Italian banks hit with surprise windfall tax

The Porta Nuova business district seen from the terrace of Duomo Cathedral in Milan

Italy has passed a one-off 40% tax on the profits banks earn from higher interest rates, in a shock move that has seen shares plummet.

A hike in official interest rates has resulted in record profits for Italian banks, prompting the government's move.

Proceeds will be used to help mortgage holders and to cut taxes, the government says.

But Italian banks have said the tax on their profits will be "substantially negative" for the sector.

The surprise move was agreed by Prime Minister Giorgia Meloni's ministers at a cabinet meeting late on Monday. They vowed to invest the funds raised into helping households and businesses struggling with the cost of borrowing.

"One has only to look at banks' first-half profits to realise that we are not talking about a few millions, but of billions," Deputy Prime Minister Matteo Salvini told a news conference in Rome late on Monday.

The tax will apply to the net interest income that comes from the gap between the banks' lending and deposit rates.

Around €2bn (£1.7bn) is reportedly expected to be generated from the levy, which will be used to fund support for families hit by higher interest rates.

Italy's parliament now has 60 days to pass the tax decree into law.

Foreign Minister Antonio Tajani told the Corriere della Sera newspaper the tax was not against the banks, "but a measure to protect families" and those struggling to pay mortgages.

But some European banks have said the surprise move is bad news for the sector.

Equity Research Analyst at Citi, Azzurra Guelfi, said: "We see this tax as substantially negative for banks given both the impact on capital and profit as well as for cost of equity of bank shares."

Shares in the country's two largest banks, Intesa Sanpaolo and UniCredit, dropped by 8% and 6.5% respectively on Tuesday morning following the announcement.

Shares in Banco BPM, the country's third-largest bank dropped 8.2%, while the state-owned Monte dei Paschi di Siena dipped by 7.4%. Other banks including BPER Banca, Banca Generali and Mediobanca were also down.

The fallout has had ramifications for other banks, with shares dropping at Germany's Deutsche Bank and Commerzbank, and France's BNP Paribas and Credit Agricole.

"The tax that Italy has levied on the excess profits that banks are perceived to be making has come as a surprise and is likely raising concerns that other countries could follow Italy's example," said Stuart Cole, chief macro economist at Equiti Capital.

Other European countries including Hungary and Spain have imposed similar windfall taxes on banks.

In May, Lithuanian lawmakers backed a temporary windfall tax on banks to fund defence spending, while Estonia is planning to raise the tax level on banks to 18%, up from 14% this year.

A windfall tax is a levy imposed by a government on companies that have benefited from something they were not responsible for - in other words, a windfall.