Security expense: Super tax to hit banks’ earnings

Experts say second-quarter profits to be in contrast to first

KARACHI: Earnings of banks are going to be “sharply dampened” in the April-June quarter because of the imposition of the super-tax, according to Alfalah Securities.

In a note issued to clients, research analyst Fahad Irfan said profitability indicators for the second quarter of 2016 will be in contrast with those recorded in the preceding quarter (Jan-Mar) when banks witnessed “robust earnings.”

According to the State Bank of Pakistan (SBP), banks earned a net profit of Rs53 billion in Jan-Mar, up 3.9% over the preceding quarter. However, the banking sector is expected to post subdued earnings on a quarterly basis for the three-month period ending on June 30, thanks to the super tax, analysts believe.

Going back on its word, the government decided in June to keep the “one-time” super tax of 4% on the income of banking companies - first imposed in the last federal budget - for another fiscal year.

Every bank earning more than Rs500 million in 2015 will have to pay the tax to help rehabilitate internally displaced people in the wake of Operation Zarb-e-Azb. Banks will book the expense in the April-June quarter, although it will be applicable to 2015 earnings.

The super tax had taken away 2.5%-3% from the profits of banks that earned in excess of Rs500 million in 2014, according to BMA Capital research analyst Jehanzaib Zafar.

Analysts expect the super tax to be more painful for banks this time around because higher profits in 2015 should result in the super tax having a more profound impact in 2016.

Irfan said “slight relief” would arise from the capital gains and provisions that banks will book for the second quarter. Referring to official data released by the National Clearing Company of Pakistan (NCCPL), Irfan said banks were net sellers (Rs4.1 billion) of securities in the second quarter, which should generate higher capital gains for them. Similarly, outstanding provisions by domestic commercial banks increased by a modest Rs761 million in April-June, which should contribute to healthy bottom lines for the quarter.

Published in The Express Tribune, July 21^st, 2016.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.