TSA implementation to hit NBP, AKBL profits the most: analysts

KARACHI: Transfer of government funds from commercial banks to IMF-recommended Treasury Single Account (TSA) could hit profits at some banks depending on the quantum of government and public sector entities’ deposits in the mix, analysts said.

The Ministry of Finance has stopped all public sector entities (PSEs) and autonomous bodies from depositing surplus funds in private banks. This indicates that the second phase of TSA implementation has started. Last week, the State Bank of Pakistan (SBP) directed all banks to shut down the federal government accounts and transfer all available balances to the SBP’s account number-1 by June 13, 2022.

“We believe that the process of transfer of funds to TSA account will only apply on Federal government and public sector entity deposits initially where National Bank of Pakistan (NBP) and Askari Bank (AKBL) will be key losers as their total holding of government deposits constitute around 40 percent of their total deposits, out of which 50-60 percent are estimated to be federal government deposits,” said Umair Naseer, an analyst at Topline Securities in a note. “We believe that this may get implemented in at least 2-3 years given the size of the deposits, and it may impact NBP and AKBL bottom-line the most. On other hand, Bank of Khyber (BOK) and Bank of Punjab (BOP) have deposits of provincial government predominantly which may be less impacted,” Naseer added.

TSA is a financial policy tool used by countries to consolidate all government cash resources in a single bank account maintained with the central bank. The aim of establishing TSA is to enable the government to better manage its cash resources and reduce borrowing costs.

In the first phase of TSA implementation, which was carried out in 2021, federal government accounts that were dormant or had zero balance were partially closed, but now the implementation of the same would also apply to other accounts in a phased manner.

“As per SBP, the federal government and public sector institution deposits constitute around 16 percent of total deposits of the banking sector (May 2022) hence its gradual transfer of funds will be ensured so it does not become a systematic risk, we believe,” Naseer noted.

The exact timeline of the complete transfer of funds to TSA has yet not been communicated to banks by the SBP, according to him. Implementation of TSA has remained a key demand by the IMF over the years for Pakistan; however, the country has delayed it for many years. Since it was a key policy tool towards fiscal consolidation; the IMF would again press Pakistan to get it implemented in its ongoing negotiation for the revival of the IMF programme.

Banks in Pakistan have been slapped with even more taxes in the recent budget. The government in the budget for the year starting on July 1 proposed to increase the corporate tax rate from 35 percent to 45 percent from 2022 and onwards.

The 4 percent super-tax was being replaced by an additional 2 percent poverty alleviation tax on banks (with earnings of Rs300 million and above). The government has also recommended a significant increase in the additional tax rate on investment income from investing in government securities. The earnings for the entire sector are likely to take a hit, falling around 20 percent for 2022 and 15 percent for 2023 if these proposals are approved, analysts warned.