ROME: Italy’s right-wing government has shocked markets with an unexpected tax on banks’ windfall profits, wiping out around $10 billion from the market value of the country’s lenders.
Deputy Prime Minister Matteo Salvini announced a 40% levy on the extra profits of lenders late Monday night, as part of a wide-ranging decree approved at a cabinet meeting. Analysts at Citi estimate it will wipe 19% from banks’ earnings.
The levy targets higher interest incomes following rate increases by the European Central Bank (ECB), according to a government statement on Tuesday. The decree could cost banks more than €3 billion ($3.3 billion) in taxes, according to Bloomberg Intelligence.
Italy’s populist administration is looking for a cheap way of financing help for families hit by the cost-of-living crisis, including tax cuts and support for mortgages for first-time owners.
However, the move requires approval by parliament, and could be changed. It could also be challenged in the courts, like a similar measure in Spain.
Italian banks were the worst performers among European stocks, leading declines on the Stoxx Europe 600 Index on Tuesday, with shares in UniCredit down as much as 6.7% and those in Intesa Sanpaolo down about 8.6%. The drop in banking shares erased as much as €9.5 billion from the market value of the country’s lenders.
John Bilton, head of global multi-asset strategy at JP Morgan Chase Bank, said the government’s measure raises concern “about the motivations of the Italian economic policy”.
The move comes shortly after Italian banks reported a bumper set of earnings, with Intesa and Unicredit raising their full-year guidance for the second consecutive quarter on the back of rapid policy tightening by the ECB. Net interest income at UniCredit, for example, surged 42% in the first half.
Italian lenders, especially domestically focused banks, could collectively owe more than €3 billion in taxes if the government’s extraordinary levy is imposed, based on the six Italian banks covered by Bloomberg Intelligence (BI).
The levy matches a similar pattern across Europe, where lenders are announcing a wave of share buybacks as they continue to benefit from higher interest rates and solid performances in stress tests. But the backlash is growing against a backdrop of a cost-of-living crisis.
A spokesman for UniCredit declined to comment on the new levy, while Intesa representatives were not immediately available for comment.
Antonio Tajani, another Italian deputy premier, pointed the finger at the ECB on Tuesday. “We have been saying for months the ECB was wrong to raise rates and this is an inevitable consequence,” Tajani told the newspaper Corriere della Sera.
The tax could bring the Italian government over €2 billion, said Luigi Tramontana, an analyst at Banca Akros.
The administration will choose between two options, picking the highest amount, according to the government statement. The money will be put into a fund to finance measures to reduce pressure on families and companies from inflation.
The first option would impose a levy of 40% on the difference between net interest income in 2022 and 2021 — when the difference exceeds 5%. The second option would target the difference in net interest income between 2023 and 2021 — with a floor of 10%. The tax cannot exceed 25% of the bank’s shareholders’ equity.
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.
The Spanish government also surprised investors last year when it announced that it would slap banks with a windfall tax as interest rates soared, with the aim of raising €3 billion over two years.
The tax is set be in place for 2023 and 2024 and is part of a battery of measures Socialist Prime Minister Pedro Sánchez put in place to fund policies aimed at mitigating the impact of inflation.
Spain’s largest lenders, including Banco Santander and Banco Bilbao Vizcaya Argentaria, have indicated that they may seek to challenge the tax in court.