British banks rebound slightly, analysts sceptical on tax plan

British banks are rebounding slightly on Monday as several analysts are out saying the sharp falls last week on worries about higher taxes were overdone.

Natwest NWG.L shares fell 4.9% on Friday and Lloyds dropped 3.4% LLOY.L after a think-tank called for a new levy on lenders and the Financial Times said industry figures were worried the government was planning to raise cash by targeting the sector.

Both are up around 1% so far on Monday.

And analysts are pretty dismissive about the scale of the selloff.

"If it were genuine flag-flying by HMT (the British Treasury), one might expect a modest selloff. But a 5% hit to domestic banks on the back of yet another think tank highlighting potential reserve-remuneration-related benefits is not justified in our view," said Jefferies' Jonathan Pierce.

"An extra bank tax may come, but we doubt it will take the form suggested here."

The proposal focused on the interest British banks earn on their hundreds of billions of pounds of reserves at the Bank of England, largely as a result of the central bank's quantitative easing and is now being run down.

Analysts at BofA also said they thought such a move was unlikely.

Instead, "If tax contributions were to increase for the sector, we think the most likely channel is an increase in the Banking Surcharge, which was reduced from 8% to 3% in 2023, when UK Corporation Tax was increased from 19% to 25%," they say.

They say a tax rise would affect Lloyds and NatWest more - around a 3% reduction to 2026 profit - than Barclays - around 1.5% - simply because of their UK focus.

Others pointed to the potential economic impact of such rises.

"We would hope the government has looked at the impact of implicit taxes on business, like the rise in interest rates and national insurance contributions and the impact of those on UK economic growth," said Rory McPherson CIO at Wren Sterling.

(Alun John and Lucy Raitano)