They say revenge is a dish best eaten cold but the endless regulatory reprisals against the banking sector are now well past their use-by date.
Bankers may have got off lightly in the immediate aftermath of the financial crisis, but the endless floggings and bleedings they have endured since are starting to look like a life sentence. Worse, investors in Barclays (LSE: BARC), Lloyds Banking Group (LSE: LLOY) and Royal Bank of Scotland Group (LSE: RBS) are getting punished as well.
As ever, ace fund manager Neil Woodford saw it coming. He dumped all his holdings in HSBC due to fears over “fine inflation”, as regulators repeatedly returned for yet another pound of flesh. Nothing that has happened since will changed his mind.
Chancellor George Osborne has imposed five taxes on the banking industry since 2010, including the bank levy, bank surcharge and bonus tax. In total, these will cost the sector £40bn over the next decade, according to figures from the British Bankers’ Association.
Each new tax seems to beget another. The bank levy has been raised 11 times since 2011. It was reduced in the July Budget to keep HSBC in the UK, but an 8% surcharge on banking profits was introduced. New research by accountants EY says the impact of this surcharge on bank profits has been “vastly understated” and could easily take double its predicted £1.66bn net tax gain over the next five years.
Even with the forthcoming reduction in the bank levy, EY calculates that the changes will increase the net tax burden on bank profits by around 5% over the next five years. The only consolation is that the surcharge will hit rival challenger banks such as Aldermore, Metro, Shawbrook and Virgin Money relatively hard.
As Exane BNP Paribas has pointed out, banks face tougher regulatory standards, including the 2018 implementation of the IFRS9 accounting standard regarding provisions, a technical document that could hit tier 1 equity ratios, tangible net asset values and near-term dividend expectations. It also warned that the Bank of England is expected to require large UK banks to hold MREL (Minimum Requirement for Own Funds and Eligible Liabilities) at a level broadly equivalent to twice the Basel total capital requirement, which could reduce earnings per share by between 3-6%.
PPI mis-selling, the scandal that wouldn’t die, may be given a new lease of life. The Financial Conduct Authority is currently deciding whether to unleash a fresh round of multi-billion pound claims, to compensate customers who weren’t told how much commission their adviser was earning from each policy sale. This could cost the financial services sector as a whole £33bn. And then there is the numberless stream of mis-selling and rate rigging class action cases.
The authorities (and public) won’t be happy until the banks are begging for mercy. It will get even more brutal if Jeremy Corbyn’s new hardline Shadow Chancellor John McDonnell is ever in a position to follow through on his threats to nationalise the banks without shareholder compensation. If Corbyn’s new hard left Labour Party succeeds in pushing the national conversation to the left, the bankers could become even bigger hate figures. Banks won’t be the only ones being bled white, shareholders could turn pale as well.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Barclays and HSBC. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.