After Finance Minister Nirmala Sitharaman announced a mega corporate tax relief last week, Motilal Oswal noted that private sector banks will be the biggest beneficiaries, and the move will now boost their profitability.
After Finance Minister Nirmala Sitharaman announced a mega corporate tax relief last week, Motilal Oswal noted that private sector banks will be the biggest beneficiaries, and the move will now boost their profitability. The government’s decision to sharply reduce the corporate tax rate from 30% to 22% is expected to boost corporate profitability and help banks in multiple ways as this will help boost investment activity over the medium term, noted the firm. “Most private banks under our coverage universe pay taxes at a high rate and thus will witness an earnings upgrade of 8%-14% in FY21,” added the report.
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, as per the report. Motilal Oswal said that ICICI Bank, Axis Bank and SBI are among its top stock ideas from the banking space. HDFC Bank, Kotak Mahindra Bank and IndusInd Bank and other retail banks pay tax at a high rate or around 34%, and carry low stock of deferred tax assets (DTA), according to the firm. On the other hand, Axis Bank, ICICI Bank have higher DTAs, which will need to be marked down to the revised tax rate. “This will impact their earnings in FY20, while the full benefit will accrue from FY21. Thus, AXSB/ICICBC’s earnings are estimated to see a downgrade of ~13%/~14% in FY20 but see an upgrade of ~12%/~8% in FY21,” the report added.
Motilal Oswal estimates an earnings upgrade of 9%-17% over FY19-21, with HDFC Bank likely to see an upgrade of +14%), Kotak Mahindra Bank (+14%), IndusInd Bank (+13%), RBL Bank (+14%) and Federal Bank (+15%). On a longer term basis, Motilal Oswal expects some of these benefits to be passed on in the form of competitive pricing. The firm estimates that the return ratios should improve as banks look to maintain respectable RoEs.
Last week, FM Nirmala Sitharaman had announced four key measures including cutting corporate tax rate, withdrawing tax on share buyback, reducing the minimum alternate tax and providing tax relief to FPIs on capital gains on investments. The finance minister slashed effective corporate tax to 25.17% inclusive of all cess and surcharges for domestic companies, subject to condition that these firms will not avail any exemption/incentive. Further, these companies opting for 22% income tax slab would not have to pay minimum alternative tax (MAT).