Italy shocks banks with 40 percent tax on profits they reap from higher interest rates

Italy has dealt a surprise blow to its banks and sent shock waves across the sector in Europe by setting a one-off 40 percent tax on profits reaped from higher interest rates, after reprimanding lenders for failing to reward deposits.

Sharply higher official interest rates have yielded record profits for banks, as the cost of loans has soared while lenders have held off paying more on deposits.

Countries such as Spain and Hungary have already imposed windfall taxes on the sector and others may now follow suit.

Italian Prime Minister Giorgia Meloni’s government floated the idea earlier in the year, but appeared to have cooled on the plan.

A senior banking executive said lenders had been ready for “the chopping block, but then the axe didn’t come down”.

Since then, however, bumper first-half results from banks brought the issue back into focus and prompted the government to act on the eve of the summer political shutdown.

One government source said the move came as a surprise even to some ministers at Monday night’s cabinet meeting. A second source made clear the government intended “to punish banks’ unfair behaviour”.

“One has only to look at banks’ first-half profits … to realise that we are not talking about a few millions but … of billions,” Deputy Prime Minister Matteo Salvini told a news conference in Rome late on Monday.

“If [it is true] 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.

European bank shares tumbled on Tuesday on the news, the biggest daily drop since the turmoil in the banking sector in March when Credit Suisse collapsed.

Italy’s banks led losses. The country’s two biggest lenders, Intesa Sanpaolo and UniCredit, fell 8.2 percent and 7.2 percent, respectively. BPER Banca was down 10.5 percent and FinecoBank dropped 8.8 percent.

“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 equities strategies at Axa Investment Managers in Paris.

Citi analysts calculated the tax could wipe up to 12 percent off Italian banks’ 2023 earnings. Bank of America estimated proceeds of between 2-3 billion euros ($2.2bn-$3.3bn) for the government.

Sources said the treasury expected to collect less than 3 billion euros ($3.3bn) from the measure. That would be similar to the 2.8 billion euros ($3.1bn) raised by this year’s windfall tax on energy companies.

Italy will apply the tax only in 2023 with banks paying the sums by June 30, 2024. The measure applies to the net interest margin (NIM), a measure of income deriving from the gap between lending and deposit rates.

Refusal to reward cash

Italy will tax 40 percent of the NIM earned in 2022 or 2023 – depending on which sum is bigger – and will target the yearly increase above thresholds set at no less than 5 percent for 2022 and 10 percent for 2023. Under an early draft, the thresholds were 3 percent and 6 percent.

Intesa at the end of last month said it expected to pocket more than 13.5 billion euros ($14.8bn) this year from its NIM alone.

All main Italian lenders reported much stronger than expected results for the first six months and upgraded their profit outlook thanks to higher rates.

Unlike peers in some other European countries, Italian banks never charged for deposits when official rates fell below zero.

Since rates rose, they have cut current account costs but have refused to reward cash held there, saying that money is for day-by-day use and not an investment.