Lloyds Banking Group PLC (LSE:LLOY) could be hit to the tune of £1.6bn under plans being mooted to reduce the interest paid on deposits held by high street lenders at the Bank of England, according to research by a leading investment bank.
The controversial plan has been floated in the media with Bloomberg carrying a comprehensive analysis of the back-door windfall tax, which it reckons could save the government £10bn a year.
JP Morgan used Lloyds as its case study. It assumes in its calculation that the policy would target the liquidity coverage banks have to maintain in order to fund cash outflows in a time of crisis.
“Based on this, such a move would cut the gross NII [net interest income] benefit for a bank like Lloyds from c£4.5bn to c£2.9bn at a base rate of 3% over the medium term,” JPM said in a note to clients.
“The banks would look to mitigate this in various ways, but the net earnings impact could be into double digits if the policy were structured to be highly restrictive.”
Banks confident they can mitigate earnings impact
JPM’s analysts also pointed out that the CFOs at HSBC PLC, Lloyds and NatWest Group PLC (LSE:NWG) recently indicated in analyst meetings that most of the earnings impact could be mitigated.
Even so, it remained bearish on the scenario: “Given the recent improving sentiment towards UK banks, we believe that such an outcome would be a negative for the sector and would only increase the cost of equity and feed concerns that the Banks will not be allowed to earn above 10-12% returns despite higher rates.”
Those comments chimed with assessments given by analysts at Barclays Capital and Citigroup following the Bloomberg article quoting Gerard Lyons, an "external economic advisor" to Liz Truss, on the possibility of introducing reserve tiering.
The issue of "interest on reserves" has risen up the agenda and the new government is "aware" of the financial benefit from potentially introducing tiering, the report stated.
It was also said, "the fact they are aware does not mean they are going to make it policy".
Citi has its say
Citi analysts said: "The article also quotes BoE Governor Bailey as stating the arrangement would effectively be a tax on the banks and is, therefore, a decision for the Treasury."
Barclays said it was "highly uncertain" that it would be implemented, but limiting interest paid on cash held at the BOE "would present risks" to the outlook for UK banks' net interest income.
"However, its impact depends on the exact implementation of any such policy and banks' ability to reinvest elsewhere. Such a policy may also carry a number of broader unintended consequences."
The initial Bloomberg report on Wednesday led to a sector-wide sell-off.
That pressure continued with NatWest off 4.3% and Lloyds down 2.4% in early afternoon trade. That said, this was against a backdrop of triple-digit losses on the FTSE 100.