Perhaps the most memorable image of the 2010 mining tax stoush was billionaire Gina Rinehart standing on the back of a truck, leading a mob of protesters in chants of “axe the tax”.
Bankers being a more sedate bunch, it doesn’t look like we’ll get anything quite as colourful in the backlash against the major bank levy.
But leaders of our biggest financial institutions are still tapping into their inner protester – in their own way. The chairmen of the big four banks have written to their hundreds of thousands of small shareholders, warning of the potential impact on dividends.
With the exception of ANZ Bank’s chairman David Gonski, who struck a more conciliatory tone, these letters bluntly attacked the policy, which targets our five biggest banks for an extra $1.5 billion a year. CBA will even hold a virtual “town hall” meeting for shareholders over the tax.
In the interests of balance, then, perhaps we should also look at the benefits bank shareholders also receive from society. Surely that is relevant, too, alongside the 0.06 per cent of bank borrowings the government wants to take in extra tax?
I can think of two substantial advantages banks receive, and there are probably plenty of others. If you’re a bank shareholder who’s recently received a letter from the chairman, consider these alongside the potential hit to your dividends.
One is much cheaper money from the wholesale debt markets, where the major banks get about 30 per cent of their funding.
This isn’t a conspiracy theory pushed by the smaller bank rivals. It is there for all to see in the major banks’ credit ratings.
When Standard & Poor’s decides on the big banks’ credit ratings, it gives the big four a very strong AA-, in part because it assumes the government would provide “timely” financial support in a crisis.
Smaller banks like Bank of Queensland or Bendigo Bank don’t get this benefit. If they did, their credit ratings would be three “notches” higher than they are today.
And what is a higher credit rating worth? It lowers the cost of raising wholesale debt – a market where Australian banks, mainly the big four, borrow $125 billion a year.
The RBA has even tried to quantify this advantage. In an internal paper released last year, RBA researchers said the banks had an “unexplained” cost advantage when raising money in the wholesale markets, by paying interest rates that are 20 and 40 basis points lower than otherwise.
S&P’s decision to cut the ratings of smaller banks last month will make this cost advantage higher still.
Another benefit the major banks have is their greater ability to set prices in the loan and deposit market – known as “pricing power”.
Treasurer Scott Morrison said the banks had “significant” pricing power in a speech last week, arguing they had used it “to the detriment of everyday Australians”.
This speech was tough on banks, sure, and pricing power is a hard thing to quantify.
But make no mistake – it exists, and it is ultimately paid for by customers. Investment professionals – hardly bank bashers – acknowledge pricing power exists in spades among the big four banks, and it’s part of the attraction for investors.
Why do banks have so much pricing power?
One likely reason is a reluctance to switch banks by customers, which dulls the intensity of competition.
Even though a series of federal treasurers have encouraged customers to vote with their feet, 80 per cent of people still choose to have their bank account and home loan with a big four lender. That might be because the big four offer sharp prices, good customer service, or a large number of ATMs.
But there’s also an argument some customers are so loyal to the big banks because of a misconception that their money is safer with the big four, even though every deposit worth up to $250,000 is taxpayer guaranteed.
A 2010 paper from the Australia Institute found almost a quarter of customers thought it safer to put their cash with a bank making bigger profits, despite taxpayer guarantees of deposits.
Whatever its exact cause, pricing power is probably one reason the banks have been such a good investment over the years, alongside Australia’s record run without a recession.
Yet were pricing power or implicit government guarantees mentioned in any of the letters sent to shareholders in CBA, Westpac, National Australia Bank or ANZ Bank last month? Of course not.
Instead, the banks’ lobbying has honed in on the likely cost of the tax, and who might ultimately wear it. And on this score the banks are basically telling the truth.
It is true that some of the tax may end up coming out of bank dividends, if banks can’t pass the cost on to customers or make up for it with internal cost cutting.
If dividends are cut, it also follows that superannuation funds holding bank shares would be affected, although recent analysis suggested the hit for an average super balance of $55,000 was just $7 a year.
What’s missing from the banking industry’s anger, however, is acknowledgement of the commercial advantages these businesses receive due to their special place in the economy.
Valuing these advantages with any precision is hard. But I’d bet they are worth more than the 0.06 percentage points of liabilities the taxman will soon be taking in extra tax.