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By Bloomberg

British banks looking for the new Conservative government to lower the levy on their balance sheets face disappointment, at least for now.

Tinkering with the tax would risk angering voters stung by the financial crisis and make it tougher to plug Britain’s budget deficit, said Mark Garnier, a Conservative lawmaker and member of the Treasury Committee.

The levy was introduced in 2010 after Britain sank about 1 trillion pounds ($1.6 trillion) into banks to prop up the nation’s financial system. The state still owns 79 percent of unprofitable Royal Bank of Scotland Group Plc and about a fifth of Lloyds Banking Group Plc.

“I don’t think anything will change on the bank levy before such time as we have no stake in RBS and Lloyds,” Garnier said in an interview. “There is no way I’m going back to my constituents and saying, sorry guys, we’re struggling on whatever it happens to be, but the banks are OK.”

The parliamentary majority Prime Minister David Cameron’s Tories unexpectedly won in the May 7 election allowed the City of London, as Britain’s financial district is known, to dodge tougher policies promised by his Labour Party challenger, Ed Miliband. In the runup to the vote, HSBC Holdings Plc threatened to quit the U.K. over increases to the levy and tougher rules. Standard Chartered Plc is also reviewing its London headquarters.

Best Case

Chancellor of the Exchequer George Osborne’s budget in March included an eighth increase to the bank levy. Last year, it generated 1.9 billion pounds, with HSBC paying the most, at 750 million pounds, followed by Barclays Plc at 462 million pounds.

For the levy to remain flat is probably the most banks can hope for, said Jason Napier, an analyst at Deutsche Bank AG in London. “We would see that as a decent outcome for the banks and for the way investors look at the stocks.”

The FTSE 350 Banks Index of eight companies has risen 1.6 percent since election day, partly on the view the Conservatives will be more sympathetic to banks’ concerns.

HSBC and Standard Chartered say the tax unfairly affects them because both make most of their revenue in Asia, not the U.K., and they weren’t bailed out by the state, as RBS and LLoyds were. Stuart Gulliver, HSBC’s chief executive officer, has said the levy stymies dividend growth. Shareholders such as Aberdeen Asset Management Plc urged the two banks to relocate.

‘Positive Signal’

“The bank levy imposes a significant cost on banking businesses in the U.K., which is making many banks move work and jobs to other parts of the world,” said Anthony Browne, CEO of the British Bankers Association, an industry lobby group. The latest levy increase “further disadvantages U.K. headquartered banks by increasing tax on their overseas activities, while their competitors in those markets do not pay this tax at all.”

Michael Spencer, the CEO of ICAP Plc and a former co- treasurer of the Conservative Party and prominent donor, has said he wants to see the balance-sheet tax reversed under Cameron’s government.

“An announcement from the chancellor that this tax is no longer going to go up and indeed will be steadily reduced over time would be an incredibly positive signal,” he told Bloomberg after the election.

One option to soften the levy might be to leave the headline rate unchanged while reducing the portion of the balance sheet the tax applies to, Garnier said. But no changes are likely to happen for some time, he said.

No Options

The finance industry would have seen its tax bill rise more under a Labour government. The opposition party had pledged to crack down on tax breaks used by hedge funds and private-equity firms, increase the bank levy again and impose a tax on bonuses for bankers to fund social programs.

“There has been a change in tone since the election,” said Tom Aston, a partner at KPMG who advises banks on tax. “Government is listening. However, there aren’t any obvious options without accepting a lower tax yield, which would cause corresponding pain elsewhere.”