Spanish bank executives have lashed out at the national government's plan for a €3 billion tax on the country's largest lenders, warning that it threatens the strength of the country's banking system and contradicts EU guidelines.

The CEOs of Spain's largest domestic lender, CaixaBank SA, and the country's second-largest bank by total assets, Banco Bilbao Vizcaya Argentaria SA, were responding to the July 28 publication of details of the tax in a bill presented to Spain's parliament. The bill proposes a 4.8% levy on Spanish banks' net interest income plus net fee income. The levy would apply to lenders whose net interest plus net fee income exceeded €800 million in 2019, meaning only the largest banks would be affected.

Spain's ruling left-wing coalition government is imposing the tax to raise revenues to help tackle an escalating cost of living crisis caused by surging inflation. The tax aims to generate €1.5 billion per year from 2022 and 2023 earnings. The government also hopes to raise €4 billion over the two years from windfall taxes on energy companies.

"It's clearly the wrong idea. It's unfair, it's distortionary and it's counterproductive," Gonzalo Maria Gortazar, CaixaBank CEO, said during a second-quarter earnings call. "This is weakening the banks. It makes no sense."

CaixaBank hardest hit

The proposed tax would impact CaixaBank the most, Gortazar said. The bank would have to pay between €400 million and €450 million in additional tax in 2023 based on current estimates for 2022 net interest and fee income, the CEO said.

BBVA expects the tax to cost it around €250 million from 2022 earnings, CEO Onur Genç said during the bank's second-quarter earnings call.

Based on 2021 domestic net interest and fee income, Banco Santander SA would have to pay around €311 million in additional tax, Banco de Sabadell SA around €181 million and Unicaja Banco SA around €73 million. Bankinter SA would also face an additional tax burden.

CaixaBank will have to review its dividend policy if the current proposal becomes law.

"It's not tax deductible, so it would be directly a hit to the bottom line if it's approved in this form," said Gortazar. "If it's included, we need to rebase our commitments."

CaixaBank is targeting a dividend payout of 50% to 60% of net income in 2022. The bank returned €0.1463 per share for full-year 2021 on a 50% payout ratio.

The tax looks set to dampen improving profitability outlooks at Spanish banks, many of which have struggled in recent years to increase returns amid record low interest rates and other challenges. Positive first-half results allowed Sabadell to upgrade its return on tangible equity guidance for 2022 to 7% from 6%.

"We provided a return on tangible equity guidance based on the information that we have and what it is in our hands to produce this year," said Sabadell CFO Leopoldo Alvear. "On top of that, we will have the tax."

The case against

The executives challenged the economic soundness of the measure. BBVA's Genç questioned the logic of punishing a sector that does not create "negative externalities" in the economy, defined as costs that are suffered by a third party because of an economic transaction.

"There is empirical evidence on this, there is so much academic work on this," said Genç. "It hurts the economy; it doesn't help the economy."

Gortazar raised the specter of the global financial and eurozone sovereign debt crises, during which the country's economy suffered a prolonged slump and the Spanish banking sector struggled for stability. "We can only look back to 2008 to 2012 in Spain to see the impact of a crisis where the banking sector is not strong," said Gortazar. "And you don't [want] to have that again."

The European Central Bank, which is responsible for maintaining financial stability in the eurozone, of which Spain is a part, has previously discouraged the introduction of additional taxes on banks. Genç cited the regulator's published opinion on such taxes, which it released in December 2019 following a proposal by the Lithuanian government to increase taxes on lenders.

The statement said the measure "would be undesirable to the extent that such taxes would place undue burden on banks, hampering the provision of credit with a knock-on effect on growth in the real economy."

The Spanish government's proposal, which will penalize lenders that try to pass on the cost of the tax to their customers, also appears to be in conflict with guidelines from the European Banking Authority that tell banks to include the cost of any tax in their loan pricing. "We have a big conflict of jurisdiction," said Gortazar. "Spain is in no way in a position to go against EU rules in something like this."

The tax will put Spain's largest lenders at a disadvantage compared to domestic and international banks that do not exceed the €800 million net interest plus net fee income threshold, Gortazar said. "It makes no sense," said Gortazar. "It's not a good competition rule."

Gortazar rubbished the government's characterization of the levy as a tax on extraordinary profits, citing Bank of Spain data showing that Spanish lenders had an aggregate return on equity of 5.3% in the last 12 months.

"To establish a tax now on extraordinary profits just doesn't respond to reality," Gortazar said. "5.3% is obviously very far away from extraordinary profits."

The proposed application of the tax to banks' revenues contradicts its stated aim of targeting extraordinary profits and raises the issue of double taxation, Gortazar added. "[They're] really using a tool that is not the right one. This is something very unsettling for all of us."