Budget hits banks with levy

The government has announced a levy on the big banks to raise $6.2bn over the next four years. The levy will apply to banks with liabilities of greater than $100bn, which includes the four major banks as well as Macquarie Group, and it will be calculated at 0.06% per year of a bank's liabilities, excluding hybrids and deposits of below $250,000 per individual protected by the Financial Claims Scheme.

At an annual rate of about $1.5bn, that amounts to slightly less than 5% of those five banks' expected net profit for this year. The impact will be lessened if the banks pass some or all of the levy onto customers. However, doing so will reduce the competitive advantage they enjoy over their smaller competitors.

Prima facie (ie before passing any of it on) the levy is likely to amount to a per cent or two more of the profit of the banks that make lower returns on assets (ROA) and have relatively few protected deposits (ANZ and NAB in that order), compared to those making greater ROA and with a greater slice of protected deposits (CBA and Westpac in that order). Macquarie is also relatively insulated by its large proportion of non-bank earnings, notably from asset management.

We'll be keeping an eye on the banks' reactions, but we don't see any need to change our price guides at this stage. Note that some of the share price impact of the news was absorbed today, with the banks' share prices falling between 2% (ANZ) and 4% (CBA), although that was also impacted by a weak third-quarter trading update from CBA.

Note: The Intelligent Investor Equity Income Portfolio holds shares in CBA and Westpac. You can find out about investing directly in Intelligent Investor and InvestSMART portfolios by clicking here.