Spanish Bank Profitability Outlook Darkened by New Temporary Tax

The commentary analyses the potential impact of the new tax on financial entities on Spanish banks announced on Tuesday 12th July in Parliament by the Spanish Prime Minister. Summary highlights from the commentary include:

• The tax on financial entities is expected to be temporary, affecting financial years 2022 and 2023; and the government expects it to generate EUR 1.5 billion per annum. To put the figure into context, the Spanish domestic banking system paid EUR 1.2 billion of taxes on profits in the prior 12 months as of March 2022.
• DBRS Morningstar consider this new tax as potentially having a sizeable impact on Spanish banks, especially those which lack international diversification. Using 2021 as a benchmark, the new tax represents around 10.3% of the domestic banking system´s net profits.
• DBRS Morningstar notes that these estimates are uncertain and the final impact could fluctuate, as the revenue collection will depend on as-yet unknown details.
• DBRS Morningstar has estimated that NII could increase by around EUR 4.1bn during the next year due to the impact of higher interest rates whereas the new tax will aim to collect around EUR 1.5bn per year.
• As a result, the new tax would reduce one of the banks’ tailwinds in the current uncertain economic environment and in a situation of already low profitability (the Return on Equity was 5.4% for the domestic banking system as of March-2022).

“The new tax reduces Spanish banks’ flexibility to cope with an uncertain environment. In addition to the new tax, Spanish banks’ domestic profits could also be negatively affected by the deterioration in the outlook for the Spanish economy, which could translate into higher loan loss provisions as well as lower business volumes.” said Pablo Manzano, Vice President from the DBRS Morningstar Global Financial team.