By 11:30 a.m. in London, Lloyds Banking Group was down 1.8% and NatWest slipped 1.51%. Barclays edged 0.13% higher after reversing earlier losses, while London-listed HSBC rose 1.2% and Standard Chartered added 0.71%.
The shifts came after stories suggested the government plans to raise the banks' sector surcharge applied to profits of London-listed institutions later this month.
Speaking to Bloomberg on Thursday, Healey called the banking sector the crown jewel of the U.K. economy. He is expected to raise the surcharge on banks' profits to 8% from 3% on Oct. 28.
The levy sits on top of corporation tax and was cut from 8% to 3% in 2023 under Rishi Sunak's Conservative government. The prospect of a higher take has revived concerns about how Labour will approach financial services as it seeks to strengthen public services while also hitting its fiscal targets.
Aviva CEO Amanda Blanc described financial services as one of the U.K.'s "core industries." "What you need to do is to encourage financial services to be successful," she 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."
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KBW said in an Oct. 12 note that restoring the surcharge to 8% could raise about £2 billion ($2.67 billion) a year and shave roughly 6% from banks' earnings. Citi said the budget could be a "clearing event," even if the potential increase overshadows third quarter results and weighs on shares.
"Fears of a tax & spend (anti-growth) budget, combined with broader geopolitical events, have driven gilt yields higher," Citi wrote on Oct. 14. "This is beneficial for the banks' structural hedge roll benefit to NII, but also serves to increase CoE, which has driven a multiple de-rating and explains why U.K. banks trade at a discount."
Citi's European financials equity chief, Andrew Coombs, who leads the team, argued that U.K. banks' underlying picture remains healthy, pointing to corporate releveraging and some of the strongest net interest income growth in Europe. They anticipate a mixed set of third quarter results, seeing adjusted pretax profit beat consensus at Barclays and NatWest, but fall short at HSBC, Lloyds and StanChart.
According to PwC, U.K. banks contend with an overall tax burden exceeding 46%, compared with 38.9% in Frankfurt and roughly 27% in New York.
The bottom line: taking the surcharge back to 8% is estimated to add roughly £2 billion a year to the Treasury and trim banks' earnings by about 6%, while separately, worries about a tax-heavy budget and the run-up in gilt yields have lifted banks' cost of equity and helped leave U.K. lenders trading at a discount.
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