Lloyds and NatWest Shares Fall Ahead of U.K. Budget

Lloyds Banking Group and NatWest shares fell in London on Friday as investors weighed a possible increase in the U.K.'s extra tax on bank profits ahead of the government's Oct. 28 budget.

By 6:30 a.m. ET (10:30 UTC), Lloyds was down 1.8% and NatWest had lost 1.51%. Barclays was 0.13% higher after earlier losses. HSBC rose 1.2% and Standard Chartered gained 0.71%; both earn much of their profits overseas.

The U.K. charges banks a surcharge on profits in addition to corporation tax. A possible budget change would lift the surcharge to 8% from 3%. The rate was reduced from 8% to 3% in 2023 under then-Prime Minister Rishi Sunak's Conservative government. Finance Minister John Healey is scheduled to deliver his first budget on Oct. 28.

A higher surcharge could add $2.67 billion in annual revenue for the Treasury while cutting lenders' earnings by 6%. The estimates come as U.K. banks face total tax rates above 46%, compared with 38.9% for banks in Frankfurt and about 27% in New York.

Aviva Chief Executive Amanda Blanc described financial services as a core U.K. industry and urged policymakers to support investment in the sector. The potential tax change has also renewed concerns about the U.K.'s appeal as a financial center.

Budget concerns and geopolitical events have pushed U.K. government bond yields higher. Higher yields can benefit banks’ net interest income as structural hedges roll over, while increasing the cost of equity and weighing on valuations. Third-quarter adjusted pretax profit is expected to be above consensus at Barclays and NatWest, but below consensus at HSBC, Lloyds and Standard Chartered.