Removal of ADR tax may increase banks’ deposits, earnings

KARACHI: Elimination of the advance-to-deposit ratio (ADR) based tax would encourage banks to accept expensive deposits and boost their profits, a brokerage report stated on Tuesday.

“As per our channel checks, the ministry of Finance has issued a notification, removing the ADR tax from 2023,” said an analyst at Ismail Iqbal Securities in the report. The government had imposed a higher tax on investment in government securities linked to ADR.

“Now as per our understanding, the banks will be charged a 43 percent tax rate (39 percent base tax + 4 percent super tax) on their income for the calendar year 2023,” he said. Though the increased ADR tax had no material impact on banks’ earnings as almost all banks were able to achieve a 50 percent ADR target in the fourth quarter of 2022, the development had impacted the deposit growth. Industry deposit growth ended at 7.1 percent for 2022, which was growing at an average of 15.7 percent during the 11 months of 2022, a potential loss of deposits worth Rs1.8 trillion. “Removal of ADR tax will incentivise banks to take on high-cost deposits. Higher deposits will mean more funds available for banks to invest in Government securities, which will help the Government in domestic borrowing, reliance on which has increased drastically amid the absence of foreign funding,” the report said.

“This would be earnings positive for the banks; however, the quantum would depend upon banks' strategy, which would vary from bank to bank. Given extremely high rates, some banks might not be as aggressive in taking on high-cost deposits as they do in low-interest rate environment,” it added.

Recently, the government has also taken some other measures to increase the availability of funds. It has waived tax on non-resident banking companies, investing in government securities. Also, Public Procurement Regulatory Authority (PEPRA) rules related to direct borrowing from commercial banks have been relaxed, according to the report.

Despite economic headwinds and hefty taxation, banks recorded profitability growth of 16 percent year-on-year during 2022.