European equities experienced a decline on Tuesday, prompted by an unexpected move from Italy to impose a new tax on bank profits, leading to a sharp drop in shares of financial institutions.
During early morning trading in London, the Stoxx Europe 600 index saw a 0.3% decrease, while Italy’s FTSE MIB index plummeted by 1.4%. Notably, UniCredit’s stock fell by 6.5%, and Intesa Sanpaolo witnessed a significant decline of 7%.
Italy’s surprise introduction of the tax was discreetly included within a comprehensive package of measures, spanning areas from taxi licenses to foreign investment, by Prime Minister Giorgia Meloni’s cabinet. The projected revenue from this tax is estimated to exceed €2 billion ($2.2 billion), according to the Ansa newswire.
The tax policy encompasses a “40% withdrawal from banks’ multibillion euro extra profits” for the year 2023, with the intention of funding tax reductions and providing support for initial-time homebuyers’ mortgages.
Citi analysts highlighted the potential ramifications of the levy, stating that it could impact bank earnings by about 19%. They further elaborated that the tax’s consequences extend to capital, profit, the cost of equity for bank shares, and various financial metrics.
The new tax is equivalent to around 19% of banks’ projected net income for 2023, approximately 3% of their anticipated tangible book value, and roughly 0.5% of the risk-weighted assets projected for 2023.
Given that financial institutions account for more than 30% of the Italian stock market, the imposition of the new tax renders the market more susceptible to negative effects, as observed by Leonardo Pellandini, an equity strategist at Bank Julius Baer.
Pellandini acknowledged the robust performance of banks in light of elevated net interest margins driven by rising interest rates. He posited that the current situation may herald a period of healthy consolidation within the sector.
Italy’s decision arrives shortly after the nation’s banks had unveiled favorable earnings reports, with Intesa and UniCredit enhancing their full-year guidance for the second consecutive quarter due to the European Central Bank’s (ECB) proactive policy tightening. UniCredit, for instance, experienced a substantial 42% surge in net interest income during the first half.
This trend of strong performance and increasing profitability has been mirrored across Europe, as banks engage in share buy-back initiatives, leveraging higher interest rates and demonstrating resilience in stress tests. Nevertheless, a growing backlash against this backdrop has emerged alongside concerns over a cost-of-living crisis.
Similar developments are taking place in other European countries. Spain had introduced plans for a temporary tax on bank revenues to address a cost-of-living crisis. Certain Baltic countries are also contemplating the implementation of measures to raise taxes on commercial banks following instances of elevated profits due to rate hikes.
This unexpected tax announcement adds a fresh element of uncertainty to European stocks, which recently encountered their first episode of volatility in a considerable duration. Market concerns have been fueled by speculation surrounding potential interest rate hikes and their potential repercussions on economic growth.
Furthermore, on the same day, data emerged revealing a more significant than anticipated drop in Chinese trade, contributing to apprehensions regarding the ongoing global economic recovery.
In other notable stock movements, Glencore, a major player in commodities trading and mining, reported a sharp decline in profit, leading to a substantial decrease in its share price. Asset manager Abrdn also experienced a decline following its first-half results, indicating that clients had withdrawn substantial funds from its investment vehicles.