Super tax to hit banking sector’s profitability

July 19, 2023 (MLN): The banking sector in Pakistan has been on a roll since the start of this month, outshining the broader KSE-100 index with impressive gains on the back of the IMF deal, better macroeconomic conditions, and attractive valuations.

However, the banking sector’s profitability is expected to decline sequentially due to a higher effective tax rate on the back of the imposition of a 10% super tax.

The sector, which has been enjoying robust growth and high returns, will have to brace for a lower bottom line.

HBL, UBL, MCB, MEBL, and BAFL are expected to post earnings per share (EPS) of Rs8.3, 8.9, 9.5, 8.1, and 4.6, respectively in 2QCY23, as anticipated by Insight Securities Limited.

Similarly, these banks are likely to announce dividends per share (DPS) of Rs1.5, 7, 6.5, 2.8, and 3, respectively.

The net interest margin (NIM) is likely to shrink in the second quarter of 2023 compared to the previous quarter, as the higher cost of deposits will probably outweigh the income from asset pricing.

However, banks will likely offset the squeeze on their lending profitability due to the acceleration in deposit growth on a QoQ basis.

This is because the effects of the last rate hike is expected to reflect in the subsequent quarter.

On the balance sheet front, the total deposits held by scheduled banks moved up by 11.83% YoY to Rs25.5 trillion in June 2023.

Similarly, banks’ deposits edged higher by 4.59% MoM.

Total advances increased by 12.09 % to Rs12.2 tr compared Rs10.88 from a year ago. On a monthly basis, advances increased by 1.08 % from its values of Rs12.07 tr in May 2023.

Advances to Deposit Ratio (ADR) stood at 47.84% showing a decrease of 166 bps on a monthly basis and an increase of 12 bps on a yearly basis.

Total Investments of Scheduled Banks stood at Rs20.89 tr compared to Rs20.14 tr from a month ago and Rs17.41 tr from a year ago, showing a MoM increase of 3.73% and a YoY decrease of 19.96%.

Investment to Deposit Ratio (IDR) moved down by 68 bps to 81.92% compared to May 2023 and increased by 555 bps when compared to a year ago.

Banking scrips performance Month-to-date

It is important to note that, the banking sector, which accounts for about 21.06% of the KSE-100’s market capitalization, has been one of the main beneficiaries of the IMF deal, as the economy is expected to move towards stability with increasing Foreign Exchange Reserves and strengthening PKR.

The top performers (month-to-date) in the banking sector are Meezan Bank Limited (MEBL), which has surged 31.05%, Faysal Bank Limited (FABL), which has jumped 18.33%, and Bank of Punjab (BOP), which has soared 17.58% since the market opened after the Eid-ul-Adha holidays.

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