Italian One-Off Bank Tax Likely to Exceed Initial Expectations

The commentary analyses the potential impact of the new tax on Italian banks announced on Monday, 7th August, by the Italian government.

Summary highlights from the commentary include:

• The Italian government unexpectedly announced a new tax on Italian banks' extraordinary profits reported as a result of the rapid hike in the ECB interest rates since July 2022. However, the new tax still requires approval by the Italian parliament and details might change.

• Our understanding is that, based on first estimates the government expects to collect up to EUR 3 billion. The tax is expected to be temporary, affecting 2023 only with the payment envisaged by H1 2024 for most banks.

• The new tax will be based on 2022 and 2023 financial statements and will consist of a 40% levy triggered if net interest income (NII) reported in 2022 exceeded NII reported in 2021 by at least 5%. This percentage increases to 10% when comparing NII in 2023 with that in 2021.

• If applied on the basis of the comparison between 2022 and 2021, the bank levy would amount to around EUR 2.1 billion based on DBRS Morningstar's calculations. While we see NII to be close to peaking, we would still expect profits in 2023 to be higher than in 2022 considering the strong results reported in H1 2023 to date by the largest Italian banks. Therefore, DBRS Morningstar expects the new tax to exceed the government's initial expectations.

“Our view is that a one-off tax would not have a material credit impact on the banks considering the significant improvements in profitability made by the banks systemwide over recent quarters and it is unlikely to substantially hamper lending” said Andrea Costanzo, Vice President from the DBRS Morningstar European Financial Institutions team. “However, if the tax were to be permanent, this could have more negative implications for creditworthiness.”