Windfall Taxes Are the Latest Hit on Europe’s Banks

European banks have started to reap higher profits from rising interest rates—and governments are already starting to clamp down on them.

In Spain, the government has laid out plans to tax lenders on their rising income and use the money to alleviate higher living costs for the population. Hungary has imposed a similar measure, and the Czech Republic, where inflation is above 17%, is also considering such a move. In Poland, where mortgages carry variable rates that are quickly rising, the government placed a moratorium on repayments to help borrowers.

Banks in Europe have long struggled with anemic growth and slim profit margins. Even the continent’s larger lenders have market values that are a fraction of those of U.S. giants such as

JPMorgan Chase & Co.

A big part of the challenge: years of negative central-bank interest rates. Subzero rates cut banks’ margins on loans and made them unattractive for investors, since the lenders struggled to earn returns above their cost of capital.

Rising rates had looked like a light at the end of the tunnel. Banks are usually beneficiaries in such an environment, since they can increase the rates they charge borrowers faster than they lift payouts to depositors.


Commerzbank AG

CRZBY 4.06%

said it could take a revenue hit of as much as 290 million euros, equivalent to $290 million, in the third quarter from its business in Poland. Its second-quarter revenue was €2.4 billion. Spain’s

Banco Santander SA

SAN -0.43%

could potentially lose more than €1 billion in revenue through 2023 from Spain’s and Poland’s moves, according to analysts. Last year, the bank made €8.6 billion in revenue from both countries.

“The first thing that worries me is that the sector is stigmatized,” Santander Chief Executive Officer

José Antonio Álvarez

said after the Spanish plan was unveiled. “Regardless of who is affected by the tax, inflation cannot be fought with taxes.”

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

In other areas too, European governments are acting quickly when judging companies to be earning abnormally large profits. The U.K. has said it would introduce a windfall tax on energy companies, and Spain is imposing a similar levy as well as the new tax on banks. Such regulatory risk for investors helps explain why returns on European stocks have long lagged behind those on their U.S. equivalents. 

Investors should consider lenders as like utility companies, providing relatively low but stable returns in forms of dividends, said

Marco Troiano,

head of financial institutions at ratings firm Scope Ratings.

“Profitability in the sector is pretty much regulated by the government,” following the global financial crisis, Mr. Troiano said, adding that while banks are being punished now, they received state support in the pandemic and other crises.

Skyrocketing inflation is forcing the European Central Bank and other monetary authorities to increase interest rates. In turn, those higher borrowing costs are further squeezing families and companies as they contend with soaring prices. As governments step in with relief measures, they are tapping banks for money and relief for borrowers.

Spanish Prime Minister

Pedro Sanchez

told Parliament in July that given big banks were already starting to benefit from interest-rate rises, they should be taxed. Under the plan, which needs to be approved in Parliament, Madrid expects to get €1.5 billion in each of 2022 and 2023 by imposing a 4.8% charge on banks’ net interest income and net commissions. 

Spain’s lenders, such as

Banco Bilbao Vizcaya Argentaria SA,

BBVA -0.57%

said they are being unfairly punished for conducting normal banking business. 

“What is extraordinary is negative rates, not positive rates,” BBVA CEO Onur Genç said as he presented the bank’s second-quarter results, adding that banks would cut down lending because of the measure. He has estimated a yearly revenue hit of €250 million from the measure.

How have China, Mexico and Greece handled inflation, and where does the U.S. fit in? WSJ’s Dion Rabouin explains.

Mr. Genç said that while banks would normally post returns on equity in the double-digit percentage range, as often is the case in the U.S., the 10-year average for Spanish lenders was minus 1.1%. Last year it was 6%. Return on equity is a key measure of profitability for banks, and such low levels indicate that banks aren’t creating value for shareholders. 

In Germany, Commerzbank said it would consider legal action against the Polish measure, which allows mortgage holders to suspend payments for eight months through the end of 2023. Other banks with a presence in Poland affected by the moratorium include Dutch lender

ING Groep

NV and France’s

BNP Paribas SA

Chris Garsten,

a European equities fund manager at U.K.-based Waverton Investment Management, is staying away from European bank stocks. To gain from rising interest rates, he has invested in

Deutsche Börse AG

, the German stock-exchange operator. Deutsche Börse has a custody business that holds clients’ cash and earns interest on the deposits.

“There is a nice net-interest income uplift if interest rates go up without the credit risk” that banks face if loans go sour, Mr. Garsten said. And “when interest rates turn positive they keep the interest.”

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


Krisztian Bocsi/Bloomberg News

Write to Patricia Kowsmann at

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Leave a Reply

Your email address will not be published.

%d bloggers like this: