August 9, 2023: On Tuesday, Italian banking claims took a beating after Italy’s cabinet agreed to a 40% windfall tax on lenders’ “extra” returns in 2023.

At 2:32 p.m. in Rome, BPER Banca shares were 10% lower, Banco BPM shares declined 9%, Intesa Sanpaolo and Finecobank were down over 8%, and UniCredit declined 6%.

The effects were seen beyond Italy, with Germany’s Commerzbank down around 3.2% and Deutsche Bank trading 2% lower.

On Monday, Italian Deputy Prime Matteo Salvini told a press conference that the 40% levy on banks’ extra profits derived from higher interest rates, amounting to several billion euros, will be used to cut taxes and offer financial support to mortgage holders.

“One only has to look at the banks’ first-half 2023 profits, also the result of the European Central Bank’s rate hikes, to realize that we are not talking about a few million, but we are talking, one can assume of billions,” Salvini said, according to a Reuters translation.

“If the cost of money burden for households and businesses has increased and doubled, it has not equally doubled what is given to current account holders.”

The one-off tax will equal about 19% of banks’ net profits for the year, analysts at Citi estimated based on currently available data.

“We see this tax as substantially negative for banks given the impact on capital and profit and bank shares’ equity cost. The new simulated impact is also higher than the simulation we ran in April,” Citi Equity Research Analyst Azzurra Guelfi said in a note Tuesday.

The tax will apply to “excess” net interest income in both 2022 and 2023, resulting from higher interest rates, and will be used on NII exceeding 3% year-on-year change in 2022 from 2021 levels and exceeding 6% year-on-year growth in 2023 versus 2022. Banks must pay the tax within six months after the end of the financial year.

“The introduction of this tax (which was discussed, then left pending) could lead to Italian banks increasing their cost of deposits to reduce the extra profit, and this comes after a round of results when every bank increases 2023 guidance for NII and assuming a slowdown of growth in 2H,” Citi said.

“It is unclear whether the tax will apply to domestic NII only, which could have a larger impact for UCI vs. peers (given international franchise).”