The 'political risk premium' is exacting a toll on the UK banking sector, with investors increasingly wary of pouring funds into banks amidst the uncertainty surrounding Downing Street. The FTSE 350 bank index has still managed an 8% year-to-date increase, building on last year's 60% surge, driven by stalwarts like HSBC, Lloyds, NatWest, Barclays and Standard Chartered.
A potentially destabilising change in Prime Minister is casting a shadow over the sector. Analysts warn that banks could be seen as 'ripe targets' for increased taxation under new leadership, with John Cronin from Seapoint Insights flagging concerns about stalled regulatory reforms adding to investor anxiety. Despite Chancellor Rachel Reeves' efforts to create a more favourable environment for financial services – including recent ring-fencing regime reforms – mounting pressures on Treasury finances could see banks squarely in the sights of future tax-raising measures.
The impact of this uncertainty is already evident in individual bank performances: Lloyds has posted a modest 4% year-to-date gain, recovering from earlier losses tied to the Iran conflict; Barclays remains largely flat, while NatWest has dipped by 5%. William Howlett at Quilter Cheviot notes that investors are hesitant to allocate further funds to UK domestic banks due to heightened political uncertainty and the prospect of a leadership contest.
Andy Burnham's anticipated foray into the Makerfield by-election this week is further muddying waters. Should he succeed, it could mark the start of his bid for the premiership – an outcome that would likely place banks 'front and centre' in his sights. Analysts are raising concerns about a potential 'tax and spend' approach under such leadership, which could unsettle bond markets and the banking sector.
Despite these headwinds, encouraging underlying trends persist: UK Finance's data reveals a 16% year-on-year increase in lending to small and medium-sized businesses in Q1 2026, reaching £5.3 billion – a post-pandemic high. However, investor perceptions of banks as a source for increased government revenue continue to overshadow these positive operational developments, creating a challenging environment for attracting new investment.
Source: City AM, Seapoint Insights, Quilter Cheviot, IG, UK Finance