U.K. Banks Dodge Bullet With Lower-Than-Expected $3 Billion Liability Levy

Chancellor of the Exchequer George Osborne said lenders need to share the pain of tax increases as he announced a levy on lenders’ balance sheets. Investors and analysts say banks have dodged a bullet.

Osborne told lawmakers the tax will raise 2 billion pounds ($3 billion) a year, compared with the 5 billion-pound estimate of analysts at Evolution Securities Ltd. The 0.07 percent levy on wholesale liabilities is less than half the 0.15 percent rate being considered by the U.S. government.

“It’s less scary than it could have been,” said Lothar Mentel, chief investment officer for Octopus Investments Ltd. in London. “The banks got away with it pretty lightly. There was a lot of fear in the market that the banks were going to be hit much harder than has proved to be the case.”

Osborne’s levy is designed to curb banks’ reliance on the short-term funding that helped trigger the biggest financial crisis since the Great Depression. France and Germany are also considering similar taxes as they try to tackle budget deficits swelled by bank bailouts and stimulus measures. France will present a plan in its coming budget, while the German government will publish legislation this summer, according to a joint statement by the governments yesterday.

The levy is equivalent to 7 percent of the 28 billion-pound combined profit analysts expect HSBC Holdings Plc, Barclays Plc, Royal Bank of Scotland Group Plc, Lloyds Banking Group Plc and Standard Chartered Plc to report in 2011, according to data compiled by Bloomberg.

‘Large Balance Sheets’

“RBS and Barclays are likely to be the most negatively impacted given large balance sheets, substantial short-term funding and relatively low asset margins,” said Goldman Sachs Group Inc. analysts led by Aaron Ibbotson in a note to clients today.

Separately, Merrill Lynch & Co. estimated that 75 percent of the revenue raised will come from Britain’s six largest banks, including Banco Santander SA’s U.K. unit. Barclays and HSBC may each have to pay 370 million pounds, RBS 360 million pounds, Standard Chartered 90 million pounds and Santander approximately 70 million pounds. The rest will be paid by British building societies and overseas-based banks, analysts Michael Helsby and Chris Roberts said in a note to clients.

“Clearly the government wants to be seen as constructive and overall this is better than expected,” said Guy de Blonay, who helps manage about 19.5 billion pounds at Jupiter Fund Management Plc in London. “The market reaction is positive as ultimately the cost will be passed on to the customers.”

Banks Fall

Lloyds fell 0.5 percent to 58.7 pence, while RBS fell 0.8 percent to 46.72 pence. Barclays slipped 3.2 percent to 300.8 pence and HSBC fell 1.1 percent to 651.8 pence. Standard Chartered dropped 1.5 percent to 1,757.5 pence.

“For the U.K. banks, this is a pretty good result,” said Colin Morton, who helps manage about $1.7 billion at Rensburg Fund Management in Leeds. “If these banks are going to be making substantial profits, the levy could end up not affecting these banks much at all.”

Lloyds and RBS will be most hurt by the levy because they rely on short-term wholesale funding more than any other British banks, analysts at Matrix Corporate Capital LLP said. The measure will cost London-based Lloyds about 286 million pounds, about 8 percent of estimated 2010 pretax profit, and Edinburgh- based RBS 517 million pounds.

HSBC and Standard Chartered, which have the lowest loan-to- deposit ratios among U.K. banks and are therefore less reliant on wholesale funding, will be least hurt by the proposal, according to Matrix.

‘Pressure on Banks’

“It’s another encouragement for the banks to reduce risk,” said Simon Adamson, a London-based analyst at research firm CreditSights Inc. “It’s part of the pressure for banks to extend their liabilities.”

Osborne told lawmakers he was introducing the levy so banks make a contribution that reflects the “risks that they generate.” The U.K. government spent more than 66 billion pounds bailing out RBS and Lloyds during the financial crisis.

The tax will apply to banks with liabilities of more than 20 billion pounds based in or operating in the U.K. The levy will exclude liabilities such as Tier 1 capital and insured retail deposits. Wholesale funding longer than a year’s duration will also attract a reduced rate of as little as 0.02 percent. Investment Banking

“The levy does not apply to retail banking and therefore it adds further pressure on investment banking, where this burden will be borne,” said Rod Roman, a financial services partner at Ernst & Young.

‘Taxed Many Times’

It isn’t clear from yesterday’s proposals how the tax will apply to overseas banks operating in the U.K. and whether they will be able to escape it by paying a levy in their home jurisdiction, according to Peter Maybrey, financial services tax partner at PricewaterhouseCoopers LLP said.

The U.K. Treasury needs to ensure that international banks such as Goldman Sachs Group Inc. don’t have to pay a levy in every country in which they operate, Angela Knight, chief executive officer of the British Bankers’ Association, said in an interview.

“We don’t want to have a scenario whereby a bank operating in multiple jurisdictions finds itself taxed many times over for the same functions,” Knight said. “We need to retain our competitive edge.”

Levy Opposed

Bankers opposed the levy, saying the costs risked curbing lending to consumers and businesses, imperiling economic growth. The levy should be “implemented in a way that allows banks to continue to support economic growth,” a spokesman for Barclays said in an e-mailed statement. RBS, Lloyds and HSBC spokesman declined to comment. Standard Chartered was “looking at the detail,” a spokesman said. A spokeswoman for Goldman Sachs in London declined to comment.

Banks will also benefit from Osborne’s decision to cut the rate of corporation tax. The government plans to reduce that by 1 percentage point each year over the next four years, taking the rate to 24 from 28 percent starting next year. A reduction in corporation tax to 25 percent would save Britain’s five largest banks about 336 million pounds a year based on 2010 bank earnings, JPMorgan Chase & Co. said in a June 2 report.

To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Andrew MacAskill in London at amacaskill@bloomberg.net

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