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Economics Legislation Committee
Major Bank Levy Bill 2017 Treasury Laws Amendment (Major Bank Levy) Bill 2017

KING, Mr Peter, Chief Financial Officer, Westpac Banking Corporation

ZUBER, Mr Curt, Group Treasurer, Westpac Banking Corporation

CHAIR: I now welcome representatives from Westpac. Thank you very much for appearing before the committee today. I invite you to make a brief opening statement, should you wish to do so.

Mr King : I represent Australia's second largest taxpayer and a company that supports Australia's economic growth in many ways. We employ over 32,000 people in Australia, who last year paid just under $1 billion in pay-as-you-go income tax. We paid over $3 billion in corporate income tax. We returned 80 per cent of our profit to shareholders, through $6.3 billion in dividends, much of it to mum-and-dad shareholders or into their superannuation. We are also the conduit for $147 billion from offshore capital markets to fund loans in Australia.

While Westpac do not support the major bank levy, we do welcome the opportunity to provide input to the committee's deliberations. Prior to making some suggestions to amend the legislation I would like to comment on the policy. While we understand that this tax is supported by a majority of the parliament, we believe it sets poor precedent for tax policy and potentially for other industries. This law codifies the notion that it is okay to tax a small number of companies to fill a budget gap just because they can afford it. This creates investment uncertainty, and we have already seen international investors expressing concern at this change in tax policy and some have already reduced investment weighting in Australia. It is also a tax on growth and investment, where the more we lend, the more we are taxed. At a time when creating jobs is a priority, it is counterintuitive to tax growth.

Further, some rationales used to justify this levy are flawed—in particular, the banks can simply absorb the levy. A bank is not an entity separate from customers, suppliers, shareholders and employees. The fact is that increasing the bank's costs will be felt by most Australians and this includes shareholders in terms of lower returns, including dividend impacts; suppliers in terms of lower spending; and customers in terms of reduced services or changes to prices.

I will now turn to the specifics of the legislation. On budget night the levy was announced as a budget repair measure. In light of this expressed reason, Westpac recommends the legislation include a sunset clause. This would see the levy cease once the budget returns to surplus, which, on the government's projections, will be in 2021. As I mentioned before, we see this levy as inefficient, as it targets growth. It also distorts the competitive landscape. Westpac competes with international banks in key markets, such as trading in government and semigovernment securities; short-term lending, including trade finance; and business deposits. Selectively applying the levy places extra burden on Australians, while allowing foreign bank shareholders off the hook for budget repair.

Finally and importantly, the design of the tax assumes that banks will be profitable at all times. We hope this remains the case; however, prudent design would suggest the legislation be amended to allow the government to suspend payment if it places undue stress on any bank. Thank you for the opportunity to speak. I welcome your questions.

CHAIR: Thank you very much, Mr King, and thank you very much for providing a copy of your opening statement. I assume the committee would like that tabled. If you are happy to table that document, that would be terrific. I will use my chair's prerogative to kick off the questions. Do you believe that Australia's financial services sector is highly concentrated?

Mr King : Australia is a small country so there are concentrated industries in Australia and banking is one of them. It is just a fact of life in a country that is the size of Australia that you do have concentration in a number of markets, including financial services.

CHAIR: I note that in the last couple of weeks Standard & Poor's downgraded the ratings of all but the major banks. What do you think that this suggests to us about the level of competition in the banking sector at the moment?

Mr King : How Standard & Poor's rates some of our paper does not impact competition. Competition—I live and breathe it—is very intense in deposits, very intense in mortgages and intense in most parts of our business. I think there is a focus on this rating issue, but now 70 per cent of our loans are funded in deposits. We are much less reliant on wholesale funding than we were before the crisis. In fact, the people who set the price for wholesale funding are the investors. They may take account of ratings agencies' recommendations, such as S&P, but they set the price for wholesale funding.

CHAIR: Have you made an estimate or calculated or modelled what this levy might cost Westpac potentially in dollar terms next year, for instance?

Mr King : We said $260 million after tax in terms of the impact on Westpac, and that was estimated based on a historical balance sheet. What it will eventually be will depend on the balance sheet at a future point in time.

CHAIR: Have you done any modelling as to what it might cost Westpac should Australia lose its sovereign AAA credit rating?

Mr King : Again, in terms of the way that we fund the bank, 70 per cent of our funding comes from deposits, and deposits are predominantly domestic. Of course, depositors get preference under the Banking Act, and, within that, some of them are guaranteed, so we would not expect deposits as such to be impacted by any rating change. Competition is what drives pricing in the deposit market. I will just take you through the impact of it. If we look at wholesale funding, it is about 17 per cent of our funding that is impacted by what investors pay, particularly offshore. It is very hard to estimate the impact. It could be zero. We saw Canadian banks downgraded the other day, and it looks like the impact was quite small. In the wrong conditions, it could be quite large, so it is very hard to estimate.

CHAIR: You suggested that your international investors have some concern over the imposition of the bank levy. Now, $260 million on a relative basis for an organisation of the size and the numbers that you were explaining to us earlier does not sound like something that international investors should be concerned over. Is it the dollar amount that they are concerned over?

Mr King : It is a number of factors. Investors like certainty, and this measure was not expected. It was a surprise. That is one factor. The second thing is that it is open ended with no sunset clause, so they are thinking about the policy implications and the read-through. I will just read you an email we have had. One of our UK investors, an equity investor, said to us: 'We've reduced our exposure to Australia as a result of the damaging tax recently announced affecting the banking sector. We see this as raising the risk profile of the whole country and have taking our weighting down from 33½ per cent to 27.2 per cent.' So investors in Australia look at policy and policy certainty, and they have options. They do not have to invest in Australia; they can invest in other countries.

CHAIR: Do you think that a reduction in company tax rates would have a greater impact on a dollar basis and perhaps, rather than concerning international investors, would delight international investors in the opposite way?

Mr King : I am not sure the two issues are linked. It is policy—

CHAIR: Surely, you are suggesting that they both affect the bottom line.

Mr King : Well, they will both affect the bottom line, but investors are looking for certainty, and the challenge with the current bank levy is that it is open ended and was a surprise.

CHAIR: Should a company tax rate cut apply to Westpac, as is this government's intention—I am just looking at your opening statement—would the effect of that on the bank's costs be felt on shareholders in the form of higher returns, including dividend impacts; on suppliers potentially as higher spending; or on customers in terms of improved services or changes to prices?

Mr King : That is possible. If the tax rate is reduced, our costs have gone down; we have opportunities to invest more; we have opportunities to change our interest rates; we have opportunities to employ more people. They are all possible. It is a fair way out, in terms of timing, that that may happen, so we will see if we get there.

CHAIR: I would be assuming, then, that you would be hoping that the opposition would not prevent those changes to company tax rates going through the parliament.

Mr King : I think it would be good to have a tax policy that is consistent for all companies.

CHAIR: Thank you very much.

Senator KETTER: I want to follow on from the chair's questioning about the concerns expressed by international investors that you have talked about. Would it be fair to say that part of their concern is around the policy purpose confusion in relation to the bill? Is that one of the factors?

Mr King : I think when there is uncertainty in policy, investors get confused. In this case there have been three purposes, but our reading of the document was this is primarily for budget repair. If it is for budget repair, then we believe it should have a sunset clause.

Senator KETTER: In terms of your own business going forward over the next four years, can you share with us what credit growth and liability growth you are expecting over that period?

Mr King : Most market estimates are for growth to be in the four to five per cent range in balance sheet growth. That is broadly what most estimates are.

Senator KETTER: How does this compare with your reading of the budget papers in terms of implied credit growth?

Mr King : It is very difficult for me to comment because we have not seen the detailed modelling either for the industry or individual banks. It is probably a question for the Treasury.

Senator KETTER: So you are not in a position to say whether they are realistic or not in your view?

Mr King : I have not seen the modelling.

Senator KETTER: Have any of your analysts looked at the assumptions that are built into the revenue projections?

Mr King : We have seen the reports from equity brokers and media that highlight that there is a difference in what the banks have released and what is included in the budget papers. But, again, I could not comment with certainty without seeing the modelling.

Senator KETTER: Can you comment in relation to what extent costs are passed on to consumers?

Mr King : In the budget papers? No. Again, I have not seen the modelling.

Senator KETTER: Is it concerning that no one seems to understand how these figures have been put together?

Mr King : I think we can look at the impact on our company and think about how we respond. In terms of the impact on the budget, that is for the government to work through. The government did say there is interplay with other taxes—that could be franking credits, or it could be corporate tax. It is very difficult for me to comment without seeing the modelling.

Senator KETTER: Have they provided you with any further detail?

Mr King : No. We have asked for the modelling, and we did ask during the consultation process, but that was not forthcoming.

Senator KETTER: I understand you were promised that you would be provided with the modelling?

Mr King : No. My recollection was that it was indicated that it would not be provided to us.

Senator KETTER: Some of the measures included in the bill provide the Treasurer with the opportunity to vary the liability base of the levy if there is a shortfall in revenue. Do those mechanisms within the bill concern you?

Mr King : With any bill, we like changes to go through due process and consultation. That is standard. We would hope that any changes, if they are required, would go through that process. One of the challenges we have is that the speed with which it has been put in means we have not been able to think through all the issues involved. In some way, it might be useful to have an ability to change it in a way that removes unintended consequences.

Senator KETTER: In terms of the other efforts of the government and APRA to introduce prudential reforms, do you believe the levy compliments those other measures?

Mr King : One of the points I made in my opening statement was about the ability to stop the levy. The economy is cyclical. Banking is also cyclical. At the current time, the levy does not have a major impact in terms of the stability of the system, but if we are in a situation where the economy does have a downturn and the banking system becomes less profitable, or even makes losses, we think it would make sense to have the ability to suspend the levy. If you look at this over a cycle, there are potentially challenges. In relation to other things such as 'unquestionably strong', we have worked very hard since the GFC to boost our capital and funding levels. We will hear soon from the chairman of APRA on where he wants to set the standards for 'unquestionably strong', but we think we are well positioned. The one area that will require much more thought is what is called TLAC, or total loss absorbing capital. That could create issues with the interplay with this levy.

Senator KETTER: Do you think anyone understands how the short-term money markets are going to be impacted by the levy?

Mr King : The levy is quite blunt in that it just applies to liabilities. It is a bit of a blunt stick. The challenge is that we do not understand how it will translate into markets. Certainly, we made the points in our numerous submissions that it would make sense to remove money market activities, derivative activities—those ones that are short-dated and require liquidity. The one that we call out in our submission is repurchases of government securities. Certainly, there is a challenge in that market where they trade on very fine spreads—one basis point. So in that context a six basis point cost on the funding of those is quite material. That might mean the major Australian banks are not in a position to compete or even be in that market anymore, and that could see it move to foreign banks or other market participants. We do not think that makes sense from a competitive perspective.

Senator KETTER: Just in general terms, what would you say is the importance of the short-term money markets?

Mr King : Having a market that is liquid and trusted is very important for setting interest rates in the economy, for managing risk and for cash flow. So it is very important to have a system that functions very well.

Senator KETTER: Isn't it somewhat concerning that there is no clarity in terms of the impact of this measure on the short-term money market?

Mr King : I think it is an area that we will have to watch very closely as this is implemented.

Senator KETTER: You made some suggestions in respect of the inclusion of foreign banks. Outside of your retail business, can you tell us the competitive landscape that you have got in wholesale institutional trade credit?

Mr King : In institutional banking, they operate in a global market. We have operations in China, Singapore, London, New York, New Zealand and Australia. So it is a global footprint. We compete with the major US global banks, the major European global banks, the Chinese banks and other Asian banks. So it is a very competitive market. The point we are making is that, in terms of competing for Australian business, the five major banks have now got a different situation to face from those international banks. That is one aspect. I think the other aspect is more a policy piece in that Australians are being asked to pay for budget repair through the bank levy, and I do not understand why foreign bank shareholders would not be asked to contribute as well.

Senator KETTER: I am after a bit more detail. Can you tell us who your major competitors are in those other non-retail markets?

Mr King : The types of organisations are JP Morgan, Citibank, HSBC and the Chinese. They are some examples of major competitors.

Senator KETTER: What are the typical margins in those businesses?

Mr King : They are quite tight. They are very different via different products. It is a small margin, high volume, high turnover business.

Senator KETTER: How does the levy impact on your operations in those markets?

Mr King : Potentially, some businesses may not make sense anymore. The challenged ones will be corporate and government debt trading. Trade finance may be impacted. We are still working through the nuances of all these items.

Senator KETTER: You have touched on your concerns about repo. In terms of trade finance, these could be significantly impacted by the levy. Could you elaborate a bit more on that, please.

Mr King : Trade finance is one market that is international, so it can be provided either onshore or offshore. If you have different players with different funding costs it may impact where the business goes, because customers will move their business for six basis points.

Senator KETTER: What is your view about the design of the policy? Do you think this demonstrates that the government understands the impact of the levy?

Mr King : I think that the policy itself is budget repair. It is a simple calculation of liabilities times a rate. I think that is how the system has been set up.

Senator KETTER: Earlier on, Mr King, you made a comment about the potential area of conflict between the levy and total loss-absorbing capital. Can you just elaborate on that, please?

Mr King : One of the recommendations out of the financial services inquiry was that Australia adopt what is called 'total loss-absorbing capital'. Put simply, that is capital—shareholders give us funds and then we have different instruments, called tier 1 and tier 2. At the moment wholesale investors give us money through unsecured borrowings. Potentially, an extra layer gets added, which is debt that can be bailed by APRA, should they choose to. So that gives an extra loss-absorbing capacity to the bank.

That is a policy that is out there. We do not understand where the country is going to go on that particular policy, but it needs to be considered.

Senator KETTER: Right, so there is a conflict there? Or is there an undermining impact?

Mr King : If we go down that route, potentially it has impacts on this levy.

Senator KETTER: Okay, thank you.

Senator WHISH-WILSON: When was that meeting with the institutional investor that you mentioned? The one who said that they were changing their holding in Westpac because of the—

Mr King : In the last week.

Senator WHISH-WILSON: In the last week. Would you agree, given the recent downgrades we have seen across the board for the smaller banks and the very public signals our key Treasury and other officials have been making about the key risks to the economy in Australia at the moment, that the key risk is the housing market? Are there other factors at play here in relation to downgrading of the banks, or changing positions in the banks?

Mr King : If I look at the position that he put to us, he has not mentioned those issues.

Senator WHISH-WILSON: But, you would agree, though, that they are quite serious issues for investors at the moment when they are looking at the banking sector?

Mr King : Yes. Investors want to talk about a number of aspects when we speak to them: the performance of the Australian economy, certainty in government policy, the housing market, commodity prices and how China is going. So there are lots of issues that investors pick up on. In the case of this investor, they called out that they are moving underweight because of policy uncertainty.

Senator WHISH-WILSON: Senator Ketter asked you a number of specific questions about different revenue streams that you have within the bank—different areas that you are competitive in. Would it be true to say that you are a vertically integrated, well-diversified bank and that you may take funding pressure in some areas but you can balance that off across your various divisions when you consolidate your profits?

Mr King : We are a diverse business, that is right. We are a retail bank, a business bank and an institutional bank, predominantly in Australian and New Zealand from a geographical perspective. But $260 million is a lot of money for us to work through.

How we do that is that there are the four stakeholders in the financial sense: there are customers, employees, suppliers and shareholders. We have to balance that up in some way.

Senator WHISH-WILSON: Okay. In relation to your comments about foreign banks, why are you not also calling for the levy to be levied on the second-tier banks in Australia?

Mr King : That is the government's policy.

Senator WHISH-WILSON: Okay, but in terms of what you want to see—is there a reason for why you are only calling for it to be on the foreign banks, rather than on all banks?

Mr King : We would like policy to apply consistently across all industries. But I think that the government has made it fairly clear that it is not on the table.

Senator WHISH-WILSON: Yes, I understand it is not on the table. I do not want to put words in your mouth, but your comment was that you could not understand why this had not been levied on the foreign banks. I am putting the proposition to you that, in a way, it would be discriminatory if they did levy it on the foreign banks and not on the second-tier banks as well, so that everyone was on the same policy. Do you accept that would be a better policy outcome?

Mr King : In a policy sense I think it makes sense to treat people equally—or treat companies equally. That is what I believe. But in the end that is a government call.

Senator WHISH-WILSON: But the government has made it clear, Mr King, that they are treating everybody equally, in the sense that they have set a liability limit—the $100 billion. So any institution that has liabilities at that level will pay the levy. Do you see that as being a fair policy perspective?

Mr King : It is a very high limit. If we look at the UK the limit is set at a much lower level so that small operations are not captured. Again, the point I am making today is: it is unusual that we are asking most Australians to pay, through the bank levy, for budget repair and not foreign bank investors. In terms of the nuances of this policy—that is not in my hands; that is something that the government sets. My preference would be a policy that applies consistently to all players, but that is not on the table.

Senator WHISH-WILSON: I understand that. I was just interested in whether you saw the foreign banks as being your key competitors in the Australian market.

Mr King : In the parts of the market that operate in global businesses they are our key players, and the way this levy is structured has a particularly big impact on those parts of the businesses.

Mr Zuber : I think it is the low-margin part of that business which could see quite dramatic changes in flows and potentially hurt liquidity in the market that is quite critical to keeping confidence and liquidity flowing. I think that is the unique aspect of the foreign bank aspect that we wanted to call out.

Senator WHISH-WILSON: I just have a couple of quick questions in relation to implicit and explicit guarantees. I understand that it is not in the budget documents or in the policy documents that this is the rationale for this levy—that it is budget repair. But I think, underlying that, it is a fair assumption that the government is asking the banks to put their hands in their pockets and contribute to the budget because there has been a taxpayer benefit to the banks at least over the last decade in relation to explicit and implicit guarantees. Do you accept that Westpac has benefited from both those guarantees since they were implemented?

Mr King : I think our customers have and the Australian economy has. If I look at the GFC, there has been a lot of focus on guarantees of long-term wholesale funding. But the country had a choice of Australian banks not being able to import capital from offshore locations because other countries had put a guarantee on their banks—that was one choice—or having a guarantee which we paid for and bringing capital into the country. I think we made the right decision.

Senator WHISH-WILSON: I agree. I think we did too.

Mr King : In the end we supported continued growth and jobs, and that benefit went back into the community.

Senator WHISH-WILSON: I agree, Mr King. I think it was the right decision to make. I suppose my proposition is: if the taxpayers of this country are essentially insuring you against failure, do you think you should be paying an acceptable premium for that insurance?

Mr King : I think that is the case for deposits under $250,000. There is a guarantee.

Senator WHISH-WILSON: Yes. It is an explicit guarantee.

Mr King : But it is a post-funded guarantee, so if it is ever called on then there is a levy on the industry to pay for it.

Senator WHISH-WILSON: What about an implicit guarantee?

Mr King : As I said before, 70 per cent of our funding now comes from deposits. It is only 17 per cent of our funding that is subject to this assumption in Standard & Poor's. But investors set the price for investing in this country, not Standard & Poor's. As I also said before, we saw Canada downgraded the other day, and the impact there was pretty small. So I think investors are thinking about what the price is for investing in banks around the world.

Senator WHISH-WILSON: I suppose from a public policy perspective what I am interested in as a parliamentarian is what kind of benefits you have had over the last decade from explicit and implicit guarantees—and I know you have probably not quantified it and I accept hardly anyone has—because, in relation to the quantum, my feeling is that what we are asking you to pay for a levy would be significantly smaller than the overall advantage that you have received.

CHAIR: Senator Whish-Wilson, there is nowhere—and we have had this conversation—in the explanatory memorandum or in the bill that suggests that this levy is being applied as any form of compensation for a guarantee, whether it be explicit or implicit, so I think that is a difficult question.

Senator WHISH-WILSON: Chair, I am allowed my line of questioning. Unless you are saying it is somehow out of order, I do not appreciate you raising these issues.

CHAIR: You have time for your last question.

Senator WHISH-WILSON: Well, could I ask that you do not—

CHAIR: Last question.

Senator WHISH-WILSON: interject again unless—

CHAIR: Better hurry up.

Senator WHISH-WILSON: it is a point of order.

Senator IAN MACDONALD: Just be relevant to what the inquiry is looking at.

Senator WHISH-WILSON: It is highly relevant to this issue.

Senator IAN MACDONALD: In your view.

Senator WHISH-WILSON: No, what I am stating is actually factual and I do not see why you are trying to interject.

CHAIR: Well, it is not—it is not part of the bill and not part of the explanatory memorandum, so therefore it is outside the terms of reference of the inquiry.

Senator WHISH-WILSON: It is part of the justification for banks having received a benefit.

CHAIR: It is part of your justification; it is not part of the government's justification—

Senator WHISH-WILSON: I am entitled to my line of questioning.

CHAIR: I understand. So you had better get on with it.

Senator WHISH-WILSON: I ask the witnesses: have you formally or informally discussed with the Australian Bankers' Association or otherwise an advertising campaign for or against the bank levy?

Mr King : I think there were all kinds of ideas that were floated as part of the process, so that was probably one of them. I personally have not discussed it, but I am sure that was floated as an idea.

Senator IAN MACDONALD: You mentioned that the legislation needed to have an ability for the Treasurer, I assume, to suspend the levy in the event of the banks being in financial difficulty—that is my interpretation; it is not quite how you put it. Could you elaborate on that.

Mr King : If I contrast it with income tax, income tax is paid out of profit, so, if profits fall, you pay less tax. Because this is a levy on $600 billion worth of balance sheet, the levy does not change as profitability changes. So the point is—

Senator IAN MACDONALD: Okay—we are short of time. Could you suggest to me an amendment that might be needed to address that particular issue? Again, it would mean your lawyers working very quickly.

Mr King : We could.

Senator IAN MACDONALD: And I am not giving any commitment that I would support that.

Mr King : I understand.

Senator IAN MACDONALD: I would just be interested in how difficult it would be to amend the bill to take into account the issue you rightly raise.

Mr King : We will do that.

CHAIR: Thank you, Mr Zuber and Mr King.