The banking sector is likely to face more negative earnings implications from the upcoming FY24 budget, as the government may increase taxes on the sector to boost its revenue collection.

According to a report by JS Global Capital, a leading brokerage house, the government may hike the Super Tax on banks from the current level of 4% to 10%, leading to an earnings impact of 13% for CY23E.

The report also said that another possible tax measure could be a flat tax on income from Federal Government Securities (FGS), which are the main source of income for banks. The report ran a sensitivity analysis, applying 15%/30% flat tax on FGS income, leading to an average earnings decline of 12%/25%, respectively.

The report said that combining the two tax measures (worst case scenario), the banks’ P/Es would remain attractive for CY23E/CY24F as they would average below 3.5x, while their ROEs would average at around 18%.

The report added that while higher tax on FGS income would dent the banks’ profits, it may also dispel the concerns over domestic debt restructuring at the same time.

The report said that the banking sector has been among the key sectors historically for the government to reap tax collections, as it contributed 17% of total direct taxes in FY23.

The report advised investors to remain selective in the banking sector, preferring banks with higher exposure to private sector lending, lower reliance on FGS income, and stronger asset quality.