Record profits expected for Croatian banks in 2023, but we are far from additional taxation

Shares of the Italian banking sector took a hit after the Italian government approved a tax on ‘excess’ profits of banks this year.

The BPER Banca group recorded a drop in shares of more than nine percent, while Intesa Sanpaolo and Finecobank fell by more than eight percent. The effects are visible beyond Italy. Germany’s Commerzbank fell by about 3.2 percent while Deutsche Bank dropped by two percent.

Italy’s Deputy Prime Minister Giorgia Meloni, Matteo Salvini, stated at a press conference that the 40 percent tax on banks’ extra profits will be used to provide financial support to citizens taking out mortgage loans to purchase their first property.

– One only needs to look at the profits of banks in the first half of 2023 to understand that we are not talking about a few million, but billions – said Salvini, as reported by Reuters.

According to estimates by analysts at Citi Equity Research, the one-time tax will amount to about 19 percent of banks’ net profits this year, and similar taxes have already been introduced by other European countries, including Spain and Hungary.

The tax will apply to the ‘surplus’ net interest income in 2022 and 2023 resulting from higher interest rates, and will affect all whose net interest income exceeds three percent year-on-year growth in 2022 compared to levels in 2021, as well as those whose annual growth in 2023 is greater than six percent compared to the previous year.

Italian financial sector vulnerable to new tax

The tax on extra profits, or the Law on Additional Profit Tax, was introduced at the end of last year in Croatia as well, and as we have already reported in Lider, the government reported in May this year that the tax collected ‘just over 230 million euros’.

The additional profit tax had to be paid by companies that generated revenues greater than 300 million kuna last year, at a rate of 33 percent, but only on profits exceeding 20 percent compared to the four-year average.

The government has committed to using the collected tax funds exclusively to assist the most vulnerable groups of citizens, such as pensioners, recipients of child allowances, or minimum guaranteed benefits.

Following the news of the tax on banks’ extra profits in Italy, the question ariseswhether Croatia will further burden banks considering that additional taxes have also been imposed on banks in Spain and Hungary, but according to economic analyst Petar Vušković, ‘we are far from introducing additional taxes on banks’ extra profits’.

– For banks, this would certainly be a serious financial blow and the question arises as to how they would ultimately pass such costs onto citizens (through increased fees, account maintenance, perhaps even raising interest rates), so this would certainly mean certain anomalies in the financial market – explains Vušković.

Interestingly, the financial sector holds more than 30 percent of the Italian stock market, making it vulnerable to the newly approved tax, which is expected to bring more than two billion euros to the state treasury.

What is certainly important to note is that two Croatian banks are also Italian-owned, and the Unicredit group (which owns Zagrebačka banka) reported this year record results in the first quarter and growth of more than 80 percent compared to the previous year. The owner of Privredna banka Zagreb, Intesa Sanpaolo, also boasted of the best business results in history and profits of 4.2 billion euros.

Large profits expected for banks

This move by Italy was also commented on by independent economic analyst Ivica Brkljača.

– If the move by the Italian government is followed by other governments in the European Union, then the Croatian government would likely decide on a similar move. Otherwise, if the Italians remain alone, I do not see it as a likely possibility that the Croatian government would decide on a similar proposal – says Brkljača, who believes that banks in Croatia will further profit this year due to entering the euro area.

– Namely, with the entry into the euro area, banks have had their reserve requirement rate lowered, thus freeing billions of euros in additional liquidity. The HNB, now as part of the Eurosystem, must pay banks interest on that excess liquidity or on overnight deposited funds at the HNB (the interest rate on the cash deposit of commercial banks at the central bank currently stands at 3.75 percent). Thus, in the first half of this year, a total of about 190 million euros in interest was paid to banks based on those overnight deposits, and in the second half of the year, that amount will be significantly higher as the prescribed interest rate on the cash deposit of commercial banks has increased several times since the beginning of the year – says Brkljača.

As he stated, the profits of commercial banks in Croatia this year could be higher by about 450 million euros solely based on entering the euro area.

– In layman’s terms, banks have profited ‘without plowing or sowing’. Whether this will ‘tickle’ the Croatian government to further tax banks remains to be seen – concludes Brkljača.