Italy backtracks with cap on windfall tax after bank shares slide


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Italian bank shares rebounded on Wednesday after the government tried to soothe market tensions by partially backtracking on its unexpected windfall levy on the sector.

The finance ministry said the tax on net interest income would be capped at 0.1 per cent of the bank’s total assets. Analysts at Jefferies said this cap would “greatly reduce” the measure’s impact by cutting the total levy collection from €4.5bn to €2.5bn or less.

Shares in Intesa Sanpaolo and UniCredit, Italy’s two largest banks, gained 2.8 per cent and 4.4 per cent, respectively, by mid-afternoon but remained below last week’s levels.

A person with knowledge of the discussions said the finance ministry had “scrambled” to come up with a solution that would at least “partially calm market jitters” after lenders lost €10bn off their market capitalisation on Tuesday.

Furious bankers and treasury officials held frantic phone calls on Tuesday to discuss a solution, said another person familiar with the conversations.

The ministry announced the cap that evening, saying it was “aimed at safeguarding lenders’ financial stability”. The unexpected announcement of the windfall tax on Monday had triggered a sell-off in bank stocks that left major Italian lenders down between 5.9 per cent and 10.8 per cent the following day.

The finance ministry added on Tuesday night that banks that had already raised interest rates on savings accounts “as recommended in a note [to lenders] by the Bank of Italy in February” would not see any meaningful impact from the proposed tax.

Prime Minister Giorgia Meloni broke her silence on the initiative on Wednesday, posting a video on Facebook lashing out against “banks’ unfair interest rate margins” and saying they were slowing the economy.

“The European Central Bank has opted to increase interest rates, and while the policy isn’t necessarily working [to curb inflation], banks should behave fairly, and that’s not what they are doing.

“So introducing a tax on these interest rate margins was the only way we had to intervene,” she said.

Haphazard communications over the tax spread panic after it was unveiled. Filippo Alloatti, head of financials at Federated Hermes, an investor in UniCredit, Intesa and Banco BPM bonds, called the government’s approach an “epic fail”.

“They put out a press release which didn’t say a lot about how they would use the receipts. It appears they didn’t do the math. They lost quite a lot of goodwill they built since the formation of government,” he said.

A leaked document that circulated widely on Tuesday was later followed by an official government statement featuring different numbers and terminology. Analysts struggled to parse both versions of the draft text, which must still be approved by Italy’s parliament.

Following Tuesday’s late-night announcement of the cap, which still contained few details, the ministry then clarified on Wednesday that the limit would be applied to total assets, a measure that does not take into account risk exposure.

The industry welcomed the cap. A banking executive in Milan said “the ping-pong” on the measure was “shocking”, but added that the government appeared to have taken the negative reaction on board.

If the tax secures lawmakers’ approval, it will be applied to the net interest income generated from the gap between banks’ lending and deposit rates.

The hasty measure followed political pressure on Meloni’s rightwing coalition to do more to help households hit by rising rates and inflation.

The move won some opposition support on Tuesday. The leader of the populist Five Star movement Giuseppe Conte said on social media: “Better late than never.” Lawmakers from the centre-left Democratic party also applauded the tax.

The government said on Tuesday that the threshold for imposing the 40 per cent levy would be based on the difference between net interest income in 2021 and the figure for 2022 or 2023, whichever was larger. Banks would pay the tax once their net interest income for the selected year exceeded 2021 by a specified percentage — 5 per cent for 2022 or 10 per cent for 2023.

Alloatti said that banks’ own rhetoric on profitability had contributed to the imposition of the tax.

“The banks didn’t help,” he said. “Every quarter they have been bragging about having the best profitability for years. They were making themselves an easy target. Politicians cynically realised there was an easy way to refill the state coffers.”

Cole Smead of Smead Capital Management, a shareholder in Unicredit, called the Meloni government “detached from economic thinking”. “If [the government] want to spur economic growth and investment for the future, this will cast a pall,” he said.

Morningstar analyst Johann Scholtz said the most damaging impact of the tax would be “the higher risk premium that investors will demand to compensate them for the risk of future government intervention”.

Additional reporting by Owen Walker and George Steer in London

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