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A fair few people got a fright in late October, including (probably) anyone taking a look at Lloyds‘ (LSE: LLOY) shares. The Halloween festivities coincided with the share price falling off a cliff on the back of a recent announcement by Chancellor John Healey of a windfall tax on banks. Lloyds’ shares are now trading for pennies again – at 94p a pop, as I write.
Is a reversal of the ‘banking surcharge’ going to send shares in the Black Horse bank into a tailspin? Or is this simply market noise that’s offering a chance to buy in cheap? Here’s what I think.
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Firstly, the much-predicted windfall tax was less impactful than it might have been. The basic detail is that the ‘banking surcharge’ has been temporarily increased for 15 months, taking it from 3% to 6%. The net effect is that banks like Lloyds will be losing 3% of earnings for just over a year.
A bigger impact in recent days was its 29 October earnings call. Shareholders might have been spooked by signs that things might be heading in the wrong direction. Net income increased 9% year on year, but there were worrying indications that margins are going to be squeezed. Net interest income’s expected to be lower for 2027 on the back of competition in both lending and deposit markets. The share price dropped 6% on the day.
Eagle-eyed observers will however, note that the slide in Lloyds’ shares – over 20%, meaning we are now firmly in crash territory – began all the way back in August. Not only that, but other FTSE 100 banks, and even ones abroad, are struggling too. So what the devil might be going on here?
Should I sell?
One of the biggest issues for Lloyds is the short-term trajectory of the economy – in both the UK and the world at large. The success of banks is tied to the economies they operate in. More money flowing around means higher earnings.
So what’s going on? Essentially, it’s mostly down to the Iran war and its knock-on effects on inflation. Oil prices are loads higher than they were and shipping costs are on the up too. All this will have downstream effects on inflation.
We might already have seen the canary in the coal mine with retailer Poundland announcing its closure – its input costs had already been rising thanks to recent inflation and taxes. Also, it’s worth mentioning the UK’s growth forecast was downgraded by the OBR too.
Overall, the favourable interest rates backdrop combined with a possible catalyst to roll back some of the above issues (a long-overdue resolution to the Iran war) means I’m not considering selling my position. But the 20%+ drop does look justified.
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John Fieldsend owns shares in Lloyds.
This story originally appeared on Motley Fool
