Spanish banks: populist hopes to faucet into increased financial institution earnings


Populist measures are possible throughout robust financial occasions. They are much more predictable when an election looms, because it does subsequent 12 months for the federal government of socialist Prime Minister Pedro Sánchez.

Hoping to quell voter dissatisfaction from falling dwelling requirements brought on by inflation his authorities has determined to focus on banks and utilities with a brief tax on “extraordinary profits”. This may increase a complete of €7bn over 2023 and 2024, he advised parliament on Tuesday.

The logic of going after banks — to boost round €1.5bn yearly — assumes that because the European Central Bank will increase rates of interest lenders will earn extra from rate of interest spreads. Any windfall revenue would return to taxpayers. But the argument additionally falsely means that banks have little publicity to financial downturns.

This revenue switch from banks to the state has type. The UK’s authorities has solely lately lowered (from 8 to three per cent) an organization tax surcharge in place since 2010. Hungary, which started elevating charges a 12 months in the past, plans to tax financial institution web revenues generated in 2021 by a tenth. This is the equal of 37 per cent of the sector’s web revenue, in response to S&P Global.

The Spanish tax would possible take considered one of two kinds, thinks Citi’s Borja Segura. The present levy on financial institution deposits could possibly be elevated from 3bp to round 20bp, or Spain might go down Hungary’s route, taxing home revenues equal to about 6 per cent of the full for Spain. Either choice would imply roughly a 15 per cent fall in anticipated sector earnings per share on common for every of the proposed years.

This appears unhealthy for shareholders, even when Spanish taxpayers can declare to have saved banks prior to now. Sabadell and CaixaBank misplaced over 7 per cent on the day, recovering solely modestly Wednesday.

Yet the impact of upper rates of interest on debtors after such an extended interval of ultra-low charges is an unknown. While the sector appears moderately wholesome now, with widespread fairness tier one ratios over 13 per cent, a return of unhealthy mortgage provision to 2020 ranges would devour half of this 12 months’s anticipated pre-provision earnings in Spain.

At least the buffer for losses is even wider within the UK and Germany, the place banks have capital ratios above 16 per cent. Then once more, there is probably not a lot security in numbers this time.