Never has there been more speculation as to the future of Australia’s banking sector than in recent times. Word on the street is that housing markets are largely sustaining, not just our nation’s financial services industry, but the fate of the economy itself.
This message was apparent in the recent federal budget proposals intended to consolidate Canberra’s coffers and generate sufficient revenue to address the gaping economic deficit.
Mind the gap
A new bank levy was one of the primary sales pitches Treasurer Scott Morrison led with, suggesting taxing the big banks would generate an extra $1.6 billion annually, or $6.2 billion over four years.
Interestingly though, recent reports suggest a miscalculation between what the government says the bank levy will earn them, and what the banks claim they’ll be required to contribute, according to the proposed percentage amount.
Last week, the Commonwealth Bank, Westpac, ANZ and NAB estimated they would be contributing a combined $965 million a year after tax, or $1.38 billion before tax. It seems someone, somewhere has fudged some figures.
Yet to be accounted for is Macquarie Group’s contribution, however analysts speculate that even with its forecast, the investment bank will fill a very small part of the gap between government expectation and fiscal reality.
According to Deutsche Bank analyst Andrew Triggs, even with Macquarie’s contribution, there’s an obvious shortfall in anticipated revenue from the proposed levy, as it currently stands.
“As such, the levy may need to be lifted in order to achieve the government’s goals for budget repair,” he said.
Concerns around present and future governments using banking sector profits as a ready-made revenue raiser, by lifting the levy contribution at will, was voiced by the sector after the budget announcement. The same thing has already occurred in Britain, where their banking levy has been raised nine times since its inception.
Morgan Stanley analyst Richard Wiles said it remains unclear right now as to how the tax will impact bank earnings and the stability of the financial services sector, as it depends on the potential for an upward adjustment to the levy and how lenders might reconcile the cost burden with their own repricing.
Of great concern, says Wiles, is the timing of it all, as growth prospects and future bank profitability is under more pressure than ever, raising the risk of unintended consequences.
It doesn’t rain…
Banks are copping it from all directions right now. Not only are they staring down the barrel of an uncertain bottom line, with the government revealing very little about how much they intend to take in the proposed levy, there’s also regulators and ratings agencies to worry about.
The Australian Prudential and Regulatory Authority is once more making a song and dance over the requirement for more detailed information around the financial wellbeing of borrowers.
Coincidentally, the ‘third and final’ warning from APRA (it must be at least three by now!) came after 23 regional banks across Australia had their credit rating downgraded by global ratings agency Standard and Poor last week.
S & P’s credit analyst Sharad Jain said the “rapid rise” in household debt and house prices has exposed our nation’s financial system to “greater economic risks”, with property values vulnerable to “sharp correction”.
While regulatory moves were welcomed by S & P as viable solutions to address our perceived financial systems imbalance “in an orderly manner” the risks, they say, are still substantially elevated.
Let’s face it, the last time regulators rode in all gung-ho and proclaimed the banks must henceforth toe the line they’d drawn in the sand, we saw a minor disturbance in the housing market at best, before it was business as usual. This is particularly true of Sydney and Melbourne.
“The impact of regulatory measures on house price trends is often hard to predict,” Jain said.
“It may be premature to conclude that the trend of house price growth in Melbourne and Sydney has abated sustainably. Over the past four years, there have been periods where house price growth has appeared to be tapering off before resurging strongly.”
Major banks have avoided the ratings downgrades due to an implicit guarantee from the federal government. However, shares in Bendigo Bank and the Bank of Queensland fell yesterday by 1.6 per cent and 2.4 per cent respectively after the ratings slip.
All bark and no bite?
Perhaps the government has, with the proposed inception of a banking tax, found the greatest leverage when it comes to restricting the banks’ freedom around internal lending practices, and increasing accountability to regulatory bodies.
Where APRA has tried and failed, could it be a direct hit to banking profits would be a better mechanism of control?
APRA is now requesting for the first time that banks supply information on borrowers’ debt-to-income ratios, increases in debt limits and loans to unincorporated private businesses, as concerns over heightened risks in the residential mortgage market grow.
But while the regulator’s bark has been loud, its bite has been delayed, as the banks complain that they lack the necessary resource to compile all the data APRA is demanding.
APRA general manager of statistics Katrina Ellis has criticised lenders for their apparent failure to adequately invest in their management systems.
“APRA expects that a prudent (bank) with material exposure to residential mortgage lending would invest in management information systems that allow for appropriate reassessment of residential mortgage lending risk exposures,” she said.
“Nonetheless in response to feedback received, and given the volume of changes to reporting requirements underway, APRA has deferred the first reporting period for the new reporting requirements.”
And just like that, the banks have dodged another regulatory bullet with very little by way of even a flesh wound. So, just how bulletproof is Australia’s banking sector? As household debt rises and more bluster is made of potential housing bubbles, only time will tell…
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).