NZ tax case will barely dent Aussie banks, UBS Analysts say

Friday 17th July 2009

Banking analysts are unperturbed by the prospect of Australian banks paying back as much as $3 billion in back taxes in New Zealand, if appeals by the Bank of New Zealand against a $654 million bill for unpaid tax and interest fail.

Standard & Poor’s today reaffirmed the banks' ratings while assuming they would be unsuccessful at appeal, and with a caveat on the potentially punitive impact of penalties the New Zealand Inland Revenue Department might seek to apply over and above outstanding liabilities.

UBS Investment Research in Sydney identified $2.4 billion of liabilities covered by Inland Revenue Department actions against Westpac ($903 million exposure), ANZ (NZ$562 million), Commonwealth Bank of Australia ($280 million), and the National Australia Bank's kiwi subsidiary, the BNZ ($654 million).

The sums are all before application of IRD penalties.

However, UBS had no concerns for the capital adequacy of any of the banks if awards were made against all of them, despite no apparent provisioning for the losses by any of the banks.

All the cases involve similar structured finance transactions which, in the BNZ case, were ruled to have no commercial purpose other than to allow foreign-owned banks to exploit the New Zealand tax base.

Macquarie Equities analyst Ben Zucker told the Australian newspaper the BNZ decision was unwelcome but "not too alarming."

"It's a one-off issue and a hit on the capital side, unless it's reversed on appeal," Zucker said. "But even on a worst-case scenario, it's not a massive blow-up."

He estimated an initial provision in the range of 30%-to-50% of the exposure, rising as avenues for appeal are exhausted.

S&P today confirmed the 'AA/Stable/A-1+' ratings on the four major Australian banks, "despite the recent New Zealand High Court judgement on tax liabilities in relation to certain transactions of Bank of New Zealand".

"Although the impact of the IRD disputes on the major New Zealand banks' earnings could be material, the affirmation on the major New Zealand banks' ratings reflects their core status within the parent bank groups," S&P said.

S&P saw "an increased probability that the four major banks will need to make significant payments to the IRD in relation to these disputes".

However, such payments would not put pressure on their ratings, for four reasons:

· The payments would be one-off items, significantly smaller than the Australian major banks'
expected earnings and equity bases at the consolidated group levels;

· Australian and New Zealand banks' shareholders are likely to show forbearance for any resulting cut in earnings or dividend payments.

· banks would be topping up their equity positions in the unlikely scenario that a resultant loss caused a significant reduction in their equity bases at the group level.

· The payments are unlikely to pose any significant liquidity challenges.

"S&P considers that the increased probability of these payments reduces the buffer for further unfavorable developments in the major banks' ratings. We note that the penalty amount has not yet been determined, and that a materially punitive penalty could put pressure on the consolidated group earnings or equity bases.

As a proportion of the contingent liabilities of the New Zealand-based subsidiary banks, they were "materially larger", compared with those of the consolidated group.

UBS said that, "in the case of full provisioning, we believe: 1) potential impacts to Tier 1 ratios appear manageable. All banks mantain Tier 1 above 7.5%; 2) New Zealand Tier 1 ratios are likely to stay above the 4% minimum and 3) banks are unlikely to require APRA approval to pay dividends."

"We believe investors will begin to price Aussie banks on a longer term view as return on equity rebounds."

Businesswire.co.nz

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