- As court suspends tax on ADR shortfall, banks turn to low-interest lending to meet December 2024 deadline
According to media reports, Islamabad High Court has temporarily barred the government from collecting an additional tax of up to 15% from commercial banks, as about a dozen financial institutions approached the court to suspend the tax, they were liable to pay after failing to meet the mandatory private sector lending targets in the outgoing year 2024. The average advance-to-deposit ratio (ADR) of the banks operating in Pakistan recently stood at 38%, significantly lower than the mandatory 50%. Accordingly, banks were projected to pay additional taxes to the tune of around PKR197 billion in the year.
To recall, the government has imposed an additional tax on banks if they fail to meet a 50% ADR threshold by December 2024. As of June 2024, banking sector average ADR was at 38.6%. If banks were unable to reach the 50% ADR mark at the end of December 2024, they would have to incur an additional 10% tax if the ADR was between 40-50%, and a 16% additional tax if the ADR remained below 40%.
As of June 30, 2024, only 3 out of 19 listed banks which includes Samba Bank (SBL), Faysal Bank (FABL) and Askari Bank (AKBL) have a gross ADR above 50%.
To avoid this tax, few banks have recently started lending at as low as 4% (KIBOR minus 12%), as per channel checks.
In a recent transaction, as per news reports, Trading Corporation of Pakistan (TCP) got PKR360 billion financing from banks at KIBOR (benchmark lending rate) minus 11.9%. With KIBOR standing at around 16% on that day, TCP effectively raised financing at a 4% interest rate.
In a recent corporate briefing session, banks were confident in meeting the 50% target by December 2024. However, banks were confident they would strive to cross 40% ADR mark to ensure lower additional taxation of 10% against 16%.
It was believed that any further deep discounted lending to corporates either of short-term or long term nature may trigger repricing of existing loan book, which may have impact across the industry.
Auto financing, which declined to PKR227 billion in August 2024 from a peak of PKR368 billion in June 2022, was expected to also start gaining momentum as many banks have already begun offering lower fixed rates of 14-15% as against 20-24% a year ago.
Analysts believe the major challenge for banks is finding secure, guaranteed lending opportunities. Nevertheless, the push to meet the ADR threshold is likely to encourage more competitive lending, potentially benefiting both borrowers and the broader economy.
This aggressive lending by banks in the coming months bodes well for the local stock market and will also increase cash liquidity.
Moreover, analysts believe that the interest expenses of leveraged listed companies will decrease due to sharp fall in lending rates; KIBOR has come down by 140bps in last 7 days.
Currently, the market is trading at a forward P/E of 3.9x, which we expect to rise to 4.6x, taking our index target for Jun 2025 to 106k, potential upside of 27%.
Analysts have conducted a sensitivity analysis to determine the additional lending required by listed banks to achieve a 50% gross ADR by Dec-2024 and its net impact.
Based on the working, analysts believe, approximately PKR3.6 trillion would be required to be disbursed by the listed banks in total to reach the target.
According to the findings, most of the banks will experience a net positive impact if they choose to lend at 3% (KIBOR of 15% minus 12%) for a quarter compared to the provisioning of tax. Banks will be loosing 12.5% for 3 months assuming they lend at KIBOR minus 12%.
Given the low demand of funds (good quality) on the corporate side, we believe, it will be difficult for the banks to achieve the target and they may eventually end up provisioning higher tax.
However, if all listed banks were able to lend the additional advances required to reach 50% target, the government would lose around PKR157 billion.