Irish bank shares rise as lenders weather €200m levy increase

Speaking as part of Budget 2024, Finance Minister Michael McGrath said the levy would be increased from €87m to €200m in 2024

With the existing bank levy of €87m expiring this year, investors were met with large uncertainty, with questions of whether or not a new levy would be introduced, and if it would better reflect the bumper profits posted by Ireland's pillar banks so far this year.

Shares in AIB, Bank of Ireland and Permanent TSB have been left largely unaffected by Budget 2024 which saw Ireland become the latest EU country to raise its bank levy. 

Speaking in the Dáil on Tuesday, Finance Minister, Michael McGrath announced that the bank levy, which raised €87m in 2022 and is expected to do the same by the end of 2023, would be increased significantly to €200m in 2024.

Exceeding the amount raised in 2021 before the withdrawal of KBC and Ulster Bank from the Irish banking market, Mr McGrath said it was important that the sector continued to make a contribution to the Irish economy, following the support it received during the financial crisis.

With the existing bank levy of €87m expiring this year, investors were met with large uncertainty with questions of whether or not a new levy would be introduced, and if it would better reflect the bumper profits posted by Ireland's pillar banks so far this year. 

However, the Government's increase has done little to sway investors, with Irish bank shares up by almost 5% following the announcement. 

In the past week, Bank of Ireland shares remain up by more than 3%, AIB is up by more than 4.7% with Permanent TSB remaining unchanged as confirmation of a bank levy increase provides long-awaited clarity to investors. 

Ireland is now the latest EU country to impose a levy increase on the banking sector following a move across wider Europe to further address rising bank profits.

The Netherlands and Italy recently joined Spain, Hungary, the Czech Republic and Lithuania in imposing increased taxes on the banking sector as profits reach highs not seen since before the financial crisis.

In Ireland, the banking sector has  posted bumper profits so far this year, prompting calls for further taxation, with some even calling for targeted windfall taxation.

In July, AIB posted an operating profit of more than €1.2bn for the first six months of 2023, exceeding its total of €1.08bn for all of last year. Similarly, Bank of Ireland posted an operating profit of €1bn at the end of June from €351m in the same period last year.

Furthermore, Permanent TSB reported a surge in net interest income, measured as the difference between the interest it pays on loans compared to the interest it charges on loans, to €298m, with the bank's mortgage market share rising from 16% to more than 23% in just one year.

Despite immune share prices, the Banking and Payments Federation (BPFI) has hit out at the increased levy, criticising its "arbitrary nature."

With the new levy set to raise €200m in 2024, up significantly from €87m, the BPFI said the banking landscape has changed significantly since the levy was introduced, with the number of retail banks in Ireland decreasing from 12 to 5, 2 of which are also exiting the Irish market.

The federation also noted that while state ownership has been a feature of the retail banking sector for the past decade, the governments strategy to return banks to private ownership and the State's present day recovery value from AIB, Bank of Ireland and Permanent TSB was over 94% of its original investment.

"The arbitrary nature of the increase in the levy introduced in today’s budget risks Ireland’s reputation as a stable, consistent and transparent tax regime," the BPFI added.