Shares in Britain's biggest banks fell on Friday amid reports that the government will raise a tax on lenders' profits later this month, in what would be a key test of the Labour administration's approach to financial services.
Shares in Britain's biggest banks sold off Friday amid reports that the U.K. government will hike taxes on London-listed lenders' profits later this month.
Lloyds Banking Group led losses, sliding 1.8%, while NatWest was 1.51% lower by 11:30 a.m. in London. Barclays moved 0.13% higher, reversing earlier losses. London-listed shares of HSBC and Standard Chartered, which both derive much of their profits overseas, added 1.2% and 0.71%, respectively.
Finance Minister John Healey is expected to raise the sector-specific surcharge on banks' profits to 8%, up from 3%, when he delivers his first budget as Chancellor, scheduled for Oct. 28. The levy, which sits on top of corporation tax, was cut to 3% from 8% under Rishi Sunak's Conservative government in 2023.
While the hike could raise £2 billion ($2.67 billion) per year for the U.K. Treasury, it could also slice 6% off lenders' earnings, KBW analysts said in a note on Oct. 12.
Healey on Thursday described banks as the "jewel" in the U.K.'s economic crown in an interview with Bloomberg. However, the proposed levy has revived wider concerns about the Labour government's approach to financial services, and how the sector may be treated as ministers seek to fund public services and meet fiscal targets.
Amanda Blanc, CEO of Aviva, said the financial services sector is one of the U.K.'s "core industries". "What you need to do is to encourage financial services to be successful," Blanc told CNBC's "Squawk Box Europe" on Friday. "My urge would be if you really believe that financial services is important, don't make it difficult for people to invest in the U.K., and for those businesses in the U.K. to invest in the U.K."
U.K. banks operate with a total tax rate of more than 46%, according to PwC data, compared with 38.9% for banks in Frankfurt and about 27% in New York. The tax hike could overshadow lenders' upcoming third-quarter earnings and weigh on shares.
Analysis
Why This Matters
- A rise in the bank surcharge could add around £2 billion ($2.67 billion) a year to Treasury revenues while slicing about 6% off lenders' earnings, according to KBW analysts.
- The outcome will signal how the new government balances funding public services against keeping the UK competitive as a financial centre.
- UK banks already carry a total tax rate above 46%, higher than their peers in Frankfurt and New York, according to PwC.
Background
The sector-specific surcharge on bank profits was cut to 3% from 8% under the previous Conservative government in 2023. The reported plan to restore the rate to 8% would come in Finance Minister John Healey's first budget, scheduled for Oct. 28, as ministers seek revenue to fund public services and meet fiscal targets.
Friday's sell-off was led by domestically focused lenders, while internationally oriented banks such as HSBC and Standard Chartered, which earn most of their profits overseas, rose.
Key Perspectives
The government: Healey has described banks as the "jewel" in the UK's economic crown, but the reported tax hike suggests ministers are prepared to lean on the sector for revenue as they fund public services and pursue fiscal targets.
Financial services leaders: Aviva CEO Amanda Blanc said financial services is one of the UK's "core industries" and urged the government not to make it difficult for people and businesses to invest in the UK.
Analysts and investors: KBW analysts estimated the higher levy could cut 6% off lenders' earnings, and the uncertainty contributed to losses in Lloyds and NatWest shares on Friday, with both down more than 1.5%.
Critics/Skeptics: The proposed levy has revived wider concerns about the Labour government's treatment of financial services. A higher tax burden, on top of an already steep overall rate, could weigh on investment and further pressure bank shares.
What to Watch
- The Oct. 28 budget, and whether the surcharge rise to 8% is confirmed, amended or abandoned.
- Third-quarter earnings from UK lenders, which the tax hike could overshadow.
- Further moves in bank shares, particularly domestically focused lenders such as Lloyds and NatWest.