For U.K. Banks, Election Could Mean 10% Upside—Or 30% Downside

(Bloomberg) -- For investors in U.K. banks, the stakes couldn't be much higher ahead of this month's general election.

HSBC Holdings Plc analyst Robin Down expects the sector to rally as much as 10% if Prime Minister Boris Johnson seals a majority for his Conservative party at the Dec. 12 poll, bringing the prospect of reduced Brexit uncertainty and lower taxes. But should Labour win control under Jeremy Corbyn, lenders' stocks could plunge as much as 30% as many of the party's policies are potentially negative for bank share prices, he predicts.

According to the latest polls, a Conservative majority remains the most likely outcome. However, there's also the possibility of a hung parliament, the implications of which would throw up a whole different set of scenarios for bank stocks.

A minority Conservative government might put a “no-deal Brexit” back on the table due to the party's inability to pass Johnson's withdrawal agreement, pressuring the sector, Down wrote in a Nov. 26 report. By contrast, the sector might benefit from an alliance of parties that favor remaining in the European Union as this would remove the risk of no-deal departure, he says.

According to Barclays Plc analysts Chris Manners and Aman Rakkar, an outright Conservative victory would boost sterling and push up yield curves, all to the benefit of bank earnings.

The analysts noted in a Nov. 13 report that financials was tied with technology as the best-performing U.K. stock sector in the month that followed the country's last election in June 2017, which saw the Conservatives remain in power, albeit with support from Ireland's Democratic Unionist Party.

Below, we take a look at how some key election issues may affect the banking sector:

Tax

Labour says it will reverse some cuts to corporation tax implemented by the Conservatives. For a 100% domestic bank, that could mean a 10% cut to earnings, Down says.

Corbyn has also vowed to reverse Tory cuts to the 2.4 billion-pound ($3.1 billion) a year bank levy, and don't forget the “transaction tax,” Labour's proposed levy on investment banking trades that has got traders worried.

Capital Requirements

A June report commissioned by the Labour party suggests increasing capital requirements known as risk weights for mortgages, while lowering them for areas viewed as “strategically more useful,” such as lending to small- and medium-sized enterprises.

With risk weights on mortgages already on the rise due to changes to U.K. and European regulations, further increases would be negatively received, Davy analyst Diarmaid Sheridan said by email.

Equity Ownership

Labour has pledged to “give workers a stake in the companies they work for,” by requiring large firms to set up “inclusive ownership funds,” whereby up to 10% would be owned collectively by staff.

Assuming the equity is newly issued, Down estimates that such a policy would dilute bank earnings by 9%.

Nationalization

Labour's rhetoric around public ownership of Royal Bank of Scotland Group Plc has moderated since last year, with Corbyn focusing instead on railways, mail and utilities.

Barclays' Manners and Rakkar expect a “material fall” in RBS's share price were a Corbyn-led government to attempt to buy the shares the government doesn't already own.

RBS Chairman Plays Down U.K. Bank Nationalization Under Labour

--With assistance from Hanna Hoikkala.

To contact the reporter on this story: Joe Easton in London at jeaston7@bloomberg.net

To contact the editors responsible for this story: Beth Mellor at bmellor@bloomberg.net, Paul Jarvis, Jon Menon

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