European stocks fell after Italy surprised investors with a new tax on bank profits, sending lenders’ shares plunging.
The Stoxx Europe 600 index declined 0.3% at 8:07 a.m. in London, while Italy’s FTSE MIB slumped 1.4%. UniCredit SpA tumbled 6.5% while Intesa Sanpaolo SpA dropped 7%.
Read More: Italy Surprises Markets With Tax on ‘Extra’ Profits of Banks
The Italian levy was slipped into a huge package of measures that ranged from taxi licenses to foreign investment. The tax could bring over €2 billion ($2.2 billion) into state coffers, according to Ansa newswire. Italy agreed on a “40% withdrawal from banks’ multi-billion euro extra profits” for 2023 which is set to finance tax cuts and support for mortgages for first-time owners.
“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,” Citigroup Inc. analysts led by Azzurra Guelfi wrote in a note. “The new simulated impact is also higher than the simulation we ran in April.”
The analysts calculate that the tax is equivalent to about 19% of banks’ net income in 2023, approximately 3% of their 2023 tangible book value and around 0.5% on 2023 risk-weighted assets.
“Financials weigh more than 30% in the Italian stock market, making it vulnerable to the newly approved levy,” said Leonardo Pellandini, an equity strategist at Bank Julius Baer. “With this said, banks had a strong year so far given the net interest margins boost from higher rates so it is time for a healthy consolidation.”
The Italian tax plan is a fresh headwind for European stocks which last week endured their first bout of volatility in quite a while, amid speculation over further interest rate hikes and the potential impact on economic growth. Also on Tuesday, data showed Chinese trade plunged more than forecast in another hit to the economic recovery.
In other individual stock moves Tuesday, Glencore Plc fell the most in a month after the commodities trading and mining giant reported a steep drop in profit. Abrdn Plc declined after first-half results showed clients pulled more money from the asset manager’s funds.
--With assistance from Jan-Patrick Barnert and Michael Msika.