JS Securities Limited - JS Research.

Karachi -- June 30, 2022 (PPI-OT)

Banks: Some positives amidst barrage of negative tax changes

The document detailing amendments regarding Finance Bill 2022 has reported key changes for the banking sector, including (1) Corporate Tax maintained at 39%, earlier increased to 45%, (2) shift of 10% Super Tax charge to CY22, earlier to be charged on CY21 earnings and (3) continuing Super Tax at 4% beyond CY22.

The decrease in Corporate Tax will only impact ~45% of the income, as there is no change reported in the higher taxes on income from federal government securities. This limits positive earnings impact to 7% for the Big 4 and ABL, while extends it to 13% for mid-tier banks and MEBL, as the latter meet the 50% Gross ADR benchmark.

Another area of discussion not related to the budget is the likely drag on adequacy ratios due to unrealized losses on fixed income bonds. We however find our universe banks well placed to remain on track for 2Q22 dividends, barring HBL which faces both higher capital requirements due to DSIB status, with limited buffer on balance sheet.

39% Corporate Tax for banks, only for ~45% of the income

The amendments regarding Finance Bill 2022 finally came on the second last day before the start of FY23, bringing significant changes for the banking sector. The key changes for the sector were (1) Corporate Tax maintained at 39%, earlier increased to 45%, (2) shift of 10% Super Tax charge to CY22, earlier to be charged on CY21 earnings and (3) continuing Super Tax at 4% beyond CY22.

The decrease in Corporate Tax will only impact income derived from sources other than federal government securities, limiting positive earnings impact to 7% for the Big 4 and ABL, as there is no change in the higher taxes on income from federal government securities (~55% of income), subject to each bank's Gross ADR levels (refer table). For mid-tiers and MEBL, the positive impact increases to an average of 13% as these banks meet the 50% Gross ADR benchmark in Mar-2022 and in our estimated projections for CY22-end. Moreover, the higher taxes subject to ADR levels will also be charged on CY21 income and 1QCY22 income, which is likely to be reported in 2QCY22.

The changes related to Super Tax do not change our earnings estimates materially as we had incorporated the same on a recurring basis into our base case post the Budget announcement. We present JS Banking Universe key stats post the...