Worrying times for Lloyds (LSE: LLOY) shares. The government has a £50bn black hole in the public finances and reports are emerging that British banks could be subject to a tax raid.
A proposed windfall tax on Britain’s four biggest banks (which includes Lloyds) might bring in £11bn according to one report. The always unpopular banking sector’s recent profitability might make such a tax palatable to the British public. The tax might even be necessary if those in charge want to keep manifesto promises of not touching income tax or VAT.
So what are the chances the government might follow through with a windfall tax on banks? What might be the impact on the share prices if they do? Will Rachel Reeves sink the Lloyds share price?
A disaster in the making?
Sceptics might suggest such a tax is pie in the sky. The government leaked dozens of ideas to the press before last autumn’s Budget — putting the feelers out, so to speak — most of those mooted tax raises never saw the light of day after.
However, let’s assume the windfall tax on banks is one they plump for. What might it do to the Lloyds share price?
Lloyds’ net income for 2024 was £4.5bn. A 40% windfall tax (similar to that levied against oil and gas firms) would bring in about £2bn. Given that Lloyds has already faced a one-off charge that was reversed by court decision this year, along with a jump in share price, my back-of-the-envelope maths figures we could be looking at a 3%-4% fall in share price on those numbers.
On the other hand, when rumours of the windfall tax made headlines on 29 August, Lloyds shares dropped over 3%. That suggests there could be even more pain than I had thought!
A close eye
Whether a windfall tax comes in or the share price drops, it’s little skin off my nose. I’ll treat it much like that motor loans verdict where the share price jumped 9%. Yes, I was happy to see a swift one-day jump in my stake.
But I’m more interested in long-term trends than short-term hiccups. Over the long run, a larger worry is that this windfall tax could be the canary in the coal mine of a worsening regulatory environment for the finance sector.
What else could banks like Lloyds have in store in years to come? Interest rates and general borrowing costs look set to remain high for years and perhaps decades. Banks like Lloyds will use higher costs of loans to good effect in growing earnings, which might put them under the crosshairs again.
What will the mood of the public be like after a decade or more of bumper earnings for London’s biggest sector? What fresh taxes might be on the way? The questions raised aren’t enough for me to sell my stake at present but I am keeping a closer eye on Lloyds stock than I was before.
