UK bank stocks were unmoved by headlines in the Financial Times that Chancellor Rishi Sunak, will use next week’s budget to announce his intention to reduce the UK bank corporation tax surcharge from 8% to 3% from April 2023. Shares in Lloyds (LLOY), NatWest (NWG), HSBC (HSBA), and Barclays (BARC), all drifted marginally lower in line with the FTSE 100 index.

This is not a complete surprise given that the Chancellor had already indicated that he wanted to ensure the competitive position of UK banks vis-à-vis their international peers from a tax perspective. There had been fears that the increase in UK corporation tax might impact the sectors competitive positioning.

Nonetheless, interest in the banking sector is increasing ahead of Q3 updates, starting tomorrow with Barclays, and continuing into next week with HSBC, Lloyds and NatWest.

MUCH ADO ABOUT NOTHING

The Chancellor’s intention to cut the UK bank corporation tax surcharge by 5% will largely mitigate the 6% increase in the UK corporation tax (from 19% to 25%) that is also due to come in force from April 2023. At present, banks currently pay a corporation tax of 27% on UK profits which are above the £20 million level.

This is a combination of the 19% standard rate of corporation tax plus the 8% surcharge. From April 2023 this rate will increase to 28%, the addition of the reduced 3% surcharge with the 25% corporation tax rate.

Investors are likely to focus on three key issues ahead of third quarter updates for the UK banks sector.

WHAT TO WATCH FOR

First, Andrew Bailey, governor of the Bank of England, has warned that it will have to act over rising inflationary pressures. This suggests that UK interest rates will have to rise soon. An increase in interest rates would have significant positive implications for the profitability of the UK banks sector.

Second, the central bank has now removed all restrictions on bank dividends and share buy-backs. This has raised the possibility of more progressive dividend policies as we move into 2022.

Third, investors will be looking for updates regarding both HSBC and Lloyds’ move into the wealth management segment.

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Issue Date: 20 Oct 2021