Italian bank stocks slide after government surprise with random tax

Italian bank stocks took a hit Tuesday morning after Italy’s cabinet approved a 40% random tax on lenders’ profits in 2023.

By 9:45 am in Rome, shares in BPER Banca were down 8% and Intesa Sanpaolo down 7%, while Banco BPM, UniCredit and Finecobank all lost more than 6%.

Italian Deputy Prime Minister Matteo Salvini told a news conference on Monday that the 40 percent levy on banks’ billions of euros in excess profits from higher interest rates will be used to cut taxes and provide financial support to mortgage holders.

“You only have to look at the banks’ profits in the first half of 2023, which are also the result of the European Central Bank’s rate hikes, to see that they are not a few million, but billions to expect. Said Salvini, according to a Reuters translation.

“If [it is true that] “The cost of charging money to households and businesses has increased and has doubled, it has not equally doubled what is being paid out to current account holders.”

The one-time tax on incremental profits will be about 19% of banks’ annual net profits, Citi analysts estimate based on currently available data.

“We see this tax as significantly negative for banks as it affects capital and profits as well as the cost of equity of bank stocks. The new simulated impacts are also higher.” [than] “The simulation we ran in April,” Azzurra Guelfi, an analyst at Citi Equity Research, said in a note on Tuesday.

The tax will apply to “excess” net interest income in both 2022 and 2023 resulting from higher interest rates, and will be applied to net interest income that increased by more than 3% year-on-year in 2022 from 2021 levels and over grow by more than 6% year-on-year -annual growth in 2023 compared to 2022. Banks are required to pay the tax within six months of the end of the financial year.

“The introduction of this tax (which has been discussed but is then pending) could result in Italian banks raising their deposit costs to reduce the additional profit and this comes after a series of outcomes with each bank updating their projections for NII for 2023.” “Assuming a slowdown in growth in the second half (due to the increase in deposit beta, although expectations are lower than previous guidance),” Citi said.

“It is not clear if the tax will only apply to domestic NIIs (we base our simulation on this) and this could have a larger impact on UCI compared to competitors (given the international franchise).”