Italy Backtracks On Windfall Bank Tax To Prevent Further Market Turmoil

Italy was forced to water down its new windfall tax on excessive banking profits after the surprise Tuesday announcement spooked capital markets and wiped out $10 billion from banks’ market value. 

The finance ministry said Tuesday night the new levy won’t exceed .01% of the lender’s assets, and financial institutions that have already increased the interest rates offered to depositors “will not have a significant impact as a consequence of the rule.” 

The backtrack was enough to send shares of Italian lenders higher on Wednesday, recouping some losses after shares tumbled on Tuesday. 

Shares of UniCredit SpA were up 4%, Banco BPM +4%, Intesa Sanpaolo +3%, and Finecobank +7.5%. The FTSE Italia All-Share Banks Index was up nearly 4%. Italian banks recovered more than $4.2 billion in market capitalization today. 

Mission accomplished? 

Finance Minister Giancarlo Giorgetti spent Tuesday trying to extinguish the fire after Deputy Prime Minister Matteo Salvini’s surprise bank tax sent shockwaves across markets, according to Bloomberg, citing a person familiar with the discussions. A watered-down version of the tax was the best way to mitigate the fallout and prevent further deterioration in bank stocks. 

Gianmarco Rania, head of equities at Banor Capital, told CNBC that he was surprised about how badly the government communicated the new fiscal measure and that the government “did not really make the right calculation”: 

“Initially, right after the announcement of the windfall tax on Monday evening, the government reiterated that they were expecting to raise around 3 billion euros in tax, but then the market realized that the numbers didn’t add up,” Rania explained.

“During yesterday’s session, analysts started to make their own calculations and realized that if the measure was to be fully impacted, the actual proceeds for the Italian government would have been well in excess of 3 billion [euros] — around 4.5, 5 billion.”

Realizing it could obtain the 3 billion euros required to enable it to cut taxes and offer financial support to mortgage holders, the finance ministry then introduced the cap — which will mean a significantly lower negative impact on 2023 earnings, Rania said.

“If fully applied under the initial government conditions, we would have between 20% and 25% impact on 2023 earnings for small and mid-cap banks, and between 8% and 15% for the large banks,” Rania estimated.

“With these changes, now we are talking about numbers which are less considerable, more under control, so we are talking about 10, 12% earnings impact for the small, mid banks on 2023 earnings, and something not really meaningful for the large banks in the area of 3-5%.”

Rania noted that much of the downward momentum of Tuesday in the stock prices of banks was down to concerns about shareholder remuneration, which has long been a draw for investors looking for consistent returns.

“The Italian banking system on average returns to shareholders in the area of 11, 12% yield if you include dividends and buybacks, so clearly yesterday this was heavily under scrutiny,” he said.

“After the adjustment of last night in the cap, most of the banks are confirming their shareholder distribution policies, in particular the larger banks — UniCredit and Intesa.” –CNBC

Italy’s move could spur other countries to impose bank taxes to claw back profits made in a high-rate environment. This could be an emerging headwind for European equities.