Italy backtracks with cap on windfall tax after bank shares slide

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Italian bank shares regained some ground on Wednesday after the government sought to address market turmoil by partially backtracking on its surprise windfall levy on the sector.

The finance ministry said in a statement late on Tuesday that the tax on net interest income would be capped at 0.1 per cent of assets, without specifying exactly what measure would be used. Analysts at Jefferies said the cap would halve the expected impact of the levy.

Intesa Sanpaolo and UniCredit, the country’s two largest banks, opened up more than 2 per cent in early trading on Wednesday.

A person with knowledge of discussions within government said the finance ministry had “scrambled” to come up with a solution that would at least “partially calm market jitters”.

The finance ministry said the cap was “aimed at safeguarding lenders’ financial stability”.

Jefferies analyst Marco Nicolai said on Wednesday that “our updated estimates are of 30 basis points core equity tier one [capital, a key ratio of lenders’ financial health] impact on average for the 10 banks we cover, halved [compared to] the scenario where no cap is applied.”

One banking source in Milan said the limit would make the levy “much more manageable” and would raise an estimated €1.8bn, in contrast with previous estimates of more than €4.5bn issued by analysts at Jefferies and Equita.

An initial draft text setting out details of the tax, leaked after the measure was approved, had said the levy would be capped at 25 per cent of banks’ net assets, but a later official version on Tuesday afternoon failed to mention any cap, adding to the confusion.

Markets had reacted with shock, sending shares in major Italian lenders down by between 5.9 and 10.8 per cent by the time trading ended on Tuesday.

The finance ministry added on Tuesday evening that banks that had already adjusted their deposit rates “as recommended in a note by the Bank of Italy in February” would not see any meaningful impact from the proposed tax.

A banking executive in Milan said “the ping-pong was shocking” but added it signalled that the government had taken on board negative reaction.

The tax, approved in a cabinet meeting late on Monday, still needs to secure parliamentary approval. If it proceeds, it will be applied to the net interest income generated from the gap between banks’ lending and deposit rates.

The apparently hasty measure followed political pressure on Prime Minister Giorgia Meloni’s rightwing coalition to do more to help households hit by rising rates and inflation. Her administration had previously criticised banks that failed to pass on interest rate rises to small savers.

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 move.

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 either 5 per cent or 10 per cent.