Labour’s proposed tax adjustments are stirring concerns among major UK banks, including Lloyds, Barclays, and Natwest. This move is seen as an attempt to address a substantial deficit in public finances left by the previous administration.
While a potential tax increase poses a risk to bank profits, industry analysts suggest that the impact may be mitigated through strategic financial adjustments. Lloyds and Natwest, in particular, are expected to reprice their loans to offset any potential losses.
Potential Profit Decline for Banks
According to Bloomberg Intelligence, the Labour Party’s proposed tax hike on banks could impact Lloyds, Barclays, and Natwest, potentially reducing their 2024 profits by “low single digits”. This anticipated reduction stems from efforts to address a £22bn deficit in public finances left by the previous Conservative government.
Despite concerns, analysts believe that Lloyds and Natwest will likely mitigate the profit impact by repricing their loans. They maintain that these potential tax measures will not jeopardise the banks’ targets for return on tangible equity (ROTE).
The Risk of a Windfall Tax
Bloomberg has labelled a windfall tax on the banking sector as a “real risk” in the upcoming Budget. However, the anticipated impact appears to be manageable, with less than a five per cent hit to the 2024 profits of Lloyds and Natwest.
Executives from various high street banks are set to meet Chancellor Rachel Reeves to discuss this issue further. Senior industry figures speculate that an increase in the corporation tax surcharge on bank profits is the most probable outcome.
Possible Tax Adjustments
Treasury officials are considering several options, with a likely focus on increasing the corporation tax surcharge introduced in 2016. Bloomberg has suggested a three per cent hike as a feasible measure.
Another proposal includes doubling the UK bank levy, initially introduced in 2011, which could yield an additional £1.6bn annually. This levy applies to lenders’ balance sheet liabilities and equity.
The levy adjustment is projected to raise approximately £3bn annually for the 2024 fiscal year, a figure significantly higher than the current £1.4bn levy.
Impact on Lloyds and Natwest
Lloyds Banking Group and Natwest are expected to be most affected by any additional levies due to their predominantly UK-based operations. Together with Barclays UK, these banks generated nearly £40bn in total revenue last year.
Revenue from central bank reserves constituted a significant portion of these banks’ earnings, particularly 14 to 20 per cent for Lloyds and Natwest, and roughly seven per cent for Barclays.
The substantial increase in bank profitability driven by rising interest rates last year is highlighted by Natwest Group, which has raised its 2024 ROTE guidance by over 200 basis points, reaching more than 14 per cent.
Challenging Decisions Ahead
Prime Minister Keir Starmer has indicated that the upcoming Budget will be “painful” and that those with “the broadest shoulders” will bear the heaviest burden. This statement underscores the government’s commitment to making tough fiscal decisions.
A Treasury spokesperson affirmed this stance, mentioning the need for difficult choices regarding spending, welfare, and taxation to strengthen the economy’s foundation.
Analysts’ Perspectives
Bloomberg analyst Tomasz Noetzel stated that Lloyds and Natwest’s heavy reliance on UK business makes them particularly vulnerable to these tax changes. The analysis suggests that these banks are positioned to be significantly impacted by any adjustments to the levy or the remuneration of central bank reserves.
Collectively, Lloyds, Barclays, and Natwest earned nearly £40bn in total revenue last year, with a notable portion derived from central bank reserves.
The boost to bank profitability due to higher interest rates is evident in the improved performance metrics of these banks. For instance, Natwest’s ROTE has been elevated by over 200 basis points to more than 14 per cent.
The proposed tax changes by Labour present a significant yet manageable challenge for UK banks. Analysts remain cautiously optimistic that the financial sector can navigate these adjustments without severely impacting returns.
Ultimately, the burden of these tax reforms will likely fall on banks with substantial UK-based operations, underscoring the need for strategic financial planning in the face of fiscal policy shifts.
