Analysis of how much Italian banks earn with the rise in interest rates Record revenues by the bankers themselves. The government’s tax on extra profits separates policy and experts. Who is right? A little data to get an idea

A measure of “social equality” or a counterproductive populist movement? The tax on the extra earnings of Italian banks, announced by the government at the beginning of the week and approved by the Bag Decree, divided the political parties and created a chorus of criticism. As Deputy Prime Minister Matteo Salvini explained, the tax was created to rebalance the effects of the European Central Bank’s gradual increase in interest rates over the past year: the government is thereby withdrawing some of the profits accumulated by institutions. contributes to this increase and redistributes it to those affected by the “mortgage on first home” high installments. According to preliminary estimates, the tax should be between 2.5 and 3 billion euros. However, several experts disagreed, highlighting the risk that such a tax could undermine the sustainability of smaller institutions or push our own bankers to buy less government bonds and even have a negative impact on end customers. households and businesses, with tighter credit networks and higher commissions. Therefore, the opposite of the spirit from which executive initiative is born.

Revenues are increasing

Whether these criticisms are excessive is a matter of debate for economists. But even non-experts can get an idea. We got some data for this. The first comes from the Dbrs Morningstar rating agency and concerns the 5 main Italian banks (Unicredit, Intesa Sanpaolo, Bpm, Bper and Mps). Since the rate hike began, the revenues of these institutions have risen sharply: between July 2022 and June 2023, they reached €58.9 billion, almost 20% more than in the previous twelve months.

And profits? Remaining in these five banks, the first half of 2023 was outstanding (on a positive note): these institutions collectively recorded a profit of 13.4 billion euros. “We produced the best first half ever,” said Andrea Orcel, CEO of Unicredit. While bpm hails the newly finished period as “the best period ever” (not just the first period). Enthusiastic statements made just days before the government’s decree infuriated the party. But this will not apply to profits, but to another item of the bank’s balance sheet: the interest margin.

interest margin

The choice of this item is important: In a nutshell, the interest margin is the difference between how much a bank collects on mortgages and loans (given by money invested by its customers) and how much this bank pays its customers in exchange for fees. deposits and current accounts. When interest rates rise, not only mortgage payments should rise, but the interest banks pay to account holders. But if the former skyrockets and the latter struggles, banks’ interest margins rise (and profits with them). And that’s what happened in Italy.

According to Dbrs, between 2019 and the first half of 2022 (i.e. before the ECB hikes), the five main Italian banks have accumulated a combined average interest margin of 5 billion per quarter. In the second half of 2023, this margin nearly doubled to $9.3 billion. Considering that 12 months have passed since the interest rates started to increase, the bill comes to 32.3 billion. In 2021, the total margin was $21.8 billion. Therefore, it is clear that the exceptional profits made by the big Italian loan companies can be attributed to this budget item.

For the time being, the main beneficiaries of the excess earnings have been the managers and shareholders of the corporations. The salaries of those working in the industry have been at a standstill for years. And the banking associations asked for a gross increase of 435 euros per month, which, as we said, met resistance from the Italian banks association ABI. Resistances clashing with salaries and dividends from partners on the upper floors. For example, Unicredit distributed 5.2 billion in 2022 alone, which is more than 4.8 billion in taxes paid to its shareholders worldwide (the bank operates in 23 countries). Perhaps as a reward for such results, the Italian giant has decided to raise the salary of its CEO, Orcel, to 9.75 million euros per year, 30% from the previous one. An increase that even ECB chief Christine Lagarde dismissed, emphasizing “the reputational side of which bank leaders should be aware of in such decisions”.

A dog chasing its tail

And speaking of the ECB, there’s another element of thinking to add when talking about extra profit. As it is known, the rate hike was decided by Frankfurt in response to inflation. If the move has not yet produced the desired results, it is also due to excessive accumulation of profits: the ECB itself announced last March that it had continued at this pace and announced its goal of “immediately bringing inflation back to target level”. “It will be more difficult. And that may require a stronger policy response.”

Again, the ECB points out in its August bulletin that “the criteria for lending to households and businesses are tightening, as banks are more fearful of the risks customers are exposed to and less willing to support them.”

give and take

Another point of analysis. The Italian tax on the extra profits of banks is not an isolated case: similar measures have been taken in Spain, the Czech Republic and Lithuania. The Madrid government decree recalled that “enormous public resources have been mobilized in the recent past to save some financial assets”. It happened in Spain, but it happened in Italy too: In 2018, the Italian state paid nearly 18 billion dollars to public funds (and hence taxpayers) to bail out institutions in distress, according to a study by the Catholic University. At least 5 billion will never be recovered.

Finally, taxes: In 2022, the five largest Italian institutions recorded a profit of 10.8 billion excluding taxes from their operations in the home country (ie, excluding profits from abroad). On the other hand, the collection of taxes on earnings for the State was approximately 800 million. A rate of 7.4%.

These are the data. Then everyone has their own opinion.

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Source: Today IT