FILE PHOTO: Euro banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/File Photo

August 8, 2023, Rome Following the Italian cabinet’s ratification of a large windfall tax, Italian banks shares saw a big decrease on Tuesday morning. The recently approved tax will have an impact on the financial markets in 2023 when it levies a 40% tax on banks’ “excess” earnings.

At 10:49 a.m. in Rome, shares of Finecobank and BPER Banca fell by about 8%, while those of Intesa Sanpaolo and Banco BPM fell by more than 7%. The shares of UniCredit decreased by 6% as well. The effects went beyond Italy; Commerzbank in Germany had a decline of around 3.2%, while Deutsche Bank’s trade value fell by 2%.

In a news conference on Monday, Italian Deputy Prime Minister Matteo Salvini said that the windfall tax, which targets banks’ increased profits brought on by rising interest rates, would cost several billion euros. The money raised will be used to reduce taxes and provide mortgage holders with financial assistance.

According to Salvini, “Looking at the banks’ first-half 2023 profits, influenced by the European Central Bank’s rate hikes, it becomes evident that we are dealing with significant amounts, potentially reaching billions.” He emphasized that while the cost of borrowing for individuals and companies has doubled, the advantages for holders of current accounts have not increased proportionately.

Based on the data that is currently available, Citi analysts estimate that the one-time tax will amount to around 19% of the net profits made by banks for the year. The tax targets “excess” net interest income that results from increased interest rates in 2022 and 2023. It will be applied if Net Interest Income (NII) increases by more than 3% annually in 2022 compared to levels in 2021 and more than 6% annually in 2023 compared to 2022. Following the end of the fiscal year, banks have six months to complete their tax responsibilities.

The tax, according to Citi Equity Research Analyst Azzurra Guelfi, is “substantially negative for banks,” she said, citing possible effects on capital, earnings, and the cost of equity for bank shares. Guelfi stressed that the projected consequences would be more significant than they were in April’s simulation.

The implementation of this tax would prompt Italian banks to think about increasing their deposit fees in an effort to reduce the surplus earnings. This follows a string of outcomes where each bank altered its forecast for Net Interest Income (NII) for 2023, anticipating a slowdown in growth during the second half of the year due to rising deposit beta.

Citi said that it is unclear if the tax would just be applied to domestic NII, which might have a greater effect on UniCredit (UCI) than on its competitors given its global brand.


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