J.P. Morgan has adjusted its baseline outlook to assume the UK banking surcharge increases from 3% to 5%, driven in the brokerage's view by mounting political pressure from the Labour left. The firm said the change would produce measurable earnings hits for domestic lenders while noting a separate, potentially larger threat from changes to reserve remuneration at the Bank of England.
The updated base case follows a leaked memo from MP Angela Rayner to Chancellor Rachel Reeves that proposed raising the surcharge to help protect welfare spending. J.P. Morgan's analysts said domestic UK banks "will likely need a trifecta - politics, macro, and sector fundamentals all supportive, to drive the next leg of a near-term re-rating."
Quantified earnings and profitability impacts
Under J.P. Morgan's scenario, a two percentage-point rise in the surcharge would reduce 2027 estimated earnings per share by:
- 2.7% for Lloyds
- 2.4% for NatWest
- 1.3% for Barclays
- 0.6% for HSBC
The brokerage also estimates the corresponding reduction in 2027 return on tangible equity would be about 52 basis points for Lloyds, 49 basis points for NatWest, 19 basis points for Barclays and 12 basis points for HSBC.
Context on tax competitiveness
J.P. Morgan highlighted UK Finance figures showing that in 2025 a model bank operating in the UK faced a total tax rate of 46.4%. By comparison, the total tax rate stood at 42.2% in Amsterdam, 38.9% in Frankfurt, 28.9% in Dublin and 27.9% in New York.
Reserve remuneration identified as a greater risk
The brokerage flagged potential changes to how reserves held at the Bank of England are remunerated as a more severe downside risk than the banking surcharge. If all reserves were remunerated at 0% versus the current bank rate, J.P. Morgan estimates the impact on 2027 profits would be approximately:
- 29% for Lloyds
- 42% for NatWest
- 48% for Barclays
- 7% for HSBC
Under a milder alternative proposed by the IPPR think tank in August 2025 - a levy on QE-related reserves at the bank rate less 2% - the projected impacts shrink to roughly 11% for Lloyds, 18% for NatWest, 21% for Barclays and 3% for HSBC.
Despite these scenarios, J.P. Morgan said it continues to view changes to reserve remuneration as less likely because of potential risks to monetary policy transmission, and it noted Bank of England Governor Andrew Bailey has previously ruled out such an approach.
Market positioning and longer-term preferences
While acknowledging the political risks, J.P. Morgan described the wider economic backdrop as supportive, citing benign asset quality, solid volume growth and a constructive regulatory direction. The brokerage said it still prefers UK Asian and Irish banks in the near term over domestic UK lenders.
For longer-term holdings, J.P. Morgan favours NatWest on a valuation and yield basis, citing a 6.5x 2028 estimated price-to-earnings multiple with an 11% total yield in 2027. Barclays is noted at 6x 2028 estimated P/E with a 10% total yield in 2027. The brokerage assigns "overweight" ratings to both Barclays and NatWest, while Lloyds and HSBC are rated "neutral."
Implications for investors
The firm’s revised base case and the scenarios for reserve remuneration suggest a range of outcomes for bank profitability depending on political decisions and central-bank policy treatment of reserves. Investors and analysts are likely to weigh the magnitude of potential profit hits against the firms' current valuations and ratings when reconsidering positions.