Good news for banks, earnings to rise up to 12 per cent after tax cut

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Updated: September 21, 2019 6:51:25 AM

Rajiv Mehta, lead analyst-institutional equities, Yes Securities, said that the direct benefit of the massive tax cut would be to the extent of around 15% on earnings, 2.5-5% on book value and 30-80 basis points (bps) on the capital position for most banks and non-banking financial companies (NBFCs).

Banks earning, HDFC, ICICI, Public sector bank, PSB, IndusInd Bank, RBL Bank, Federal Bank, corporation tax rate, corporation tax cut, corporate tax, corporate tax rate, corporate tax in india, corporate tax rate india, Narendra Modi, nirmala sitharaman, financial express, financial express opinion, corporate tax rate 2019The tax benefit may be in the form of a refund as the sector has already paid tax for the first quarter of FY20.

Banks are set to see their profits rise 10-12% on an average as a result of the government’s decision to reduce the effective corporate tax rate to 25.17%, analysts said. Large private banks are expected to benefit more from the move than their state-owned peers as their profits and tax outflows are typically higher.

The Bank Nifty recorded its largest single-day gain ever and rose as much as 10% intra-day. Individual bank stocks surged up to 20%, with private lender RBL Bank gaining the most on an intra-day basis before closing 15% higher than its previous close. At present, State Bank of India’s (SBI) effective tax rate is 41.2%, while the largest private lender HDFC Bank shells out 34.5%.

At 35%, the tax rate is the highest for Federal Bank and Yes Bank. Public-sector banks’ (PSBs) tax rates often look skewed because of the impact of provisions, which are not tax-deductible and which tend to be larger for PSBs. Kajal Gandhi, banking analyst, ICICI Direct, said: “PSBs also fall in the normal tax bracket of 33% in a normal scenario.”

The tax benefit may be in the form of a refund as the sector has already paid tax for the first quarter of FY20. HDFC Bank, IndusInd Bank, RBL Bank and Federal Bank stand to gain the most as their rates are around 34%, said Nitin Aggarwal, research analyst, Motilal Oswal Securities (MOSL).

“Private banks’ tax outgo is typically higher. For PSBs, it has been quite inconsistent for the last few years. In that category, SBI stands to gain more than Bank of Baroda (BoB) or Punjab National Bank (PNB),” he said. BoB’s tax rate is 29.8% and for PNB it stands at 30.9%, according to Bloomberg.

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The tax cut may also have an indirect effect on bank earnings by increasing corporate investments, bankers said. Rajnish Kumar, chairman, SBI, said: “The large reduction in corporate taxes across the spectrum of all companies is perhaps the boldest reform in the last 28 years. Such a rate cut will boost corporate bottomlines and facilitate a reduction in product prices.”

Rajiv Mehta, lead analyst-institutional equities, Yes Securities, said that the direct benefit of the massive tax cut would be to the extent of around 15% on earnings, 2.5-5% on book value and 30-80 basis points (bps) on the capital position for most banks and non-banking financial companies (NBFCs).

“It is tantamount to a large recapitalisation of the financial system, strengthening growth capacity and loss-absorbing buffer,” he said.
A large number of PSBs had been making losses quarter after quarter for the last few years on the back of a weak asset quality situation.
Many of them returned to the black in the June quarter this year as a result of strong treasury gains and lower provisions. “As earnings recover, PSBs could reap a benefit similar to private players,” said MOSL’s Aggarwal.

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