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The Lloyds Banking Group (LSE: LLOY) share price is edging towards £1. And investors are asking how the Budget — due 26 November — might affect it.
The idea of an extra tax on bank profits has been circulating for some time. In August, the Institute for Public Policy Research suggested it could raise as much as £8bn.
Shelved, or not?
It did look like the possibility had been rejected. The Financial Times reported that Chancellor Rachel Reeves didn’t want to damage financial sector competitiveness and risk slowing our economic recovery. And big banks already pay more corporation tax than most — 28% rather than the 25% standard rate.
But rumours have started to circulate again, as the Chancellor backs away from the possibility of raising income taxes. Some observers suggest a further hike in the bank tax rate could be back on the agenda.
If that happens, I do think it might hamper banks that compete internationally, like Barclays. But Lloyds, as a purely domestic bank, should hopefully still be on a level UK playing field. Extra tax would chip away at annual profits, though. And I’d expect anything that cuts earnings to dent the Lloyds share price — even if it’s only a little.
Other than tax
Outside of any tax threats, extra regulatory burdens could put a drag on bank earnings. But I’m not overly worried, as it does seem the Chancellor is well aware of the need to minimise risk to the economy right now. And some have even hinted at a relaxation of regulation, to help give the sector a helping hand. I wouldn’t put money on that myself, mind.
Generally, Lloyds’ position as the UK’s biggest mortgage lender has benefitted from the higher interest rates of the past few years. And rates are sure to come down further… some time. And any budget measures aimed at helping tackle inflation and get growth moving again could accelerate the Bank of England’s decisions.
Saying that, I don’t see a great deal of damage for Lloyds from lower rates. Yes, the bank’s net interest margin would likely take a hit. But if it comes at a time of renewed economic growth leading to a pick-up in housing demand? Lower interest rates might even be an overall win for Lloyds.
What to do?
In reality, the Autumn Budget is not going to change my investment plans in the slightest. I’ve lived through quite a few budgets in my time. And for every single one, if I hadn’t read the news to see what changes they made, I’d have noticed pretty much zero change in my life from before to after the event.
Budgets can seem like big headline events. But compared to the size of the free market economy and the long-term — and apparently unstoppable — rise of the UK stock market, they’re back-page news.
I’m holding Lloyds, and might still buy more — whatever Rachel Reeves does on the 26th.
