Italian Bank Shares Plummet Following Government's Unexpected Implementation of Windfall Tax

ROME - August 7, 2023: (L-R) Carlo Nordio, Minister of Justice, Adolfo Urso, Minister of Enterprise and Made in Italy, Matteo Salvini, Deputy Prime Minister and Minister of Transport, Francesco Lollobrigida, Minister of Agriculture and Orazio Schillaci, Minister of Health hold a press conference at Palazzo Chigi

In an unforeseen turn of events, Italian banking shares experienced a significant downturn on Tuesday morning after the country's cabinet sanctioned the imposition of a 40% windfall tax on financial institutions' "excessive" profits in the fiscal year 2023.

As the clock struck 2:32 p.m. in Rome, BPER Banca shares found themselves grappling with a 10% drop, while Banco BPM shares witnessed a 9% decline. Similarly, Intesa Sanpaolo and Finecobank both saw their shares plummet by over 8%, and UniCredit faced a reduction of more than 6%.

The repercussions of this decision were not confined to Italy's borders, as Germany's Commerzbank also felt the impact with a 3.2% decline, and Deutsche Bank experienced a 2% dip in their trading.

Matteo Salvini, Italian Deputy Prime Minister, addressed the media during a press conference on Monday, revealing that the 40% levy on financial institutions' surplus profits accrued from elevated interest rates, which amounts to several billion euros, will be redirected towards tax reductions and financial assistance for mortgage holders.

Salvini stated, "A mere glimpse at the first-half profits of banks in 2023, influenced by the rate hikes instituted by the European Central Bank, is sufficient to comprehend that we are dealing not with a trivial sum but, one can assume, with a sum reaching into the billions." This statement was reported by Reuters.

He further emphasized, "If it holds true that the financial burden on households and businesses due to increased interest rates has doubled, it is equally evident that the benefits conferred upon current account holders have not doubled in parallel."

Negative Implications for Banks:

Based on presently available data, financial analysts at Citi estimated that the one-off tax would equate to around 19% of banks' net profits for the fiscal year. Azzurra Guelfi, an Equity Research Analyst at Citi, remarked, "We view this tax as being decidedly detrimental to banks, given its ramifications on both capital and earnings. Additionally, it imparts a higher cost of equity to bank shares. The actual impact we've now calculated is also greater than the simulation we conducted back in April."

The windfall tax will be applicable to the "excessive" net interest income in both 2022 and 2023, attributed to elevated interest rates. It will be levied on net interest income that surpasses a 3% year-on-year growth in 2022 compared to 2021 levels, and a 6% year-on-year growth in 2023 relative to 2022. Banks are mandated to remit the tax within six months following the culmination of the financial year.

Potential Effects on Banking Operations:

Citi's analysts postulated, "The introduction of this tax, previously discussed and then deferred, could potentially lead Italian banks to raise their deposit costs as a means of mitigating the surplus profit. This development comes on the heels of a reporting cycle during which every bank revised their 2023 net interest income projections upwards. The situation also anticipates a deceleration of growth in the latter half of the year, owing to an elevated deposit beta, even though the anticipation falls short of prior guidance."

The specifics of whether the tax will exclusively impact domestic net interest income are yet to be clarified. Citi's simulation is predicated on this assumption, which could have a more pronounced effect on UCI compared to its peers, considering its international franchise.