omc: no mention; hence safe - BMA Capital Management

BANKS
MARKETWEIGHT
Budget Impact
Positive
Abdul Shakur
Banking Analyst
16
BANKS: KEY BENEFICIARY!
June 7, 2010
A number of favorable decisions were announced for the banking sector in
Budget FY11 which are expected to have a positive impact on the sector. The
following are the key elements of the Budget FY11:
� In order to address the admissibility of provisions charged by banks as tax
deductible expenses, provisions against advances for consumer and SME
have been allowed up to 5% of total advances while for other loans it has
been maintained at 1% of total advances. In addition, provision under
doubtful and loss categories charged up to 2008 -which were not claimed
as tax admissible – shall be allowed for the period in which advances were
written off. However, in this case admissibility in case of consumer loans
shall be restricted to 3% of the annual income. Considering the current
practice of the banks to create deferred assets in this regard, this
admissibility of provisions will not impact the bottom-line of the banks.
However, it would help reduce the deferred tax issues and improve cash
flows.
� 10% withholding tax deductible on government securities (including T-Bills
and PIBs) is proposed to be treated as final discharge of tax liability, for
corporations other than commercial banks. This measure would help GoP
raise investments through the corporate sector and thus reducing the
crowding-out effect for the sector. Nevertheless, we believe bank lending is
to remain muted in CY10 amid credit risk and liquidity constraints
� The ambit of advance tax collection over cash withdrawal – subject to tax
@0.3% - has been enhanced to include various transactions including TDR,
CDR, TT, online transfer, pay order and demand draft. However, the impact
of the said development is neutral for banks as the same is passed on to
the customers
Outlook CY10: Positive
Taking into account the above mentioned amendments in the Finance Bill, the
banking sector is expected to remain the major beneficiary considering
improving private credit which yields higher than govt. securities. On the other
hand, non materialization of the anticipated change regarding higher corporate
tax rate for banks having 5% or higher spreads is also expected to tune-in
further positive sentiments.
Upward revision for NSS targets by 14% to PKR213bn would however exert
further pressure over banking deposit rates. This factor would further intensify
the impact due the prevailing liquidity issues, therefore we expect banking
spreads to adjust downward. Our liking remains limited to banks having
relatively better spreads and lower liquidity risk with our top pick being MCB.
Comparative Analysis of Spreads
11%
8%
5%
2%
6%
7%
8%
4%
NBP UBL MCB BAFL FABL HBL ABL
Source: Company Reports, BMA Research
4%
7%
5%