AKD Securities Limited – Off the Analyst’s Desk

Karachi, May 17, 2018 (PPI-OT): Super tax applicability revisited

The super tax applicability on banks has reportedly been revised (amended Finance Bill 2018) in order to rationalize the impact of tax incidence on banks. According to our understanding, super tax on CY17 earnings (tax year 2018) has been exempted as the amended finance bill reportedly pushes super tax applicability (@ 4%) forward to tax year 2019 (applicable on CY18 earnings). There has been no change in the rate of super tax or the phase-wise 1% p.a. reduction to 2% until tax year 2021 (no super tax post tax year 2021).

Banks will now have to pay super tax on estimate basis only meaning tax incidence for CY18F will be 39% effectively (contrary to 42% earlier understanding where tax will be charged at 4% on CY18F profits only), 38% for CY19F (3% charge on CY19F earnings) and 37%for CY20F (2% charge on CY20F earnings).

This development is likely to limit earnings deceleration in CY18F where a gradual phase-out of super tax over the years is a positive. That said, earnings slowdown remains inevitable during the year particularly as banks like UBL, HBL and MCB have booked a chunky one-time pension related expense.

The AKD banking Universe has lost out PkR56.5bn in market capitalization over the last few months. While near-term fundamental triggers remain weak (2QCY18F results to remain subpar on account of super tax charge), MPS by the end of this month will be a key checkpoint where any hike in interest rate can catalyze performance.

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