Pakistan bank earnings to reduce 10% in 2024

Pakistani banks earnings to reduce by 10% in 2024 following increase in tax rate to 44% from 39%, a move made to increase revenue shortfall meeting target prescribed by IMF for current fiscal year.

Pakistan's federal cabinet has approved an ordinance that revises the tax structure for the country's banking sector last week.

According to the government document obtained by the Nukta, new policy eliminates the ADR-related tax on income from government securities (10-16%), which had previously been imposed on banks. At the same time, the ordinance raises the corporate tax rate for banks.

The abolition of the ADR tax is undoubtedly a welcome relief for banks, but it comes at a price. In exchange for removing this tax, the government has raised the corporate income tax rate for banks from 39% to 44% for the tax year ending December 31, 2024.

Moreover, the government has already laid out a plan to gradually reduce the corporate tax rate over the next few years. Starting in 2026, the rate will drop to 43%, and by 2027, it will further decrease to 42%. This rise in tax rates is projected to have an impact on earnings across the sector.

According to a report of Arif Habib a 10% reduction in banking sector earnings in CY24, 8% in CY25, and 6% in CY26. This increase in tax is expected to generate between PKR 62 billion to 65 billion in total revenue from all banks in the current year. It will help government achieve its tax collection targets.

The report said that the banking sector faces immediate challenges in terms of tax burdens and profitability, the abolition of the ADR tax has provided a much-needed sense of clarity.

For much of the past two years, banks have operated in an environment of uncertainty, constantly adjusting to shifting tax policies and regulatory demands.

The removal of the ADR tax has offered a degree of stability, allowing banks to refocus on their core operations without the looming pressure of meeting ADR targets just to avoid additional tax costs.

This clarity is crucial for investors and analysts, as it paves the way for more predictable earnings trajectories. While the increased tax rates will undoubtedly have a negative impact on earnings per share (EPS) in the short term, the elimination of the ADR-related tax is expected to allow banks to better manage their lending activities moving forward.