Open letter to Prime Minister Giorgia Meloni

Strong economies need profitable banks because strong, profitable banks can borrow money from financial markets cheaply and more easily and can then lend this money to Italian people and businesses.

And when these people and businesses spend this money, the multiplier effect begins to work which creates jobs and drives economic growth.

Now if you “punish” those banks as a “Government Source” told Reuters, by charging them a “windfall tax” on net interest income, then I’m afraid markets will “punish” Italian banks like they did the other day by selling their shares.

They do this because of the increased uncertainty of owning Italian businesses – it’s a 40% “windfall tax” today but what new tax could there be tomorrow? And the more unexpected taxes these banks face, the less their financial ability to cover any bad debts and that means these banks become more risk averse.

This means they slow their lending to businesses and consumers, leading to slower economic and corporate earnings growth. The problem is that investors like us want growth, so we’d rather invest in banks and companies that are growing and operate in countries where we know the rules aren’t going to change overnight.

All this unfortunately raises the cost of capital for Italian banks.

What you really want, is competition because that drives down any “windfall gains” you think these companies are earning. Competitors also need staff, offices, and regulation, and that means more jobs, office rentals, and regulatory fees. All in addition to more options for consumers.

BUT

If you change the rules overnight, other banks won’t establish new offices in Italy, and even worse, some branches of foreign ones may even shut up shop meaning fewer jobs, office rentals, lower regulatory fees and fewer options for consumers. Everyone loses.

I should also highlight that these “windfall taxes” aren't “windfall”.

As 64% shareholder in Banca Monte Dei Paschi Siena, the Italian Ministry of Economy and Finance should know that the bank’s Return on Common Equity (ROE) over the trailing 12 months is a paltry 5.4% ranking it 172 out of 179 global banks according to Bloomberg data. Their 3yr average is MINUS 7.25%

I also calculate that the ROE of the Italian banking sector over the past year is only 12.3% when weighted by assets, in line with the country averages in Canada (12.5%), the UK (12%), and the USA (12.4%) but below Sweden’s 15.4%

However, in fast-growing economies like India and Mexico, the weighted average ROEs are 17.3% and 17.5% respectively. Unsurprisingly the largest banks in these regions grew assets by 11% & 12% last year, whereas the two largest Italian banks reduced their asset bases by 9% - no surprise when you know that their average 3-year ROE is only 5%...

Italy is a global leader in luxury with iconic brands such as Gucci & Prada and to my knowledge there has never been a “windfall tax” applied to the high returns generated by these businesses. They’ve never been “punished”. And that has allowed them to flourish and encouraged the emergence of newer brands like Moncler and Ferrari which have 3-year average ROEs of 26% and 44% respectively.

So please can you and other European leaders resist the urge to respond to populist policies and stop implementing these ill-considered “windfall taxes” across Europe? It is raising your banks' cost of capital and damaging your countries' growth prospects.

Rather let competition do the work for you.

It is perhaps also worth remembering that the Conservative Party in the UK allowed themselves to be influenced by ill-considered populist policies, and the result was the disaster that is Brexit!

Yours

Sean Peche