KARACHI: Banks’ year-on-year earnings growth remained flat in the second quarter (April-June) of this year due to the taxation measures announced in the latest budget, said a research report of Topline Securities.

Besides the retrospective, one-time application of a four per cent “super tax” in FY16 budget, the government also imposed a uniform tax of 35pc on all sources of banks income including dividend income and capital gains.

The new taxation measures led to increase in effective tax rate which kept banks’ bottom line in check.

The impact of increased taxation is also evident from banks’ pre-tax profits which grew by 39pc to Rs88 billion in the quarter under review. Despite a sharp increase in provisioning expense (Rs10.1bn), strong growth in net interest income (NII) and capital gains supported their pre-tax earnings.

Within the big banks, the United Bank Limited (UBL) and MCB Bank pre-tax profits rose 34pc and 28pc, respectively, due to higher PIBs (Pakistan Investment Bonds) holdings, strong growth in fee income, and low cost-to-income ratio.

The NII of the sector increased by 22pc year-on-year to Rs115bn despite a 300bps decline in State Bank’s policy rate during 2014-15.

Non-interest income also remained strong during the quarter, increasing by 49pc to Rs59.3bn, driven by higher capital gains and fee and commission income.

Fee commission income also grew by 23pc to Rs22.6bn due to increasing home remittance business, trade volume, bancassurance and card business.

On a quarter-on-quarter basis, profitability of the sector was down by 14pc to Rs41.2bn, largely due to higher effective tax rate. However, pre-tax profits of the banks on a quarterly basis increased by 19pc.

Published in Dawn, August 29th, 2015

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