With rising rates driving spectacular increases in bank profits across the board, governments in Europe increasingly see bank profits as a source of additional tax revenues to finance their spending plans. Italy is not alone: Windfall taxes in Spain, Hungary and the Czech Republic are other examples of additional levies on banks.

Full details of the draft law are not yet public but following the government press conference, it would appear the proposal has teeth, with a tax rate of 40% to be levied on excess net interest income in 2022 and 2023. The definition of extraordinary is harsh, with only 5% growth per annum being exempted from the levy. For context, for the eight Italian banks in our universe (Intesa Sanpaolo, UniCredit, Banco BPM, BMPS, BPER, Mediobanca, Credem and BP Sondrio) NII grew by 21% YoY in 2022 and could increase by another 40% in 2023.

Figure 1: Italian banks’ growth in net interest income since 2021

Source: SNL, Scope Ratings
Note: Mediobanca’s figures refer to its fiscal years ending in June

The tax will cost banks billions of euros but does not materially alter the credit profile of the banks. By our preliminary calculations, the impacts on the CET1 ratios of the larger banks will range between 20bp and 100bp. While this is not immaterial, we believe it can be offset, at least partially, by adjustments to capital distribution plans, which explains the violent moves in Italian bank share prices following the announcement.

We share concerns about the arbitrary definition of normal vs exceptional profit, and the ability of the executive branch to create ad hoc retroactive taxes. We additionally highlight the risk that the decision may be seen as an ex-post confiscation, with negative implications for the sector’s ability to attract equity capital at reasonable cost in times of need.

We are less worried that the tax could curtail banks’ ability and willingness to lend to the real economy at a time when the economy is slowing. Judging by the lending surveys, that process is already well underway, driven by falling demand and higher perceptions of credit risk. We do not believe the tax proposal will move the needle. The proliferation of bank windfall taxes is just another piece in the puzzle, confirming our view that European banks are seen as quasi-utilities.

Banks are a very important channel for policy transmission, both for the central bank but also for governments’ targeted financial support (think mortgage guarantees for first-time buyers, moratoriums for Covid affected borrowers etc).

At the same time, when a systemic threat emerges, banks’ credit profiles benefit from operational support via central bank facilities and government programmes aimed at facilitating the resolution of systemic problems, such as NPL guarantee schemes. Banks also tend to benefit from some degree of regulatory forbearance in times of crisis. The special attention their profitability attracts from politicians is the other side of coin.

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