Italy backtracks on banking windfall tax
Italy’s government have partly backtracked on their plans for a banking windfall tax, after shares in the country’s lenders tumbled yesterday.
As we covered on Tuesday, Italy’s cabinet surprisingly decided to impose a 40% windfall tax on its banks, aiming to cream off some of the billions of euros in extra profits they have received from rising interest rates.
But overnight, Italy’s finance ministry has announced the levy could not exceed 0.1% of each bank’s total assets “in order to safeguard lenders’ financial stability”.
That is a rather lower level than analysts had expected, as Rome limits the plan as it tries to ensure financial stability.
Jim Reid, strategist at Deutsche Bank explains:
In an update published overnight, our European bank analysts estimate that such a cap would reduce the overall size of the tax by over 40%, though it would still take more than 10% from 2023 profits.
One banking source in Milan has told the Financial Times that the limit would make the levy “much more manageable” and would raise an estimated €1.8bn, in contrast with estimates of more than €4.5bn issued by analysts at Jefferies and Equita earlier on Tuesday.
Key events
Europe’s Stoxx 600 shares indes has risen to its highest level in a week, lifted by Italian banks after Rome said it would cap its new windfall tax.
Shares have risen in London in morning trading, with the FTSE 100 index gaining 56 points or 0.75% to 7583 points.
Victoria Scholar, head of investment at interactive investor, has the details:
“European markets are trading higher with the FTSE MIB in Italy outperforming. Italian banks are clawing back some of yesterday’s declines after the government watered down its windfall tax plans. Unicredit, Intesa Sanpaolo and BPER Banca are all trading higher by over 2%.
In the UK, Coca-Cola HBC is near the top of the FTSE 100 after raising its revenue guidance while Flutter is towards the bottom after its half-year results. The owner of Paddy Power and Betfair is planning to list in the US possibly later this year or early next year.
A leading think tank, the National Institute of Economic and Social Research has warned there is a 60% chance of a UK recession at the end of 2024. It pointed to Brexit, the pandemic, and the war in Ukraine as factors contributing to five years of ‘lost’ economic growth with ‘elevated housing, energy and food costs’ taking their toll. Second quarter UK GDP figures are due on Friday at 7am.
UK mortgage rates have dipped a little this morning, but remain sharply above their levels a few months ago.
Data provider Moneyfacts says:
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The average 2-year fixed residential mortgage rate today is 6.83%. This is down from an average rate of 6.84% on the previous working day.
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The average 5-year fixed residential mortgage rate today is 6.34%. This is down from an average rate of 6.35% on the previous working day.
British housebuilder Bellway said it would build fewer homes in the current fiscal year, as rising interest rates cool demand.
In its latest financial results, Bellway says the recent increase in mortgage rates through June and July 2023 has resulted in a weaker trading environment, adding:
In the current financial year, given the level of the order book and prevailing low reservation rates, legal completions are expected to decrease materially.
Bellway also reported that revenues dipped to £3.4bn in the year to the end of June, down from £3.5bn a year earlier. Its profit margin narrowed, due to rising build costs and overhead inflation.
Bellway reports that customer demand during the year was affected by the volatility in mortgage interest rates.
Bellway private reservations collapsed by 36%, in year to July, down from 170 in ‘22 to 109 per week. Forward order book of £1,193m – almost half the £2,124m in 22. But ‘headline pricing’ (before incentives) remains ‘robust.’ pic.twitter.com/ymLbNZJ9NR
— Peter Bill (@peterproperty) August 9, 2023
Jason Honeyman, Bellway’s chief executive, told shareholders:
The backdrop of macroeconomic uncertainty and cost of living pressures affected consumer demand during the year and, given affordability remains constrained by higher mortgage interest rates, underlying trading conditions are likely to remain challenging in the near term.
Faced with this slowdown, Bellway is also reducing headcount across the company.
WeWork warns of ‘substantial doubt’ about future as membership falls
Shares in office space-sharing company WeWork have tumbled by almost a quarter in overnight trading after it warned there are “substantial” doubts about its ability to keep running.
WeWork, once one of the rising stars of the pandemic, said that its ability to continue as a going concern depended on renegotiating down its rent and tenancy costs, and boosting revenue through new sales and lowering the number of customers leaving. It also needs to limit its expenses, and raise new capital.
WeWork’s shares fell 23.7% in after-hours trading in New York.
The company was once valued at $47bn by tech investor Softbank, before its first attempt to float on the stock market failed, in 2019.
It later went public in 2021, having burned through considerable amounts of cash as it signed new leases and rolled out its office space subleasing offering in more cities.
David Tolley, interim chief executive officer, blamed a “difficult operating environment” for WeWork’s woes, explaining:
“Excess supply in commercial real estate, increasing competition in flexible space and macroeconomic volatility drove higher member churn and softer demand than we anticipated, resulting in a slight decline in memberships.”
WeWork trading down 24% after hours to a ~$330M market cap after they reported “Substantial doubt exists about the company’s ability to continue as a going concern.”
What A Freaking Ride pic.twitter.com/6BFfPvnsFK
— Sheel Mohnot (@pitdesi) August 9, 2023
TUI returns to summer profit as demand surges
Joanna Partridge
Elsewhere this morning, package holiday operator Tui has bounced back to profit for the first time since the pandemic.
Tui reported it had 12.5m bookings for this summer, of which 4.3m bookings have been added since it last updated investors in early May. That means that it has sold 86% of its summer offering, matching levels seen last year and in 2019, before the pandemic.
Tui also revealed it expects to take a €25m hit from this year’s wildfires in Rhodes, due to the price of cancelling holidays, compensating customers and covering their welfare expenses, as well as flying them home.
CEO Sebastian Ebel says:
“Summer 23 is going very well, demand for holidays remains high. It will be a good full year for TUI with a significant year-on-year improvement in earnings. We are driving the transformation forward and investing in additional revenue and earnings areas to continue to grow profitably in the future.”
Italian bank shares rally
The Italian stock market has jumped at the start of trading as traders welcome the overnight decision to limit the impact of its planned windfall tax on banks.
Italy’s banking index has risen by 2.4% in early trading.
Italy’s largest bank, Intesa Sanpaolo, are up 3% at the open, having fallen over 8% yesterday after the windfall tax was announced.
Unicredit, who fell almost 6% on Tuesday, are up around 2.5%.
Italy’s main stock index, the FTSE MIB, is 1.2% higher.
RBC Capital Markets explain:
In Italy, the govt is backpedalling from yesterday’s initial announcement on a windfall bank tax, saying it would be capped at 0.1% of a bank’s assets.
Larry Elliott
NIESR’s economic forecasts suggest Rishi Sunak will fight the next election against a backdrop of an economy suffering from five years of lost growth and a widening of the gap between the prosperous and less well off parts of Britain.
Our economics editor Larry Elliott explains:
The National Institute of Economic and Social Research (NIESR) said it would take until the third quarter of 2024 for UK output to return to its pre-pandemic peak and that there was a 60% risk of the government going to the polls during a recession.
In its quarterly update on the state of the economy, the NIESR said the poorest tenth of the population had been especially hard hit by Britain’s cost of living crisis and would need an income boost of £4,000 a year to have the same living standards they enjoyed in the year before Covid-19 arrived.
Italy backtracks on banking windfall tax
Italy’s government have partly backtracked on their plans for a banking windfall tax, after shares in the country’s lenders tumbled yesterday.
As we covered on Tuesday, Italy’s cabinet surprisingly decided to impose a 40% windfall tax on its banks, aiming to cream off some of the billions of euros in extra profits they have received from rising interest rates.
But overnight, Italy’s finance ministry has announced the levy could not exceed 0.1% of each bank’s total assets “in order to safeguard lenders’ financial stability”.
That is a rather lower level than analysts had expected, as Rome limits the plan as it tries to ensure financial stability.
Jim Reid, strategist at Deutsche Bank explains:
In an update published overnight, our European bank analysts estimate that such a cap would reduce the overall size of the tax by over 40%, though it would still take more than 10% from 2023 profits.
One banking source in Milan has told the Financial Times that the limit would make the levy “much more manageable” and would raise an estimated €1.8bn, in contrast with estimates of more than €4.5bn issued by analysts at Jefferies and Equita earlier on Tuesday.
Introduction: UK facing five-year stretch of lost economic growth
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
The UK is on course to experience five years of lost growth, as the economy suffers from a bout of 1970s-style “British diseases”.
That’s the verdict of the National Institute of Economic and Social Research, the economic thinktank, in its latest, rather grim, quarterly outlook of the UK economy.
NIESR fears that the UK economy, which is 0.5% below its pre-pandemic level, will not rise over that level until the third quarter of 2024. That would be the longest stretch of “lost economic growth” since the aftermath of the Global Financial Crisis.
Professor Stephen Millard, deputy director for macroeconomic modelling and forecasting, says NIESR only expects “stuttering growth” over the next two years:
“The triple supply shocks of Brexit, Covid and the Russian invasion of Ukraine, together with the monetary tightening that has been necessary to bring inflation down, have badly affected the UK economy.
NIESR expects that inflation will remain continually above target until 2025.
It says the UK economy is being buffered by inflation, political churn, a global economic slowdown, the shock of high oil shocks and industrial action – a cocktail of problems reminiscent of the 1970s.
And with productivity stagnant, and growth so low, the poorest will suffer the most, with NIESR predicting that the financial vulnerability of households in the bottom half of the income distribution will rise.
Real wages in many UK regions are expecting to be below pre-pandemic levels by the end of 2024, NIESR says, adding:
More specifically, the East of England, South-East and West Midlands will be below pre-Covid levels, with real wages in the West Midlands projected to be around 5 per cent lower than in 2019.
Also coming up today
China’s economy has fallen into deflation for the first time since early 2021. Consumer prices were 0.3% lower in July than a year ago, highlighting Beijing’s struggle to lift consumption and boost growth.
Michael Hewson of CMC Markets explains:
Chinese deflation has been the proverbial elephant in the room when it comes to recent tightening measures from the Federal Reserve, the ECB, and Bank of England.
How many more rate hikes can we expect in the coming months when there is a clear deflationary impulse coming from Asia, and where is the tipping point when it comes to the risk of overtightening.
