British bank stocks recovered modestly on Monday after sharp losses last week, with analysts arguing that fears of new taxes on the sector may be overstated.
NatWest (NWG) shares, which fell 4.9% on Friday, and Lloyds (LLOY), which dropped 3.4%, were both trading in the green at market open on Monday.
The declines followed calls from a think-tank for an additional levy on banks and a Financial Times report suggesting industry leaders were concerned the government could raise revenue by targeting lenders.
However, several analysts believe the scale of the selloff was excessive given the uncertainty surrounding any potential tax measures.
Analysts dismiss scale of selloff
Jonathan Pierce, analyst at Jefferies, said in a Reuters report that the recent market reaction did not match the likelihood of the proposal being enacted.
“If it were genuine flag-flying by HMT (the British Treasury), one might expect a modest selloff. But a 5% hit to domestic banks on the back of yet another think tank highlighting potential reserve-remuneration-related benefits is not justified in our view,” Pierce noted.
He added that while an extra bank tax might be introduced, it was unlikely to take the form currently suggested.
The think-tank proposal targeted the interest banks earn on the hundreds of billions of pounds they hold in reserves at the Bank of England, a legacy of the central bank’s quantitative easing programme.
These balances are now being gradually reduced.
Likely alternatives to a reserve tax
Bank of America (BofA) analysts also downplayed the likelihood of the suggested reserve-based tax.
Instead, they argued that if the government did seek additional revenue from the sector, the most probable route would be through the Banking Surcharge.
The surcharge was cut from 8% to 3% in 2023, coinciding with the increase in UK Corporation Tax from 19% to 25%.
Raising this surcharge, BofA suggested, would provide a more straightforward mechanism for boosting tax contributions from lenders.
Such a move would have uneven effects across the sector. According to BofA, Lloyds and NatWest would be more exposed due to their domestic focus, facing an estimated 3% reduction in profits by 2026.
By contrast, Barclays, with its broader international operations, would see a smaller impact of around 1.5%.
Economic growth considerations
Beyond the immediate effect on bank earnings, some market observers highlighted the potential economic consequences of increasing the tax burden on financial institutions.
Rory McPherson, Chief Investment Officer at Wren Sterling, said it was important for the government to take account of the wider business environment before introducing new measures.
“We would hope the government has looked at the impact of implicit taxes on business, like the rise in interest rates and national insurance contributions and the impact of those on UK economic growth,” McPherson said.
With UK banks still adjusting to a higher interest rate environment and a weaker economic outlook, additional taxes could weigh further on profitability and lending capacity.
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