The policy has been attacked by large numbers of self-funded retirees who claim the move will slash their incomes while supporters argue it will force retirees to use their superannuation rather than save it as a form of wealth accumulation.
Citigroup’s analysts found that as franking credits made up a large proportion of the value of the major banks, any changes to the system would flow through to shareholders.
Depending on the final policy and how that affects the stream of future dividends, Citigroup estimates its 12-month target share price for the Commonwealth Bank could slip from $72.05 to as low as $63.84.
NAB’s target price could fall from $31.12 to $27.21, Westpac’s from $29.87 to $26.18 and the ANZ’s from $30.19 to $26.89.
“Potential changes to dividend imputation and the removal of cash refunds from investors is likely to have a meaningful impact on bank shareholders,” Citigroup said.
“Depending on the changes implemented, this could impact major bank valuations by up to 13 per cent.”
Some of the impact may be mitigated by institutional investors, able to use the franking credits, taking up bank shares previously held by retail investors.
The fall would not be as much as what banks have suffered since the advent of the banking royal commission which has contributed to falls in actual share prices of almost 20 per cent.
Citi said that a change of government should “not be feared” by the banking sector, saying the election itself could see both sides of politics offering voters a suite of election sweeteners that would flow through to the wider economy.
Macquarie analysts returned similar figures, finding that franking credits delivered local investors a 43 per cent premium on banking stocks compared to international investors.
Modelling conducted by Macquarie found that a super investor on a zero per cent tax rate currently receives around $143 on a dividend of $100, and an investor on a tax rate of 15 per cent receives a final payment of $121.
Under Labor’s plan, final dividend payments to both tax brackets would fall to $100.
Analyst Victor German said the changes would dampen demand for banking shares among retail investors who were more likely to chase returns from infrastructure stocks and real estate investment trusts.
“We estimate that the relative attractiveness of bank shares would diminish as a result of the proposed change which may affect their long-term valuations,” Mr German said.
Citi played down the impact of another Labor policy, its plans to overhaul negative gearing.
“Investor lending growth has already moderated ahead of any proposed changes,” they said.
“Furthermore, with subdued house prices and the prospect for capital gains consequently also more subdued, negative gearing as an investment strategy is likely to be relatively less compelling than it has been in the past.
“Consequently, the impacts of changing government policy are expected to be somewhat muted.”
Shadow treasurer Chris Bowen said the analysis ignored how sharemarkets around the world already operate without refundability of franking credits, adding Labor’s plans were aimed at developing a tax system that encouraged diversification rather than distorting investment decisions.
“These are the facts: the stock market more than doubled between 1987 and 2000 when cash refunds weren’t part of the dividend imputation system,” he said.
“The vast majority of countries don’t have any dividend imputation, let alone refundability, and their stock markets do just fine. When the UK unwound refundability it resulted in little impact on the price of UK equities.”
Treasurer Josh Frydenberg predicts Bill Shorten will walk away from a suite of controversial housing tax reforms, following predictions prices will collapse this year.
Mr Frydenberg said Labor’s proposals to restrict some negative gearing concessions and to lift capital gains tax by 50 per cent will hit the market at the “worst possible time”.
“Labor came up with this policy at a very different time in the housing market when prices were heading up, and now they’re going down their policy is ill-suited to the times,” Mr Frydenberg said.
“It it might not be long before Bill Shorten drops it given Chris Bowen has got him in this mess.”
Mr Frydenberg said the current downturn was the result of a correction. Measures by the Australian Prudential Regulatory Authority to cool house prices were a contributing factor.
Shane is a senior economics correspondent for The Age and The Sydney Morning Herald.
Samantha is the The Age’s CBD columnist. She recently covered Victorian and NSW politics and business for News Corp, and previously worked for the Australian Financial Review.