By now, you will have heard of the Big Bank levy. You will also have heard how it's bad for Australia, bad for business, bad for small business, bad for shareholders, bad for borrowers, bad for lenders, and bad for just about anyone else that bank chairmen can rope into their stern warnings to the media.
What you won't have heard yet is how much it's going to cost. The 'Big 4' banks National Australia Bank Ltd. (ASX: NAB), Australia and New Zealand Banking Group (ASX: ANZ), Westpac Banking Corp (ASX: WBC), and Commonwealth Bank of Australia (ASX: CBA) updated the market yesterday afternoon with the likely impact on after-tax profit:
National Australia Bank: $245 million after tax (3.8% of 2016's cash earnings*)
ANZ Bank: $240 million after tax (4.2% of 2016 net profit after tax [NPAT])
Westpac Bank: $260 million after tax (3.5% of 2016 NPAT)
Commonwealth Bank: $220 million after tax (2.4% of 2016 NPAT)
*I used cash earnings for NAB because its 2016 statutory profits were just $350 million due to significant impairments
It's important to note that the calculations are preliminary and could change as the law is implemented and as banks make internal changes. There are also multiple ways to measure ongoing bank profits, and net profit after tax is just one of them. However, it seems safe to say that the likely impact will be around 3% to 4% of bank profits after tax.
Reading through the accompanying letters to shareholders written by banks, I was struck by the degree to which some executives claimed the levy would be bad for small businessmen. Here's NAB Chairman Dr Ken Henry:
"While we must balance the interests of all of our stakeholders, the options available to us are limited. We could reduce what we spend with our more than 1700 suppliers. Many of these are small businesses that have provided great support and service to our bank over many years. Reducing our spend on suppliers also affects our customers and shareholders." (emphasis mine)
I am extremely sceptical of the idea that this levy will impact small business. A 4% reduction in profits is nobody's idea of a terrible year, and a decision to recoup the losses from small business suppliers would be nothing short of predatory and malicious.
I also note that the banks have been quick to condemn the levy as bad for business and for shareholders, but were blithely unconcerned about the impacts on business and shareholders as a result of their life insurance, wealth management, interest rate rigging, and myriad other scandals over the years.
There are other ways for the banks to recoup costs, such as raising interest rates on loans or cutting dividends as Westpac suggested yesterday. The news is not ideal for bank shareholders, but it really doesn't look that severe from where I'm sitting.
