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Competitive edge of UK challenger banks could be blunted by new surcharge

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Shares in Aldermore, Onesavings, Virgin Money and Shawbrook took their biggest one-day hit on Wednesday after British finance minister George Osborne announced the surcharge, which traders said could attract a straight eight per cent earnings downgrade from analysts.

[LONDON] Fledgeling British banks are likely to find it more difficult to challenge the country's biggest lenders after introduction of a new eight per cent surcharge on bank profits, analysts and industry sources said.

Shares in Aldermore, Onesavings, Virgin Money and Shawbrook took their biggest one-day hit on Wednesday after British finance minister George Osborne announced the surcharge, which traders said could attract a straight eight per cent earnings downgrade from analysts.

Mr Osborne's move in his first Budget since the ruling Conservative party's May election victory came as a surprise to many in the industry because the government had previously said it wanted to encourage competition within the sector and make it easier for new lenders to flourish and challenge Britain's largest banks.

Lloyds Banking Group, Royal Bank of Scotland (RBS), Barclays, and HSBC control more than three quarters of personal current accounts and provide nine out of every 10 business loans.

Mr Osborne said that the charge would be enforced from next January and will apply to annual profits above 25 million pounds (US$38.4 million). The charge will largely replace the balance sheet levy, from which the so-called challenger banks are exempt. Mr Osborne said the levy will be reduced gradually over the next six years.

The British Bankers' Association (BBA) welcomed moves to reduce "damage" from the levy but said that the new surcharge will result in the sector paying more tax overall and reinforce fears that Britain is becoming a less attractive place for banks to do business. "We believe these moves will also undermine competition in the industry by making it harder for smaller players to break through and challenge larger banks," BBA chief executive Anthony Browne said in a statement.

Canaccord Genuity analysts said the surcharge would reduce growth in lending by small banks but added that it is expected to be offset to a degree by a reduction in corporation tax to 19 per cent in 2017 and 18 per cent in 2020. "Challenger banks have had an unexpected hit that proportionally hits them more than global banks," Investec analyst Ian Gordon told Reuters.

Shore Capital said the surcharge could reduce lending capacity or push prices higher.

In another announcement, Mr Osborne said that Britain would cut tax relief on mortgages for wealthy landlords.

Challenger banks that provide buy-to-let mortgages along with secured loans would, however, feel minimal impact from the tax relief cuts because most of them provide loans to professional landlords rather than amateurs, analyst said. "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," OneSavings Bank CEO Andy Golding said.

Challenger banks outperformed the Big Five of Lloyds, RBS, Barclays, HSBC and Santander UK in terms of annual growth between 2012 and 2014, according to a report published in May by accountancy firm KPMG.

REUTERS