[Italy] 40% one-off windfall tax on banks

Italy has surprised its banks and sent shockwaves across the banking sector in Europe by setting a one-off 40 per cent windfall tax on profits reaped from higher interest rates, CNN reports.

The move followed lawmakers reprimanding lenders for failing to reward depositors. Significantly higher official interest rates have yielded record profits for banks yet the cost of loans soared while lenders held off paying more on deposits.

At the end of July, European bank shares plummeted; a gauge of eurozone banks fell 4.5 per cent and was set for its biggest daily drop since the chaos in the banking sector in the spring when Credit Suisse collapsed.

Italian Prime Minister Giorgia Meloni’s government had reportedly floated the idea earlier this year but had subsequently backed off from the plan. But huge first-half results from banks brought the issue back into focus and prompted the government to act on the eve of the summer political shutdown.

All of Italy’s main lenders reported results that were far stronger than expected for the first six months and upgraded their profit outlook thanks to higher rates.

Jefferies calculated that lenders in Italy passed on average just 12 per cent of the rise in rates to depositors. The figure was 22 per cent in the euro area.

“One has only to look at banks’ first-half profits … to realize that we are not talking about a few millions but … of billions,” Deputy Prime Minister Matteo Salvini said during an August 7 news conference in Rome.

Italy’s banking share index reportedly plunged by 7.7 per cent on August 8, with sector leader Intesa Sanpaolo down 8.4 per cent and rival UniCredit down 7 per cent.

Gilles Guibout - head of equity strategies at Axa Investment Managers in Paris - said, “These government interventions in Europe do not help provide the necessary stability to lower the risk premium attached to the eurozone. This is not just an Italian thing, Spain had done the same last year.” 

Analysts at Bank of America have reportedly estimated that the new tax could cost Italian banks between 2 per cent and 9 per cent of their earnings.

The ripple effect reached other banks in the currency bloc, including Spain’s Banco Santander and Germany’s Deutsche Bank, which both fell more than 4 per cent.

For 2023 alone, the country will tax 40 per cent of banks’ net interest margin, a measure of income banks derive from the gap between lending and deposit rates. The Italian government expects to collect less than 3 billion euros ($3.3 billion) from the measure, sources told Reuters.

Italy’s deputy prime minister said that proceeds from the windfall tax will be used to help mortgage holders and cut taxes.

“The tax that Italy has levied on the excess profits that banks are perceived to be making has come as a surprise and is likely raising concerns that over countries could follow Italy’s example,” Stuart Cole - chief macroeconomist at Equiti Capital - said.

Italy is not the only European country to impose windfall taxes or bank-specific duties. Spain approved a temporary bank levy to raise 3 billion euros by 2024 - aimed at measures to ease cost of living pressures - in December 2022.

Source: CNN

(Link and quotes via original reporting)

Italy has surprised its banks and sent shockwaves across the banking sector in Europe by setting a one-off 40 per cent windfall tax on profits reaped from higher interest rates, CNN reports.

The move followed lawmakers reprimanding lenders for failing to reward depositors. Significantly higher official interest rates have yielded record profits for banks yet the cost of loans soared while lenders held off paying more on deposits.

At the end of July, European bank shares plummeted; a gauge of eurozone banks fell 4.5 per cent and was set for its biggest daily drop since the chaos in the banking sector in the spring when Credit Suisse collapsed.

Italian Prime Minister Giorgia Meloni’s government had reportedly floated the idea earlier this year but had subsequently backed off from the plan. But huge first-half results from banks brought the issue back into focus and prompted the government to act on the eve of the summer political shutdown.

All of Italy’s main lenders reported results that were far stronger than expected for the first six months and upgraded their profit outlook thanks to higher rates.

Jefferies calculated that lenders in Italy passed on average just 12 per cent of the rise in rates to depositors. The figure was 22 per cent in the euro area.

“One has only to look at banks’ first-half profits … to realize that we are not talking about a few millions but … of billions,” Deputy Prime Minister Matteo Salvini said during an August 7 news conference in Rome.

Italy’s banking share index reportedly plunged by 7.7 per cent on August 8, with sector leader Intesa Sanpaolo down 8.4 per cent and rival UniCredit down 7 per cent.

Gilles Guibout - head of equity strategies at Axa Investment Managers in Paris - said, “These government interventions in Europe do not help provide the necessary stability to lower the risk premium attached to the eurozone. This is not just an Italian thing, Spain had done the same last year.” 

Analysts at Bank of America have reportedly estimated that the new tax could cost Italian banks between 2 per cent and 9 per cent of their earnings.

The ripple effect reached other banks in the currency bloc, including Spain’s Banco Santander and Germany’s Deutsche Bank, which both fell more than 4 per cent.

For 2023 alone, the country will tax 40 per cent of banks’ net interest margin, a measure of income banks derive from the gap between lending and deposit rates. The Italian government expects to collect less than 3 billion euros ($3.3 billion) from the measure, sources told Reuters.

Italy’s deputy prime minister said that proceeds from the windfall tax will be used to help mortgage holders and cut taxes.

“The tax that Italy has levied on the excess profits that banks are perceived to be making has come as a surprise and is likely raising concerns that over countries could follow Italy’s example,” Stuart Cole - chief macroeconomist at Equiti Capital - said.

Italy is not the only European country to impose windfall taxes or bank-specific duties. Spain approved a temporary bank levy to raise 3 billion euros by 2024 - aimed at measures to ease cost of living pressures - in December 2022.

Source: CNN

(Link and quotes via original reporting)