ROME – August 7, 2023: On August 7, 2023, the Italian cabinet held a press conference at Palazzo Chigi, where ministers including Carlo Nordio, Adolfo Urso, Matteo Salvini, Francesco Lollobrigida, and Orazio Schillaci announced the approval of a 40% windfall tax on banks’ “excess” profits for 2023 (source: Simona Granati – Corbis/Corbis via Getty Images).
Italian banking shares suffered a significant decline on Tuesday morning following the cabinet’s decision to implement a 40% windfall tax on lenders’ “excess” profits in 2023. As of 12:43 a.m. in Rome, BPER Banca shares recorded a decrease of more than 9%, while Intesa Sanpaolo and Finecobank experienced drops of over 8%. Similarly, Banco BPM shares fell over 7%, and UniCredit’s shares dropped by 6%.
This impact extended beyond Italy, causing a 3.2% decrease in Commerzbank’s stock value in Germany and a 2% decline in Deutsche Bank’s trading.
During a press conference, Italian Deputy Prime Minister Matteo Salvini explained that the 40% levy on banks’ additional profits from higher interest rates, amounting to billions of euros, will be utilized for tax cuts and financial support for mortgage holders. Salvini stated, “Looking at the first-half 2023 profits of banks, which have been influenced by rate hikes by the European Central Bank, it is evident that we are dealing with not just millions, but potentially billions” (source: Reuters).
Salvini further highlighted the disparity in the increased burden on households and businesses due to the rising cost of borrowing, compared to the benefits received by current account holders.
Negative Impact on Banks
Based on available data, analysts at Citi estimated that the one-off tax would amount to approximately 19% of banks’ net profits for the year.
“We consider this tax to have a significantly negative effect on banks, affecting both capital and profit, as well as the cost of equity for bank shares. The projected impact exceeds the simulation we conducted in April,” remarked Azzurra Guelfi, Citi Equity Research Analyst, in a Tuesday note.
The tax will be applicable to “excess” net interest income for both 2022 and 2023 resulting from higher interest rates. It will be imposed on NII that exceeds 3% year-on-year growth in 2022 compared to 2021 levels, and surpasses 6% year-on-year growth in 2023 compared to 2022. Banks are required to pay the tax within six months after the end of the financial year.
“The introduction of this tax, which was discussed and then left pending, could lead to Italian banks increasing the cost of deposits to reduce the extra profits. This comes after banks have raised their 2023 guidance for NII and assuming a slowdown in growth in the second half of the year (due to raising deposit beta, even if the expectation is lower than previous guidance),” Citi explained.
“It is unclear whether the tax will solely apply to domestic NII. We base our simulation on this assumption, and if it turns out to be true, it could have a more significant impact on UCI compared to its peers, considering its international franchise.”
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