By Geoffrey Smith
Investing.com -- U.K. bank stocks outperformed on Monday after a report at the weekend indicating that the sector will after all escape the burden of an extended windfall tax under new Prime Minister Rishi Sunak.
The Sunday Times reported that ministers had cooled on the idea of trying to squeeze more money out of the sector in order to cover the hole in public finances caused in part by the political turmoil of the last four months.
Citing sources close to the cabinet, the newspaper reported that Sunak and his Chancellor of the Exchequer, Jeremy Hunt, were both mindful of the difficulties that additional taxes would create as the U.K. tries to keep its financial center globally competitive, now that it has lost the automatic right of access to the EU market.
At present, banks pay a surcharge of 8 percent on the general corporate income tax rate of 19%. Sunak, while Treasury chief under Boris Johnson, had proposed reducing that surcharge to 3% while raising the general corporation tax rate to 25%. Without the surcharge reduction, banks would be facing an effective tax rate of 33%, among the heaviest tax burdens in Europe.
Hunt is expected to lay out a comprehensive new budget draft for next year on November 17th.
Most of the U.K.'s big banks reported big increases in the money they earn on their core lending businesses in the last quarter, thanks to the global trend of rising interest rates. However, Lloyds (LON: LLOY ) and Natwest Group (NYSE: NWG ) in particular warned that these extra profits could soon disappear due to rising credit losses as the U.K. slides into recession.
Lloyds Bank had missed consensus forecasts for profit in the third quarter solely because it booked over twice as much as expected in provisions against possible loan losses. It nonetheless raised its guidance for the full year, owing to the higher path of interest rates. The Bank of England is expected to raise its key rate later this week by another 75 basis points to 3%, the highest it has been in over 14 years.
By 10:45 ET (14:45 GMT), NatWest stock was up 4.9%, the best performing bank stock in Europe on the day. Lloyds stock was up 2.1%, Virgin Money (LON: VMUK ) stock was up 2.4% and Barclays (LON: BARC ) stock was up 1.6%. Barclays is less sensitive than the others to U.K. news because of its greater international exposure through its investment bank. HSBC (LON: HSBA ), the most internationally diverse of all the U.K. banks, was up 1.7%.
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