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EUR 9.11 For Business Accounts Only

Pakistan Banks_Tax measures to dampen profitability, (AKD Daily, Jul 26, 2022)

AKD Daily

Pakistan Banks_Tax measures to dampen profitabilitYy

  • The profitability of AKD’s Banking Sector is likely take a tumble as new taxation measures announced in the federal budget hit the sector’s performance hard. Consequently, the sector’s profitability is likely to be down ~40%QoQ while the effective tax rate will likely jump to ~74%.
  • The worst hit banks will likely be MCB, UBL and ABL which will have to shoulder additional tax burden by virtue of their lower ADRs (all reported ADRs below 40%) while the banks such as MEBL, BAHL and BAFL, owing to their higher lending will be somewhat protected.
  • Owing to 525bps jump in policy rate in CY22, the unrealized gains sitting on books of our banking universe will squeeze significantly. The matter wasn't helped by soaring bond yields of Pakistan’s Euro Bonds. This will therefore hit the capital buffers of the banks and the payout capacities of our coverage banks will be materially impacted, resulting in lower payouts during 2QCY22.
  • The core income however will likely improve significantly owing to i) robust book growth of ~14%QoQ, ii) better asset pricing and iii) huge repo borrowings made to exploit arbitrage opportunities by banking system. However, we may see non funded income disappointing on the back of i) poor equity market performance and ii) volatile currency.
  • Banking sector has underperformed market by 10.8% so far in CY22 owing to adverse taxation measures taken by the government. The underperformance may continue in the short term as the profitability is likely to be hit and dividend payouts may disappoint. The sector is currently trading at forward P/B of 0.6x. We highlight MEBL as potential outperformer in the banking space.

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AKD Securities Limited
AKD Securities Limited

AKD Securities Ltd. is one of the leading securities firm in Pakistan, providing a comprehensive range of investor focused services, including equity brokerage, economic and securities research, investment banking and financial advisory services. AKD Securities accounts for more than 6% of the average daily value of the Karachi Stock Exchange. AKD Securities was the first brokerage house to launch an online trading platform in Pakistan in November 2002 and now has the largest market share with over 6000 customers. This has helped diversify and expand the retail investor base in the country and ushered in a whole new universe of investors to the stock market.

AKD Securities Ltd. caters to a diversified group of domestic and international institutional investors, high net worth individuals and upscale retail clients, including expatriate Pakistanis. With high quality research, unparalleled execution and distribution capability for both regular and large block trades, AKD Securities Ltd. has earned an outstanding reputation in the Pakistani securities industry.Outside of commercial banks, AKD Securities Ltd. is one of the biggest capital market firms in the country. AKD Securities is the leader in raising and providing risk capital in underwriting, market making and mergers and acquisitions in Pakistan. Good corporate governance and professionalism are emphasized throughout the firm and AKD Securities Ltd. is amongst the very few companies to have introduced a firm-wide comprehensive CODE of ETHICS, overseen by an independent compliance manager.Ultimately, our success is based on the quality of service we provide to our customers and the trust and confidence reposed in us by them. Our focus, therefore, remains on customer satisfaction at all levels in the company.

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