The warning comes amid a government debate over taxing BP's profits from the conflict in Iran. Chancellor Rachel Reeves stated that such profits must be 'taxed appropriately', according to a Financial Times report. However, City AM (1) reported that only a small fraction of BP and Shell's revenue comes from the UK. According to analysis, the economic impact of the war could be up to £35bn, raising questions about a potential bank tax raid.
According to City AM (1), Gary Greenwood of Shore Capital said the sustainability of elevated returns on tangible equity could be questioned if the government revisits bank taxation. Neil Wilson of Saxo Markets, also cited by City AM (1), warned that banks could be ripe for a tax grab soon. According to City AM (1), there are fears that if Prime Minister Starmer is removed, Chancellor Reeves, who is hesitant on bank taxes, would follow suit. CS Venkatakrishnan, CEO of Barclays, said UK banks are more highly taxed than any other major jurisdiction, with a 46% effective rate compared to 29% in Europe.
taxed appropriately
Lloyds said the Middle East conflict and resulting inflationary pressures have prompted central banks to delay interest rate cuts. The bank expects only one rate reduction by the end of 2027, with the base rate at 3.75% until the third quarter of the following year. It also said that increases in energy prices lead to the re-emergence of inflationary pressures, delaying rate cuts until 2027. Lloyds set aside £101m as a war provision within a £295m impairment charge for sour loans, while releasing a £50m reserve previously held for global tariff and political disruption risks.
Lloyds reported that its net interest margin expanded to 3.17%, up 14 basis points year-on-year and 7 basis points quarter-on-quarter. The bank expects structural hedge income to exceed £7bn for the year. It also said operating expenses fell 3% to £2.5bn.
The sustainability of the group’s elevated returns on tangible equity could come into question should the Government revisit the prospect of further bank taxation.
Lloyds made no change to its £2bn motor finance provision, initially set at £1.2bn and increased by £800m in October, which caused profit to slide 36%. The bank said it is disappointed in the final FCA redress scheme but will not legally challenge it, adding that it has undertaken an assessment of the implications and impact.
William Chalmers, chief financial officer of Lloyds, said the sector expects a gradual increase in profitability when rates rise. He noted that bank profitability is important to the economy, highlighting that Lloyds lent over £6bn in the first quarter, adding that the only reason it can do so is because it is a profitable institution.
Banks could also be ripe for a tax grab soon.
The future of bank taxation remains uncertain, with the government yet to decide on a potential tax raid, while the timing of interest rate cuts and the adequacy of motor finance provisions add further ambiguity.