Investors need to scrutinise the impact of new tax measures on the banking sector after the Budget created clear winners and losers, managers have claimed.
Last week chancellor George Osborne revealed in his first Conservative Budget that the annual levy UK banks must pay – based on the total assets on their balance sheets – would be gradually reduced in the next six years, falling to around 0.1 per cent from its 0.21 per cent level.
But this will be partially offset by the introduction of an 8 per cent surcharge on banks’ UK profits, effective from next year.
Reaction to the announcement was largely positive, with the shares of HSBC, Barclays and RBS all rising on the day.
However, Franklin Templeton’s UK Equity Income fund manager, Colin Morton, thought domestic-focused banks would lose out in real terms.
“For the next few years you will have both systems working in tandem, with banks still paying the levy at a relatively high rate, plus this 8 per cent permanent rate on UK profits,” he said.
“The net effect is that UK-dominated banks are going to be worse off under the new system, while those that make most of their money outside of the UK are going to be better off.”
This move could add double-digit profit growth to Standard Chartered by 2021, which has almost no UK-based assets, whereas domestic banks such as Lloyds could drop by high single digits in the next two years, the manager added.
While this double taxation was a headache for established banks, the biggest losers could be the so-called ‘challenger banks’, such as Metro Bank and Virgin Money, experts said.
This is because they have stronger profits than their older, more-established rivals, which have endured the financial crisis and subsequent levies and fines.
George Barrow, analyst on the Polar Capital Financials team, said that while the tax surcharge would not apply to the first £25m, it would still have a roughly 6 per cent negative impact on earnings.
“It is important to highlight that we still expect profitability to remain at high levels, with return on equity at approximately 20 per cent and well in excess of the large UK banks,” he said.
“[But] given the government’s stated objective of encouraging competition in the UK banking sector, it is surprising that it would introduce a tax surcharge on all UK banks irrespective of size.”
Ben Ritchie, senior investment manager on Aberdeen Asset Management’s Pan European equities team, agreed challenger banks “do not have any opportunity to escape from [the UK profit surcharge], while others with overseas assets might be able to mitigate it”.
But he pointed out that their profits would not be taxed at a higher rate than any other bank.
He called the levy changes “a sensible piece of policy”, and suggested taxing banks’ UK profits could be a fairer system than applying a penalty to the whole global balance sheet.