Why The Budget Was Bad News For OneSavings Bank PLC, Shawbrook Group PLC, Virgin Money Holdings (UK) PLC And Aldermore Group PLC

Challenger banks OneSavings (LSE: OSB), Shawbrook (LSE: SHAW), Virgin Money (LSE: VM) and Aldermore (LSE: ALD) suffered their worst day on record yesterday after George Osborne announced a new corporation tax surcharge for the banking industry. 

Over the past five days, OneSavings has seen its share price fall by 12%. Shawbrook’s shares fell 13.5%. Virgin Money’s shares have tumbled 14.3% and Aldermore has suffered a decline of 21%. 

Tax surcharge

George Osborne’s new tax surcharge will amount to 8% of profits and will affect 150 lenders around the country. Designed to replace the bank levy, which is paid by only 30 lenders, the tax surcharge will see the corporate tax rate of all banks jump to 28% next year, falling to 26% by 2020. 

It’s pretty clear that this tax hike will hit the growth rate of the challenger banks. Although, according to my figures, being forced to pay an extra 8% corporate tax surcharge will hardly cripple the industry. 

For example, for full-year 2014 OneSavings reported a pre-tax profit of £61.7m and an after-tax profit of £51.5m. Based on these numbers the company paid tax of £10.2m, a tax rate of 16.5%. Paying a corporate tax rate of 28%, including the bank surcharge would cost the group an additional £7.2m per annum, or approximately 3p per share.

City analysts were expecting OneSavings to report earnings per share of 37.2p for 2016. After factoring in the extra tax paid this figure falls to 34.2p. On this basis, the company is trading at a lowly 2016 P/E of 8.2.

Based on these figures then, a higher tax rate is not going to slow down the growth of the challenger banks.

Rapid growth

City analysts have yet to adjust growth figures to factor in the higher rate of corporate tax. So, we’ll have to wait and see how the tax surcharge affects analysts’ growth projections for these challenger banks.

But at present, Aldermore’s earnings are expected to expand by 49% this year. Virgin Money’s earnings are set to grow 6% this year and a further 52% during 2016. Shawbrook’s earnings are set to double by the end of 2016 and OneSavings is expected to report earnings growth of around 30% by 2016, that’s including the additional tax adjustment. 

Cooling the market

Unfortunately, as well as announcing the tax surcharge, George Osbourne also announced measures yesterday to cool the growth of the buy-to-let market. Specifically, the Chancellor announced a crackdown on mortgage interest tax relief. 

OneSavings sells itself as a mortgage bank, specialising in buy-to-let mortgages. There was some concern that the group’s growth would be held back by this new move by the government.

However, soon after the changes were announced, OneSavings moved to reassure the market, putting out a statement that ended with the following comments from CEO, Andy Golding:

“The sheer demand and demographic growth prospects for private rented property are likely to keep the market growing despite these small changes to the tax regime.”

The bottom line

Overall, the new surcharge on bank profits will hit Shawbrook, OneSavings, Aldermore and Virgin Money. Nevertheless, the demand for these banks’ services remains high, and the higher tax rate won’t hold back growth for long.