UBS might expect Tuesday’s UK Budget bank levy to trim up to 8 per cent of normalised bank earnings, but it also thinks the tax’s net impact to be reduced by some clever, err, ‘balance sheet management.’
Fresh from the Swiss bank — this note:
European Banks – Taxing times
We expect balance sheet management, group restructuring & deleveraging to reduce the net impact of the bank levy tax Analyst: John-Paul Crutchley
The levy, you see, aims to crack the whip on wholesale banks rather harder than on retail ones. Which means banks could well take advantage of that bias, rejigging their operations accordingly.
In fact, the UBS analyst has some ideas already:
* HSBC has traditionally used its UK bank (HSBC UK PLC) as one of the main trading counterparties within the group. However, there is no reason why these trades booked on this balance sheet could not, instead, be booked on the Hong Kong bank balance sheet instead.
* CASA’s gross asset base is swollen by €248bn by internal transactions with the Regional Banks. We have adjusted our assessment of the tax for this as if the tax applied to CASA rather than Credit Agricole Group.
* Deutsche Bank suffers from a high level of charge reflecting significant wholesale activities in relation to its retail banking activities and takes no account of potential changes in the group structure, such as the potential acquisition of Postbank which would lead to a large increase in retail deposits. We also understand that c.$350bn of Deutsche’s US assets are likely to fall outside the scope of the US levy which would have the impact of reducing their earnings hit to between 4% and 5%.
We’re sure there are others, and other banks are busy trying to find them.
On the question of whether banks might actually leave British shores in tax-protest, meanwhile, UBS doesn’t think it’s very likely given the tax benefits financials have already accrued in the UK:
As a result of the crisis a number of wholesale banks generated significant tax losses in the UK which can be carried forward indefinitely, thereby reducing the potential tax base to the UK. The bank levy may be seen as a move to ensure that the tax take from the City is maintained at reasonable level. As relocation would lead to a loss of tax-loss carry-forwards, significant shifts in location are unlikely.
No bank tax exodus then, just some run-of-the-mill tax avoidance.
That sounds about right.
Related links:
The bank friendly chancellor – FT Alphaville
Banks in focus as traders weigh up levy - FT
A tax on Lloyds, Royal Bank of Scotland and Barclays – Robert Peston