Bank Stocks Drop as Moody’s Downgrades U.S. Lenders and Italy Imposes Windfall Tax
August 8, 2023
U.S. and European bank stocks experienced a significant drop on Tuesday, instilling concerns among investors about the overall health of the industry. This comes after ratings agency Moody’s downgraded several U.S. lenders and Italy approved an unexpected 40% windfall tax on its own lenders.
Moody’s decision to cut credit ratings for several U.S. regional lenders and place some banking giants on review for potential downgrade has raised worries about the profitability of U.S. banks. The agency warned that rising interest rates and funding costs, coupled with an impending recession, will make it harder for banks to generate profits. Moody’s also expressed concerns about some lenders’ exposure to commercial real estate.
While Moody’s managing director of financial institutions, Ana Arsov, clarified that they are acknowledging some headwinds and not claiming that the banking system is broken, the failures of three U.S. lenders earlier this year have left investors cautious.
As a result, the KBW Regional Banking Index experienced a 2.6% drop on Tuesday, and the shares of banks that were downgraded by Moody’s, including M&T Bank, Pinnacle Financial Partners, and BOK Financial Corp, saw declines between 2.6% and 3.7%.
Notably, major lenders that were not mentioned by Moody’s also faced the consequences, with the broader S&P 500 Banks Index sliding nearly 3%. Wells Fargo bank analyst Mike Mayo explained that investors have already adjusted their expectations for future bank earnings, taking into account some of the factors that Moody’s mentioned, such as higher rates and the potential for a recession.
While some analysts like Christopher Marinac, director of research at Janney Montgomery Scott, remain optimistic about U.S. banks and argue that their capital ratios and tangible book values have improved despite weak revenues, the industry is not completely out of the woods.
In Italy, major banks such as Intesa Sanpaolo, Banco BPM, and UniCredit experienced significant declines between 5.9% and 9% after the government announced a one-off 40% tax on profits resulting from higher interest rates. This unexpected tax has raised concerns among investors and contributed to a 3.54% slide in the European bank index.
According to calculations by Citigroup analysts, the tax could potentially reduce Italian banks’ net income by nearly a fifth by 2023. On the other hand, Bank of America estimates suggest that the tax could generate up to 3 billion euros ($3.3 billion) for the Italian government.
Overall, the recent developments have created uncertainty and caused turbulence in the banking sector. It remains to be seen how banks will navigate the challenges posed by Moody’s downgrades, rising interest rates, and Italy’s windfall tax.
Reporting by Niket Nishant, Bansari Mayur Kamdar, and Shashwat Chauhan in Bengaluru, Lananh Nguyen, Chibuike Oguh, Tatiana Bautzer, and Davide Barbuscia in New York; Editing by Shounak Dasgupta, Saumyadeb Chakrabarty, and Andrea Ricci