Italy hits banks with surprise 40% windfall tax

European bank shares plunged on Tuesday, after Italy’s rightwing coalition surprised markets with the announcement of a 40 per cent “windfall” tax on banks’ profits from rising interest rates.

Shares in Intesa Sanpaolo and UniCredit, the country’s two largest banks, fell by 8.7 per cent and 5.9 per cent respectively after the government announced the levy on Monday night, saying it would use it to fund relief for families hit by higher interest rates.

The drop in banking shares erased as much as €9.3 billion in the market value of Italian lenders.

Bank stocks slumped across Europe, amid concerns other nations may seek to impose similar levies. Bank of Ireland (down 4.7 per cent) and AIB (off by 2.6 per cent), which both posted sharp increases in profits for the first half of the year and have been criticised for not passing on rate increases to savers, were among the fallers, recording their biggest drops since June 23rd.

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Prime minister Giorgia Meloni’s government has been critical of banks for failing to raise deposit rates to help small savers, even as it raises lending rates in tandem with European Central Bank rate rises.

The tax was approved in a cabinet meeting late Monday night, and announced by Matteo Salvini, deputy prime minister, in a press conference, but it will still require parliamentary approval, analysts said.

Mr Salvini said the tax would be limited to 2023, and that the funds raised would be used to help families and businesses hit by rising interest rates, especially those in the process of purchasing their first homes.

Italy’s five top banks have reported aggregate profits of €10.5 billion in the first half of 2023, up 64 per cent year on year, according to DBS Morningstar, the ratings agency. Performance has been buoyed by higher net interest, resilient net fees and strong cost control, it said.

Analysts say the new tax will need parliamentary approval before it can take effect, meaning the country is likely to see bitter battles over the proposal as banks resist the retroactive measure.

In a tweet, Mr Salvini described the new move as a “common sense rule” and said the money raised from the tax would be used “to help families and businesses affected by the increase in rates”.

Italy’s sudden move has echoes of the Spanish government’s decision last year to levy a controversial windfall tax on bank profits to finance government initiatives to help consumers hit by the cost of living crisis. – Copyright The Financial Times Limited 2023