ANALYSIS:While bankers fulminate over new tax on sector, their fears are widely seen as exaggerated, writes PROINSIAS O'MAHONY
THURSDAY’S controversial announcement of a new bank levy by US President Barack Obama may have enraged bankers, but fears of economic and corporate weakness are overblown, if analyst reports are to be believed.
The US administration plans to levy a tax on institutions with balance sheets above $50 billion (€34.8 billion). About 50 firms are likely to be affected and 10-15 UK and European banks with US subsidiaries are expected to be among them. It is designed to recoup losses, expected to be in the region of $100 billion, incurred in the $700 billion bailout of key institutions in 2008.
JP Morgan chief executive Jamie Dimon said it was a bad idea to punish people through tax policy, while the American Bankers’ Association protested that yet another burden on the financial industry would obviously decrease banks’ ability to lend.
Anonymous press briefings were more hostile again, with one press report citing a senior industry leader as saying that lending could be hit to the tune of $1 trillion, while a senior banker, echoing the words of pre-independence American revolutionaries, told the Financial Times that affected European banks were suffering taxation without representation.
Thursday’s market reaction was much more muted, however, with the US financial sector continuing to hover near multi-month highs. Analysts have also been largely nonchalant. Oppenheimer analysts concluded that the tax is equivalent to a mere 0.15 per cent increase in the federal funds rate.
Potentially hardest hit in monetary terms would be JP Morgan and Bank of America, each of whom could have to cough up $1 billion in after-tax income. That may sound ugly but it represents just 5 per cent of both firms’ expected earnings in 2011. Indeed, JP Morgan yesterday announced $9.3 billion in compensation and benefits for employees in 2009.
In terms of earnings, Morgan Stanley (11 per cent of 2011 eps) and Citigroup (9 per cent) would be most affected. However, Oppenheimer assumes it won’t really affect the bottom line of institutions; rather, it will be simply passed through to bank customers.
Any decrease in lending, Oppenheimer said, would be barely measurable.
Morgan Stanley analysts predicted that US and European banks would see earnings decrease by 3-6 per cent between 2010 and 2012, while analysts at Goldman Sachs drew similar conclusions, predicting a potential dip of 4-6 per cent in 2011 profits for Europe’s biggest investment banks.
However, Goldman hasn’t even incorporated that cost into its earnings estimates due to the many mitigants that are likely to absorb some of the hit.
Investment banks such as Goldman, Morgan Stanley, Barclays and Deutsche Bank, analysts generally agree, are likely to be most affected by the levy, which is structured so that banks with a stable retail deposit base will be least affected.
Japanese brokerage Nomura said that the levy could cost European investment banks as much as 20 per cent of their earnings if replicated by other G20 nations. European commercial banks, it said, could lose up to 11 per cent of profits under such a regime. As it stands, Deutsche Bank is worse-placed among European banks, Nomura estimated, with the German group likely to see earnings fall by up to 9 per cent courtesy of its large US exposure.
Nomura’s gloomy outlook is far from consensus, however.
If fears for bank profitability are exaggerated, the US administration’s claims that it will recover every dime owed to it appear similarly misleading.
It is focused on monies owed to it as a consequence of the $700 billion Troubled Asset Relief Program (Tarp). The financial levy will not target Fannie Mae and Freddie Mac, the government-sponsored enterprises whose 2008 rescue is likely to prove far more costly in coming years. How costly? Approximately $448 billion, according to a detailed report issued this week by Amherst Securities, or more than four times what the much-hyped bank levy is expected to generate.
