Peter King the Chief Financial Officer of Westpac talks about the financial impact of the bank levy, and will customers and shareholders bear the brunt?
Introduction Westpac Bank Levy
Ross Greenwood: First up on the program, of course, the debate in regards to the bank tax does continue. Let’s just pick up a little bit of the prime minister today talking about this with the treasurer Scott Morrison. The interesting change in developments today is that the Prime Minister and the treasurer have indicated that this tax will be tax deductible or the levy will be tax deductible. Just have a listen.
Speaker 1: Is the bank tax which the government announced in its budget, tax deductible for the big banks?
Speaker 2: Mr. Speaker my advice that it will be a deduction for the banks as an expense that they had.
Ross Greenwood: Therefore as a result six and a half billion dollars, if you consider over three years. Let’s go back the best part of 1.2 billion per year. Now, if it is thoroughly deductible against other income the banks earn, then they already pay 30% in tax pretty much give or take according to my maths. That means let’s call it a third, do they get 400 million of the 1.2 billion back on an annual basis.
I’m a person who knows this because I have done the numbers, crunched it and that is Westpac today. Has hit the markets and basically said it expects a $260 million annual cost hit as a result of the government’s bank levy. It’s sent out a letter to shareholders and again protested this levy. Let’s go now to the chief financial officer of Westpac Peter King King who’s on the line. Many thanks for your time Peter King.
Interview with Peter King, Chief Financial Officer Westpac
Peter King: Pleasure Ross Greenwood.
Ross Greenwood: Were you surprised to discover that the levy is now tax deductible?
Peter King: Ross Greenwood, I think we understood following our meeting with Treasury some time ago that it was deductible, so now that was confirmed what we understood in terms of the levy itself.
Ross Greenwood: Does that mean according to my equation, I mean you know the math better than me, that the government technically collects less because it might collect the six and a half billion over three years from the big four Plus Macquarie, but then it earns a certain amount of that money back as a tax deduction?
Peter King: Ross I think the budget papers made it clear it was net of tax, so I don’t think there’s any new information in terms of what was said in Parliament today.
Ross Greenwood: In other words, the government is going to collect more tax from the banks but then will hand back a tax deduction. Is that the way in which I’d read it?
Peter King: I think what we announced today was the new levy which is significant from my perspective is 370 million but then after we get the tax deduction is still 260 million. So it’s significant, we think it’s important that shareholders understand the potential cost of this new levy. Obviously, we haven’t made any decisions on how to react to the levy but we need to see the final legislation before we can think those issues through.
Ross Greenwood: Okay because as the bank quite clearly pointed out today and other bank executives have done the same thing, somebody would have to pay for this levy. It’s either going to be the customers or it will be the shareholders. You winded up in terms of the shareholders. What the cost would be if they flee bare the impact of it and you put it in dividend per share. Just explain that.
Peter King: Yes, the treasurer certainly made his point clear that shareholders shouldn’t say, sorry, our customers shouldn’t be impacted by this and we wanted our shareholders to understand what that means. So what we said today is, it’s equivalent of about eight cents per share or that’s four percent of last year’s total dividends. I think by any measure it’s a significant change if shareholders are impacted.
Is it a One-off Tax?
Ross Greenwood: Okay, the other aspect of this which is also important and some might people might say, “Well, okay profits of banks will grow as a result, dividends might grow in the future, it might be one, two years of dividend growth that might be coming out from the banks at this stage. The truth is this is an ongoing tax or levy. That’s what people are really going to get through their head. It’s not as though this is a one-off, this is something that goes off into the future as well.
Peter King: Yes, that certainly as a budget repair levy is how this was announced on budget night and we believe that at a minimum it should have a sunset clause so it doesn’t continue. It should stop at the end of this budget cycle, so the end of the four years is our position on that.
Bad Public Policy
Ross Greenwood: The interesting thing is that your Chairman Lindsey Maxsted today has come out and said this new tax is bad public policy and inefficient tax. The targets is just five companies who are already are among the largest tax payers in Australia. the interesting side of this is if say for example and we hope that wouldn’t happen but if bank profits did fall for any reason, if there was any real problem in the way in which bank profits came out ,therefore dividends to the shareholders also came out. The truth is that the levy would continue because it is a levy on the liabilities that the banks are holding and so that’s not something that can easily be done away with over the economic cycle as it were.
Peter King: Yes, Ross that’s a very good point which we also made in our original submission to Treasury that this levy shouldn’t be payable if the banks have challenging times and report a loss. So it’s not like income tax that’s paid out a profit it’s based on the liability and we believe that’s not a well-designed structure for a financial system which sits in the middle of the economy.
Ross Greenwood: In this regard also today we’ve seen from Standard & Poor’s that the credit ratings of 23 Australian institutions have been lowered on a buildup of what they call economic imbalances the government claims today that as a result of this bank levy Australia has maintained its triple-a credit rating. I mean this is the other balancing act that’s going on with Australia at the moment because if Australia loses its triple-a credit rating then it’s quite clear that the credit ratings of our big banks would also be lowered one notch as well which would mean that the cost of funding would also go up.
Peter King: Yes, Ross Greenwood I think you’ve articulated that very well. S&P have highlighted that housing prices have grown substantially in the last four years and I believe that some moderation there would be helpful and they also say that they think that that will happen gradually over time however of course if we did lose if the country did lose the triple-a rating it would directly impact the banks ratings that’s clear and that would force up cost of funds for the economy.
Ross Greenwood: There’s no doubt about that. It’s absolutely true but there’s other issues right now with that bank levy as well Westpac coming out and saying it will cost 260 million dollars but that’s even after the tax deductibility, the nature of that as well. Peter King is the chief financial officer of Westpac. We’ll talk up next with Standard & Poor’s S&P global about the reason why they’ve cut the ratings on those 23 financial institutions but in the meantime Peter King we appreciate your time in the program this evening.
Peter King: Thank you Ross Greenwood.