They say revenge is a dish best eatencold but the endless regulatory reprisals against the banking sector are nowwell past their use-by date.
Bankersmay have got off lightly in the immediate aftermath of the financial crisis, but the endless floggings and bleedings they have endured sinceare starting to look like a life sentence. Worse, investors in Barclays (LSE: BARC), Lloyds Banking Group (LSE: LLOY) and Royal Bank of Scotland Group (LSE: RBS) are getting punished as well.
Fine Time
As ever, ace fund manager Neil Woodford saw it coming. Hedumped all his holdings in HSBC due to fears over fine inflation, as regulators repeatedly returned for yet another pound of flesh. Nothing that has happened since will changed his mind.
Chancellor George Osborne has imposed five taxes on the banking industry since 2010, includingthe bank levy, bank surcharge and bonus tax. In total, these will cost the sector 40bn over the next decade, according to figures from the British Bankers Association.
Taxing Time
Each new tax seems to beget another. The bank levy has been raised 11 times since 2011. It was reduced in the July Budget to keepHSBC in the UK, butan 8% surcharge on banking profits was introduced. New research by accountants EY saysthe impact of thissurcharge on bank profits has been vastly understated and could easily take double itspredicted 1.66bn net tax gain over the next five years.
Even with the forthcoming reduction in the bank levy, EY calculates that the changes will increase the net tax burden on bank profits by around 5% over the next five years. The only consolationis that the surcharge will hit rival challenger banks such as Aldermore, Metro, Shawbrook and Virgin Money relatively hard.
As Exane BNP Paribas has pointed out, banks face tougher regulatory standards, including the 2018 implementation of the IFRS9 accounting standard regarding provisions, a technical document that could hit tier 1 equity ratios, tangible net asset values and near-term dividend expectations. It alsowarned that theBank of England is expected to require large UK banks to hold MREL (Minimum Requirement for Own Funds and Eligible Liabilities) at a level broadly equivalent to twice the Basel total capital requirement, whichcould reduce earnings per share by between 3-6%.
White Out
PPI mis-selling,the scandal that wouldnt die, may be given a new lease of life. The Financial Conduct Authority is currently deciding whether to unleash a fresh round of multi-billion pound claims, to compensate customers who werent told how much commission their adviser was earning from each policy sale. This could cost the financial services sector as a whole 33bn. And then there is the numberless stream of mis-selling and rate rigging class actioncases.
The authorities (and public) wont be happy until the banks are begging for mercy. It will get even more brutal if Jeremy Corbyns new hardline Shadow Chancellor John McDonnell isever in a position to follow through on his threats to nationalise the banks without shareholder compensation. If Corbyns new hard left Labour Party succeeds in pushing the national conversation to the left, the bankers could become even bigger hate figures. Banks wont bethe only ones being bled white, shareholders could turn paleas well.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Barclays and HSBC. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.