Spanish banks: populist hopes to tap into higher bank profits

Populist measures are probable during tough economic times. They are even more predictable when an election looms, as it does next year for the government of socialist Prime Minister Pedro Sánchez.

Hoping to quell voter dissatisfaction from falling living standards caused by inflation his government has decided to target banks and utilities with a temporary tax on “extraordinary profits”. This could raise a total of €7bn over 2023 and 2024, he told parliament on Tuesday.

The logic of going after banks — to raise around €1.5bn annually — assumes that as the European Central Bank increases interest rates lenders will earn more from interest rate spreads. Any windfall profit would return to taxpayers. But the argument also falsely suggests that banks have little exposure to economic downturns.

This income transfer from banks to the state has form. The UK’s government has only recently reduced (from 8 to 3 per cent) a corporation tax surcharge in place since 2010. Hungary, which began raising rates a year ago, plans to tax bank net revenues generated in 2021 by a tenth. This is the equivalent of 37 per cent of the sector’s net profit, according to S&P Global.

The Spanish tax would likely take one of two forms, thinks Citi’s Borja Segura. The current levy on bank deposits could be increased from 3bp to around 20bp, or Spain may go down Hungary’s route, taxing domestic revenues equivalent to about 6 per cent of the total for Spain. Either option would mean roughly a 15 per cent fall in expected sector earnings per share on average for each of the proposed years.

This looks bad for shareholders, even if Spanish taxpayers can claim to have saved banks in the past. Sabadell and CaixaBank lost over 7 per cent on the day, recovering only modestly Wednesday.

Yet the effect of higher interest rates on borrowers after such a long period of ultra-low rates is an unknown. While the sector looks reasonably healthy now, with common equity tier one ratios over 13 per cent, a return of bad loan provision to 2020 levels would consume half of this year’s expected pre-provision profits in Spain.

At least the buffer for losses is even wider in the UK and Germany, where banks have capital ratios above 16 per cent. Then again, there may not be much safety in numbers this time.