UK bonus tax will hit US banks

Some of the largest US institutions may have to pay $2 billion in bonus taxes to British authorities. Goldman Sachs' bill may hit $600 million.

By Charley Blaine Jun 16, 2010 8:22PM

U.S. banks will foot a total bill of about $2 billion (about £1.35 billion) in their second-quarter results to pay for the U.K. tax on bankers’ bonuses.

The charge could significantly reduce earnings at financial groups such as Citigroup (C), JPMorgan Chase (JPM) and Bank of America (BAC), the Financial Times said late today.


The amounts to be paid by U.S. banks, with Goldman Sachs (GS) alone in line for a $600 million-plus charge, will contribute to a windfall of £2.5 billion ($3.68 billion) from the levy, larger than expected by British authorities.

Analysts say the tax will be a negative factor when U.S. banks report second-quarter results next month, reducing earnings per share at Citi, JPMorgan and Bank of America by 10% or more, the British newspaper said.

Bank stocks have been struggling this year because of the potential of more regulation from congressional legislation. The KBW Bank Index ($BKX) is up 16.8% for the year but is down slightly in June after falling 10.4% in May.

The tax -- introduced last year by the Labor government of then-Prime Minister Gordon Brown amid a public outcry at bankers’ pay -- forced banks to pay a one-off 50% levy on all U.K. bonuses above £25,000 (about $36,800), 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 U.S. 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 U.K. bonus tax was the driver behind his decision to lower his estimate of JPMorgan’s second-quarter earnings from  80 cents a share to 66 cents.

"The bulk of the decline is from the U.K. bonus tax, which the company has not yet disclosed but we estimate at $525M," he wrote. JPMorgan wouldn't comment to the newspaper on the report. Executives have told investors that the tax charge would be "material."

Citi has said it will take a $400 million hit for the U.K. levy. The move could reduce its quarterly earnings by about 13%. Bank of America has disclosed the tax will cost it about $465 million. McDonald said that would wipe out more than 9% of Bank of America's earnings.

Goldman and Morgan Stanley (MS) are also expected to see an earnings fall, the Financial Times said. Morgan Stanley has not forecast its total costs, but analysts predicted the tax would shave $350 million, or 21 cents a share, from the bank’s earnings.

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