The enormous profits being recognised by Australia's big four banks will certainly raise flags in Canberra as smaller competitors such as credit unions and building societies urge the government to reconsider the annual levies enjoyed by the banks.
Australia and New Zealand Banking Group (ASX: ANZ), for instance, reported an unaudited cash profit of $1.73 billion for its first quarter to 31 December 2013 – an increase of 13% compared to the same period last year, which could imply an annualised profit of around $7 billion. Commonwealth Bank of Australia (ASX: CBA), which announced its half-year results yesterday, also delivered an incredible cash profit of $4.268 billion which smashed analysts' expectations and improved on the prior corresponding period by almost 16%.
While the banks are recognising enormous profits, others within the industry are calling for the major players to be hit with a new tax when the federal government conducts the biggest financial system enquiry in 17 years, dubbed "the Son of Wallace". Under the proposed tax, the big four could be forced to pay an annual tax worth around $1.4 billion for their "too-big-to-fail" status, which they believe could help level the playing field across the sector.
However, speaking after the bank's earnings release yesterday, CBA boss Ian Narev defended the major profits being recognised by the big banks, arguing that they had helped Australia survive the global economic crisis. He also argued that the bank's strong results benefited the "800,000 Australian households who own our shares directly, and the millions more who own them through their superannuation." After all, the incredible profits recognised have certainly boosted the share price, while incredible dividend distributions have also been made possible.
While Westpac Banking Corp (ASX: WBC) will not deliver any earnings results this month, National Australia Bank Ltd's (ASX: NAB) quarterly results will be released to the market next week.
Foolish takeaway
Although it is argued that a higher level of competition needs to be introduced to the banking sector, the Federal Government must also consider the effects that such a tax would have on shareholders and the local equity market as a whole.
