The Budget Took a Slice of UK Bank Profits. The Rate Rise Only Gives It Back by Year Three
· Members
No, not in the first year. The Budget's doubled bank surcharge costs Lloyds about £262m in its first full year, NatWest about £259m and Barclays about £141m. The Bank of England's quarter point rise, eight days later, adds back roughly £52m, £83m and £48m after tax in its first year, using each bank's own rate sensitivity. That is a fifth to a third of the tax. The rate rise only overtakes the surcharge in year three, and only if Bank Rate stays at 4%. Both numbers are small next to what moved the shares in between: Lloyds and NatWest are down since the Budget, Barclays is up.
Watch it play outFor Lloyds, the tax takes five times what the rate rise gives in year one
Each dot is £10m of Lloyds' after-tax profit. The surcharge rise takes about £262m in its first full year.
The quarter point rise adds about £52m after tax in year one. The tax wins by about £210m.
In year two the surcharge has three months left, about £66m, while the rate gain grows to about £125m.
In year three the surcharge is back at 3% and the gain is about £216m, as long as Bank Rate stays up.
Source: Yield Theory estimates from Lloyds results and Budget documents
This issue builds on our earlier piece on Lloyds, Barclays and NatWest, which covered the structural hedge, motor finance and valuation, and flagged the Budget as the near-term test. The test has now been sat. Below we work out what the surcharge costs each bank in pounds and per share, what the rate rise is worth using the sensitivities the banks publish, and the net of the two. Then we set that against what the shares actually did and what they are worth now.
The short version of our view: the surcharge is a small, one-off cost, worth less than a tenth of the permanent 8% the market had braced for, and the rate rise was already in the banks' own forecasts. Neither event changes the investment case much. What changed in these eight days was the price. Barclays still comes out best and Lloyds worst, and NatWest's 9% results-day fall has turned it into the value pick.
What did the Budget do to bank tax?
Banks pay the normal 25% corporation tax plus a bank surcharge on profits above an allowance. The surcharge was 3%. Chancellor John Healey doubled it to 6% for 15 months, from the first day of next year to the end of the following tax year, after which it reverts to 3%. The Budget document says the time limit will be written into the coming Finance Bill and "will not be extended". The £100m allowance, the slice of each banking group's profit the surcharge ignores, is unchanged, Skadden notes. Challenger banks had lobbied to raise it to £500m, City AM reported.
The money pays for part of a £2.6bn Household Energy Payment: £100 paid straight into the bank accounts of up to 20 million households in England in council tax bands A to D. The Treasury's costing table puts the surcharge rise at £305m in the current tax year, £950m in the next and £220m in the one after, about £1.5bn in all. Money arrives in the current tax year because the higher rate starts three months before that year ends, and large companies pay corporation tax in quarterly instalments based on their expected bill.
A doubled rate, but for 15 months only
3% → 6%Bank surcharge rate
15 monthsHow long the higher rate lasts
£1,475mTreasury's estimate of what it raises
£100mAllowance before the surcharge applies, unchanged
For most of the month before the Budget, reports pointed to the surcharge going to 8%. CNBC reported that an 8% rate was expected to raise about £2bn a year, and KBW estimated it could cut lenders' earnings by 6%. The UK had run an 8% surcharge before, until it was cut to 3% when corporation tax went to 25%.
The domestic banks sold off. From their close four weeks before the Budget to their lowest close before it, Barclays fell 11.0%, NatWest 8.9% and Lloyds 6.1%, while the FTSE 100 rose 0.8%, on Yahoo Finance closing prices. The Market Reporter put it the same way: fears of an 8% levy had pushed the three down by as much as 11%.
The domestic banks fell 6% to 11% while the market rose
Barclays−11.0%
NatWest−8.9%
Lloyds−6.1%
FTSE 100+0.8%
Close four weeks before the Budget to each bank's lowest close before it.
Source: Yahoo Finance closing prices
On Budget day the relief was real but smaller than the headlines. Intraday, Lloyds, NatWest and Barclays were up between 2.2% and 3.7%, Finimize reported, and AskTraders had them up 3.3% to 3.6% in early afternoon. By the close the gains had faded to 1.7% for Lloyds, 2.0% for NatWest and 1.6% for Barclays.
Here is the arithmetic of why investors were relieved. Take the version the market feared, 8% with no end date, and value it the way the market values the banks' earnings, at each bank's own price to earnings ratio. For Lloyds, five extra points on about £8.7bn of profit above the allowance is about £437m a year. At Lloyds' multiple of about 9.8 times earnings, that is worth about £4.3bn, or 7.5% of its market value. NatWest works out at 7.1% and Barclays at 3.1%. The actual measure, three extra points for 15 months, costs Lloyds about £328m once, 0.6% of its market value.
The shares fell about as far as a permanent 8% would justify, then got a 15-month tax
Pre-Budget fallValue of a permanent 8%Value of the actual rise
24681012%0
6.1%7.5%0.6%
LloydsPre-Budget fall6.1%Value of a permanent 8%7.5%Value of the actual rise0.6%
8.9%7.1%0.7%
NatWestPre-Budget fall8.9%Value of a permanent 8%7.1%Value of the actual rise0.7%
11.0%3.1%0.3%
BarclaysPre-Budget fall11.0%Value of a permanent 8%3.1%Value of the actual rise0.3%
LloydsNatWestBarclays
All as a percentage of each bank's market value. Permanent case: five extra points on estimated profits above the allowance, valued at the bank's price to earnings ratio. Actual case: three extra points for 15 months.Source: Yield Theory estimates; Yahoo Finance prices; bank results
For Lloyds and NatWest, the pre-Budget fall was close to what a permanent 8% surcharge would have been worth. Barclays fell much further than its UK tax exposure could explain, which suggests it was also caught in a wider sell-off in bank shares. Either way, the Budget delivered something worth less than a tenth of what had been priced. On that arithmetic the relief could have been worth several percent for Lloyds and NatWest, even allowing for the smaller rise some analysts already expected. They got 2%, then results week took over.
How much does the surcharge cost each bank?
The surcharge falls on UK banking profits above the £100m allowance. Our estimate of each bank's taxable base uses its latest nine months of profit, scaled to a full year:
Lloyds is almost all UK. We use its statutory pre-tax profit of £6,625m for the nine months, from its third-quarter statement, which annualises to about £8.8bn. Its effective tax rate is already 27%, the 25% main rate plus most of the 3% surcharge.
NatWest is also almost all UK. Its nine-month operating profit was £6,543m, according to its quarterly filing, or about £8.7bn a year.
Barclays earns much of its profit abroad, and its group tax rate is only 21.4%. We use its two UK banking divisions, Barclays UK and the UK Corporate Bank, which made £2,722m and £879m before tax over nine months, according to its results. That annualises to about £4.8bn.
The extra cost in the first full year is 3% of the base minus the allowance. The 15 months then add three more months at a quarter of that.
Bank
Estimated taxable base a year
Extra cost, first full year
Final three months
Total, 15 months
Per share, first year
Share of a year's earnings
RBC estimate
Lloyds
£8.8bn
£262m
£66m
£328m
0.46p
4.5%
3.8%
NatWest
£8.7bn
£259m
£65m
£324m
3.3p
4.3%
4.0%
Barclays
£4.8bn
£141m
£35m
£176m
1.05p
1.8%
1.8%
Share counts: Lloyds 57,409m, NatWest 7,931m, Barclays 13,379m. Earnings are the latest nine months annualised: about 10.1p a share at Lloyds, 76.5p at NatWest and 57.3p at Barclays. RBC column: hit to next year's net attributable profit, RBC Capital Markets via Proactive.
Our estimates sit close to RBC's, which is reassuring for a back-of-envelope method. RBC is slightly lower for Lloyds because it divides by next year's forecast profit, which is higher than this year's run rate. The bigger point is the spread between the banks: Lloyds and NatWest lose about 4% of a year's earnings, Barclays under 2%. RBC puts HSBC at 0.8% and Santander at 0.5%.
Lloyds and NatWest pay more than twice as much of their earnings as Barclays
Lloyds4.5% (£262m)
NatWest4.3% (£259m)
Barclays1.8% (£141m)
First full year of the higher surcharge, as a share of a year's earnings at the current run rate.
Source: Yield Theory estimates from bank results
There is a useful cross-check. The Treasury expects the surcharge rise to bring in £950m in its one full tax year. Our three banks come to about £662m a year between them, roughly 70% of the total. The rest would come from HSBC's UK bank, Santander UK, Nationwide, the challengers and foreign banks' UK arms. That share looks right for three banks that dominate UK current accounts and mortgages.
Measured against capital, the hit is also modest. Lloyds has about £31.8bn of tangible equity (shareholders' equity minus goodwill and intangibles), so £262m takes about 0.8 points off its return on tangible equity (RoTE) for a year. NatWest loses about 0.9 points and Barclays about 0.3.
Proportionally, the listed bank hit hardest is not one of the big three. RBC puts the hit to next year's profit at 3.2% for Shawbrook, 2.9% for OSB Group and 2.7% for Paragon, specialist lenders whose profits sit not far above the £100m allowance. That is why they wanted it raised to £500m. Their letter, signed by the heads of Paragon and Shawbrook, warned of a "significantly negative and disproportionate impact on mid-tier and specialist banks". Nationwide, a mutual building society, takes about a 4% hit, the same as NatWest.
Will the banks pass the tax on to customers?
Partly, RBC expects. It thinks, City AM reported, "a proportion of this tax increase will be passed on to customers" through higher mortgage rates or lower savings rates, and warns that "more expensive lending will lead to lower customer demand". If that happens, the true cost to shareholders is lower than our table shows, because some of it is paid by borrowers and savers instead.
We would not count on much relief. A bank can only widen its margins if its rivals do the same, and Lloyds' finance director, William Chalmers, says the deposit market is getting tighter, with banks from outside the UK competing for savings. Chalmers called the extra tax "unhelpful" for growth and told City AM: "It is important to us that we have a stable and a predictable tax regime." Our estimates assume the banks absorb the whole bill.
What is a quarter point rise worth to a bank?
A bank's net interest income (NII) is what it earns on loans and investments minus what it pays on deposits and borrowing. When rates rise, it moves for two reasons, and they work on different clocks.
The first is deposit margin. When Bank Rate goes up, a bank earns more on the cash it holds at the Bank of England and on variable-rate loans straight away. It passes only part of the rise on to savers. The share it passes on is called pass-through. Lloyds models 50% pass-through on deposits; NatWest's finance director told analysts to use NatWest's 60% figure for this rise, according to the earnings call transcript. This part of the gain arrives in the first year, and it is the part competition erodes.
The second is the structural hedge, the book of fixed-rate swaps each bank uses to lock in income on current accounts that pay little or no interest. Only a slice of it matures each month, so a higher rate reaches hedge income slowly, as old swaps are replaced. This is why each bank's sensitivity grows over three years.
Watch it play outA rate rise reaches the hedge slowly, one maturing swap at a time
Lloyds fixes the income on £246bn of stable deposits with swaps, spread over several years.
Each lit dot is £5m of extra income a year. In year one a quarter point adds about £75m, mostly from deposit margins.
As more swaps mature and are reinvested higher, year two adds about £175m.
By year three the gain is about £300m a year, four times year one. It only lasts if rates stay up.
Source: Lloyds half-year and third-quarter results
Each bank publishes how its NII would change if the whole yield curve, Bank Rate included, moved by a quarter point overnight and its balance sheet stayed the same size. These are the latest figures, before tax:
NatWest gains most in year one; by year three every bank gains two and a half to four times as much
LloydsNatWestBarclays
100200300£400m0
£75m£120m£70m
Year oneLloyds£75mNatWest£120mBarclays£70m
£175m£214m£150m
Year twoLloyds£175mNatWest£214mBarclays£150m
£300m£312m£240m
Year threeLloyds£300mNatWest£312mBarclays£240m
Year oneYear twoYear three
Extra net interest income before tax from a 0.25 point parallel rise in rates, constant balance sheet. Barclays publishes only a fall scenario; we assume a rise works the same way in reverse.Source: Lloyds and NatWest half-year results; Barclays investor presentation
To put the sensitivities in proportion: Lloyds expects underlying NII of more than £14.9bn this year, so its £75m year one gain is about half of one percent. NatWest's £120m is under 1% of its roughly £17.9bn income guidance. A quarter point is a rounding error in a single year, and only builds into something meaningful as the hedge rolls.
Three details matter. NatWest's year one figure has come down: at the end of last year it was £194m, because its managed margin, mostly deposit pricing, was worth £153m in year one then and only £77m now. Lloyds says its sensitivity is larger for a fall than for a rise "due to pricing lags on deposit accounts", which suggests our mirrored Barclays figure is a little generous. And Barclays shows that almost all of its sensitivity comes from swap rates rather than Bank Rate itself: of the £70m year one effect, about £50m is swaps and £20m is Bank Rate, and in years two and three it is all swaps.
Wasn't the rate rise already expected?
Yes, and this is the part most coverage skips. A rise was priced at above 99% before the decision, CNBC reported. More importantly, the banks had it in their own numbers. Lloyds' base case already included a rise at this meeting, according to Investing.com's summary of its results slides. NatWest's finance director, Katie Murray, said it expected Bank Rate "to remain at 4% throughout" next year, with five-year swap rates averaging 4%.
That matters for the question in our title. In accounting terms, a 4% Bank Rate is worth the sums in the table above compared with staying at 3.75%. In market terms, little of it was new money. Much of the hedge benefit comes from five-year swap rates, which had already risen through the year as markets priced in a war-driven energy shock. Lloyds' hedge earned an average yield of about 3% in the third quarter, according to Investing.com, while NatWest has been reinvesting its maturing swaps at about 4.2% this year. That gap, not the latest quarter point, is the engine.
The engine is large. Lloyds expects structural hedge earnings of more than £7.0bn this year and more than £8.0bn next year. NatWest expects its hedge income to rise by more than £1bn next year to over £7bn, with three quarters of it already locked in. Next to those numbers, a £262m one-year surcharge is a dent.
The net: does the rate rise pay back the tax?
To compare the two properly, both need to be after tax. The surcharge is a tax, so its cost already is. The rate gain is pre-tax income, and while the surcharge is at 6%, each extra pound of UK banking profit is taxed at 31%. We keep 69% of the year one gain, about 71% in year two (three months at the higher rate) and 72% in year three.
One timing caveat applies throughout. The banks' year one runs from their half-year balance sheet, while the surcharge's first full year is the next calendar year. We line them up as "year one" for both. The direction of the answer does not change if you shift either by six months.
Lloyds gets its surcharge back only in year three, with about £65m to spare
Surcharge, 15 months−£328m
Rate gain, year one+£52m= −£276m
Rate gain, year two+£125m= −£151m
Rate gain, year three+£216m= £65m
Net after three years£65m
After tax. Rate gains are Lloyds' published sensitivity to a 0.25 point rise, taxed at 31% while the surcharge is 6% and 28% after.Source: Yield Theory estimates from Lloyds results and Budget documents
Run the same sums for all three:
After tax, £m
Year one
Year two
Year three
Three years
Per share, year one
Per share, three years
Lloyds surcharge
−262
−66
0
−328
Lloyds rate gain
+52
+125
+216
+393
Lloyds net
−210
+59
+216
+65
−0.37p
+0.11p
NatWest surcharge
−259
−65
0
−324
NatWest rate gain
+83
+152
+225
+460
NatWest net
−176
+87
+225
+136
−2.2p
+1.7p
Barclays surcharge
−141
−35
0
−176
Barclays rate gain
+48
+107
+173
+328
Barclays net
−93
+72
+173
+152
−0.69p
+1.13p
The answer is the same shape for all three. Year one is a loss: 3.6% of Lloyds' annual earnings per share, 2.9% of NatWest's and 1.2% of Barclays'. Year two is a small gain. Year three is where the rate rise pays for everything, but only for a bank whose rate stays at 4% for three years, which nobody is promising.
All three lose in year one and come out ahead over three years
Net, year oneNet, three years
−300−200−100100£200m0
−£210m£65m
LloydsNet, year one−£210mNet, three years£65m
−£176m£136m
NatWestNet, year one−£176mNet, three years£136m
−£93m£152m
BarclaysNet, year one−£93mNet, three years£152m
LloydsNatWestBarclays
After tax. Surcharge rise against each bank's published sensitivity to a 0.25 point rise; Barclays' rise case is our mirror of its fall case.Source: Yield Theory estimates
Lloyds comes out worst. It has the biggest surcharge bill and the smallest year one rate gain relative to it: a fifth of a year's tax is all a quarter point recovers in year one. Its three-year net of £65m is barely positive. NatWest pays almost the same tax but earns more from deposit margins in year one. Barclays wins on both counts: a smaller tax bill and a rate gain, on our mirrored estimate, worth a third of the tax in year one.
If rates fall back or the surcharge outlives its end date, Lloyds never gets its money back
Pick how long Bank Rate stays at 4% and what happens to the surcharge
Lloyds, net after tax over three years−£276m−£538m−£151m−£413m£65m−£197m
−£341m−£603m−£216m−£478m£0m−£262mbelow Base casebelow Base casebelow Base casebelow Base casein line with Base casebelow Base case
Base case£65m
−£538m£65m
Illustration only. Rate gains are counted only for the years the rise holds, which flatters the short cases slightly because swaps already written at higher rates keep earning. An extension adds a full year of about £262m.
What did the shares actually do?
Here are the eight days, close to close on Yahoo Finance, up to the afternoon of the rate decision.
Budget day
Day after
Second day after
Last two days, to the rate decision
Since the day before the Budget
Lloyds
+1.7%
−5.0%
−5.2%
+5.7%
−3.1% (102.15p to 99.0p)
NatWest
+2.0%
−1.8%
−8.8%
+5.1%
−3.9% (634.4p to 609.8p)
Barclays
+1.6%
+0.7%
−3.9%
+5.2%
+4.6% (422.05p to 441.55p)
FTSE 100
+0.1%
+0.3%
+0.1%
+2.6%
+2.2%
Results week, not the Budget, knocked Lloyds and NatWest; Barclays is up
Closing prices rebased to 100 on the day before the Budget, in trading days. Rate day is the afternoon price on the day of the decision.Source: Yahoo Finance
The Budget rally lasted one day. The day after, Lloyds reported. Its third-quarter profit of £2.3bn matched forecasts, but it did not raise its targets, and its finance director said "we are seeing a tighter and more competitive deposit market", Reuters reported. The shares fell 5.0%. The next day NatWest guided that its net interest margin would be "broadly stable" next year, when analysts had expected the hedge to widen it, and its shares fell 8.8%. Lloyds fell another 5.2% with it.
Then the rate rise came into view. On the day before the decision, bank shares jumped 4.48%, their biggest one-day gain in nearly six months, Reuters reported via MarketScreener, as Brent crude fell below $100 a barrel. On the day itself, the Bank voted 8 to 1 to raise Bank Rate to 4%, its first rise in more than three years, with one member wanting half a point, according to the Bank of England.
Put the per-share numbers side by side. Lloyds' net year one cost from both events is 0.37p a share; the shares are 3.15p lower than before the Budget. NatWest's is 2.2p; the shares are 24.6p lower. Barclays' is 0.69p; its shares are 19.5p higher. The tax and the rate rise explain almost none of the move. These eight days were about guidance: whether margins keep widening next year.
What could cut the other way?
Higher rates lift arrears. The same quarter point that raises NII raises borrowers' costs. The Bank's minutes note that benchmark two-year mortgage rates had risen by nearly half a point in about two months and new mortgage approvals had been falling. The margin for error is thin. Lloyds' loans are about £495.5bn, so one extra basis point (a hundredth of a percentage point) of credit losses costs about £50m a year. Its year one rate gain of £75m before tax is wiped out by 1.5 basis points of extra impairments. Lloyds' impairment charge was already £926m in the first nine months, up from £619m. At NatWest and Barclays, with loan books of about £449bn and £460bn, a basis point is worth about £45m a year; NatWest's charge rose to 24 basis points in the third quarter, after releases had flattered the second.
A quick reversal. The Bank's guidance leans towards more rises, not fewer. Governor Andrew Bailey said that unless the Middle East conflict is resolved, the rise does not "seem likely to be the last increase", Reuters reported via Investing.com, and the Bank expects inflation of about 5% by the middle of next year. But the case rests on energy. Brent fell below $100 the day before the decision, on hopes that the US midterm results would make further strikes on Iran less likely, Yahoo Finance reported, and traded near $94 on the day itself, the Irish Times reported. If oil keeps falling and the Bank cuts back to 3.75%, the year two and year three gains shrink while the surcharge, now legislated, stays. Our scenario above leaves Lloyds £151m to £276m down over three years.
Two events eight days apart, and the results in between
Day 0BudgetSurcharge doubled to 6% for 15 months; banks close up 1.6% to 2.0%
Day 1Lloyds resultsNo target upgrade, deposit competition; shares down 5.0%
Day 2NatWest resultsFlat margin guided for next year; shares down 8.8%
Day 7Oil below $100Banks up 4.48% on rate rise hopes
Day 8Bank Rate to 4%Vote of 8 to 1; Bailey signals more if energy stays high
Source: Bank of England; Reuters; Yahoo Finance
The surcharge outlives its end date. The Budget says it "will not be extended". But fiscal headroom has shrunk to £15bn from £23.6bn, AskTraders noted, and RBC points to Spain, where bank taxes have proved more persistent than promised. A one-year extension would cost Lloyds and NatWest about £260m each and Barclays about £140m. That would leave Lloyds behind even after three years of higher rates.
Motor finance has not gone away. Four challenges to the regulator's compensation scheme, one from a consumer group and three from car lenders, go to the Upper Tribunal in a hearing that starts in about three and a half months. The Financial Conduct Authority has told lenders to plan for the scheme being quashed in whole or in part, and payments are unlikely to begin before the second half of next year, LawPlus reports. Lloyds' £1.95bn provision is unchanged; Barclays added £105m earlier this year. A consumer win that raised payouts would hit Lloyds hardest.
Book value dips when rates rise. Higher swap rates cut the value of the banks' receive-fixed swaps, which runs through the cash flow hedge reserve and lowers reported tangible book. Barclays says a quarter point move is worth about £1.2bn before tax, or about 6p of tangible book per share, in its results presentation. Lloyds' tangible net assets fell 1.6p to 55.4p in the third quarter partly for this reason. It is an accounting effect that unwinds as the swaps mature, but it makes price to book look higher in the meantime.
How do the banks look on valuation now?
Bank
Price
Tangible book per share
Price / tangible book
RoTE, year to date
RoTE the price implies
Dividends, last 12 months
Yield
Lloyds
99.0p
55.4p
1.79x
17.9%
17.3%
4.01p
4.1%
NatWest
609.8p
359p
1.70x
20.2%
16.6%
35.0p
5.7%
Barclays
441.55p
410p
1.08x
13.8%
11.6%
11.5p
2.6%
Dividends: Lloyds' 2.43p final for last year plus its 1.58p interim, from its full-year and half-year results; NatWest's 23.0p final from its annual results plus a 12.0p interim; Barclays' 5.6p final from its full-year results plus a 5.9p interim.
The "implied" column uses the rule of thumb from our earlier issue: fair price to tangible book is roughly (RoTE minus growth) divided by (cost of equity minus growth), with an 11% cost of equity and 3% growth. Turned around, it tells you the long-run return the price assumes.
NatWest and Barclays earn well above what their prices assume; Lloyds is priced for what it earns
RoTE so far this yearRoTE the share price implies
510152025%0
17.9%17.3%
LloydsRoTE so far this year17.9%RoTE the share price implies17.3%
20.2%16.6%
NatWestRoTE so far this year20.2%RoTE the share price implies16.6%
13.8%11.6%
BarclaysRoTE so far this year13.8%RoTE the share price implies11.6%
LloydsNatWestBarclays
Implied RoTE assumes an 11% cost of equity and 3% long-run growth. Next year's surcharge takes about 0.8 points off Lloyds, 0.9 off NatWest and 0.3 off Barclays.Source: Yield Theory estimates from bank results and Yahoo Finance prices
Lloyds is priced for about the return it makes. Take off 0.8 points for next year's surcharge and its 17.9% falls to about 17%, right where the price sits. It has been the most generous returner of cash: £1.75bn of buybacks completed this year and a further £1.0bn under way, about 4.8% of its market value together. Buying back at 1.8 times book adds less per share than buying near book, and its year one rate gain covers the smallest share of its tax bill.
NatWest fell furthest and now looks cheapest relative to what it earns. A 20.2% return against a price that implies 16.6% means the market believes the flat-margin guidance and then some. It has the highest yield at 5.7%, pays out about half its profit as dividends, and expects to announce its next buyback with its full-year results. If hedge income rises by more than £1bn next year as guided while margins hold flat, earnings still grow.
Barclays remains the outlier we flagged before. At 1.08 times book it is priced for an 11.6% return while making 13.8%, and its UK bank made 21.2% in the third quarter. It has the smallest surcharge exposure, a third-quarter buyback of £500m on top of £1.5bn earlier this year, and plans a £2bn dividend for the year, about 15p a share or a 3.4% forward yield. Its discount reflects its investment bank, which made a 9.5% return in the quarter.
What to watch next
The next rate decision, in about six weeks. CNBC put the odds of another quarter point then at about 25%, and markets price three more rises next year, more than most economists expect, according to Reuters. Each further rise adds another layer to the sensitivities above, with the same lag.
NatWest's full-year results, where it expects to announce its next buyback. A large one at 1.7 times book, after a 9% fall, would be a signal the board thinks the shares are cheap.
Barclays' fourth quarter, the last of its three-year plan, which promised at least £10bn of capital returns. It has announced £2.8bn this year so far.
The motor finance hearing, and whether the regulator's scheme survives it.
Where our numbers could be off
The taxable bases are estimates from reported profit, not the banks' tax computations; Lloyds' includes some insurance profit and NatWest's some offshore profit, so both costs may be slightly high. The sensitivities assume a constant balance sheet and fixed pass-through, and Barclays' rise case is our mirror of its fall case. Year one for the rate gain and for the surcharge are offset by six months. None of these changes the conclusion that year one is a net loss for all three.
Our read
The rate rise does not give the Budget's slice back this year. For Lloyds it recovers about a fifth of the year one tax; for NatWest and Barclays about a third. Only by year three, with Bank Rate held at 4%, does each bank come out ahead, and Lloyds only just. But both effects are small. The surcharge costs 0.3% to 0.7% of each bank's market value once, a fraction of the 6% to 11% the shares had fallen in fear of a permanent 8%. The rate rise was already in the banks' guidance. The structural hedge, worth billions of extra income a year as old swaps roll into new ones near 4%, matters far more than either.
So these eight days were a pricing event, not an earnings event, and they have left the three banks in a different order. Barclays is our preference: least exposed to UK tax, cheapest against its returns, and the only one whose shares are higher than before the Budget. NatWest is the value after its results-day fall. It is priced for a sharp drop in returns that its own guidance does not imply, with a 5.7% yield while you wait. Lloyds comes out worst: the biggest tax bill, the smallest year one rate gain relative to it, a price that already assumes its returns hold, and deposit competition its own finance director is flagging.
What would change our mind: a quick reversal of the rate rise as oil falls, which would hurt Lloyds and NatWest most; impairments rising by more than a couple of basis points; an extension of the surcharge, which would turn Lloyds' three-year net clearly negative; or a slump in Barclays' investment bank, which would undo the case for its discount closing.
The doubled bank surcharge costs Lloyds about £262m and NatWest about £259m in its first full year. The Bank of England's quarter point gives back a fifth to a third of that in year one. Our per-bank waterfall, the per-share net, and why Barclays comes out best.
£100 put into Standard Chartered five years ago is now worth £435, and Lloyds has doubled. Here's what the structural hedge, motor finance redress, a possible bank tax and price-to-book say about whether UK banks can keep going.
The thesis, the numbers behind it, and what would break it. Full access is $39 a month.
Lloyds, Barclays and NatWest, which covered the structural hedge, motor finance and valuation, and flagged the Budget as the near-term test. The test has now been sat. Below we work out what the surcharge costs each bank in pounds and per share, what the rate rise is worth using the sensitivities the banks publish, and the net of the two. Then we set that against what the shares actually did and what they are worth now.