Why bank shares are getting slammed on federal budget tax rumours

The Commonwealth Bank of Australia (ASX:CBA), National Australia Bank Ltd (ASX:NAB) and Westpac Banking Corp (ASX: WBC) share prices are all being sold down ahead of the federal budget.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The share prices of the big banks like Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) are being hosed down today on news reports the federal government may increase their tax burden when it hands down tonight's budget.

Federal Treasurer Scott Morrison is reported by Sky's news channels to want to tackle the dominance of the Big 4 banks in Australia and the increasingly (cartel like) strength of their combined market position.

For example the common $2 or more charge for a consumer to withdraw cash at an ATM that does not belong to their own bank is largely a product of the Big 4's cosy oligopoly where all maintain the charge in textbook cartel-like behaviour that sees them increase profits via collective practice designed to keep charges at high levels. It is areas like this where the big banks are vulnerable to politically popular moves that break up their power and take money out of their profits by putting it into consumers' pockets.

Tonight's budget though is rumoured to be introducing a kind of inter-bank lending levy – according to news reports on Sky Business anyway.

Inter-bank lending is critical to all of the Big 4 banks as a source of wholesale capital to fund some of the assets (loans) on their balance sheets such as home loans over 20 to 30-year terms. The Big 4 traditionally "lend long" usually via collateralised home loans and "borrow short" commonly from each other via the issue of what the industry calls "paper" or short-term money market (debt) instruments loaned at lower rates.

These instruments (alongside retail and enterprise customer deposits) make up the majority of liabilities on a bank's balance sheet and generally have short maturities with the spread between the interest rate on the assets (commonly home or business loans) and liabilities one of the bank's key profit drivers known as its net interest margin.

The point being that inter-bank lending (including with the Reserve Bank) via paper such as certificates of deposit, bank bills, treasury bills, repos, and other short-term debt instruments commonly linked to the Bank Bill Swap (BBSW) rate is absolutely central to the daily business of banks' treasury teams managing their balance sheet risks.

Any attempt to tax or introduce a levy on inter-bank lending then is likely to be met with apocalyptic fury by the banks and exactly what the government has up its sleeve is yet to be revealed.

It's more likely any "inter-bank lending levy" the government introduces will be designed to incentivise the banks to lend more into the real economy where possible, rather than actually introducing a legally dubious tax on inter-bank lending.

Still this looks a potential issue within tonight's budget for bank investors to watch closely, as it could create extra costs and any threat to the Big 4's oligopoly is likely to threaten profits over the medium term.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of National Australia Bank Limited. You can find Tom on Twitter @tommyr345 Motley Fool contributor Tom Richardson has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »