Last week’s Federal Budget was given a meaningful shake up from the prior year with previous (“zombie”) budget measures abandoned. The Government succumbed to suggestions from the Reserve Bank of Australia (RBA) that fiscal policy needs to be a key theme in Australia’s economic plan by announcing a pipeline of key infrastructure projects across the nation (estimate of $75 billion over 10 years) including inland rail developments, a second Sydney airport and the Snowy Mountains hydro-electric scheme. This marks a clear shift from the Government’s previous strategy of “austerity” with the Treasurer still forecasting a budget surplus by 2021 ($7.6 billion)

Chart 1: Bloomberg AUSBond Composite Index (Monthly) Chart 2: Bonds vs Equities 2016/2017 (Monthly) Chart 3: Term Deposit Review – March

Bank Levy The biggest announcement on the night was the Government’s proposed bank levy which is estimated to raise $6.2 billion over 4 years. The new tax (draft legislation on Wednesday) will affect the Big 4 and Macquarie and is expected to commence from the 1st of July 2017. Given the opposition’s call for a royal commission into the Australian banking sector and a similar proposal from the Greens, we believe this legislation will be passed in parliament fairly quickly and absorbed without too much fuss. However, the impact of increased surveillance for executive pay, a review into banking competition and the ACCC pricing inquiry could be more threatening. Affected banks were quick to show their distaste for the reform highlighting minimal detail, lack of consultation and favouring of large foreign banks as key flaws of the policy. It is uncertain whether the cost will be passed through to customers and/or shareholders but in our opinion, the end outcome will be broadly credit neutral and less relevant than any change to the broader regulatory landscape expected in 2017 (i.e. residential mortgage risk weights).

Australia’s Credit Rating Following the Budget, there was no immediate impact to the sovereign credit rating nor is there an expectation at least in the short term. However, we believe wage growth and Treasury’s broader labour market assumptions will be scrutinised by the credit rating agencies in line with their concerns surrounding Australia’s inflated real estate market and consequent household vulnerability. Interestingly last week Moody’s downgraded the credit ratings of 6 major Canadian banks due to similar macroeconomic risks present in Australia (i.e. overheated house prices and elevated levels of private sector debt). The question here is whether this rating action will be duplicated in Australia any time soon for the same reasons. Although the two economies are similar in terms of systemic risk in the housing market, Australia is less vulnerable to a correction due to stronger GDP growth and lower unemployment. Australian banks are also stronger than their Canadian counterparts in terms of capitalisation and asset quality. As a result, we believe the Moody’s downgrade has enough points of differentiation to put investor concerns at ease (at least in the short term) and given the suite of measures being introduced to curb credit growth by the RBA and APRA, further risk is being constrained (albeit there is a long way to go).

Crown Resorts In corporate news, Crown Resorts (ASX: CWN) last week revealed it had entered into an agreement to sell its remaining 11.2% stake in Melco Crown Entertainment Limited (MCE). The sale is scheduled to be complete on the 15th of May 2017 and is expected to generate ~$1.3 billion. The group has outlined the proceeds will initially be used to reduce debt but no further detail has been disclosed yet. Crown is in the process of buying back the Crown Subordinated Notes (ASX: CWNHA – $406 million remaining), recently tendered to buy back its $450 million 2019 senior notes and its next significant maturity is its $300m July 2017 senior notes. Given the MCE proceeds sufficiently cover these capital initiatives, the group will have greater capital flexibility as it progresses through its large capital expenditure pipeline in 2018/19.

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