Earnings Hit From Italian Windfall Tax on Banks Manageable; Negative Impact on Sentiment Far Greater

The most damaging impact of the surprise windfall tax announcement by the Italian government will not be the hit to the earnings of Italian banks, but the higher risk premium that investors will demand to compensate them for the risk of future government intervention. The haphazard manner of the announcement, where the government changed the terms of the tax at least three times in one day, will do little to restore investor confidence. Many investors already view European banks as seminationalised institutions, and we believe this goes a long way to explain the continued steep discount that European banks trade at relative to the broader market. Following a similar windfall tax in Spain and a ban on dividend payments during the coronavirus pandemic, investors will be even more concerned about the risk of arbitrary intervention from governments and regulators. We do not expect other major European governments to follow Italy and Spain, especially after seeing the fallout from the Italian debacle. We estimate that the hit to FactSet 2023 consensus earnings estimates will be 10% for Intesa Sanpaolo and 6% for UniCredit. BNP Paribas and Credit Agricole are the other European banks we cover with the most significant exposure to Italy. We calculate that the impact on group earnings for both would be below 2%. We do not plan to change our fair value estimates for BNP Paribas (EUR 76/share) and Credit Agricole (EUR 14.50/share). We have not resumed coverage of Intesa Sanpaolo and UniCredit yet.