Lloyds shares were higher on Thursday after falling in the prior session, as investors considered the merits of holding the UK bank’s shares near 52-week highs.
In an article recently published by the UK Investor Magazine, we explained that the end of rising interest rates made the UK banking sector less attractive, and key profitability metrics are set to come under pressure in the coming periods.
Lower interest rates will ultimately result in lower net interest margins and lower income for banks unless they experience a material increase in lending activity, which doesn’t seem likely.
However, Lloyds investors now have a fresh threat to the share price—the new Labour government.
Keir Starmer has made it clear he and Rachel Reeves will announce plans for a tax raid in the upcoming budget, and banks are in the firing line.
Along with speculation around changes to inheritance tax and capital gains tax, Labour are thought to be eyeing up banking profits to boost the public coffers.
As Dan Coatsworth, an investment analyst at AJ Bell, explains, banks are easy targets for the treasury, as they can generate billions in extra tax receipts with little public backlash.
“Keir Starmer and Rachel Reeves have made it perfectly clear they will leave no stone unturned in the search to find ways to boost public finances. That also means being creative with where they impose tax and it seems the banking sector could be in their sights,” Dan Coatsworth said.
“It’s about as easy a target as you can get. No-one is going to shed any tears if the banks are forced to hand over more of their profits.
“Banks have made big money from higher interest rates, profiting when the rest of the country has struggled through a cost-of-living crisis. If the oil and gas industry can be slapped with a windfall tax as a result of a spike in energy prices, so can the banks as a result of higher rates.”
The double whammy of falling interest rates impacting the top line and additional taxes eroding what’s left on the bottom line must be carefully considered by Lloyds investors.