Will Barclays, Lloyds and NatWest shares take a beating in next week’s Budget?

NatWest (LSE: NWG) shares have had a blistering run, up more than 50% in the last year and 250% in five years. Long-term investors will be sitting on sizeable profits, even after the recent FTSE 100 wobble. That’s the magic of owning individual stocks. Get it right and they can really motor.

The Barclays share price has done pretty well too, up almost 60% over 12 months and 200% across five years. Lloyds Banking Group is also up 60% in a year, and 155% over five. In every case, dividends are on top.

After years of slogging through the post-crisis stigma, the big lenders have finally been liberated. But their success also raises the question of how far they can go from here. They’ve been boosted by higher interest rates, which allow them to boost margins, but with the Bank of England expected to cut rates policy on 18 December and possibly twice more next year, that could reverse.

FTSE 100 banks fly

Rate cuts might lift the property market and support lending volumes, but the broader UK economy still looks sluggish. Before any of that takes shape, there’s the Budget on 26 November.

Campaigners are pushing for a banking windfall tax on profits. One proposal is to lift the 3% surcharge to 8%, which could raise £8bn over four years. If that happened it would lift the effective corporation tax rate on banks from 28% to 33%. A fortnight ago this looked unlikely, but the confusion around the Chancellor’s income tax plans has revived speculation. Nothing’s guaranteed until Budget day.

Bank stocks are likely to drop on the day if a tougher surcharge lands. I doubt it would trigger a collapse though. While £8bn is a real hit, but given the strength of their recent numbers it isn’t fatal. NatWest posted operating profit before tax of £6.2bn in 2024. Its 24 October update showed Q3 net profits rising 35% to £1.68bn. Barclays and Lloyds look similarly solid. Also, the banks will almost certainly pass the added costs onto customers over time. It’s what they do.

Another pressure point

There’s also talk of a levy on the income banks generate from Bank of England reserves. That could backfire by pushing up the cost of capital and hitting lending, so may not happen. Like I said, nobody knows.

If the tax position stays unchanged, the banks could enjoy a relief rally on the day. By the time any investor tries to trade on the news, the moment may have passed.

If bank shares do drop sharply because of tougher measures, they could look more appealing. NatWest already looks good value trading on a price-to-earnings ratio of 11.4. If that falls further, it might look even more of a bargain. As ever, investors should tune out the short-term noise and focus on the long term.

Despite the uncertainty, I think all three lenders are worth considering. With luck, over the years the big FTSE 100 banks should continue to deliver share price growth and dividend income, along with the usual ups and downs investors must always expect when buying shares. The rewards ultimately make it worthwhile.

The post Will Barclays, Lloyds and NatWest shares take a beating in next week’s Budget? appeared first on The Motley Fool UK.

More reading

• This FTSE 100 bank is up 63% — why am I still buying?
• Will the Budget take a hammer to Barclays, Lloyds, and NatWest shares?
• Up 314%, could one of the UK’s biggest dividend stocks still offer more growth and income?

Harvey Jones has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Barclays Plc and Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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