Tax on banks may increase to 40 percent

Karachi: Banks will come under the tax ambit that are investing in government securities.

According to Standard Capital, the federal government is expected to increase the tax rate from existing 35% to 40% in Finance Bill FY12 on profits earned by banks making investment in government securities. This news may throw spanner on banking stocks outlook at KSE but in economic terms it would be a laudable step since Pakistani banks are making relatively higher spreads of nearly 7% (banking ROE’s are higher than any manufacturing industry in Pakistan).

Standard Capital did not see any major decline in bank’s earnings growth despite increase in tax rate since banks are already taking advantage of high interest rates (lending rate above 15%) whereas cost of deposits are still lower. Standard Capital like MCB (target PBV 2.5x) and UBL. However, some of the mid size struggling banks such as BAFL may take a hit of less propensity in earnings growth.

Reduction in customs duty by 10% to 20% on import of new cars and motorcycles
It is expected that custom duty could be reduced up to 10% to 20% on import of news cars and motor bikes in FY12 budget.

Standard Capital though that it would be a bad news for auto assemblers in Pakistan who are already reeling due to exacerbated JPY against PKR.

Auto vendors may get reprieve
Also Import of auto parts localization of which have been achieved in the country may attract higher customs duty i.e. customs duty on import of old and used cars, buses, tractors, trucks and vans is under active consideration keeping in view the proposal submitted by the Ministry of Commerce.

This may make auto vendors a bit attractive. Some of the companies that are on limelight include Agri‐Auto (AGIL) that is yielding PE of 4.5x as per Standard Capital www.scstrade.com snapshot (FY10 PE: 5.3x).

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