The U.K. May Be About to Create the Perfect HSBC/Lloyds Trade

Next Wednesday the U.K. government will present a new budget, and analysts expect Treasury chief George Osborne to tackle the topic of the bank levy -- effectively a tax on bank balance sheets that hits HSBC PLC particularly hard.

Any changes to that levy could have a big impact on U.K. banks, according to Bernstein analysts, and that could create a trading opportunity.

In a note to clients on Thursday, Bernstein said it's expecting a change to the levy, and is therefore recommending to go long HSBC, and short Lloyds Banking Group PLC as we head into next week's budget.

The levy has been a sore point for HSBC executives for a number of years. In April, the bank said it was reviewing whether it should move its headquarters out of the U.K and cite the levy as a specific reason. Last year, the bank paid a 2014 levy of $1.1 billion, the largest of any bank.

Bernstein laid out various scenarios for the levy. Most obviously, any scrapping of the levy would result in a significant upside for HSBC, around a 9% increase in future earnings. In comparison Lloyds would see an increase of 5%.

If the bank levy is directed at U.K. balance sheets only, rather than global balance sheets, again HSBC stands to benefit the most, with its 2015 bill cut in half to around £500 million ($781 million) according to Bernstein. This is because the majority of its balance sheet is concentrated in Asia. But for Lloyds, a U.K. focused bank, the bill would triple to around £750 million.

Another change to the bank levy could be to switch the taxable variable to U.K. market share, rather than balance sheet.

Again, Lloyds would be hardest hit. The market leader in U.K. current accounts and mortgages, its levy could hit £950 million, whereas HSBC’s could drop to around £450 million.

Of course, Mr. Osborne could also stick to his policy. Many analysts and commentators expected Mr. Osborne to review the bank levy in an important annual speech to the financial industry last month. But it wasn't mentioned.

Out of the possible scenarios, analysts at Bernstein are backing some “recalibration of the bank levy to retain the likes of HSBC.” The bank's share price is 6.7% over the first half of the year. Lloyds share price is up 14% year to date.

Lloyds declined to comment. HSBC didn't return calls.