Big weekend for Aussie bank sector

Implications of budget for banking sector


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What will the federal budget's levy mean for the major banks?

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Justin Still.

Justin Still.

In last week’s budget the government announced a levy on the major banks, which aims to raise $6.2 billion over the next four years.

Based on the wording in the budget paper, we calculate that the Major Banks Levy will impact 2018 cash earnings of the four major banks by circa 2.2 per cent to 2.6pc.

While the Government has said that the levy will raise $6.2bn over the forward estimates period net of interaction with other taxes, we are struggling to arrive at a number this big based on our current understanding of the application of the levy.

Based on our understanding and assumptions, the levy will raise circa $3.5bn over the forward estimates period. If the Government's $6.2bn estimate is correct then the impact on the major banks' annual cash earnings will be more like a 4 to 5% fall in cash earnings.

Our base case is that the banks will offset the impact of the levy on cash earnings through asset and liability repricing, as well as cost management.

We believe the falls in major banks' share prices over the past week reflects an overreaction to the levy, particularly given that we expect the impact of the levy on cash earnings to be negligible at this stage after allowing for repricing of assets and liabilities and cost management.

Half year reporting

Also over the past 2 weeks ANZ, Westpac and National Australia Bank have all reported their first half profit results, while the Commonwealth Bank has provided a third quarter trading update.

In general, cash earnings and net interest margins of the banks have been slightly below forecasts. National Australia Bank was the one exception however, reporting a cash profit which was 1.5pc better than forecasts.

Westpac has been our prefer stock in the banking sector for quite sometime and post reporting it remains our top pick within the sector.  

The keys reasons for this are:

  • Its relatively strong capital position.
  • Maintainable dividend
  • Stands to benefit most from repricing of investor home loans.
  • Relatively low reliance on treasury and markets income, which is a volatile income stream.
  • Despite low revenue growth environment, Westpac has not been compromising on investment spend particularly on technology infrastructure. On the technology front, we view Westpac as second to Commonwealth Bank.

Morgans current valuation for Westpac is $38.00. Key downside risks to our valuation include increased funding costs and greater than expected asset quality deterioration.

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