Imposition of 5 percent excise duty on fee income is likely to be passed on to the consumers and, in the worst case, if the banks take the hit on their books then, on an average, banks'' profits will be affected by average 2 percent listed at the Karachi Stock Exchange.
Depending on the size or balance sheet of the listed banks, in the worst scenario, which is unlikely because the five percent excise duty would certainly pass on to the consumers, would range from 0.5 percent to 4.5 percent, based on listed banks'' 2005 results.
Tax on cash withdrawals is to document the economy, and analysts do not see a major impact of these cash withdrawal on banking deposits. An aggressive bank borrowing target bodes well for the banks as it is likely that higher interest rates (6-month T-Bill of 8.3 percent & 6-month KIBOR of 9.6 percent) will be maintained in the next 12 months.
Banking sector has been one of the best performing sectors of 2005, in which growth in profitability of the sector was recorded at 99 percent and market cap reached Rs 60 billion. In recently announced Budget FY07, some neutral to positive measures have been taken for the banking sector.
As expected, banking sector corporate tax has been reduced to 35 percent from 38 percent in the current budget, in line with the tax rate on other corporate entities.
Mohammad Imran, research analyst at Jahangir Siddiqui Capital Markets Ltd, said that many incentives have been announced in the Budget FY07 for the development of agriculture and SMEs. This may further increase lending of commercial banks in these areas. Five percent withholding tax has been imposed on the fee, commission and brokerage income of the banks.
Reduction in corporate tax rate is likely to result in after-tax profitability growth of 5 percent, keeping other things constant.
Measures to promote agriculture and SMEs are likely to result in increased credit demand from these sectors. Increase in NSS rates is not likely to result in a massive transfer of fund from the sector, as most commercial banks have also started to offer double-digit rates on their deposit schemes. Moreover, the superior service quality of banks will also strengthen the assumption that the deposits growth would not hurt from the rise in NSS rates.
Imran said: "Our ''Overweight'' stance is maintained on banking sector. Bank''s profitability is likely to grow by 44 percent in 2006 and 20 percent annually for next 4 years. The spread of banking sector is likely to remain favourable (that is, above 7 percent) in the year 2006. After this, we expect the spread to squeeze mainly due to rising competition for deposits and advances. However, large commercial banks will be affected less from it as they have excess liquidity with them and their costs of deposits is also on the lower side.