(Bloomberg) -- Spanish Prime Minister Pedro Sanchez is heading into a major stand-off with the country’s biggest banks after hitting them with an increased windfall tax.
Sanchez’s coalition government managed to push an extension of the levy through Parliament at the last minute on Thursday, after clinching support from a small far-left party. The tax, which was originally designated as a one-time charge when introduced a few years ago, was set to expire at the end of the year.
Instead, the tax will now be extended for a further three years. The original flat rate of 4.8% will also rise to as much as 7% for the biggest banks, which is expected to include Banco Santander SA and BBVA SA, while falling to as low as 1% for small ones.
Spanish bank stocks were among the worst performers across European financial services on Friday, with Santander dropping as much as 5% and BBVA by 3.4%. By contrast, Unicaja Banco SA, which is likely to benefit from the changes for smaller lenders, jumped as much as 4.1% before paring gains.
The tax “puts more pressure on larger players,” Jefferies analysts including Inigo Vega and Miruna Chirea said in a note. “Its design continues to possibly over-tax some banking business that are crucial for the Spanish economy such as SME lending.”
The ultimate impact can’t be fully estimated yet because it’s not clear if the new tax rules include deductability options, the analysts wrote.
The country’s banking industry was swift to condemn the move, with the Spanish banking associations AEB and CECA saying in a statement the tax was “created in a chaotic and non-transparent process, behind the backs of citizens and without dialogue.” It’s “without parallels in other EU countries” and damages domestic banks, they said.
The government says lenders in the country have reaped outsized benefits from a rise in interest rates in recent years, which should be taxed. The profitability of Spanish banks has soared, with many lenders achieving their highest earnings ever last year.
But the banks say the rise in rates is fair compensation for the long period of low and negative rates they previously endured. They also point out that the European Central Bank has begun to cut rates, which is likely to reduce their lending income over time.
“Maintaining a tax which is now difficult to link to windfall benefits generates uncertainty for shareholders,” Deutsche Bank AG analysts Alfredo Alonso and Atul Hanamante wrote in a note dated Thursday. The move contributes to “a certain degree of stigmatization toward Spanish banks, especially the domestic ones.”
The highest new tax rate will apply to banks that make more than €5 billion ($5.2 billion) in annual revenue from interest and fee income. That would impact the country’s largest lenders, including Santander and BBVA.
Some banks outside the top tax bracket are poised to benefit. Banco de Sabadell SA estimates the change will save it about €30 million, Chief Financial Officer Sergio Palavecino said at an investor conference on Friday. He added the bank, which paid €192 million for the tax this year, was still assessing the impact given the uncertainties around deductibles.
“We already expected the levy to be extended but we didn’t expect changes to its mechanism,” KBW analysts including Hugo Cruz said in a note on Friday.
The Spanish government is looking for new sources of revenue as it risks starting 2025 without a budget, after already failing to pass a budget for 2024, meaning it had to roll over the previous one — a move that limits the government’s ability to allocate funds for new or increased expenses.
The fiscal package adopted by Spain on Thursday included a number of tax changes. It faced strong resistance from allies both on the left and the right when Sanchez’s administration presented the proposal to a parliamentary committee earlier in the week.
(Updates with share moves in fourth paragraph, analyst comments in fifth and sixth paragraph, Sabadell comment in twelfth paragraph.)
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