The new 40% tax on the ‘extra profits’ of Italian banks is presumably a bit of a shock to Andrea Orcel, the arch investment banker leading Italian bank Unicredit.
When Unicredit announced its second quarter results at the end of July, including a 90% increase in first half profits year-on-year, there was no intimation of incoming taxation and every reason to suppose things could only go onwards and upwards.”UniCredit’s excellent results are a demonstration of a resilience of not only Europe, but of the European banks,” declared Orcel. Unicredit would be a new “benchmark” for European banking, he added; it would “execute relentlessly.” Orcel boldly declared himself “obsessed with costs,” “confident” that the bank’s strong financial performance would continue in “2023, 2024, and beyond.” The bank accordingly raised its profit guidance for 2023.
That was two weeks ago, and Unicredit’s share price rose around 2% following the display of optimism. Today, however, the bank’s share price fell nearly 7% on news of the proposed windfall profits tax which Citi analysts estimate could wipe 19% from earnings.
The decline matters for Unicredit bankers with stock bonuses. Last year, the average material risk taker at Unicredit received €303k as a bonus, of which around half was stock; that fell €10k in value this morning. The unpredictability may make the Italian bank a less appealing employer – Unicredit is on a hiring spree and has added 2,000 people (mostly in Germany and Italy) since 2022, including the likes of ex-Credit Suisse bankers Andrea Berti and Emilio Grisolia in Milan.
Mostly, though, senior Italian bankers say the new tax should be read as a warning. Levied by the right wing Italian coalition government to fund tax cuts and mortgage subsidies, bankers in Italy say it could easily catch-on elsewhere.
“This is a populist measure. If it works, other countries could follow,” says one senior Italian trader. Implementing a similar tax in the UK could be a vote winner for Rishi Sunak, he says. Another Italian trader predicts a similar tax in France.
Spain’s socialist government introduced a windfall levy on banks’ profits last year.
One senior trader suggests the new Italian taxes could be a good thing for markets professionals and bankers: they mean that banks will be less able to simply rely on the controversial harvesting of fees from net interest income as interest rates rise. Banks will need to ensure they have solid fee generating businesses away from the retail bank.
More broadly, though, windfall taxes could have unforeseen side effects. “The risk is that banks, which have been big buyers of Italian government bonds, sell them in response to this initiative,” says one trader. “This has the potential to increase volatility, and may discourage international investors from the Italian market.” The other trader said it suggests that shares in Italian banks “need to be bought very opportunistically with a short term speculative horizon.”
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