Bank Stocks Plunge in Europe Italy's unexpected decision to tax banks on their "excess profits" has weighed down European stocks, with bank shares taking the hardest hit.
On Tuesday, August 8, European shares opened lower, deepening their losses as the day progressed. The FTSE MIB index in Italy, dominated by the banking sector, plummeted by 2%, marking a one-month low and leading the decline in European stocks. The Euro Stoxx 50, Germany's DAX, and France's CAC 40 all dropped close to 1%, while the UK's FTSE 100 index fell by 0.5%.
Banking stocks in the Eurozone saw a significant drop, with the index momentarily dipping by 3.4%, its most significant drop since March. Shares of Bper Banca plunged over 9%, followed by Banco Bpm and UniCredit, both falling over 8%, and UniCredit Group declining by 6.5%.
This downturn came as a reaction to Italy's unexpected cabinet approval to tax banks on their "excess profits" this year, catching the market off guard.
Leonardo Pellandini, a stock strategist at Swiss bank Pictet, noted, "Financial stocks make up more than 30% of the Italian stock market, making it highly susceptible to the effects of the newly approved tax. That said, banks have performed strongly this year due to widened net interest margins from rate hikes, so a recalibration might be in order."
Italian Prime Minister Meloni's cabinet surprisingly greenlighted the plan to tax banks on their "additional profits" for the current year. Reports suggest that this tax could generate more than 20 billion euros ($22 billion) in revenue for the national treasury. Deputy Prime Minister Matteo stated that Italy has agreed to "extract 40% from the tens of billions of euros of additional profits from banks" in 2023. This fund will be allocated to tax reductions and support mortgage loans for first-time homebuyers.
According to Reuters, the Italian government is considering two potential taxation schemes, likely opting for the one with the highest yield. The first would impose a 40% tax on the difference between net interest incomes of 2022 and 2021 when the difference exceeds 3%. The second option targets the net interest income difference from 2021 to 2023, with a minimum difference of 6%. The imposed tax cannot exceed 25% of the bank's shareholder equity.
Georgios Leontaris, Chief Investment Officer of HSBC's Global Private Banking and Wealth Division, said that while these "windfall tax" measures seem limited to the Italian market for now, they have undoubtedly drawn attention to financial institutions across Europe benefiting from increased loan profits due to rate hikes.
