The new tax knocks down Italian banks and leaves the sector groggy in Europe

Moody's lowers the rating of ten small US banks and puts another six larger ones on negative review.

The new tax knocks down Italian banks and leaves the sector groggy in Europe

Moody's lowers the rating of ten small US banks and puts another six larger ones on negative review


The surprise announcement by the Government of Italy that it will introduce a "social equity" measure that will tax extraordinary bank profits at 40% in 2023 has dealt a severe blow to the sector, which has succumbed in the Stock Market session of Milan with losses in some cases of more than 10% and which has also shaken the price of other entities on the Old Continent.

In addition to the announcement by the Executive led by Giorgia Meloni, the listing of banks received other bad news on the other side of the Atlantic in the form of a rating downgrade by Moody's of the solvency of a dozen small US entities, as well as the worsening of the perspective of the rating of another eleven small and medium-sized banks and the placement on negative watch of the ratings of half a dozen more entities.

In this way, at the close of Tuesday's session on the Milan Stock Exchange, the shares of entities such as Bper lost 10.94%, while those of Banca Monte Paschi di Siena (BMPS), the oldest entity in the world , they left 10.83%, and those of Banco BPM lost 9.09%.

Likewise, the rest of the listed Italian banks did not escape the correction and closed with significant falls, which in the case of Intesa Sanpaolo reached 8.67% and in that of Mediolanum 5.96%, while UniCredit lost 5.94 % and Mediobanca saved the session with a cut of 2.48%.

Apart from the Italian banks, in the rest of Europe the contagion of investor nervousness was visible in the price of the Stoxx Banks subindex, which brings together the main banking entities in the euro zone, which closed the session at 108.81 points, falling 3.66% compared to Monday.

Specifically, euro area entities such as Deutsche Bank (-3.84%) and Commerzbank (-3.34%) also reflected the impact of the announcement in Italy, while among French banks BNP Paribas lost 3.01% and Crédit Agricole 2.46%, while Société Générale fell 1.70%.

On their side, the Dutch banks ING and ABN Amro managed to weather the session with falls of 2.09% and 1.57%, respectively.

In the case of Spanish banks, there have also been general declines, led by Banco Santander (-2.71%), ahead of Unicaja Banco (-2.45%), Banco Sabadell (-2.16%), BBVA (-1.92%), Bankinter (-1.87%) and CaixaBank (-1.48%).

The Council of Ministers of Italy announced late on Monday the introduction of a tax in 2023 that will tax 40% of the extraordinary profits recorded by the country's banks, the proceeds of which will be used to help those with mortgages and to reduce the tax burden of the citizens.

"The Council of Ministers approved a social equity rule that is a tax on extra bank profits in 2023," the Vice President of the Italian Government and Minister of Transport and Infrastructure, Matteo Salvini, announced at a press conference.

In this sense, the minister indicated that all the income from the new tax will go to aid for the first home mortgages and tax cuts.

In his presentation, Salvini defended the introduction of the extraordinary tax on banks because the rise in interest rates as a result of the tightening of the monetary policy of the European Central Bank (ECB) has led to an increase in the cost of money for families and companies, "But there hasn't been as fast, as diligent and as significant a rise in consumers holding checking account deposits."

Without wanting to assess the potential collection of the tax, the Italian minister indicated that "it is enough to look at the first half of 2023 of the banks" to understand that we are not talking about a handful of millions, but a few billion.

Subsequently, in a message posted on his account on the X social network, formerly known as Twitter, Salvini assured that the new tax intends to "use part of the million-dollar profits from the banks to help families and companies affected by the rise in rates ".

On the other hand, the credit rating agency Moody's has lowered the long-term solvency note of a dozen small and medium-sized banks in the United States, while it has placed it under review with a view to a possible rating cut for others six largest banks and has revised the outlook on the ratings of eleven more entities.

In its analysis, Moody's warns that US banks continue to grapple with risks related to interest rates and asset liability management with implications for liquidity and capital, as the end of unconventional monetary policy drains funds. system-wide deposits and higher rates reduce the value of fixed-rate assets.

"The second-quarter results of many banks showed increasing profitability pressures that will reduce their ability to generate internal capital," says the risk rating agency, noting that this circumstance occurs when a mild recession is looming in the US for the beginning of 2024 and asset quality looks set to worsen from strong but unsustainable levels, with particular risks in some banks' commercial real estate (CRE) portfolios.

In this way, Moody's considers that the increase in financing costs and the decrease in income metrics will erode the profitability of entities, the first buffer against losses, something that could already be seen in the accounts published for the second quarter, while that, despite the fact that the flight of deposits caused by quantitative tightening (QT) has moderated, there is still a significant risk that deposits will resume their decline in the coming quarters.

Furthermore, the results show that banks have reduced loan growth to preserve capital, but this will slow the shift of balance sheets towards higher-yielding assets, even as funding costs rise and banks face investment of the yield curve, notes the agency.

On the other hand, Moody's cautions that most regional US banks have comparatively low regulatory capital compared to larger US banks and their global peers, which, in the current high-rate environment, leaves some banks vulnerable to a loss of investor confidence.

In this way, Moody's has downgraded the long-term solvency rating of a dozen small entities, including the ratings of M

Likewise, the risk rating agency has placed the notes of six other entities such as Bank of New York Mellon, U.S. Bancorp, State Street, Truist Financial, Cullen/Frost Bankers, and Northern Trust.

For its part, the agency has downgraded the rating outlook of eleven other banks to negative, including some as prominent as Capital One, Citizens Financial, PNC Financial Services Group, Ally Financial or Fifth Third Bancorp.