Macro Analysis /

Pakistan banks: Impact of Budget FY 22

  • Corporates and HNWIs encouraged to shift funds from bank deposits into government securities

  • Modest increase in funding costs anticipated for Pakistan banks

  • Incentive based limits defined for ADRs to incentivise banks to increase lending

Yusra Beg
Yusra Beg

Senior Investment Analyst

Intermarket Securities
2 July 2021

The government passed the Finance Act 2022 in the National Assembly with major amendments to the originally proposed Finance Bill. In this note, we highlight several changes for Banks.

  • Threshold on profit on deposits reduced to PKR5mn

    The government has reduced the threshold for taxable profit (return) on bank deposits, from PKR36mn to PKR5mn. Profit below PKR5mn will be exempt, but once the threshold is crossed, the entire profit will now draw the normal applicable tax rate (as per the applicable income slab; up to 35%) vs. 15% earlier.

  • Tax on Federal Government securities capped at 15%

    Complementing this change, the tax payable by an individual /corporate other than a Banking or Insurance company with respect to the profit on debt from investment in Federal Government securities shall be 15%, and no further tax would be paid. Previously, the applicable tax rate of the individual/corporate applied.

Impact on Banks

This may encourage corporates and high net worth individuals (who are likely to be more financially savvy) to shift their funds from bank deposits into Government securities, or alternatively seek higher deposit rates from banks. The impact may differ from bank to bank, depending on the proportion of big ticket deposits in the mix. In order to sustainably retain such deposits, banks may have to reduce the rate gap between fixed deposits (6.0%+) and Government securities (c. 7.5% on 6M T-Bill and 8.7% on 3yr PIBs), which can marginally lift funding costs for them, all else the same, in our view.

  • 2.5% tax on additional income through Government Securities if ADR threshold is less than 40%

    Under the Finance Act 2022, the government has defined ADR (Advances-to-Deposits ratio) limits for banks. From CY22f, if their ADR levels fall below the defined limit, banks will face an additional tax of 2.5% on their incremental investment in Government securities. This will be over and above the existing 2.5% additional tax on incremental investment in Government securities (introduced in FY21 Federal Budget).  It is pertinent to note that the new ADR limits are applicable on an ‘as at’ position and may allow banks to either (i) reduce their deposit base right at the end of the year, or (ii) book large ticket advances in order to meet the 40-50% ADR limit. Similar to the above, the impact on banks from this move is likely to be marginal as well.