Government eyes bank surcharge U-turn despite Lloyds profits tumbling

Britain’s biggest mortgage lender, Lloyds Bank, has set aside hundreds of millions of pounds in preparation for a surge in loan defaults caused by the rising cost of living and higher interest rates squeezing household budgets.

The lender today said it had banked £668m over the three months to September to absorb souring loans, primarily concentrated in its mortgage loan book.

That reserve build up weighed on the firm’s profits, which tumbled over the last year to £1.51bn from £2.03bn.

The government in next month’s budget is eyeing ditching cutting the bank surcharge – an effective windfall tax – to three per cent from eight per cent.

When asked by City A.M. if prime minister Rishi Sunak and chancellor Jeremy Hunt were mulling keeping the surcharge at its current level, a treasury spokesperson said “no options are off the table”.

If the levy is left intact, banks’ headline tax bill will hit 33 per cent next April when corporation tax rises to 25 per cent.

Sunak pledged to ease the surcharge at the March 2021 budget to avoid creating a punitive UK bank tax regime.

UK banks have been subjected to an additional levy on top of their corporation tax bills for several years.

Home purchase loan rates have scaled above six per cent over the last month, caused by former prime minister Liz Truss’s calamitous mini-budget sending gilt markets on an upward spiral, raising the risk of defaults.

Gilts yields have dropped back to around the same level they were when the mini-budget was delivered on 23 September, indicating mortgage rates will curb over the coming months. Yields and prices move inversely.

Lloyds has become the latest bank to revert to the Covid-19 crisis trend of injecting hundreds of millions of pounds into its reserve buffer.

During the pandemic, all the UK’s major high street lenders swelled their loan loss pool to cope with an expected jump in borrowers failing to repay their debts.

Third quarter UK bank earnings season, which has been in full swing this week, has been overshadowed by the likes of Barclays, HSBC and Santander profits being mired by a buildup of loan loss reserves.

Lloyds’s chief Charlie Nunn described the economic downturn in the UK as “concerning for many people”. Households are facing a huge hit to their living standards from elevated energy bills and rising food prices.

Lloyds shares initially fell to near the bottom of the FTSE 100, before ending the day higher.

British lenders have this week boasted of a sharp rise in income generated from loans driven by rising interest rates.

Lloyds, which owns mortgage giant Halifax, registered a 19 per cent jump to £3.4bn in net interest income, a key source of revenue for banks.

Its net interest margin, the difference between what a bank pays depositors and charges for loans, widened 43 basis points over the last year.

The Bank of England has hiked borrowing costs seven times in a row, including two successive 50 basis point rises, to 2.25 per cent.

Banks often benefit from higher interest rates as it gooses profits from lending.

Bank governor Andrew Bailey and the rest of the monetary policy committee next Thursday are expected to lift interest rates 75 basis points to three per cent to tame inflation, which has soared to a 40-year high of 10.1 per cent, more than five times the Bank’s two per cent target.