Why bank shares are getting slammed on federal budget tax rumours

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.

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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.

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