Lloyds, Barclays and Natwest could weather Labour tax raid, analysts say

Lloyds, Barclays and Natwest would see their 2024 profits fall by “low single digits” if the Labour government decides to raise taxes on banks in October’s Budget, according to Bloomberg Intelligence.

Bloomberg analysts said Lloyds Banking Group and Natwest would likely offset the hit to their profits by repricing their loans, while they did not expect the potential measures to derail the lenders’ targets for return on tangible equity (ROTE).

The research adds to signs that the UK banks, which enjoyed bumper profits on the back of higher interest rates last year, could be an easy target for a tax raid to fill what Labour says is a £22bn “black hole” in the public finances left by the Conservative government.

Bloomberg said on Tuesday that a windfall tax on the banking sector is a “real risk” but that its “impact looks manageable”.

City A.M. understands that bosses from some high street banks have been summoned to meet Chancellor Rachel Reeves in Downing Street on Thursday, where they will likely raise the issue.

The government has not committed to raising taxes on banks, but in his first major speech as Prime Minister Keir Starmer said recently that the Budget would be “painful” and that the heaviest burden would be carried by those with “the broadest shoulders”.

Treasury officials have a range of options to choose from, but senior industry figures think the most likely outcome is to increase the corporation tax surcharge on bank profits, introduced in 2016.

Bloomberg said a three per cent increase in the surcharge was “a possible option as policymakers consider the impact on monetary transmission and credit supply”.

Lloyds Banking Group and Natwest would be ‘most directly affected’

Analysts also floated the possibility of doubling the UK bank levy, introduced in 2011, by reducing interest paid on the £760bn that commercial lenders hold in reserves at the Bank of England.

The levy applies to lenders’ balance sheet liabilities and equity and is expected to raise some £1.4bn in the 2024 fiscal year, according to the Office for Budget Responsibility.

Bloomberg said that raising the levy to £3bn through a European Central Bank-style “deposit tiering” system would translate to a less than five per cent hit to Lloyds’ and Natwest’s 2024 profits.

“Lloyds Banking Group and Natwest – with 90 per cent-plus of UK-based business – would be the most directly affected by any additional levies or changes in remuneration of central bank reserves,” said Tomasz Noetzel, an analyst at Bloomberg.

Combined with Barclays UK, they earned nearly £40bn in total revenue last year. This includes £7.4bn from central bank reserves, which made up between 14 and 20 per cent of Lloyds and Natwest’s revenue and roughly seven per cent for the wider Barclays group.

“The huge uplift to bank profitability that rising rates brought in the UK is exemplified by Natwest Group, which raised its 2024 ROTE guidance at least 200 basis points to more than 14 per cent,” Noetzel said.

“Though capital return and buyback have boosted ROTE expectations, much of the uplift comes from expectations for slower monetary easing in the UK and better margin performance.”

He added: “The chart for Lloyds Banking Group, the other heavily UK-focused domestic bank, is similar.”

The Treasury has not ruled out the prospect of tax rises, with a spokesperson saying: “The Chancellor has been clear that difficult decisions lie ahead on spending, welfare and tax to fix the foundations of our economy.”