The new bank levy has opened a Pandora's box that leaves Australia's biggest financial institutions exposed to even higher costs in future, according to a leading industry analyst.
Ratings agency Moody's estimates the levy introduced in this week's federal budget will reduce the big banks' pre-tax profit by about 3.8 per cent, and UBS banking analyst Jonathan Mott says future hikes of the levy are a real possibility.
"Pandora's box has been opened," Mr Mott wrote in a note to investors.
The chief executives of ANZ, Commonwealth Bank, National Australia Bank and Westpac have all said the cost will be passed on - with shareholders, customers and staff in the firing line - but that could lead to more problems.
Mr Mott said the government could raise the levy from its July 1 rate of 0.06 per cent of banks' liabilities as punishment for passing on the cost to customers through higher interest rates.
He noted that the UK government had lifted an equivalent levy on that country's banks on nine occasions.
"Future governments could also raise the bank levy as an easy source of revenue to fund spending, tax cuts or the deficit, especially as none of the political parties oppose this policy," Mr Mott warned.
NAB chief executive Andrew Thorburn said the levy represented a threat to the health of the industry and the broader economy.
"I'm surprised to see it from any government, to be honest, because the banking sector is so crucial to the strength and viability, and the growth of our economy," Mr Thorburn told Melbourne radio 3AW on Thursday.
The big banks have already repriced their mortgage books, in particular to make interest-only and investor loans more expensive to comply with Australian Prudential Regulation Authority limits on riskier lending.
More rises could have deleterious effects on the housing market and wider economy, Mr Mott said.
"If the banks reprice their mortgage books this would put further pressure on household cash flows which are already suffering from near record low income growth, higher mortgage payments and higher power bills," Mr Mott said.
"While the implication on the 'animal spirits' in the housing market is difficult to predict, we see substantial risk to the Australian Housing Bubble."
Moody's said the government's announcement of additional regulation of the sector further reduced the threat of a royal commission into the sector.
But that offered little relief to ANZ, CBA, NAB, Westpac and Macquarie Group, the fifth bank affected by the change.
"We struggle to see the upside case in owning the banks in the current environment," Mr Mott said.
