Italy shocks banks with 40% windfall tax for 2023

Italy shocks banks with 40% windfall tax for 2023

By Angelo Amante, Giuseppe Fonte and Valentina Za

ROME (Reuters) -Italy has approved a one-off 40% tax on profits banks reap from higher interest rates after reprimanding lenders for failing to reward deposits, in a surprise move that sent banking shares plunging across Europe.

Sharply higher official interest rates have yielded record profits for banks, as lenders hike the cost of loans while holding 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 had floated the idea of a windfall tax on banks earlier in the year but appeared to have cooled on the plan.

A senior banking executive told Reuters that 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 starkly into focus once again and prompted the government to act on the eve of the summer political shutdown.

One source said the plan came as a surprise even to some ministers at Monday night’s cabinet meeting.

Italy’s banking share index plunged 7.4% by 0915 GMT on Tuesday, with top bank Intesa Sanpaolo down 8% and rival heavyweight UniCredit down 6.5%. Italian banks dragged the European index down 2.4%, with a Moody’s downgrade of some U.S. banks also weighing on bank shares.

“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 that) 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.

The government wants to use the proceeds to help those struggling with the cost of living such as mortgage holders.

WINDFALL FOR THE TREASURY

Citi analysts calculated the tax could wipe nearly a fifth off Italian banks’ 2023 net income. Bank of America estimated proceeds of between 2-3 billion euros for the government.

Sources said the Treasury expected to collect less than 3 billion euros ($3.3 billion) from the measure.

That would be similar to the figure of 2.8 billion euros 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 banks derive from the gap between lending and deposit rates.

Italy will tax 40% of to the NIM earned in 2022 or 2023 – depending on which sum is bigger – and above given thresholds for a yearly increase.

Intesa at the end of last month said it expected to pocket more than 13.5 billion euros this year from its net interest margin alone.

All main Italian lenders reported much stronger than expected results for the first six months and upgraded their profit outlook thanks to the boost from 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 held there for day-by-day use not as an investment.

($1 = 0.9112 euros)

(Additional reporting by Federico Maccioni and Danilo Masoni; Editing by Keith Weir and Susan Fenton)