What The Big Bank Levy Means For You

The banks are screaming blue murder. But it mightn't be that bad…

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Unless you've been hiding under a rock — and not paying attention to the falling Commonwealth Bank of Australia (ASX:CBA) share price, among others — you'll know that the federal government is coming for the big five banks with a new bank tax… sorry, 'levy'.

Yes, the bottom lines of CBA, Australia and New Zealand Banking Group (ASX:ANZ), Westpac Banking Corp (ASX:WBC) and National Australia Bank Ltd. (ASX:NAB) are going to be collectively up to $1.5 billion poorer per year, thanks to a new 0.06% levy on liabilities.

But it's not just the Big 4. Macquarie Group Ltd (ASX:MQG) is also being hit by the impost.

On its face, the new tax represents about 5% of the big banks' annual profits. And, in an effort to get bank shareholders to man the barricades, the banks are telling them about the impact in a dividend-cents-per-share manner — hoping to use the pollies' favourite 'hip pocket nerve' to galvanise investors into action.

Of course, that's 'up to' $1.5 billion. And confirmation, post-budget, that this new tax is — wait for it — tax deductible, will probably reduce that take.

Now, the Australian banking sector is famed for its competitiveness and the willingness of Australian customers to change banks, right? So there's no way the banks could all just put up their fees and interest charges to absorb the new tax, right?


Maybe the sector can't absorb the new levy. But I'd bet it can — at least in part. And the lowering of the smaller banks' credit ratings recently by S&P will have helped redress any competitiveness questions, as those banks' costs will increase accordingly.

Bank bosses have warned that the bank levy may lead to lower dividends. It might. Or it might just be used as a smokescreen for any bank CEO who was already worried that his dividend payout was too high and was already looking to lower the dividend.

But surely they wouldn't do that… would they?

I'm rarely a betting man (usually a losing Melbourne Cup bet is my maximum), but I reckon there's a 90% chance the banks find a way to pass on the levy. And I reckon the chance of a dividend cut is about 25% — but it'll almost certainly have more to do with the banks' underlying business than the levy.

Banks are good for income. But there are better options out there.

Motley Fool contributor Scott Phillips (TMFGilla) has no position in any stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited. 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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