Italy’s New Tax Wipes Out $10 Billion From Market Value of Banks

Italian stocks dropped after a surprise new tax on bank profits sent the country’s lenders tumbling, erasing €9.3 billion ($10.2 billion) from their combined market capitalization. A surge by drugmaker Novo Nordisk to a record high helped cap declines in the broader European index.

(Bloomberg) — Italian stocks dropped after a surprise new tax on bank profits sent the country’s lenders tumbling, erasing €9.3 billion ($10.2 billion) from their combined market capitalization. A surge by drugmaker Novo Nordisk to a record high helped cap declines in the broader European index.

Italy’s FTSE MIB fell 2.1%, with UniCredit SpA dropping 5.9% while Intesa Sanpaolo SpA sank 8.7%. The Stoxx Europe 600 index declined 0.2% by the close in London. Novo Nordisk jumped after a highly anticipated study showed that its Wegovy obesity treatment reduced the risk of heart attacks and strokes. The company is now closing in on LVMH as the biggest European firm by market capitalization.

The Italian levy was slipped into a huge package of measures that ranged from taxi licenses to foreign investment. The tax could bring over €2 billion into state coffers, according to Ansa newswire. Italy agreed on a “40% withdrawal from banks’ multi-billion euro extra profits” for 2023, which is set to finance tax cuts and support mortgages for first-time owners.

“The move by Italy is one of many signs that businesses are being held to account for all the considerations of their business activities and the impact that they have on communities,” said Stephanie Niven, a London-based portfolio manager at investment firm Ninety One. 

“One of the issues with the banks has been that they’ve been returning more to shareholders, which doesn’t sit well broadly given the help they’ve had in the past,” Niven said. “Banks are sitting on more capital and the governments want to avoid that being distributed exclusively to shareholders.”

Citigroup Inc. analysts calculate that the tax is equivalent to about 19% of banks’ net income in 2023 and approximately 3% of their 2023 tangible book value. Bloomberg Intelligence analysts said Italian lenders’ 2023 net income could be reduced by about 10%.

“Financials weigh more than 30% in the Italian stock market, making it vulnerable to the newly approved levy,” said Leonardo Pellandini, an equity strategist at Bank Julius Baer. “With this said, banks had a strong year so far, given the net interest margins boost from higher rates, so it is time for a healthy consolidation.”

Charles-Henry Monchau, chief investment officer at Banque Syz, said the news had “prompted a reassessment of our stance on the sector.” 

“While the positive factors of bolstered capital, improved returns, and distribution plans remain pertinent, the uncertainties linked to taxes and the potential repercussions on earnings introduce new variables that need to be carefully considered when evaluating the prospects for European banks,” he said.

The Italian tax plan is a fresh headwind for European stocks, which last week endured their first bout of volatility in quite a while, amid speculation of further interest-rate hikes impacting economic growth. Weak trade data from China and a warning by Moody’s Investors Service about the state of US banks also weighed on sentiment on Tuesday.

Among other individual stock moves Tuesday, Glencore Plc fell after the commodities trading and mining giant reported a steep drop in profit. Abrdn Plc declined after first-half results showed clients pulled more money from the asset manager’s funds.

Here’s what other market participants said about the surprise tax by Italy:

Gerry Fowler, head of European equity and global derivative strategy at UBS Group AG:

“It’s not unheard of for governments to impose super-profit taxes. The news was a little bit of a shock, but it had already been discussed even in Italy. But nonetheless, the market was caught off guard with the timing and potentially the scale of it.”

“The big question in the market is: is this a one-off? There’s definitely some extrapolation of either a broadening of this measure from Italy across other countries in Europe, or particularly for the Italian banks that have fallen quite sharply — that this is not just a one-year thing, and that perhaps it does persist, particularly because we do think banks will actually be able to maintain net interest income at a fairly high level, probably above the threshold at which this will be cutting in for an extended period.”

Marc Stacey, a senior portfolio manager at RBC BlueBay Asset Management:

“I’d say this is more of an equity story versus a credit story. It is clearly a negative development for Italian banks’ returns but we are still light on detail so we can’t determine exactly what the impact might be. While clearly a drag on earnings, Italy’s large national champions will still be well capitalized and highly profitable.”

Christopher Hiorns, portfolio manager at EdenTree Investment Management:

This has “obviously hurt sentiment for all European banks. Not sure whether other countries will necessarily follow.” Hiorns said he held shares in banks in Germany, the Netherlands and Ireland. “Neither Germany nor Ireland are under very much budgetary pressure so hopeful that they won’t follow suit. Plus, the profitability of German banks has never been that great anyway. Netherlands also is probably one of the markets it is less likely.”

–With assistance from Chiara Remondini, Jan-Patrick Barnert, Michael Msika and Henry Ren.

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