Eurozone banking stocks suffer strong losses as Italy approves 40% windfall tax

Eurozone banking stocks suffered strong losses on Tuesday, with STOXX Europe 600 Banks Index falling about 2 per cent, after Italy approved a proposal to levy a 40 per cent windfall tax, which will apply only in 2023, on banks.

A windfall tax is an additional and special tax that is levied when an entity unexpectedly makes a lot of money. This tax is intended to capture some of the extra money that the companies or individuals earn and use it for public needs or government projects.

As per media reports, Italy's cabinet approved a 40 per cent tax on banks' extra profit which banks earn from higher interest rates. The Italian government plans to use the proceeds to aid mortgage payments and tax cuts.

"Only for 2023, Italy will tax 40 per cent of banks' net interest margin, a measure of income banks derive from the gap between lending and deposit rates. Rome expects to collect less than 3 billion euros ($3.29 billion) from the measure," a Reuters report said.

"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 over countries could follow Italy's example," Reuters quoted Stuart Cole, the chief macro economist at London-based Equiti Capital, saying so.

This move of the Italian government has come after several Italian banks reported strong quarterly results in the recent past. As per a Wall Street Journal report, two major banks, Intesa and UniCredit, raised their expectations for 2023 after second-quarter earnings beat forecasts.

Citi analysts, as per the Wall Street Journal report, found this decision surprising and substantially negative for Italian banks. "The tax could hit Italian banks’ earnings by around 19 per cent and reduce their book value by around 3 per cent," Wall Street Journal quoted Citi analysts saying so.