Update, August 9: The Italian government said that the proposed windfall tax is likely to be capped at 0.1% of risk-weighted assets. Bank shares rebounded on Wednesday.
Italian banking stocks fell sharply on Tuesday after the surprise decision by the government to impose a windfall tax on banks, dragging down the FTSE MIB Index.
All major credit institutions saw daily losses up to 10%, including Intesa Sanpaolo (ISP), Unicredit (UCG), BPER (BPE), Finecobank (FBK) and Monte dei Paschi di Siena (BMPS).
The measure, brought to the Council of Ministers by Giancarlo Giorgetti, minister of economy, was elaborated at a press conference by the deputy prime minister and minister of infrastructure, Matteo Salvini, Alliance News reports. The tax will be levied at 40% for 2023, with sums paid out until the end of June 2024. It will apply on net interest income, the difference between the rates of money received from borrowers and paid out to depositors. For mainstream banks this income can bring in billions of dollars - for example, HSBC's net interest income was over $20 billion in 2022.
"The proceeds will go to help with first home mortgages and to cut taxes," explained Salvini, defining the provision as a "norm of social equity".
Salvini said that the increase in interest rates by the European Central Bank has led to an increase in the cost of money for households and businesses while "there has not been an equally diligent, fast and important increase for consumers”. In failing to pass on the effect of interest rates, banks had cost savers billions of euros, he added. The ECB, which sets rates for 19 countries, last raised rates to 4.25% in early August, the highest level since the financial crisis.
“The aim is to raise more than €2 billion in revenue to finance tax relief and mortgage support,” according to a note by JP Morgan. “Based on our preliminary estimates, we expect that the State could collect more than €3.5 billion in additional taxes, with an impact on profits of around 30% for Intesa Sanpaolo and Banco BPM and around 12% for Unicredit, which is impacted to a lesser extent as only 50% of the loan portfolio is in Italy. In our view, the levy is likely to be recalibrated as part of the budgetary process in September/October, but the impact on earnings could remain significant."
Giorgio Broggi, quantitative analyst at Moneyfarm underlines how “the market's attention remains on dividends, which will probably be negatively affected by the announcement”. He adds: “Interestingly, French and German banks are also reacting poorly, expressing concern that similar measures could be implemented in other European economies. In other words, it's not just an Italian issue, and certainly banks in the UK and elsewhere in the EU are keen to assess developments within their own borders."
After a robust earnings season for UK banks, especially HSBC, the government is under pressure to follow up its windfall tax on UK energy companies with a levy on the banks. In the current impasse, banks are offering ways to ease the mortgage crunch such as switching to interest only home loans or extending the mortgage term to 40 years. Shares in UK banks also fell today.
