Italy has imposed a 40% one-off tax on its banks for 2023, citing the need to help mortgage holders and cut taxes. The move has sent shockwaves across the European banking sector, which has seen its profits soar as global interest rates have risen.
Banks’ net interest margin targeted by the tax
The Italian government will tax 40% of banks’ net interest margin (NIM), a measure of income banks derive from the gap between lending and deposit rates. The tax will apply to the NIM earned in 2022 or 2023, depending on which sum is bigger, and above given thresholds for a yearly increase.
The deputy prime minister and infrastructure minister, Matteo Salvini, said the tax was justified by the record profits that banks have made in recent quarters. “One has only to look at banks’ first-half profits … to realise that we are not talking about a few millions, but … of billions,” he said at a news conference in Rome.
According to Bank of America analysts, the Italian government could raise between €2bn (£1.7bn) and €3bn from the tax, which could shave between 2% and 9% off banks’ earnings.
Banks’ shares plunge as investors fear contagion
The announcement of the windfall tax sent banking shares tumbling on Tuesday. A gauge of euro zone banks fell 3.7%, and was set for its biggest daily drop since the turmoil in the banking sector in March, when Credit Suisse collapsed.
Italy’s banks led losses. Its two biggest lenders, Intesa Sanpaolo and UniCredit, fell 7.9% and 6.6% respectively. Other banks in the currency bloc, such as Spain’s Banco Santander and Germany’s Deutsche Bank, also suffered losses of around 3%.
Investors feared that other countries could follow Italy’s example and impose similar taxes on their banks. “These government interventions in Europe do not help provide the necessary stability to lower the risk premium attached to the eurozone. This is not just an Italian thing, Spain had done the same last year,” said Gilles Guibout, head of equity strategies at Axa Investment Managers in Paris.
Rising interest rates boost banks’ profitability
The windfall tax comes at a time when banks have benefited from rising interest rates, which have boosted their profitability. Interest rates have increased as central banks have signalled a shift away from their ultra-loose monetary policies in response to rising inflation and economic recovery.
In Italy, the cost of loans has soared while banks have managed to avoid paying more on deposits. “If (it is true that) the burden deriving from the cost of money has … doubled for households and businesses, what current account holders receive has certainly not doubled,” Salvini said, adding there was a large gap between the rates applied to loans and deposits.
Intesa Sanpaolo reported a net profit of €2.5bn for the second quarter of 2023, up 75% year-on-year, while UniCredit posted a net profit of €1.8bn, up 93% year-on-year. Both banks attributed their strong results to higher net interest income and lower loan loss provisions.
