Australian bank stocks are being slammed again after the government revealed it would impose a levy on their liabilities in a move intended to encourage competition for retail deposits and help repair the nation’s budget deficit.

In the federal budget on Tuesday night, Scott Morrison, Australia’s treasurer, announced the four major banks and Macquarie Group would incur a charge on their liabilities of 6 basis points, or 0.06 per cent.

This levy would apply to about A$2.6tn in liabilities including senior bonds, covered bonds, subordinated bonds and all retail deposits above A$250,000 per individual, and raise A$6.2bn for the government over four years.

Treasury officials are of the view it will be tough for banks to pass on the charge to customers – a common concern. They think if the major banks cut their deposit rates or lift interest rates, smaller banks not subject to the levy will fill the gap with more competitive offerings.

Morgan Stanley’s strategy team, led by Daniel Blake, estimate the “proposed bank levy would reduce major bank earnings by ~4.5% before any repricing offsets” and would strip about 1.6 percentage points off the Australian stock market’s earnings per share. “As a result, we expect downside risk to build for ASX 200 index returns from here, and recommend positioning in Non-Bank Financials, Global-Earners, Healthcare and Materials,” MS said.

Hasan Tevfik at Credit Suisse forecast the levy should mean a 5 per cent earnings hit for these banks. He continued:

The new levy is so big, it is also expected to weigh on ASX 200 profits. By itself the levy will reduce the profits base for our market by 1-2%. Tax cuts and cost cuts will help fill the void here, in time, but it is not what a fledgling earnings expansion needs. Still there was not enough bad news in the budget to back away from our constructive view on Aussie equities.

The so-called “four pillars” are down on Wednesday, extending falls from earlier in the week. Commonwealth Bank of Australia, the largest company in the S&P/ASX 200 by market capitalisation, was down 1.3 per cent, followed by a 1.1 per cent drop for National Australia Bank, a 1 per cent fall for Westpac and a 0.9 per cent drop for ANZ Banking Group.

The so-called “regional” banks, which will not be subject to the levy, were faring better. Bendigo and Adelaide Bank jumped 3.1 per cent – its biggest gain since late March – while Bank of Queensland gained 2.2 per cent.

The S&P/ASX 200 was up 0.2 per cent, with gains for materials and industrials offsetting declines for the banks.

On Tuesday, the major banks closed lower by between 2 per cent and 3.9 per cent on Tuesday as rumours of the bank levy leaked into the market before being officially revealed in the federal budget later in the day. Commonwealth Bank was the worst of the lot, despite delivering third quarter earnings that were in line with analyst expectations (notwithstanding a slip in net interest margin).

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