been maintained over the past seven reporting periods. Nevertheless, banks are currently at the top of their payout ranges. Although this is likely to continue in the near-term, over the longer-term it is unsustainable unless the banks either lift their earnings or they lift their dividend policy. Given that neither are likely, we believe there could be a moderating of dividends beyond this year.
The banks are leveraged to the economy, so if you believe in Australia’s future, it is inevitable that the big four banks will benefit. While it might be a stretch for them to grow their earnings in the medium-term and share prices will likely be range-bound, we still believe income-seeking investors can count on the banks to continue to meet their dividend commitments at, or close to, current levels.
Published Tuesday 23 May 2017
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