Friendly fire to hit bank customers

Those among us who are unfamiliar with the term ‘collateral damage’ are about to learn its meaning first hand, because it is what we have become – innocent victims of bad governance across Australia.

Increased taxes and charges are nothing new, with most taxpayers prepared to pay a fair share for essential services and community infrastructure.

But what started in Canberra a few weeks ago as an attack on banks appears to be tumbling out of control, with the South Australian government inventing an entirely new form of state tax on banks, and Western Australian Treasurer Ben Wyatt saying he’s also thinking of taxing banks.

Politically pain-free it may be, but the end result will be that everyone doing business with a bank will ultimately pay the price, because it is extremely easy for banks to pass costs on to their customers.

On one level what governments are doing is understandable, and might even be politically popular, because banks seem to have gone out of their way to upset customers with poor service in branches (those that remain), and provide dud investment advice while still achieving soaring profits.

But the issue that cuts deepest with everyone is the profit margin banks are able to extract from borrowers through high (and rising) interest rates on loans, while savers are penalised with low interest rates on their deposits.

Over the past 10 years, thanks initially to a guarantee from the Australian government that saved the country’s banks from the worst effects of the GFC, banks’ profits have boomed, as have their share prices.

Supported by government protection and the profits generated by the yawning gap between deposit rates and loan rates, Australia’s banks have grown spectacularly fat, arguably the fattest in the world.

Examples of just how successful Australia’s banks have become is best shown in stock market data, where the banks have displaced mining companies such as BHP and Rio Tinto as the biggest on the bourse.

The stock exchange pecking order at the close of business on Friday showed Commonwealth Bank of Australia on top, with its number one ranking due to its market value of $140 billion.

One bank on top is not significant, but the fact that second (Westpac at $101 billion), third (ANZ at $81 billion) and fourth (National Australia at $78 billion) make up the top four is noteworthy – though slightly misleading as the value assigned to BHP ($71 billion) does not incorporate its London-listed shares.

Those high values can be traced to the post-GFC, taxpayer guaranteed recovery, during which Commonwealth has risen from a 2009 low of $24 to a high in 2015 of $96 before slipping to $81.50, and Westpac has risen from $14 to $40, before easing to $30.30.

And it’s on the stock market that a glimpse of the collateral damage you’re going to suffer can be seen, because even as the debate about state bank taxes unfolded last week, the share prices of the big four recovered from the initial shock and have started to trend up.

Behind the modest price rises by the banks since last Wednesday is the fact that, whatever governments extract from the banks by way of new taxes, the banks will extract from their customers by way of higher charges.

It is impossible to measure the full effect of the new bank taxes because it is not yet known whether all states will follow South Australia and WA, if Mr Wyatt follows up with his suggestion.

But it is possible to see how the process works through the reaction of investors who are bidding up bank share prices, confident that the tax attack is simply a nuisance and possibly even a way to ratchet up their charges by an extra notch to cover the tax, and perhaps keep a bit extra in case the taxes keep coming.

Overall, the effect of states taxes on banks is a negative development, despite claims that governments need to repair their broken budgets.

But all that governments have done is transfer their own problems, caused largely by overspending on pet projects, onto the wider community.

With household debt at a record high, and the Bank for International Settlements (the peak global banking organisation) warning of the danger of a GFC re-run, which will this time catch the two countries that dodged the 2007 crisis – Australia and Canada – a rate rise today will have a magnified effect.

Small in percentage terms and not at all damaging to bank profits, the new state tax on banks taxes will hurt the very consumers who are cheering it on.