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Ireland has become the latest European country to hit banks with higher taxes, as governments target the bigger profits lenders have generated from rising interest rates.
As part of the Irish Budget announced on Tuesday, Dublin said the target for the sum raised by the banking levy would increase from around €87mn to a larger than expected €200mn in 2024. It would be paid by the banks that had received financial assistance from the state: AIB, Bank of Ireland and Permanent TSB.
“It is important that the banking sector continues to make a contribution to the Irish economy following the support they received during the financial crisis,” finance minister Michael McGrath told the Irish parliament.
Ireland follows a wave of European countries increasing taxes and levies on banks. The Netherlands and Italy have recently joined Spain, Hungary, the Czech Republic and Lithuania, which made such moves over the past year.
Rising rates have boosted bank profits as they benefit from the difference between the interest they pay out to depositors and what they make on loans.
As profits have hit their highest levels since the global financial crisis, politicians have sought to target lenders with higher taxes to help pay for measures to support voters facing an increase in living costs.
Yet the tax rises have often been met with resistance. In Spain, the banking sector began legal challenges, while Italy was forced to water down its own windfall tax last month following fierce criticism of the measures, including from the European Central Bank.
Stories in the Irish press over the weekend indicated the levy could rise to €175mn, though bank shares were little affected by the announcement on Tuesday. AIB stock was up more than 5 per cent, Bank of Ireland’s up 3.5 per cent and PTSB up 4.6 per cent by late afternoon.
“Today’s announcement is within investor expectations and removes one of the key remaining uncertainties on the Irish banks, so could act as a catalyst for the shares to now re-rate,” said Citi analyst Borja Ramirez Segura.
The government did not provide details on how the levy would be broken out, but Goodbody analyst John Cronin estimated AIB’s annual contribution would rise from €37mn to €92mn, Bank of Ireland’s would go from €25mn to €81mn and PTSB’s would increase from €22mn to €27mn.
“It has presumably purposefully been struck at a level that is a bit higher than was anticipated in the public domain in a bid to be seen to be trying to inflict some pain on the sector given current high returns — and, perhaps, to stave off any further media/political pressures from a deposit pricing perspective,” Cronin added.
Analysts at Davy in Dublin said in a note to clients: “We estimate that the incremental impact from the increase will be in the range of 2%-3% of profit before tax across all three banks on current 2024 forecasts.”
