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I recently added Barclays (LSE:BARC) I added shares to my portfolio after becoming convinced that the FTSE bank has the potential to significantly increase its earnings in the coming years.
But reports have emerged suggesting the new Labour government is considering raising bank duty in an attempt to plug a hole in the country's finances.
Currently, short-term and long-term liabilities (deposits) are taxed at a rate of 0.1% and 0.05% respectively. This is in addition to the higher corporate tax rate that banks must pay.
The tax is estimated to raise £1.4bn over the 2024-25 financial year.
In a recent speech, the Prime Minister said that when it comes to tackling the budget deficit: “Those with the broadest shoulders should bear the heaviest load”. And based on the company's 2023 after-tax earnings, FTSE 100 IndexThe group's five banks (£36.79bn) could be easy targets.
A budget is due to be presented on 30 October. I am concerned that a significant increase in the rate (or other taxes) could negatively affect the Barclays share price.
Don't be afraid?
It is unlikely that any changes will be implemented in 2024. But to illustrate the potential impact, I will look at how it could affect this year's earnings.
Analysts forecast that for the year ending December 31, 2024 (FY24), the banking levy will cost Barclays £276 million, or $1.9 million per share.
With expected FY24 earnings per share of 30.5p and a current (6 September) share price of 224p, the stock has a forward price-to-earnings (P/E) ratio of 7.3.
If the government were to double the tax (all else being equal), the share price could fall by 6.7% to 209p, potentially limiting future capital growth.
| Financial year | Profit after tax (millions of pounds sterling) | Basic earnings per share (pence) |
|---|---|---|
| 2024 | 4.526 | 30.5 |
| 2025 | 5.541 | 39.6 |
| 2026 | 6.306 | 48.4 |
But the impact on Lloyds Banking Group and NatWest Group It could be higher. They have almost all their assets located in the UK. Barclays only has a domestic exposure of 60%. The tax does not apply to overseas assets.
Although I don't look favorably on the value of my shares going down, it's not as bad as I feared. But I've only assumed that the tax will double. Given the size of the government's deficit, I might try something more radical.
However, if the Chancellor of the Exchequer really wants Britain to grow again, I think she will need a healthy banking sector that is able to lend at competitive rates. This could mean doing nothing.
Looking to the future
I bought my Barclays shares for the long term after doing some number crunching.
Its price-to-book ratio is 0.47. This means that if it were to cease trading today and sell all of its assets and use the proceeds to pay off its liabilities, there would be enough cash left to return 448 pence per share to shareholders.
This represents a 114% premium over its current share price.
Its price-earnings ratio is also low compared to its peers and the FTSE 100 as a whole.
But bank stocks can be risky. Bad debts could rise if economic conditions start to worsen, and margins will shrink if interest rates (as expected) start to fall.
However, I remain optimistic. Whatever the Chancellor of the Exchequer announces in October, I think I have got a bargain.
