UK Tax to Cost US Banks $2 Billion

US banks will foot a total bill of about $2 billion in their second-quarter results to pay for the UK tax on bankers’ bonuses — a charge that could significantly reduce earnings at financial groups such as Citigroup , JPMorgan Chase and Bank of America .

Tower Bridge and City of London financial district
Source: Dominic Burke | Getty Images
Tower Bridge and City of London financial district

The amounts to be paid by US banks, with Goldman Sachs alone in line for a $600 million -plus charge, will contribute to a windfall of £2.5bn from the levy, larger than expected by the British authorities. Analysts say the tax will be a negative factor when US banks report results for the April-June period next month, reducing earnings per share at Citi, JPMorgan and BofA by 10 per cent or more.

The tax — introduced last year by the previous government amid a public outcry at bankers’ pay — forced banks to pay a one-off 50 per cent levy on all UK bonuses above £25,000, including those awarded in shares.

Unlike some European rivals, which passed on some of the tax to employees in the form of lower pay to avoid dipping into shareholders’ funds, most US banks paid the full amount, shielding bankers from the effects of the levy.

In a note to clients this week, John McDonald of Bernstein Research said the UK bonus tax was the driver behind his decision to lower his estimate of JPMorgan’s second quarter EPS from $0.80 to $0.66.

“The bulk of the decline is from the UK bonus tax, which the company has not yet disclosed but we estimate at $525 million,” he wrote. JPMorgan on Wednesday declined to comment, but bank executives have told investors that the tax charge would be “material”.

Citi has said it will take a $400m hit for the UK levy. The move could reduce its quarterly EPS by about 13 per cent. BofA has disclosed the tax will cost it about $465 million. Mr McDonald said that would wipe more than 9 per cent off its EPS.

Goldman and Morgan Stanley are also expected to see a fall in EPS although the latter has not revealed how much it will pay in bonus taxes. All banks declined to comment on Wednesday.

When the then chancellor of the exchequer Alistair Darling announced the tax in December, it was attacked for threatening London’s competitiveness as a global financial centre.

The government initially estimated the levy would raise £550 million but it later raised that estimate to £2 billion. This week it was raised to £2.5 billion.

The charges for the UK bonus tax are likely to compound a challenging quarter for US banks. Analysts predict an end to their streak of investment banking and trading profits. With Europe’s sovereign debt troubles and bearish news on US economic growth unsettling capital markets, investors and companies have largely stayed on the sidelines in the past three months, reducing the dealmaking activity of large banks.