On Monday, Italian Deputy Prime Minister Matteo Salvini declared a 40% duty on any additional "excess" profits that banks gain from higher interest rates. Analysts at Citi calculated that the one-time tax would be equivalent to nearly 19% of banks' total profits for the year upon examining current available data. "After taking this into account, we would say that this tax has a significantly deleterious effect on banks due to its repercussions on both their capital and profits, as well as the cost of equity associated with bank stocks," Citi elucidated.
On Tuesday morning, Italian banking shares felt the repercussions of the government's approval of a 40% tax on "excess" profits made by lenders in 2023. BPER Banca, Intesa Sanpaolo, Finecobank, Banco BPM, and UniCredit stocks all saw a large fall in value, with losses ranging from 6-9%. International banking giants Commerzbank and Deutsche Bank were also affected, with both trading around 2-3% lower. Deputy Prime Matteo Salvini declared at a press conference that the billions of euros to be generated from this levy will be used to reduce taxes and extend aid to mortgage holders. He highlighted that the money gained from the rate hikes of the European Central Bank should not just line the pockets of current account holders.
Analysts at Citi have estimated that the one-time tax will constitute about 19% of banks' net profits for the year, based on currently available data. Citi Equity Research Analyst Azzurra Guelfi noted in a recent note Tuesday that the impact of this tax is"substantially negative" for banks due to the effect it will have on capital and profits as well as the cost of equity of bank shares, an effect that is greater than the one estimated in April.
The tax applies to "excess" net interest income in both 2022 and 2023 due to higher interest rates, and it will kick in when NII exceeds a 3% YoY growth in 2022 from 2021 levels, or 6% YoY growth in 2023 versus 2022. Banks are expected to pay the tax within six months of the end of the fiscal year.
Citi has suggested that the tax might cause Italian banks to increase their cost of deposits in order to reduce the extra profit, particularly after a round of results in which every bank raised its 2023 guidance for net interest income while expecting a slowdown in growth during the second half of the year due to the higher deposit beta. The bank also notes that it is not yet known whether the tax will apply to domestic NII only, which could result in UCI having a larger impact than its peers given its international franchise.
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