Italian bank shares fall after Meloni government introduces windfall tax

New levy follows bumper earnings for lenders after interest rate increases

Italian Prime Minister Giorgia Meloni's government approved a surprise tax on bank profits at a cabinet meeting on Monday night that aims to fund tax cuts and support first-time mortgage borrowers. Reuters
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European stocks fell on Tuesday after Italy surprised investors with a new tax on bank profits, sending lenders’ shares plunging.

The Stoxx Europe 600 index declined 0.3 per cent at 8.07am in London, while Italy’s FTSE MIB slumped 1.4 per cent. UniCredit tumbled 6.5 per cent while Intesa Sanpaolo dropped 7 per cent.

The Italian levy was slipped by Prime Minister Giorgia Meloni’s cabinet into a huge package of measures that ranged from taxi licences to foreign investment.

The tax could bring over €2 billion ($2.2 billion) into state coffers, according to Ansa newswire.

Italy agreed on a “40 per cent withdrawal from banks’ multibillion euro extra profits” for 2023 which is set to finance tax cuts and support for mortgages for first-time owners.

The tax will have a 19 per cent impact on bank earnings, Citi analysts wrote in a note.

“We see this tax as substantially negative for banks given both the impact on capital and profit as well as for cost of equity of bank shares,” Citi analysts led by Azzurra Guelfi wrote.

“The new simulated impact is also higher than the simulation we ran in April.”

The analysts calculate that the tax is equivalent to about 19 per cent of banks’ net income in 2023, approximately 3 per cent of their 2023 tangible book value and around 0.5 per cent on 2023 risk-weighted assets.

“Financials weigh more than 30 per cent in the Italian stock market, making it vulnerable to the newly approved levy,” said Leonardo Pellandini, an equity strategist at Bank Julius Baer.

“With this said, banks had a strong year so far given the net interest margins boost from higher rates so it is time for a healthy consolidation.”

The tax move comes shortly after Italian banks unveiled a bumper set of earnings with Intesa and Unicredit raising their full-year guidance for the second consecutive quarter on the back of the ECB’s rapid policy tightening. Net interest income at UniCredit, for example, surged 42 per cent in the first half.

It matches a similar pattern across Europe, with lenders unveiling a wave of share buy-backs as they continue to benefit from higher interest rates and performed well in stress tests. But the backlash is growing against a backdrop of a cost of living crisis.

In the UK, banks have faced accusations of “profiteering,” as rising interest rates boost their lending margins more than their savings offers while heaping pressure on customers.

Last month, the UK financial regulator told banks to speed up efforts to improve access to their best savings rates. Some opposition politicians are raising the idea of more windfall taxes in the wake of an ongoing cost-of-living crisis.

Spain first outlined plans for a temporary tax on bank revenues last year to raise funds to help offset a cost-of-living crisis.

Measures to raise taxes on commercial banks after rate increases prompted larger profits are also being considered by some Baltic countries.

Lithuanian lawmakers in May backed a temporary windfall tax on banks to finance defence spending. Estonia plans to raise the tax level on banks to 18 per cent from 14 per cent as part of a series of tax measures to narrow the budget deficit, and Latvia may follow.

The Italian tax plan is a fresh headwind for European stocks which last week endured their first bout of volatility in quite a while, amid speculation over further interest rate hikes and the potential impact on economic growth. Also on Tuesday, data showed Chinese trade plunged more than forecast in another hit to the economic recovery.

In other individual stock moves on Tuesday, Glencore fell the most in a month after the commodities trading and mining giant reported a steep drop in profit. Abrdn declined after first-half results showed clients pulled more money from the asset manager’s funds.

Updated: August 08, 2023, 8:30 AM