Budget bashes big banks

In the first Conservative party Budget for almost 20 years, chancellor George Osborne went a long way to make sure some of the world's largest banks remain on UK soil. A decision to restrict tax relief on buy-to-let property could, however, have serious implications for other UK lenders.

Introduced in the 2010 budget and increased eight times in the last five years, the rate of the Bank Levy will undergo a phased reduction over five years, which should keep wantaway HSBC onside. The £110 billion bank is locked in a long-running dispute with regulators, claiming that heavy spending on meeting new industry standards is hurting profits.

It paid a $1.1 billion levy in 2014, twice as much as any other bank, and expects that will rise to $1.5 billion this year.

Last year, chairman Douglas Flint moaned that results "illustrate the challenge of funding a considerable expansion of risk and compliance resources as well as the operational and structural changes needed to address new regulatory and public policy requirements at a time of limited revenue growth opportunities".

But in his Summer Budget, Osborne said he was introducing a phased reduction in the rate of the Bank Levy charged on banks' balance sheets. Between 2016 and 2021, the tax will drop from 0.21% to 0.1%. And from 2021, UK headquartered banks will only be levied on UK balance sheet liabilities, not on overseas subsidiaries.

"Finally, by allowing tax receipts to respond naturally to changes in banks' balance sheets and profitability, these changes will introduce stability into the banking tax regime and ensure that banks can incorporate tax into their business plans with greater certainty," said the chancellor.

Ahead of the Budget, Deutsche Bank said a fall in the rate would benefit all banks, although due to the complexity of how the rate is calculated, it is difficult to estimate how exactly it will affect each one. Still, it tipped Standard Chartered and Barclays to benefit the most. It also speculated that replacing the global bank levy with a UK-only bank levy would benefit Standard Chartered and HSBC the most given the small size of the UK within their overall balance sheet.

However, a new tax on banking sector profit will be introduced from 1 January next year, set at a permanent rate of 8%. Overall, changes in this Budget will raise an extra £2 billion from the banks over the forecast period. That news turned the mood sour and bank shares turned south (see chart below). Lloyds and Standard Chartered fell furthest.

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And for Lloyds, in which the government still has a 16% stake, there's another potential threat to profits. Currently, individual buy-to-let landlords can offset mortgage interest payments against tax. But by April 2020, tax relief for individual landlords - £6.3 billion in 2012/13 tax year - will be restricted to 20%, the basic rate of tax, from 40% and 45% currently.

"The restriction will be phased in over 4 years, starting from April 2017," says Osborne. "This will reduce the distorting effect the tax treatment of property has on investment and mean individual landlords are not treated differently based on the rate of income tax that they pay. It will also shift the balance between landlords and homeowners."

Of the large banks, Lloyds - down 2% - has the largest exposure at around 18% of mortgages and 11% of total loans are buy-to-let. Aldermore also has significant exposure to the buy-to-let market with 59% of mortgages, and 44% of the total loan book - its shares slumped by 7%. Barclays and RBS have the lowest exposures. Clearly, the market expects an impact on housebuilders - Persimmon, Barrat Developments, Taylor Wimpey and the rest are all down around 5%.

Osborne also confirmed the government will begin to sell off its stake in RBS in the next few months. "Over the course of this Parliament, the government will dispose of at least three-quarters of its stake in RBS, starting with a sale in the coming months," he said. It should raise at least £2 billion in 2015-16.

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