Italian Banks to Support 2025 Budget
New government measure aims to raise up to EUR 4 billion for healthcare and social services, with a manageable impact on the financial sector
The Italian government announced a new measure requiring Italian banks and insurance companies to contribute significantly to the 2025 budget law. This decision follows a similar measure introduced in August 2023, when the government imposed a one-off tax on banks' extraordinary profits. A commentary by DBRS sees a limited impact on financial sector
Key Details of the Measure
The latest initiative, which still requires parliamentary approval, is designed to raise between EUR 3.5 billion and EUR 4.0 billion. Two-thirds of this amount will come from the banking sector, achieved mainly by freezing the deductibility of deferred tax assets (DTAs) for 2025 and 2026, as well as expenses related to management stock options. The insurance sector's contribution will come through a tax on specific life insurance products, particularly those in Class III and Class V (unit- or index-linked products), though traditional life insurance products (Class I) will be exempted.
This new fiscal strategy is designed to fund improvements in healthcare services and aid for vulnerable groups within Italy. Notably, the government took a more collaborative approach this time by engaging with stakeholders, such as the Italian Banking Association (ABI), to avoid adverse market reactions and protect smaller institutions.
Impact on Banks and Insurers
Though the measure represents approximately 5% to 6% of the total net income of banks and insurers in 2022 and 2023, the credit impact is expected to be minimal. Italian banks have reported strong profitability, with H1 2024 results indicating that the full year will likely remain a record one due to delayed interest rate cuts and only minor signs of deterioration in asset quality.
For insurance companies, premiums in the life sector are expected to grow in 2024, with steady demand in the non-life sector as well. However, the exact effect of the tax on unit- and index-linked products remains uncertain.
Outlook
Despite these new fiscal obligations, the overall profitability of banks and insurers, combined with their robust capitalization, suggests that the impact will be manageable. However, when combined with upcoming regulatory pressures such as implementing the Basel III rules, the measure could force some banks to adjust their dividend payouts to maintain adequate capital buffers. Nevertheless, lending activity, which has been sluggish due to high interest rates and weak economic growth, is not expected to be significantly affected by the measure.
While Italian banks and insurers are being asked to support the 2025 budget, the effect on their financial stability remains broadly manageable. The government's decision to collaborate with stakeholders and the temporary nature of the measure have mitigated the potential risks, ensuring that both sectors can continue to function effectively while fulfilling their obligations to public finances.
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Relevant Links:
https://dbrs.morningstar.com/research/441283/italian-banks-and-insurers-called-to-contribute-to-governments-budget-plan-broadly-manageable-impact
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