The UK and Europe have taken the lead imposing excess profits or ‘windfall’ taxes on their energy and utility sectors and recently on the banks. The US has not, maybe learning from its miss-steps at using this tax tool last century. But investors do not like new taxes and this was evident last week as markets dived after the news from Italy that a new windfall tax on banks will be imposed, writes eToro analyst for Romania, Bogdan Maioreanu.
Italy dealt a surprise blow to its banks and sent shockwaves across the sector in Europe by setting a one-off 40% tax on profits reaped from higher interest rates, after reprimanding lenders for failing to reward deposits. The measures scared the investors and as a result Italian banks’ shares prices, such those of Intesa Sanpaolo, Banco BPM, Monte Paschi di Siena and UniCredit, fell between 5% and 10% after the announcement, with the fallout also influencing other stock exchanges from Europe. The stocks recovered some of the losses after Italy announced a watered down version of its new windfall tax on banks and set a cap on payouts. Analysts at Jefferies estimated that the cap would limit collective payouts from some of Italy’s largest listed banks, which account for about 50% of Italian deposits, to about €2.5bn, compared with earlier estimates of up to €4.9bn.
Encouraged by the huge amounts the Meloni tax may reap, Positive Money, a UK campaign group, said – according of The Guardian, – that replicating Meloni’s windfall tax could result in £3.4bn being raised for the taxpayers from the big four banks – Lloyds, NatWest, Barclays and HSBC’s UK operations – based on profits earned in the first half of 2023 alone. The sum could be greater if the UK would follow the Czech government’s footsteps by introducing a 60% tax on bank profits exceeding 120% of their average between 2018 and 2021 – and could raise nearly £11bn, the group estimated.
Windfall taxes on banks are not new, as similar decisions have been taken by the Czech Republic, Lithuania and Spain in recent months. Romania introduced windfall tax only for electricity, coal, oil and natural gas producers and distributor companies.
While they bring an immediate revenue into state coffers, the windfall taxes are negatively impacting the companies’ valuations by creating economic uncertainty and reducing profitability. Both elements reduce worth and have contributed to the widening valuațion discount of UK and European assets vs the US, with the Energy and Financial sectors in Europe now 41% cheaper than their US counterparts considering the P/E ratio. Windfall taxes were pioneered in the US, but their lack of success in the past has combined with political costs and gridlock to prevent their further use there. Governments are looking forward to the future revenues these taxes bring but the actual amounts raised are often disappointing as the biggest and most global companies find ways to fight or mitigate the tax, often at the expense of smaller companies, and may also curb local investments.
