Spain’s new prime minister Pedro Sanchez is envisaging to increase taxation on banks. Although the project is still in its infancy and needs the support of Parliament, analysts have got out their calculators and released their first estimates with notable impacts for domestically-focused players. Experts at Alphavalue believe the assessment of the impact is not as straightforward as it seems and could be largely watered down.
Pedro Sanchez’s desire to create a new tax for the banking sector follows his statement regarding his willingness to set a floor on large corporations’ effective rate by closing existing loopholes. In exchange, the government intends to increase the pay of civil servants or the defence budget and increase its budgetary deficit.
In Alphavalue’s view, the impact assessment is not “as straightforward as it seems”. They explain:
Notably, a pivotal aspect concerns the question of whether the tax increase will take the form of an increased tax rate or a specific bank levy. This matters as, in the first case, this also potentially increases the tax deductibility of losses, which is not the case with the second option.
Here it is worth reminding that the return requested by investors (be it shareholders or bondholders) aims at covering an expected loss.
As such a loss is tax deductible, taxation is theoretically (and fortunately) neutral on the remuneration of capital. As a consequence, the lowering of the EPS attributable to a tax increase should in theory be offset by an increased P/E (driven by a lower after tax cost of capital).
Of course this is not true when it comes to a tax levy usually expressed as a percentage of the balance sheet whatever the operating performance. For the time being, the bottom line of Spanish banks remains depressed by systemic charges, namely the contributions to the deposit guarantee and resolution funds, which are due to be phased-in in the coming years. If the new tax was calibrated in order to “replace” these systemic charges this would avoid any inflation of the sector’s overall contribution.
And last, analysts from Alphavalue consider that it also remains to be seen to what extent the government’s expansionary strategy could support Spanish banks’ profitability recovery.