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A number of banks, NBFCs and housing finance companies could see an improvement in their capital base and return on assets with the recent cuts in corporate tax rates.
This could potentially turn out to be a boost for the sector, which has been battling high non-performing assets, defaults and a liquidity concerns.
“The reduction in corporate tax rate will be a big boost to the capital base and help revive the growth and employment generation across all sectors,” said Sanjaya Gupta, Managing Director, PNB Housing Finance.
For 2018-19, PNB Housing effective tax rate on a consolidated basis was 31.3 per cent. Considering the tax reduction as per the announcement, the expected reduction in the effective tax rate for PNB Housing can be anywhere between eight and nine percent, the company said in a statement on Monday.
According to a report by ICICI Securities, the corporate tax reduction will lead to an average of 10 to 14 basis points improvement in return on assets and Tier-1 capital respectively in 2019-20.
“Under the revised guidelines, financial companies will have an option to pay tax at about 25 per cent v/s about 35 per cent earlier,” it said, adding that it has not factored-in the tax benefit likely to arise from write-offs.
Federal Bank, DCB Bank, Edelweiss, and CreditAccess stand to benefit the most followed by South Indian Bank, AU Small Finance Bank and KVB, it said.
According to Rajiv Mehta, Lead Analyst –Institutional Equities, Yes Securities, the corporate tax cuts for would translate into a direct benefit of nearly 15 per cent on earnings, 2.5-5 per cent on book value and 30-80 basis points on capital position for most banks and NBFCs.
“It is tantamount to a large recapitalisation of the financial system, strengthening growth capacity and loss-absorbing buffer. Since it’s a big step towards rekindling the corporate capex cycle and revitalizing sagging consumption, it would also be credit positive for banks and NBFCs; undermining prospects of a deep and elongated NPL cycle,” he said.
Finance Minister Nirmala Sitharaman had on September 20 announced a slew of tax measures for India Inc including reducing the effective tax rate for domestic companies to 25.17, provided they do not take any incentives. For new manufacturing firms, the effective tax rate will be 17.01 per cent inclusive of surcharge and cess.
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