The fact that banks now face 42% taxation, up from the previous 39%, could significantly impact the sector's profitability, experts told Business Recorder on Friday, after the government announced raising the rate in the budget.

The new tax percentage "will adversely impact profitability of the banking sector,” said Arif Habib Limited vice-president of research and a senior analyst Sana Tawfiq.

“Our estimates show a negative impact of 7% on the profitability," she said, adding that "from the government's point of view, this measure will help them collect an additional Rs15 billion to Rs17 billion in tax revenue.”

In his speech, finance czar Miftah Ismail had said the move "could fetch around Rs15 billion to Rs20 billion in taxes."

Last month, Business Recorder reported that the Federal Board of Revenue (FBR) was preparing budget proposals based on “targeted taxation” for increasing the incidence of tax on sectors earning windfall profits including the banking sector, the edible oil industry, the steel sector, the tobacco industry, and beverages.

At the time, sources had told Business Recorder that the FBR is focusing on huge profit-making sectors during the budget preparation exercise for the next fiscal year for realising the full potential of tax.

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“While taxation measures stated above will adversely impact the bottom line of banks, we believe the current levels at which banks are trading still make them attractive,” said Tawfiq.

“Currently, they are trading at 0.7 times price to book value, and 4.3 times price to earnings against their historic 10-year average of 1.1 price to book and 8.2 times price to earnings.”

“Moreover, with the government's heavy reliance on borrowing from banks (other than SBP) in order to finance the budget deficit, we believe this bodes well for the banks’ earnings,” she added.

Meanwhile, Executive Director BMA Capital Saad Hashmey told Business Recorder that the banking sector, and the corporate sector as a whole, may benefit from measures taken in the budget.

"The budget appears to be poor-friendly, and is taxing the rich. This would in effect increase disposable income of the common people, which would increase their spending and deposits, and eventually benefit banks as well as the corporate sector," he said.