Italian lenders hit with windfall tax: Shock move sends bank shares tumbling

Shares in Italy’s largest banks slumped after the country’s government slapped a surprise windfall tax on the industry.

US banks, meanwhile, were also knocked by a series of downgrades from Moody’s.

The credit rating agency warned the sector could find its profits under pressure from an economic slowdown and the effects of higher interest rates.

The Italian financial sector was blindsided after it announced a one-off 40 per cent tax on banking profits, which have surged over the last year as lenders cashed in on rising interest rates.

Cash grab: Italian prime minister Giorgia Meloni (pictured), had warned banks against reaping the rewards of higher rates while failing to pass on the benefits

The government in Rome, led by prime minister Giorgia Meloni, had previously warned banks against reaping the rewards of higher rates while failing to pass on the benefits to savers.

A windfall tax on profits was floated by Italian officials earlier this year but the government appeared to have cooled on the idea, leaving the sector shocked when the measure was unveiled late on Monday night.

Meloni’s coalition government said the sums raised from the tax, which still requires approval from Italy’s fractious parliament, would be used to fund assistance measures for families and small businesses. 

But the move sparked a sell-off in the banking industry, with shares in Intesa Sanpaolo, Italy’s largest bank, falling 8.7 per cent on Tuesday and Milan-based rival Unicredit tumbling 5.9 per cent.

Across the wider sector, the FTSE Italia All-Share Banks index slumped 7.6 per cent while the downturn also spread to European markets with the Euro Stoxx Banks Index dropping 3.5 per cent.

UK banking stocks were also caught up in the sell-off, with Barclays down 2.5 per cent, HSBC slipped 1.5 per cent, Lloyds lost 1.1 per cent and NatWest dipped 1.3 per cent.

The move to tax the banks is likely to reignite the debate about implementing a similar levy in Britain, although the Government has so far resisted the idea.

Victoria Scholar, head of investment at Interactive Investor, warned that London following Rome’s lead could prove an own goal in the battle against inflation. 

She said: ‘One downside of a windfall tax is that if it is used to fund tax cuts like in Italy, it could potentially work against the Bank of England, which is trying to reduce borrowing and spending in an attempt to cool inflation.

‘It could also potentially discourage investment in the financial sector.’

Instead, UK officials have opted to increase pressure on banking bosses to pass on the benefits of higher rates to customers rather than fattening their profit margins. 

Last week, the UK’s financial watchdog warned banks with low savings rates would face ‘robust action’ if they could not justify the small returns for customers.

It followed comments from Chancellor Jeremy Hunt, who in July urged banks to pass on higher interest rates to customers, saying businesses needed to respect the ‘social contract.’ 

There was more bad news for the banking sector across the Atlantic as several mid-sized US lenders were downgraded by Moody’s.

The agency said the sector was facing ‘growing profitability pressures’ and warned a ‘mild US recession’ was expected next year.

It cut its credit ratings for ten banks and placed six large US lenders, including Bank of New York Mellon, US Bancorp, State Street and Truist Financial, under review for possible downgrades in the future.

Moody’s also warned that many banks were exposed to loan losses as higher interest rates, falling demand for office space and lower availability of credit would put pressure on borrowers.

It added that some institutions were sitting on large unrealised losses, a term for assets that have decreased in value but not been sold.

This made them more vulnerable to a fall in confidence as rates remained higher.

The assessment sent shudders through the US financial sector, with shares in even the major banks taking a hit.

JP Morgan’s stock lost 0.6 per cent in trading on Wall Street, Morgan Stanley dropped 1.9 per cent, Goldman Sachs slumped 2.1 per cent and Citigroup fell 1.5 per cent.

US banks have been in a delicate position after the collapse of Silicon Valley Bank and a handful of other lenders earlier this year shook confidence in the financial system.

It sparked several bank runs that were eventually brought under control by officials.

This post first appeared on Dailymail.co.uk