Banks set to gain from Osborne's tax regime

Britain's banks have emerged as major beneficiaries of the Budget, with the City warning that the coalition Government's proposed levy will fail to reach its target of generating £2bn revenues a year.

While Wall Street dragged London shares down in afternoon trading yesterday, HSBC, Lloyds and Royal Bank of Scotland all outperformed the FTSE 100 index of leading shares as analysts rated the banking levy a damp squib. Citigroup analysts said the five major London listed banks – which also include Barclays and the emerging markets specialist Standard Chartered – could end up contributing as little as £1.3bn.

At the same time, UBS analysts said that some banks would be likely to shift business to centres where levies will not be imposed, such as in Asia, if they have significant businesses in the region.

"We expect the legislation to lead to a significant review of where trading activity is booked and group structures in order to minimise the charge," the Swiss bank's researchers said. This would be the case with HSBC, which has a significant trading book in Hong Kong.

The levy is based on a percentage of a bank's liabilities but applies only to those in the UK. Analysts at UBS said that HSBC would be able to limit the impact by declaring trades on its Hong Kong balance sheet.

They added in a report published yesterday: "HSBC has traditionally used its UK bank as one of the main trading counterparties within the group. However, there is no reason why these trades booked on this balance sheet could not, instead, be booked on the Hong Kong balance sheet instead."

Groups such as the City of London Corporation and the British Bankers' Association have been critical of the levy and warned that it could push business away from Britain.

But both UBS and Citigroup said the impact on banks' earnings would be relatively small and more than offset by the cuts to corporation tax, also promised in the Budget.

Citigroup said Lloyds Banking Group, which has received billions of pounds of state aid, would actually be a significant net winner from the tax changes announced in Tuesday's emergency Budget.

Leigh Goodwin, at Citigroup, said the bank could make up to £132m a year in extra profit from the year 2012. "It is clear Lloyds is the 'winner' among the banks," she added. "The new bank levy is expected by the Government to accrue 'over £2bn annually'. This is towards the lower end of the £2bn to £4bn range speculated upon in the press and expected by the market, we believe.

"Based on the full levy rates announced, we estimate that the five major UK-listed banks will contribute around £1.3bn."

The FTSE 100 finished at 5178.52, down 68.46 points or 1.30 per cent. But Lloyds finished down just 0.5 per cent at 58.7p, HSBC gave up 1.12 per cent at 651.8p and Royal Bank of Scotland lost only 0.76 per cent at 46.72p. Barclays and Standard Chartered, however, were laggards.

The final levy is still subject to consultation and banks have been warned they could face another hit, possibly in the form of a small tax on each transaction, as suggested by the International Monetary Fund.

While France, Germany and the US have all pledged to introduce levies, countries whose banks held up well during the financial crisis have rejected calls for new bank taxes of their own. They include Japan and Canada, which have argued that their banks should not be penalised for the mistakes made by those in other countries.