Time to impose Prosperity Tax 2.0 on banks

The banking sector posted substantial profits throughout lockdowns

by S BIRRUNTHA / graphic TMR

AS HIGHER earnings are anticipated for the banking sector this year, analysts opined that it is high time for the government to impose another round of Prosperity Tax, this time on banks.

UCSI University Malaysia assistant professor of finance Dr Liew Chee Yoong said that the government led by Prime Minister (PM) Datuk Seri Anwar Ibrahim should consider imposing Prosperity Tax 2.0 on banks this year, as most of them recorded extraordinary financial year-end profits in 2022.

“Malaysian banks had recorded strong profits from 2017 to 2021 with pretax profit of more than RM500 million (each).

“Hence, I don’t think Prosperity Tax 2.0 will affect their bottom line that much,” he told The Malaysian Reserve (TMR).

Liew, who is also a fellow at the Centre for Market Education, opined that even if a global recession does materialise, Malaysian banks will be able to withstand it as their resilience has been proven during past financial crises such as the Asian Financial Crisis 1997 and the Global Financial Crisis 2007-2009.

He added that during these crisis periods, not even a single Malaysian bank went insolvent although the government did play a part to a certain extent in the bank’s survival through capital injection, mergers, asset management and debt restructuring during the 1997 crisis.

The Covid-19 lockdowns left a trail of devastation with many businesses forced to shut down. However, the banking sector posted substantial profits throughout these lockdowns, contributed notably by lower operating cost and running interest charges, despite the moratorium on loans.

In financial year 2021, the country’s biggest bank Malayan Banking Bhd’s (Maybank) net profit surged to RM8.1 billion (2020: RM6.48 billion), while Public Bank Bhd and CIMB Group Holdings Bhd recorded RM5.66 billion and RM4.3 billion respectively (2020: RM4.87 billion and RM1.19 billion).

Having said that, Liew said Malaysian banks still need to be prudent, cautious and not take things lightly, especially with the gloomy economic predictions in 2023.

He noted that the outlook for the banking industry for 2023 is bleak. “According to International Monetary Fund MD Kristalina Georgieva, the world will likely head into a recession in 2023 due to the US, European Union (EU) and China’s economy slowing down this year.

“Also, emerging markets are affected by high-interest rates and the appreciation of the US dollar relative to their currencies, which further slow down their economies.

“All these point towards an inevitable global recession in 2023 and the banking industry needs to prepare for this, especially performing regular stress tests to ensure that they have sufficient capital to withstand any upcoming recessions or financial crises,” Lieu said.

Tax All Firms with Income Beyond a Specific Level

Echoing his views is Putra Business School associate professor and economist Dr Ahmed Razman Abdul Latiff, who said that the government should impose Prosperity Tax on banks because they always reported profit and never suffered any losses despite the pandemic.

He added that excess profits made by the banks should be given back to society via this form of taxation.

“Local banks thrived in terms of profit last year due to Overnight Policy Rate (OPR) hikes and economic recovery.

“We believe that the banks will perform better this year due to the expanding economy and the increasing number of approved applications for loans last year,” Ahmed Razman told TMR.

Another analyst with a local brokerage firm said the government needs to aggressively find short-term solutions to help the people cope with inflation, amid the increasingly burdensome cost of living.

He noted that imposing the Prosperity Tax on companies that generate high income should be highlighted because it can help the government cover the subsidies given to the people.

He also opined that all companies with taxable income beyond a specific level should be subject to this windfall tax, not only banks.

“This scenario is the same as when the Prosperity Tax was imposed on companies like Top Glove Corp Bhd and Hartalega Holdings Bhd, which generated astounding profits due to the surge in demand for rubber gloves during the spread of the Covid-19 virus worldwide.

“Therefore, companies that get a windfall from the current situation such as palm oil companies and oil and gas companies that take advantage of global price increases, as well as banks, are proposed to pay Prosperity Tax so that it can be channelled to the people as a short-term measure.

“Most importantly, the taxes collected by the government are used for the wellbeing of the people,” the analyst, speaking on condition of anonymity, told TMR.

Meanwhile, EMIR Research has proposed that the Pakatan Harapan-led government can impose a windfall tax on banks, as part of “recouping” the government’s incurred expenditure to increase its targeted subsidy allocations

“This would partly relieve some pressure on our reliance on Petroliam Nasional Bhd’s (Petronas) dividends for example — with oil prices expected to come down,” said its president and CEO Datuk Dr Rais Hussin and head of social, law and human rights Jason Loh Seong Wei in a recent commentary entitled “Immediate priorities of the new PM”.

They said with the fourth consecutive OPR hike to 2.75%, this would mean a rise in the cost of loans affecting both businesses and households and, by extension, the cost of living.

A Dual Interest-Rate Regime

They also highlighted that as per market rates, banks are earning higher profits due to the successive OPR hikes, and banks have been the top gainers or performers on Bursa Malaysia (any differences in terms of losses had been extremely minimal), which is transmitted from higher interest income as per market sentiments.

They pointed out that banks are also top gainers from higher coupon rates for fresh issuance of government bonds, as well as higher yields on the secondary markets on the debt instrument front.

On that note, Rais and Loh also raised the idea of banks being able to afford a dual interest-rate regime which can be readily implemented.

“It’s just a matter of political will on all sides — regulator and lender.

“Bank Negara Malaysia (BNM) should instruct commercial banks under the Central Bank Act 2009 to provide a lower interest rate (based on the OPR of 1.75% before the first hike in May 2022) to the B40 (bottom 40% income group) and M40 (middle 40% group) households,” they noted.

According to Rais and Loh, the OPR is flanked by “two sides of the corridor”, namely the ceiling and floor rates which are separated from the OPR by 0.25% or 25 basis points (bps).

“With 2.75% OPR, this means that the floor rate is at 2.5%.

“Even at 2.5% interest paid on deposits of commercial banks (at the standing facility), they (commercial banks) can still afford to allow the B40 and some M40 to pay their instalments based on the pre-May interest rate,” they suggested.

What is Prosperity Tax?

The federal government introduced the Prosperity Tax, commonly referred to as the windfall tax, in Budget 2022 on businesses that generated unusual profits during extraordinary circumstances.

The one-off tax measure was imposed on glove companies in hopes that it can be returned to the people to rebuild the country, after being severely affected by the Covid-19 pandemic and ensuing multiple lockdowns.

During the tabling of the budget, former Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz announced that a one-off 33% windfall tax would be placed on companies that profited more than RM100 million for the year 2022.

Large companies will pay the current maximum tax rate of 24% for the first RM100 million taxable income, and the remaining earnings of over RM100 million thresholds will be taxed at a 33% rate.

However, micro, small and medium enterprises with annual sales below RM50 million and a paid-up capital below RM2.5 million would not be affected.

Analysts estimated that the government may have generated an additional income of up to RM10 billion in 2022 through the implementation of the Prosperity Tax, which was imposed on no more than 250 companies in Malaysia.

However, the Prosperity Tax was not extended in the tabling of Budget 2023 last year.

Local Banks Prospered in 2022

Malaysian banks’ revenue and profitability were largely underpinned by the OPR hikes, higher interest rates and economic recovery in 2022.

BNM has been playing its part in supporting the economic recovery by pursuing a “slow-and-steady” approach with regards to raising interest rates — the OPR was increased by 100bps over 2022.

Supported by four 25bps hikes in 2022, local banks’ average net interest margins (NIMs) broadened by 6bps quarter-on-quarter to 2.39% in the third quarter of 2022 (3Q22) [1Q22: 2.28%, 2Q22: 2.33%].

Margins are anticipated to widen further in the next two quarters, buoyed by the OPR increase in November last year and another potential hike in the first quarter of 2023 (1Q23).

Hong Leong Investment Bank Bhd (HLIB Research) analyst Chan Jit Hoong said the OPR hikes have had a positive impact on banks’ earnings and helped broaden the NIMs.

“We estimated that every 25bps OPR hike would bump up the sector’s NIM by five to six bps and the profit forecast by 4% to 5%,” he said.

In the latest quarter under review, Malayan Banking Bhd topped the list with a net profit of RM2.16 billion in 3Q22, followed by Public Bank Bhd with a net profit of RM1.59 billion in 3Q22 and Hong Leong Bank Bhd with RM981.4 million in 1Q22.

Research Firms Confident in Banking Sector

MIDF Amanah Investment Bank Bhd has maintained a ‘Positive’ call on the banking sector, as it remains optimistic on further OPR-hike uplifts to net interest income, improved non-interest income (NII) outlook, further overlay write-backs and attractive dividend yields.

Its top picks for the sector remain Public Bank (‘Buy’, target price [TP]: RM5.39) and RHB Bank Bhd (‘Buy’, TP: RM6.94), according to its recent note.

RHB Investment Bank Bhd, meanwhile, maintained an ‘Overweight’ call on the banking sector with CIMB Group Holdings Bhd, AMMB Holdings Bhd and Alliance Bank Malaysia Bhd as its preferred picks.

“Lending activities may have been subdued, partly due to the fourth consecutive OPR hike since May 2022.

“Elsewhere, current account, savings account deposits continued to trend downwards, while asset quality indicators remained encouraging,” it said in a note.

HLIB Research kept a ‘Neutral’ call on the banking sector, noting that the sector has a balanced risk-reward profile. It expects the Bursa Malaysia Finance Index to trade largely sideways in the first half of 2023 (1H23) since the appetite for the banking sector has diminished on a waning outlook.

As for CGS-CIMB Research, it reaffirmed its ‘Overweight’ call on banks, predicated on potential rerating catalysts from continuous expansion in NIM and stronger growth in NII (due to improved investment income) in the 2023 forecast.

Similarly, Kenanga Research also maintained its ‘Overweight’ call on the banking sector, as it believes the sector would still demonstrate resilience with interest rate-backed support on earnings.

  • This article first appeared in The Malaysian Reserve weekly print edition