Challenger banksOneSavings(LSE: OSB),Shawbrook(LSE: SHAW),Virgin Money(LSE: VM) andAldermore(LSE: ALD) suffered their worst day on record yesterday after George Osborne announced a new corporation tax surcharge for the banking industry.
Over the past five days, OneSavings has seen its share price fall by 12%. Shawbrooks shares fell 13.5%. Virgin Moneys shares have tumbled 14.3% and Aldermore has suffered a decline of 21%.
Tax surcharge
George Osbornes new tax surcharge will amount to 8% of profits and will affect 150 lenders around the country. Designed to replace the bank levy, which is paid by only 30 lenders, the tax surcharge will see the corporate tax rate of all banksjump to 28% next year, falling to 26% by 2020.
Its pretty clear that this tax hike will hit the growth rate of the challenger banks. Although, according to my figures, being forced to pay an extra 8% corporate tax surcharge will hardly cripple the industry.
For example, for full-year 2014 OneSavings reported a pre-tax profit of 61.7m and an after-tax profit of 51.5m. Based on these numbers the company paidtaxof 10.2m, a tax rate of 16.5%. Paying a corporate tax rate of 28%, including the bank surcharge would cost the group an additional 7.2m per annum, or approximately 3p per share.
City analysts were expecting OneSavings to report earnings per share of 37.2p for 2016. After factoring in the extra tax paid this figure falls to 34.2p. On this basis, the company is trading at a lowly 2016 P/E of 8.2.
Based on these figures then, a higher tax rate is not going to slow down the growth of the challenger banks.
Rapid growth
City analysts have yet to adjust growth figures to factor in the higher rate of corporate tax. So, well have to wait and see how the tax surcharge affects analysts growth projections for these challenger banks.
But at present, Aldermores earnings are expected to expand by 49% this year. Virgin Moneys earnings are set to grow 6% this year and a further 52% during 2016. Shawbrooks earnings are set to doubleby the end of 2016 and OneSavings is expected to report earnings growth of around 30% by 2016, thats including the additional tax adjustment.
Cooling the market
Unfortunately, as well as announcing the tax surcharge, George Osbourne also announced measures yesterday tocool the growth of the buy-to-let market. Specifically, the Chancellor announced a crackdown on mortgage interest tax relief.
OneSavings sells itself as a mortgage bank, specialising in buy-to-let mortgages. There was some concern that the groups growth would be held back by this new move by the government.
However, soon after the changes were announced, OneSavings moved to reassure the market, putting out a statement that ended with the following comments from CEO,Andy Golding:
The sheer demand and demographic growth prospects forprivaterented property are likely to keep the market growing despite these small changes to the tax regime.
The bottom line
Overall, the new surcharge on bank profits will hit Shawbrook, OneSavings, Aldermore and Virgin Money. Nevertheless, the demand for these banks services remains high,and the higher tax rate wont hold back growth for long.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.