UK Tax Hike Concerns Affect Shares of London Banks

Shares of major British banks declined on Friday amid reports of a potential tax increase on profits. Lloyds Banking Group saw its shares fall by 1.8%, while NatWest experienced a decrease of 1.51%. Barclays shares ended up 0.13% higher, after initial losses. Meanwhile, HSBC and Standard Chartered, which earn a considerable portion of their profits overseas, experienced increases of 1.2% and 0.71% respectively. This market reaction occurs as the UK government is expected to announce a hike in the bank sector-specific surcharge to 8% on October 28, up from the current 3% rate, which was reduced under Rishi Sunak's government in 2023. Finance Minister John Healey is expected to introduce these changes during his first budget as Chancellor later this month. Analysts from KBW estimated the hike could reduce banks' earnings by 6% despite potentially raising £2 billion ($2.67 billion) annually for the UK Treasury. Current tax rates for UK banks exceed 46%, compared to 38.9% in Frankfurt and about 27% in New York. Concerns over the Labour government's approach to financial services have arisen, affecting investment sentiment. The broader geopolitical events and expectations of the new budget have also influenced market dynamics, driving gilt yields and influencing banks' structural hedge benefits. Despite these concerns, analysts at Citi viewed the upcoming budget as a potential 'clearing event' to resolve uncertainties faced by the lenders. Evaluating this backdrop, the fundamentals of UK banks are considered healthy, with Citi pointing towards potential mixed results in upcoming third-quarter earnings.