UK banking shares fall amid tax fears

Recently, UK banks have grown at blistering pace, outpacing both the S&P and NASDAQ even among continued growth from the AI boom. 

Taking Natwest as an example, Revenue has more than doubled since 2022 lows of $17bn to over $35bn In the most recent quarter.

A recent report by the Institute for Public Policy Research (IPPR) has applied pressure to Chancellor Reeves to consider taxing banks’ increased profit to combat the UK’s ‘fiscal black hole’.

On top of this, Deputy Prime Minister Angela Rayner already proposed tax measures against banks in a memo to Reeves.

A harsh sell-off ensued following the idea, plunging UK banking stocks up to 5% in the red by market close.

Investors are likely aware of the reality, as reported in the Financial Times, that banks are a politically popular target for a large windfall tax.

Furthermore, the idea is not unheard of in recent history.

It was only in 2022 that the UK government used a windfall tax against oil and gas companies due to exorbitant profits. 

As for what this means for the wider economy? Results vary.

Benjamin Toms, an analyst at RBC, correctly highlighted that ‘banks are conduits for growth in UK plc’. 

Financial services continue to lead the UK’s growth due to London’s position as the financial centre of Europe.

This means that a large tax on banks is likely to hinder economic growth, the supposed primary agenda of the Labour government.

On the other hand, reducing the budget deficit and achieving fiscal stability is incredibly important for the appearance of the UK economy.

If this windfall contributes to closing the ‘fiscal black hole’, it is likely to instill new confidence in those looking to invest and expand within the UK, something inherently good for the economy.

This in turn may bring more business to banks, allowing them to recoup some of what was taxed. Although, it's unlikely they would be able to recoup all of that tax money from growing confidence.