Sri Lanka’s banking sector is hit by a triple whammy of higher taxes, cessation of leasing business and the government guarantee on finance company deposits, according to an independent research company.
According to an analysis carried out in to the post-budget impact on banks by Asia Securities (Private) Limited, the tax revisions alone will have a bottom-line impact of 8 to 14 percent on the earnings of the banking sector.
“We take a negative view on the commercial banking industry with the changes introduced in the 2016 budget proposals.
As a single sector, we believe, the industry will have the highest impact from increasing taxes while proposed structural changes such as cessation of leasing business and government giving guarantees to finance companies will bear down further on the industry,” the research company said in a note. The proposed upward revision in direct and indirect taxes is estimated to increase the banking sector effective tax rate by at least 5.5 percent in 2016, resulting in forecast contraction in sector Return On Equity by as much as 150 basis points, CT CLSA Securities (Private) Limited said in its post-budget review.
Meanwhile Bartleet Religare Securities (BRS) estimates a staggering Rs.7 billion incremental tax impact on the banking sector from the proposed tax changes.
It is estimated that the 2 percent increase in the corporate income tax would cost the sector an estimated Rs.3 billion while the 1.5 percent increase in Value Added Tax would cost another Rs.1 billion.
The proposed 2 percent increase in Nation Building Tax is estimated to have an impact of another Rs. 3 billion on the sector.
It is uncertain how the government could milk the banking sector to its hilt while bringing the curtain down on conducting its leasing business from June 01, 2016, one of the fastest growth drivers of banking sector performance in 2014 and 2015.
The budget also proposed to provide 100 percent government guarantee on finance company deposits which will not only create a flight of deposits from the banks but also raise serious concerns on attracting deposits to the commercial banks at lower rates.
“At present, finance companies offer relatively higher interest rates for deposits, mostly fixed, on the back of a higher risk when compared to a commercial bank. On average, over 50 percent of the commercial bank’s deposits are fixed and in case the fixed deposit holders shift towards finance companies, on the back of lower risk and better rates, this will lead to a serious liquidity crisis in the commercial banking system,” Asia Securities cautioned.
Finance company heads to meet FM
The finance company heads are to meet Finance Minister Ravi Karunanayake on Friday at the ministry premises, according to the President of the Finance House Association of Sri Lanka (FHASL), Nalin Wijekoon.
Karunanayake last week met Chief Executive Officers of banks in a hurried called up meeting to discuss what impact the budget proposals will have on the banking sector.
The main highlight of the meeting was the proposal to ban leasing by the banks.
Mirror Business reliably learnt that Karunanayake has positively responded to the calls by the bankers to continue leasing business, however with certain limitations, after realizing the sector’s support to uplift the Small and Medium Sector which cannot be met by the finance companies.
Meanwhile, the Leasing Association of Sri Lanka, which is comprised of banks as well as finance company representation, has also called for an emergency meeting today to discuss many topical issues impacting the industry.
The 70 percent Loan-To-Value ratio on the vehicle financing came in to effect from yesterday.