Per analysts, banking sector’s profitability is hurt due to new taxation measures announced in budget
Profitability of the banking sector remained flat during April-June 2015 (2nd quarter) on yearly basis, while it was recorded down by 14 percent to Rs 41.2 billion on quarterly basis, largely due to higher effective tax rate in this quarter.
According to analysts, the profitability of the banking sector is hurt due to new taxation measures announced in the federal budget for the current fiscal year 2015-16.
The federal government had announced a one-time super tax of 4 percent on bank’s income for tax year 2015 and also imposed uniform tax rate of 35 percent on all sources of bank income, including dividend income and capital gains in the finance bill announced for 2015-16.
New taxation measures led to increase in effective tax rate from 34 percent in 2nd quarter of 2014 to 52 percent in 2nd quarter of 2015, analysts said.
The impact of increased taxation is also evident from profit before tax (PBT) numbers which grew by 39 percent YoY to Rs 88 billion in 2nd quarter of 2015. Despite a sharp increase in provisioning expense (up by 4.1 percent YoY to Rs 10.1 billion), strong growth in net interest income (NII) and capital gains supported PBT of banks in 2nd quarter of 2015.
All listed banks have announced financial results for 2nd quarter of 2015, so far excluding Bank Islami (BIPL), Summit Bank (SMBL) and Silk Bank (SILK). The sample covers 98 percent of banking sector market capitalisation.
Within the big banks, United Bank Limited (UBL) and MCB Bank (MCB) posted strong profit before tax growth of 34 percent and 28 percent, respectively due to high PIB holdings, strong growth in fee income and low cost-to-income ratio.
The net interest income (NII) of the sector increased by 22 percent YoY to Rs 115 billion despite 300bps decline in policy rate during fiscal year 2014-15.
Strong growth in NII is attributed to bank’s major investment in long term high yielding Pakistan investment bond (PIBs), which mitigated the negative impact of declining interest rates on NII. Furthermore, deposit growth of 13 percent versus 10 percent in 2nd quarter 2014 supported NII of the banks.
“In declining interest rates scenario in Pakistan, margins of banks are typically affected as cost on floating saving and fixed deposit normally go down, whereas, non-remunerative deposits (33 percent of total deposits) remain unaffected, the analyst said. However, major investment in PIB during 2014 (30 percent of deposits) mitigated negative impact,” an analyst said.
Non-interest income also remained strong during the quarter increasing by 49 percent to Rs 59.3 billion, driven by higher capital gains and fee and commission income.
Banks continued to realize higher capital gains in 2nd quarter 2015 largely on PIBs taking benefit of declining interest rates. Capital gains during the quarter surged to Rs 21.6 billion as against Rs 8.8 billion in 2nd quarter 2014.
Fee commission income also grew by 23 percent to Rs22.6 billion due to increasing home remittance business, trade volume, bank assurance and card business.
Increased contribution from non-interest income pushed the overall non-interest to total income ratio to 34 percent in 2nd quarter 2015 from 30 percent in 2nd quarter 2015.
On QoQ basis, Pre-tax profits on quarterly basis increased by 19 percent led by 9 percent QoQ growth in NII and higher capital gains and fee income up 28 percent and 19 percent, respectively.
The analyst said, “the banking sector will grow as improving macros (estimated FY17-18 average GDP growth of 5.5 percent, expected increase in credit growth to 14 percent in FY16-FY18 (last 3-year average growth of 8 percent, strong Capital Adequacy Ratio (CAR) of 16 percent vs 10 percent requirement, Strong investments in PIB (30 percent of deposits and increasing non-interest income to total ratio.”
Profitability of the sector will grow by 4 percent in 2015. In 2016 profits will fall by17 percent as large portion of PIBs will mature in Jul 2016, the analyst said.
