Healey is weighing a higher bank surcharge in his first budget on Oct. 28, according to Bloomberg. The levy, currently 3% on top of the 25% corporation tax rate, had been reduced when corporation tax went up in 2023. Lifting it now would raise banks' overall tax load above the old regime.
With the Labour chancellor ruling out a capital gains tax hike, the industry expects banks to be a prime revenue target. Analysts and investors interviewed by Bloomberg said the biggest lenders can handle an increase.
Big lenders argue a steeper tax would curb competition and broader economic growth. Barclays CEO CS Venkatakrishnan said in September that channeling bank capital into lending and investment would be preferable, and senior bank executives have met Healey to discuss potential impacts. "An increase in bank taxes at the budget would weaken the UK's competitiveness, discourage investment and job creation, and work against the government's ambition to deliver growth in every postcode," a UK Finance spokesperson said by email.
Global firms weighed in too. Citi's UK chief Tiina Lee called any hike "disappointing news," while reiterating commitment to the UK. JPMorgan's Jamie Dimon earlier this year warned that an "uncompetitive tax system" would push capital elsewhere. One open question for markets: whether any new taxes would also cover the UK arms of overseas banks.
Bank shares have pulled back as expectations for a higher surcharge built, with the FTSE 350 Banks Price Return Index down by a little more than 8% over the month to Oct. 20. Shore Capital's Gary Greenwood put it this way: "Investors are fussed but I don't think they are massively concerned that it will drive a coach and horses through profitability, and it's difficult to determine what's already priced in."
Goldman Sachs pegs the profit hit from an 8% surcharge at 2% to 3% for Barclays and 6% to 7% for Lloyds and NatWest. Still, Goldman said on Oct. 15 that a small increase would be a headwind to earnings and sentiment but "would not fundamentally alter the equity story or overall profitability trajectory."
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KBW's Ed Firth sees capacity to absorb a hike: "They're making high teens returns on equity," he said. "They're returning huge amounts of capital to shareholders in dividends and in share buybacks. They can certainly afford to pay the bank tax." SeaPoint Insights analyst John Cronin noted that Barclays' exposure is cushioned by significant earnings from the US cards and investment banking businesses.
The Big Four report third quarter numbers over the next week, starting with Barclays on Thursday. Consensus compiled by Bloomberg points to Barclays delivering £2.4 billion of pretax income, down from £3.2 billion in the preceding quarter but 17% higher year over year. NatWest is projected at about £2.2 billion of pretax income, roughly 1% above last year. Lloyds' adjusted pretax profit is expected at £2.3 billion, more than 80% higher than a year ago when it booked motor finance compensation provisions.
Higher for longer rates have likely supported lending margins, but how banks offset a tax hike is the swing factor. Citi's Andrew Coombs flagged the choice between letting shareholders take the hit or softening it by adjusting loan and deposit pricing and trimming costs.
With national debt having exceeded £3 trillion over the initial six months of the fiscal year, the deficit stood at £97.8 billion, forcing Healey into difficult decisions. On Wednesday he said the government would maintain "our fiscal discipline and drive for growth in every postcode, while giving businesses and families some breathing space." As KBW's Firth put it, "The bank tax is one small part" of a broader Treasury agenda and likely just one element of the budget.
Markets have already started to discount a higher surcharge, but details still matter for positioning across Barclays, Lloyds, NatWest and the wider bank index. If the surcharge goes back to 8%, Goldman's math suggests Barclays takes a smaller earnings bite than its more domestic peers, helped by overseas income. Near term, two catalysts line up the tape: Q3 results this week and Healey's Oct. 28 budget.
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