The Ministry of Finance’s planned increases to business taxes will squeeze profit margins for domestic banks, with those lenders heavily reliant on the local market feeling the pinch the most, Moody’s Investors Service said yesterday.
The proposed hike in the business tax rate — from 2 percent to 5 percent — will reduce the industry’s pretax profits by 7 percent, resulting in weaker capital formation, Moody’s financial analyst Ginger Kao (高玟君) said.
UBS Securities analyst Kelvin Chu (朱曉暐) said in the worst scenario, financial holding companies would face effects between 3 percent and 11 percent on their net profits. Given the difference in their revenue structure and deductible items, banks would likely see their net profits drop by about 9 percent because of the increase, higher than the 4 percent effect on life insurers’ earnings, Chu said last week.
However, Primasia Securities Co (犇亞證券) analyst Michael Lee said the negative effect would be smaller for firms that generate more fee income from sources including brokerage, underwriting and credit cards, as well as offshore banking unit revenues.
The ministry announced the proposed tax hikes on Monday last week, but the plan must be approved by the legislature. The announcement has pushed the financial and insurance sub-index on the main bourse — which reflects the general performance of shares in the financial sector — to drop 1.12 percent since then, compared with an increase of 0.48 percent on the benchmark TAIEX over the same period, according to Taiwan Stock Exchange’s data. The financial sub-index ended 1.08 percent lower at 1,002.92 yesterday.
Moody’s said its analysis showed that state-owned Bank of Taiwan (臺灣銀行) and Land Bank of Taiwan (土地銀行) would be most affected by the 3 percentage point increase in the tax rate, given that both lenders derive more than 90 percent of their gross interest and fee income from the domestic operations on which the tax is levied.
State-run Mega International Commercial Bank (兆豐銀行), the main subsidiary of Mega Financial Holding Co (兆豐金控), will feel the least impact, since overseas and offshore banking operations accounted for 64.17 percent of its revenue last year, Moody’s said.
“The increase in the business tax rate will be credit-negative and the negative effect is particularly significant for Taiwanese banks because they have been suffering from chronically low margins by global standards,” Kao said.
Lower profitability suggests weaker internal capital-generation capability, she said.
The capital levels of local banks is adequate, but not particularly strong, with the sector’s average Tier 1 capital ratio standing at 9.08 percent as of September last year, according to the ratings agency.
The heavier tax burden would also challenge the banks’ growth strategies, Moody’s said.
Banks may try to offset the fall in profitability by increasing risk appetite or charging higher borrowing costs and service fees, Kao said, adding that banks may consequently place more emphasis on fee-based businesses, such as wealth management.
First Commercial Bank (第一銀行), Hua Nan Commercial Bank (華南銀行) and E.Sun Commercial Bank (玉山銀行) have all set double-digit percentage growth for their wealth management business this year, while pursuing moderate loan expansion.