JP Morgan warns UK banks face rising tax risk as Labour leadership battle intensifies Proactive uses images sourced from Shutterstock
Base case now assumes banking surcharge will rise from 3% to 5%.
JP Morgan has warned that UK banks are likely to be caught in the crossfire of Labour’s evolving domestic political landscape, with the broker now assuming as its base case that the banking surcharge will rise from 3% to 5%.
The shift follows a leaked memo attributed to Angela Rayner, the former deputy prime minister and potential leadership challenger, which proposed the higher rate.
JPM said that while a general election remains unlikely given Labour’s parliamentary majority, rising headline risk from leadership positioning involving Rayner, Health Secretary Wes Streeting and Greater Manchester Mayor Andy Burnham could drive policy signalling, particularly if the party seeks to respond to recent local election gains by Reform UK and the Greens.
The broker said a leftward policy shift looks more probable in that environment.
A higher surcharge would reduce 2027 earnings per share estimates by 3% for Lloyds Banking Group PLC (LSE:LLOY), 2% for NatWest Group PLC (LSE:NWG) and 1% for Barclays PLC (LSE:BARC), while return on tangible equity would fall by 20 to 50 basis points across the sector.
JPM noted that UK banks narrowly avoided a higher tax rate at the last Budget and that any shift in fiscal stance could also affect the sector through higher gilt yields, raising the cost of equity, and through a weaker growth outlook.
The broker said it continues to see a lower likelihood of changes to reserve remuneration, given the potential risks to monetary policy transmission.
However, JPM added that any drag on bank profitability would likely be partly offset over time through repricing, including wider lending spreads and potentially higher fees, as well as changes in liquidity deployment such as rotating out of reserves and into gilts.