An Autumn Statement six months before a General Election was bound to be political, and George Osborne didn’t disappoint. Along with sweets for the worthy — the hard-working families of Middle England — there were penalties for the baddies of popular opinion: a new ‘Google Tax’ on multinationals, and a new tax on banks.
Like other companies, banks have been able to offset loss incurred in previous years against future profits. Henceforth, they will only be able to offset half the value of those losses. Because of the big losses generated in the financial crash, the Chancellor expects to raise an extra £3.5bn of tax from UK banks and subsidiaries of foreign banks over the next five years.
It’s not a swingeing blow, as reflected in share prices that were generally down under 1%. Hardest hit are the banks that had the worst crisis: Lloyds (LSE: LLOY), which might see its return to the dividend list delayed, and RBS (LSE: RBS).
Perhaps of more significance is not the what, but the why. The change in tax rules is completely arbitrary. Because the measure halves the value of losses already incurred (i.e. deferred tax assets) it’s almost retrospective. The economic effect is to reduce future profits, and hence future capital generation. That’s directly contrary to the government’s economic objective, to get the banks to lend more to stimulate the economy further. Economically the measure is counter-productive — but politically it satisfies the zeitgeist of bank bashing.
Which somewhat goes to prove Neil Woodford’s theory of ‘fine inflation’. He sold his holding of HSBC (LSE: HSBA) in September, fearing that fines levied by regulators for market abuse and mis-selling were being sized on ability to pay rather than extent of transgression. For fines, read taxes. This tax on banks’ existing assets is a wealth tax.
Is Mr Woodford right to steer clear of banks? The risk of arbitrary penalties apart, he sees HSBC as an attractive investment. Its scale, geographic diversity and strong capital base make it one of the safest banks and it has a generous yield, while the Chinese economy will determine its growth prospects. By contrast, fellow Asian lender Standard Chartered (LSE: STAN) is on probation with investors after a series of mishaps, and amid worries that too much is owed by too few – concentrated lending to Asia’s fragile commodities sector.
RBS and Lloyds are straight plays on the UK economy, booming along with its housing market — but a narrow business base when things turn sour. Lloyds has got its house in order and hopes to resume dividend-paying, but tight capital and the new tax could delay that. Optimistic expectations are baked into the share price, and a sale of more government shares could weigh on the price. RBS has further to go in its turnaround but it’s on the home straight: that offers potential upside to its cheaply-rated stock.
Barclays (LSE: BARC) is a mixed-bag, on its second restructuring and struggling with what to do with its investment bank, but it has some valuable franchises, including Barclaycard and Africa. The shares are cheaper than they should be, but have been for some time.
Mr Woodford’s caution is understandable, but there could well be a place for some bank exposure in your portfolio. The sector has been bashed for so long, it’s a contrarian approach.
