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Will the bank levy actually lower bank profits? Maybe not.

June 1, 2017 - 16:40 -- Admin

In the comments section of my earlier post about hatred of the banks, John Walker (no relation) asked:

If the big four did pass on the tax to their customers, do you think the ‘non big four’ banks, building societies etc would grab the chance to be more competitive or grab the chance to raise their charges?

Terrific question. I don’t know for sure, but history suggests the answer is that the smaller banks would mostly grab the chance to raise their charges. That’s the argument in my latest column for the CEO Magazine. (Note that some bank analysts seem to think around half of the levy will end up impacting on shareholders as smaller profits.)

We shouldn’t necessarily conclude that higher profits for the smaller banks is a bad outcome, though. There’s more than one road to competitiveness with larger rivals.

In this case, the smaller banks have been underpricing the bigger banks for year to no great effect. For instance, ME Bank, formerly Members Equity, was for many years consistently the lowest-price lender of any substantial size in the Australian marketplace.

How much good has that done them? Well, some, but not that much. ME bank is growing, but it’s no giant yet. And for their money, its industry super fund owners get about half the return on equity they get from shares in the Big Four banks.

To grow, ME Bank and others like it need new capital – and to justify new capital, they need better returns.

None of this is certain, but allowing the smaller players to earn a little more may be an important step in helping them compete effectively with the Big Four.

Go on, read the column.

Footnote: The front page of today’s Australian Financial Review has former CBA CEO David Murray slamming the bank levy as a “hate tax”. He’s right, in the sense that the tax is only being imposed because a majority of people dislike the banks.