U.K. Bank Stocks Drop on Report of New Tax Grab

By Geoffrey Smith

Investing.com -- Shares in the U.K.'s biggest lenders all fell on Wednesday after the Financial Times reported that the government may raise taxes on them to fill the holes in its budget.

The FT said that Jeremy Hunt, the new Chancellor of the Exchequer, may raise their effective tax rate to as much as 33% by keeping the surcharge on bank profits at 8%, even as the general rate of corporate income tax is raised to 25% from 19% currently.

Most had expected the bank levy - a tax that was introduced to indirectly recoup some of the costs of bailing out the banks in 2008/9 - to wither away, bringing banks' tax burden back into line with the rest of the private sector.

By 05:55 ET (09:55 GMT), Lloyds Bank (LON: LLOY ) stock was down 3.5%, NatWest (LON: NWG ) stock was down 1.7%, while Barclays (LON: BARC ) stock was down 1.4%. Virgin Money (LON: VM ) stock also fell 3.5%. All were underperforming the FTSE 100 , which edged higher, brushing off a higher-than-expected inflation report for September.

Banks are likely to post substantial gains in profits in the coming quarters as a result of the Bank of England's interest rate hikes, which will support their lending margins. However, the gain may not be as big as it might have been, given the political chaos of the last couple of weeks, which has caused massive swings in long-term interest rates and effectively forced lenders to stop making new home loans.

Hunt has said that he will have to take "difficult decisions" to repair the damage to U.K. public finances. Various U.K. media reports have cited unnamed sources as saying that this may mean not only higher taxes, but more cuts to public spending, up to and including the politically controversial 'triple lock', which guarantees that pensions will always keep pace with inflation.