- Banks face higher taxes under the revised ADR formula.
- The end-of-year ADR could move to calculating the annual average.
- The exclusion of certain advances could increase the tax obligations of banks.
Analysts said on Monday that the committee formed by Prime Minister Shahbaz Sharif would likely adjust the formula for imposing additional taxes on low advance-to-deposit ratios (ADRs).
Instead of using the year-end figure as of December 31, 2024, News According to reports, the calculation could move to an annual average – a move that analysts say could bring more balance and fairness.
There is a possibility that the State Bank of Pakistan (SBP) may introduce a revised formula to calculate ADR by excluding certain advances and including all deposits in the calculation.
These changes are expected as the government steps up efforts to increase tax collection from banks based on revenue generated from government securities.
Last week, the Prime Minister established a committee to address the issue of ADR, which will be headed by Deputy Prime Minister Ishaq Dar.
The committee is expected to submit its report within a week and will also recommend any necessary legal and regulatory changes to the legislation.
Currently, banks are required to achieve a gross ADR target of 50% by the end of the year to avoid having to pay additional taxes on government securities income.
According to SBP data, the banking sector had already achieved an ADR of 47% as of November 15, compared to 40% recorded on June 28.
If banks maintain an ADR between 40% and 50%, they will face an additional 10% tax. If the ADR falls below 40%, they will be subject to a higher additional tax of 16% on their government securities income.
“Yes, the formula could also be changed on average, which could significantly reduce the ADR,” said Awais Ashraf, research director at AKD Securities Limited.
“Banks have placed advances in non-bank financial institutions (NBFIs) to comply with the ADR criteria set by the government. However, if the government does not exclude these advances from the bank’s calculation, it will have a material adverse effect on the profitability of the banking sector,” Achraf added.
In 2008, the SBP, through a circular, revised the definition of “advances” and “deposits” for calculating ADR, with the SBP excluding certain advances and including all deposits for the calculation, Topline said Securities in a note.
“This time around, we cannot rule out the possibility that the SBP may introduce a similar formula, excluding loans to non-NBFIs, etc., which could result in a drop in the ADR and cause banks to pay higher taxes,” he said. .
The committee may change the additional tax formula on low ADRs from an “end of year, i.e. the specific date of December 31, 2024” to an “average for the year”, a- he added.
The report estimates that any measure targeting Rs 100 billion in additional tax revenue from banks could weigh on bank profitability by 12-15%.
In the nine months of 2024, pre-tax profits of listed banks stood at 913 billion rupees, and profits for the full year are expected to be around 1.2 trillion rupees, the report said.
About 80% (Rs 960 billion) of these profits come from government securities. If the ADR of all banks remains between 40-50%, the government could levy an additional tax of 10%, or Rs96 billion.
However, if the ADR of all banks falls below 40%, the government could levy an additional tax of 16%, amounting to Rs154 billion.
Saad Hanif, head of research at Ismail Iqbal Securities, said the SBP could exclude specific loan categories, such as loans to non-NBFIs, or make other adjustments.
“Such changes would likely aim to broaden the tax base for banks with low ADRs, thereby potentially increasing their tax burden. This is in line with the government’s intention to generate additional revenue from the banking sector,” Hanif added.
“However, the exact formula will depend on the committee’s recommendations and the policy objectives of the SBP,” he said.