The Stock Exchange disapproves of the Meloni government’s move. In the early hours of the session, around 10 billion euros were wiped off the market capitalization of Piazza Affari.
According to Bank of America, the cost of the hefty windfall tax on excess profits would reduce bank earnings by 2% to 9%.*
Piazza Affari is plummeting in response to the imminent windfall tax on bank excess profits. The government’s decision has led to a loss of around 10 billion euros in market capitalization during the initial hours of trading on August 8th. At the close, Bper falls by 10.94%, Finecobank by 9.91%, Intesa Sanpaolo by 8.67%, Mps by 10.83%, Banco Bpm by 9.09%, Unicredit by 5.94%, Mediolanum by 5.96%, and Mediobanca by 2.48%. According to Bank of America, bank profits could experience a contraction between 2% and 9%, while government sources estimate fiscal revenues to be around 2 billion euros.
“This is a strongly negative measure for the banking sector, considering its retroactive effect to the year 2022,” warns Filippo Diodovich, senior market strategist at IG Italia. “In addition to negatively impacting bank profitability, it raises questions about the ability of our financial sector (and beyond) to attract foreign capital and reduces the competitiveness of our banks compared to European peers. What investors would be willing to invest in our country if there’s a risk of such a significant government intervention? Inevitably, the prospects for the Italian banking sector worsen, and the effects of the government’s move on bank liquidity will need to be evaluated in the coming days,” he cautions. Not to mention that the sector represents a quarter of the FTSE Mib basket.*
“The Italian banking index was down 6.5% at 10:30 am on August 8th, with the rest of the market fairly stable and the spread between Italian BTPs and German bunds hardly moving,” adds Giorgio Broggi, quantitative analyst at Moneyfarm. “Market focus remains on dividends, which will probably be negatively affected by the announcement, justifying the reaction in bank stock prices,” he confirms. It’s interesting to note, Broggi continues, that French and German banks have also reacted poorly, expressing concern that similar measures might be implemented in other European economies (as Spain has already done).
Windfall Tax: Effects on European Banks
“In other words, this is not just an Italian issue. Banks in the United Kingdom and elsewhere in the European Union are certainly attentive to evaluating its developments within their own borders,” Broggi adds. In the UK, the Financial Conduct Authority addressed this matter last month and, in addition to analyzing the offering of interest rates on liquidity deposits, has already outlined a 14-point plan to ensure appropriate compensation for savers’ liquidity. “Credit institutions offering the lowest rates to their savers will be prompted by the end of August to justify the reasons for these levels. The news from Italy has not yet weighed on British banks, but the pressure is certainly higher now,” Broggi declares.
Excess Bank Profits: How the New Tax Works
Introduced unexpectedly in the omnibus decree law approved by the Council of Ministers on Monday, the regulation establishes an extraordinary tax on financial intermediaries, excluding companies managing mutual investment funds and mobile intermediation companies. As stated in a press release from the Council of Ministers, the tax is determined by applying a 40% rate to the higher value between:
- the amount of interest margin for the year prior to the one currently in progress on January 1, 2023, which exceeds by at least 5% the same margin in the year prior to the one currently in progress on January 1, 2022;
- the amount of interest margin for the year prior to the one currently in progress on January 1, 2024, which exceeds by at least 10% the same margin in the year prior to the one currently in progress on January 1, 2022.*
The proceeds will be used to support funding for first-home mortgages and reduce the tax burden on families and businesses.
From the Windfall Tax to Conflict: What to Monitor
In short, a new sword of Damocles hangs over the banks, but let’s not forget that they also have to face a series of other adverse winds. First and foremost, if the economy were to worsen, they could witness an increase in non-performing loans. The ongoing geopolitical crisis also needs to be managed. According to an analysis by the Financial Times, based on 600 annual reports and balance sheets, major European companies have suffered losses of at least 100 billion euros from their operations in Russia after the outbreak of the war in Ukraine. In the financial sector, in particular, Unicredit has taken a hit of 1.3 billion euros, according to calculations by the British Economic and Financial Daily. For Intesa Sanpaolo, the shortfall is estimated at 1.4 billion euros. Société Générale, in April 2022, sold Rosbank and its insurance activities to Vladimir Potanin, an ally of Putin, incurring losses of 3.1 billion euros. Finally, Raiffeisen has faced write-downs of 1 billion euros and other charges; moreover, it is considering the sale of its Russian unit, currently valued at 1 billion euros.
