Despite tax hike, big banks continue to shine

Net income of five largest banks registered increase of 12%

KARACHI: Despite a major hike in the effective tax rate coupled with shrinking gap between deposit and lending rates, big banks continued posting healthy profits in the first half of 2015.

Net income of the five largest banks operating in Pakistan registered a rise of 12% year-on-year to reach Rs58.3 billion in January-June, according to IGI Financial Services stock analyst Saad Khan.

Earnings growth posted by big banks in the six-month period is noteworthy because the government recently introduced major changes in tax rates on banks’ income through the federal budget. For example, the imposition of a one-off ‘super tax’ - applicable at 4% of the net income recorded in 2014 - resulted in all banks booking a higher tax charge in the second quarter of 2015.

Similarly, banks would pay taxes at different rates, ranging between 10% and 25%, depending on the source of income, such as dividends and income from mutual funds. However, the government imposed a uniform tax rate of 35% on all sources of banking incomes, which dented the bottom lines of banks in the first half of 2015.

Khan said banks’ effective tax rate during the second quarter of 2015 remained 54% versus 35% recorded in the same three-month period of 2014. “Excluding this one-time super tax of 4%, we estimate big-five earnings could have easily clocked up at approximately Rs68 billion, up 32% year-on-year, during the first half of 2015,” he said.

Taxes paid by Habib Bank, United Bank, MCB Bank, National Bank and Allied Bank amounted to Rs47.5 billion in the first half of 2015, up a massive 77% from a year ago.



Khan said increased earnings of top banks in Jan-Jun were led by improvements in both interest and non-interest income, which climbed 25% and 33% year-on-year, respectively. However, this was partly driven by the realisation of capital gains and dividend income. “As a consequence, total revenues of the five banks jumped by a staggering 27% to Rs197.8 billion in Jan-Jun,” he noted.

Earnings growth was far stronger in some of the mid-tier banks for Jan-June. For example, the combined profitability of Bank Al Habib, Bank Alfalah and Askari Bank went up by 31% year-on-year to Rs10.1 billion in Jan-Jun. The last two banks reported hefty growth of 42% in their earnings in the first half of 2015.

The increase in profitability in Jan-Jun was despite the shrinking gap in the lending and deposit rates, commonly referred to as the banking spread. Banking spreads have been shrinking since the end of 2014 in the wake of accommodative monetary policy of the central bank. Cumulatively, lending rates and deposit rates went down by 129 basis points and 106 basis points, respectively, in the first half of 2015.

Published in The Express Tribune, August 29^th,  2015.

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