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MOSL: FINANCIALS-Corporate tax rate cut – key trigger for economic revival-Spruces earnings by 8-14%

Financials: Corporate tax rate cut – key trigger for economic revival; Spruces earnings by 8-14% | DTA impact in FY20 for select banks

 

• 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. 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 as they transition to the new tax rate of 22% (25.2% incl. surcharge and cess).
• HDFCB, KMB, IIB and other retail banks will be the biggest beneficiaries as they pay tax at a high rate (~34%) and carry low stock of deferred tax assets (DTA).
• On the other hand, AXSB and ICICIBC 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.
• Top ideas: ICICIBC, AXSB and SBIN.