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Fitch: Australia Budget Negative for Banks but Impact Manageable
May 10, 2017 / 6:05 AM / 7 months ago

Fitch: Australia Budget Negative for Banks but Impact Manageable

(The following statement was released by the rating agency) SYDNEY/SINGAPORE, May 10 (Fitch) Australia's 2017-2018 budget contains measures that may negatively affect bank credit profiles, but not significantly enough to have an immediate ratings impact, says Fitch Ratings. The measures include a proposed levy on large banks and rules designed to increase competition that might erode banks' franchise strength and pricing power over the longer-term. However, proposals to allow regulators to better target housing market risks are likely to support banking system stability, while larger penalties for misconduct should help develop a stronger compliance culture. The levy on large banks would have the most immediate financial impact, but the cost should be manageable at the proposed rate of 6bp of banks' liabilities, excluding additional tier 1 capital and government guaranteed deposits. It will apply to the four major banks - ANZ, Commonwealth Bank, National Australia Bank and Westpac - as well as Macquarie Bank. The government estimates the levy will raise AUD6.2 billion over four years, which is about 5% of the affected banks' annual after-tax profits. The banks may seek to pass on the levy to customers - at least partially. That said, the government has tasked the competition regulator with completing a residential mortgage pricing inquiry by mid-2018, which may deter banks from passing the levy on to mortgage customers. The levy could intensify competition for retail deposits by raising the cost of wholesale funding. Measures to increase competition may have the greater effect on the major banks' credit profiles in the longer-term, particularly if their strong market share is significantly eroded. Customers will be granted greater access to and control over their banking data, banking licences will be made more accessible and a regulatory 'sandbox' will be created to allow fintech start-ups to develop with lower restrictions. The government has also tasked the Productivity Commission to undertake an inquiry into banking system competition, with a report expected by mid-2018. The government's proposal to allow the Australian Prudential Regulation Authority (APRA) to apply geographically-based restrictions in the housing market should help authorities deal with rising risks in some pockets of the market. However, experience suggests geographical restrictions can relocate pressures, as has recently happened in New Zealand. The government has also indicated it will grant APRA more oversight of non-bank lenders, lowering the potential of risks continuing to increase through unregulated channels. The creation of a single dispute resolution authority and a measure to increase executive accountability are less likely to have a direct effect on bank credit profiles, but could help ensure appropriate conduct is maintained by banks' management. Civil penalties of up to AUD200 million for larger banks and up to AUD50 million for smaller institutions aim to increase incentives to ensure sound conduct. In addition, the government plans to legislate that a minimum 40% of an executive's variable remuneration - and 60% for some executives, such as CEOs - be deferred for at least four years. Contact: Tim Roche Senior Director Financial Institutions +61 2 8256 0310 Fitch Australia Pty Ltd Level 15, 77 King Street, Sydney NSW 2000 Jack Do Director Financial Institutions +61 2 8256 0355 Dan Martin Senior Analyst Fitch Wire +65 6796 7232 The above article originally appeared as a post on the Fitch Wire credit market commentary page. 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