Windfall taxes are the latest blow to European banks

European banks have started reaping higher profits from rising interest rates, and governments are already starting to crack them down.

In Spain, the government has drawn up plans to tax lenders on their growing incomes and use the money to alleviate the higher cost of living for the population. Hungary has imposed a similar measure, and the Czech Republic, where inflation is above 17%, is also considering such a measure. In Poland, where mortgages come with rapidly rising variable rates, the government has imposed a moratorium on repayments to help borrowers.

Banks in Europe have long struggled with anemic growth and thin profit margins. Even the biggest lenders on the continent have market values ​​that are only a fraction of those of American giants such as JPMorgan Chase & Co..

A big part of the challenge: years of negative central bank interest rates. Sub-zero rates have squeezed banks’ margins on loans and made them unattractive to investors as lenders have struggled to earn returns above their cost of capital.

The rate hike had seemed like a light at the end of the tunnel. Banks are usually the beneficiaries of such an environment, as they can increase the rates they charge borrowers faster than they increase payments to depositors.

The German Commerzbank HER

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said it could suffer revenue of up to 290 million euros, or $290 million, in the third quarter of its operations in Poland. Its turnover for the second quarter amounted to 2.4 billion euros. Banco Santander in Spain HER

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could potentially lose more than a billion euros in revenue through 2023 due to moves from Spain and Poland, analysts say. Last year, the bank made 8.6 billion euros in revenue in the two countries.

“The first thing that worries me is that the sector is stigmatised,” Santander chief executive José Antonio Álvarez said after the Spanish plan was unveiled. “No matter who is affected by the tax, inflation cannot be fought with taxes.”

Shares of banks in Spain and Poland fell after the plans were unveiled. The Stoxx Europe 600 Banks Index is down 13% this year through August 31, roughly in line with the broader market.

In other areas too, European governments act quickly when they judge that companies are making abnormally large profits. The UK has said it will introduce a one-off tax on energy companies, and Spain is imposing a similar levy as well as a new tax on banks. This regulatory risk for investors helps explain why European equity returns have long lagged those of their US counterparts.

Investors should view lenders as utility companies, offering relatively low but stable returns in the form of dividends, said Marco Troiano, head of financial institutions at ratings firm Scope Ratings.

“The profitability of the sector is largely regulated by the government,” following the global financial crisis, Troiano said, adding that while banks are now being punished, they received state support during the pandemic and other crises.

Soaring inflation is forcing the European Central Bank and other monetary authorities to raise interest rates. In turn, these higher borrowing costs put a greater strain on families and businesses coping with soaring prices. As governments step in with relief measures, they are appealing to banks for cash and relief for borrowers.

Spanish Prime Minister Pedro Sanchez told parliament in July that since big banks were already starting to benefit from rising interest rates, they should be taxed. Under the plan, which needs to be approved by parliament, Madrid plans to raise 1.5 billion euros in 2022 and 2023 by imposing a 4.8% charge on net interest income and fees net of banks.

Spanish lenders, such as Banco Bilbao Vizcaya Argentaria HER,

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said they were being unfairly punished for carrying out normal banking activities.

“What’s extraordinary is the negative rates, not the positive rates,” BBVA CEO Onur Genç said as he presented the bank’s second-quarter results, adding that banks would cut lending because of this. measure. He estimated an annual turnover of 250 million euros thanks to this measure.

How have China, Mexico and Greece managed inflation, and where does the United States stand? The WSJ’s Dion Rabouin explains.

Mr Genç said that while banks normally post double-digit percentage returns on equity, as is often the case in the United States, the 10-year average for Spanish lenders was less than 1.1%. Last year it was 6%. Return on equity is a key measure of bank profitability, and such low levels indicate that banks are not creating shareholder value.

In Germany, Commerzbank said it would consider legal action against the Polish measure, which allows mortgage holders to suspend payments for eight months until the end of 2023. Among other banks present in Poland affected by the moratorium include the Dutch lender ING Groep NV and the French BNP Paribas HER


Chris Garsten, European equity fund manager at UK-based Waverton Investment Management, stays away from European banking stocks. To take advantage of rising interest rates, he invested in Deutsche Börse HER

, the German stock market operator. Deutsche Börse has a custodial business that holds customer cash and earns interest on deposits.

“There’s a nice increase in net interest income if interest rates rise without the credit risk” that banks face if loans go bad, Garsten said. And “when interest rates go positive, they keep interest.”

Commerzbank said it would consider legal action against the Polish measure.


Krisztian Bocsi/Bloomberg News

Write to Patricia Kowsmann at [email protected]

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