The Italian government is hitting the country’s banks with a new windfall tax, to help families through the cost of living squeeze.
Italy’s cabinet yesterday approved a 40% “windfall tax” on bank profits this year, with the proceeds earmarked to help mortgage holders and cut taxes.
Deputy prime minister Matteo Salvini told a news conference that the levy will hit the profits reaped from higher interest rates:
“One only has to look at the banks’ first-half 2023 profits, also the result of the European Central Bank’s rate hikes, to realise that we are not talking about a few millions, but we are talking one can assume of billions.”
Italy’s banks (like those in the UK) have benefited from rising interest rates over the last year.
Update: Under the one-off levy, Italy will tax 40% of banks’ net interest margin, a measure of income banks derive from the gap between lending and deposit rates, Reuters reports.
Last month, Intesa Sanpaolo, Italy’s biggest bank, lifted its profit outlook for the current year after beating forecasts with a €2.27bn net profit for April-June.
Campaigners in the UK have also been pushing for a windfall tax too.
Fran Boait, executive director of campaign group Positive Money, wrote back in February:
Just like oil and gas companies, banks are cashing in on the cost of living crisis, and should be subject to the same taxes on their unearned windfalls.
The former Bank of England deputy governor Sir Charlie Bean has supported the plan, suggesting that it could raise tens of billions of pounds. If the government increased the existing surcharge on bank profits from 3% to 35%, in line with the energy profits levy, this would raise £67bn over the next five years.
A bank windfall tax must avoid the loopholes the energy levy contained, which BP and Shell have exploited in recent months. The oil giants have been allowed to avoid paying the tax in full by chucking loads of money into fossil fuel exploration.
Sky News are reporting that a specialist investor in struggling retailers is exploring a bid to rescue Wilko, the budget retailer on the brink of collapse.
They say that Gordon Brothers, which has backed British high street names including Laura Ashley, is in talks with Wilko’s advisers about structuring a potential deal.
Sources said that an offer could involve Gordon Brothers providing funding to the general merchandise retailer to implement a restructuring that would involve significant numbers of store closures and job losses.
Wilco, which has about 400 stores, said last Thursday it had filed a notice of intention to appoint administrators at the high court on Thursday with advisory firm PricewaterhouseCoopers (PwC) lined up.
PwC has been working with Wilko in recent months to try to find a buyer in an attempt to secure additional cash needed by the end of this month to keep trading.
Here’s our news story on the Italian bank windfall tax:
The imposition of a windfall tax on Italian banks will be a welcome development for campaigners from Positive Money who have been calling on the British government for a similar levy on UK bank profits, Victoria Scholar, head of investment at interactive investor, tells us:
However at the moment, a windfall tax on UK banks still feels quite unlikely, she argues.
Banks in Italy, the UK and beyond have enjoyed a major tailwind from rising interest rates driven by the shift towards monetary tightening imposed by central banks to combat inflation. While bank earnings have ballooned, many mortgage holders, particularly those on variable rates, have struggled on the back of rising borrowing rates at a time when the cost-of-living is already taking its toll and real wage growth is in negative territory.
One downside of a windfall tax, is that, if it is used to fund tax cuts like in Italy, it could potentially work against the Bank of England, which is trying to reduce borrowing and spending in attempt to cool inflation. It may also discourage investment in the financial sector.
Perhaps instead there should be greater efforts by the government to encourage banks to pass on the benefit of higher interest rates to savers through higher savings rates, more quickly and more aggressively, which would discourage spending, encourage saving and in turn help to bring down inflation.
The one-off Italian bank windfall tax will be equal to around 19% of banks’ net profits for the year, analysts at Citi estimated based on currently available data.
That’s via CNBC, who add:
“We see this tax as substantially negative for banks given both the impact on capital and profit as well as for cost of equity of bank shares. 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.
Steve Clayton, head of equity funds at Hargreaves Lansdown, says:
Italy announced an unexpected new levy on the banking sector last night, with premier Giorgia Meloni’s government announcing that “extra profits” made by banks on the back of higher interest rates would be subjected to a 40% additional tax charge.
The move comes in the wake of Italian banks increasing their profit guidance for the full year after surging first half profits.
The Financial Times points out that Italian PM 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.
Italian foreign minister Antonio Tajani, who is also a deputy premier, pointed the finger at the European Central Bank for raising interest rates – allowing commercial banks to swell their profits.
Tajani told newspaper Corriere della Sera:
“We have been saying for months the ECB was wrong to raise rates and this is an inevitable consequence.”
Bloomberg reports that Italian stocks dropped after a surprise new tax on bank profits sent the country’s lenders tumbling, erasing as much as €9.5 billion ($10.4 billion) from their combined market capitalization.
The cost of insuring Italian bank debt against default using a credit default swap has risen this morning (but remains at low levels):
Under the one-off levy, Italy will tax 40% of banks’ net interest margin, a measure of income banks derive from the gap between lending and deposit rates, Reuters explains.
The net interest margin (NIM) is a key measure of profitability and growth. It measures the difference between what the bank charges borrowers and what it pays out to savers.
Banks increased their NIMs as central banks lifted interest rates as inflation began to climb, by raising borrowing costs more quickly than they boosted their savings rates.
Italy’s banking index is down 7.5% after Italy’s cabinet approved the one-off 40% windfall tax on banks.
One Milan-based trader has told Reuters that the Italian banking windfall tax…
…has caught some by surprise, and the market is wandering around looking for what the actual impact will be on individual stocks.”
“The good thing is that it is a one-off measure.”
It’s a dramatic time in the banking sector, with Italy unveiling a windfall tax and Moody’s cutting the credit ratings of several small to mid-sized U.S. banks last night.
Victoria Scholar, head of investment at interactive investor, tells us:
Banks are under pressure across Europe after Moody’s cut its credit ratings on 10 small to mid-sized US banks and warned it may do the same for some of the larger lenders such as BNY Mellon and State Street which have been placed on possible downgrade review.
Italian banks such as Intesa Sanpaolo, BPER Banca and Unicredit are falling particularly sharply after the government approved a 40% windfall tax on banks for 2023.
Banks have enjoyed a major tailwind from rising interest rates with the government looking to redistribute those earnings towards those who are struggling with expensive mortgage payments.
The Euro Stoxx banks index is on track for its worst session since March.
With bank shares sliding, Italy’s FTSE MIB share index has dropped by 1.5% in early trading.
The rescue deal for UK battery firm Britishvolt has been cast into doubt, after the Australian company taking over the company missed the deadline to pay for it.
Filings from administrators EY show that the final instalment of a total payment of £8.57m, which was due on 5 April, has not yet been paid. ITV News reported last weekend
EY said that the buyer, Recharge Industries, had therefore defaulted on its agreement to buy the business.
The EY report said:
“The final instalment remains unpaid and overdue. As a result, the buyer is in default of the business sale agreement.”
However, Recharge Industries are challenging this, the BBC report, saying:
“We dispute we are in default.”
Britishvolt had planned to build a massive £4bn car battery factory in the north-east of England, but went into administration in January after running out of money.
In February, Recharge Industries won the bidding battle for Britishvolt, reviving hopes that the “gigafactory” would be built, to help Britain’s move towards producing electric vehicles.