Coroporate Tax News
- Banks to benefit most from tax reform
Date: 9-Mar-2007 Sources: (Shenzhen Daily)
DOMESTIC banks are the biggest beneficiary of the government's proposed tax reforms but a lot has already been priced into their shares, said a top China executive at JPMorgan, who expects the recent market correction to uncover selective buying opportunities.
Jing Ulrich, managing director and chairman of China Equities at JPMorgan, also said China's move to curb pollution will be positive for listed industry leaders as it will help drive faster consolidation in the steel, coal and cement sectors.
The government proposed Thursday to unify the income tax paid by foreign and domestic firms at 25 percent and unveiled a series of tax breaks to promote energy saving and environmental protection.
Domestic companies currently pay 33 percent in income tax, while domestic banks have to deal with a further 5 percent revenue tax.
'What the banks will experience is a double whammy in a positive way. They will see their income tax reduced and they will also see their revenue tax reduced. So very clearly they're the biggest beneficiary of the tax reform,'Ulrich told a media conference in Hong Kong.
According to JPMorgan estimates, every 1 percent reduction in the income tax rate will lift the bank's fair value by about 3 percent and every 1 percent cut to the revenue tax will boost its fair value by 7 percent.
Ulrich said she expected buoyant earnings from banks because most of them are very well capitalized and have healthy interest margins. Their bad debts are also likely to go down.
But bank stocks have already moved on expectations that the tax reform will benefit the sector, although some have become attractive again given the recent market correction, she said.
Shares in domestic banks are the most expensive in Asia and among the most expensive in the world.
For example, China Merchants Bank's mainland stocks trade at 38.4 times forward earnings, while its Hong Kong-listed shares trade at 36.08 times, compared with 20.6 times for Bank of New York.
For industrial companies, Ulrich said many of the top firms, which have been hurt by a fragmented industry, could gain the upper hand as the government tackles pollution by improving usage of natural resources.
'If the government ends up shutting down idle capacities, excess capacities...it will benefit the listed companies, which by and large are the champions in their sectors,'she said.
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