By Lucy Raitano and Danilo Masoni
LONDON (Reuters) -European bank shares tumbled on Tuesday after Italy approved a 40% windfall tax on banks for 2023 in a surprise move that risked curbing investor appetite for euro zone assets.
The one-off levy on profits Italian banks reap from higher interest rates sent shivers across the sector that has recorded surging profits as global interest rates have risen.
A gauge of euro zone banks fell 4.5% by 1138 GMT, and was set for its biggest daily drop since the turmoil in the banking sector in March, when Credit Suisse (SIX:CSGN) collapsed.
Italian banks led losses. Its two biggest lenders, Intesa Sanpaolo (BIT:ISP) and UniCredit (LON:0RLS), fell 8.2% and 7.2% respectively. BPER Banca was down 10.5% and FinecoBank dropped 8.8%.
"These government interventions in Europe do not help provide the necessary stability to lower the risk premium attached to the eurozone. This is not just an Italian thing, Spain had done the same last year," said Gilles Guibout, head of equities strategies at Axa Investment Managers in Paris.
Analysts at Bank of America (NYSE:BAC) estimated the new tax could cost Italian banks between 2% and 9% of their earnings.
The fallout touched other banks in the currency bloc, including Deutsche Bank (ETR:DBKGn) and Commerzbank (ETR:CBKG) in Germany, France's BNP Paribas (EPA:BNPP) and Credit Agricole (EPA:CAGR), along with Spanish lenders like Santander (BME:SAN). Their shares all fell more than 4%.
Meanwhile, European banks fell 3.5% and the region-wide STOXX 600 index was down 0.6%.
The euro fell 0.5% on the day, while the derivatives market showed an indicator of credit risk in the euro area banking system rose by the most in one day since mid-July.
The so-called FRA-OIS spread, which measures the gap between the euro zone three-month forward rate agreement and the overnight index swap rate, rose 19 basis points to -8.3% - the largest one-day rise since July 18.
Only for 2023, Italy will tax 40% of banks' net interest margin, a measure of income banks derive from the gap between lending and deposit rates. The government expects to collect less than 3 billion euros from the measure, sources close to the matter told Reuters.
Proceeds will be used to help mortgage holders and cut taxes, the deputy prime minister 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," said Stuart Cole, chief macro economist at Equiti Capital.
Italy is not the only country to impose windfall taxes or bank-specific duties in Europe. In December 2022, Spain approved a temporary bank levy to raise 3 billion euros by 2024, aimed at measures to ease cost of living pressures. The decision is being challenged but inconclusive elections in July are adding uncertainty.
The cost of insuring against the risk of default for Italian banks rose on Tuesday. Five-year credit default swaps for Intesa (LON:0HBC) and UniCredit both rose to their highest since July 11, according to S&P Global Market Intelligence.
News that ratings agency Moody's on Monday downgraded the credit ratings of 10 U.S. banks by one notch was also seen as negative for the sector.
"It is the windfall tax without a shadow of a doubt, the U.S. news just adds salt in the mix and obviously does not help sentiment," said Stephane Ekolo, an equity strategist at Tradition.
($1 = 0.9140 euros)