Debt Repayment Levy stymies People’s Leasing profit growth

• Effective tax rate shoots up to 66% due to Debt Repayment Levy  

People’s Leasing & Finance PLC (PLC), a unit of State-owned People’s Bank, reported higher earnings for the quarter ended on December 31, 2018 (3Q19) on modest growth in loans and leases although the bottom line growth was stymied by a sizeable debt repayment levy. 

The non-bank lender, with assets in excess of Rs.174 billion, reported earnings of 77 cents a share or Rs.1.22 billion during the October-December period compared to 68 cents a share or Rs.1.10 billion reported for the same period, last year. The company was charged the Debt Repayment Levy of Rs.210 million for the first time for the three months under review as the new tax aimed at financial services sector came into effect from October 1, 2018. 

The levy is charged at 7.0 percent on the operating profit subject to Value-Added Tax (VAT) on financial services. 

As a result of the new levy, PLC’s effective tax rate went sharply up to 66 percent from the already higher 54 percent. 

Sri Lanka is one of the very few countries where banks and financial services sector entities are unfairly targeted by the policymakers for revenue collection. As a result, their effective tax rate remains considerably high. 

The additional taxes tend to push up the nominal interest rate of the economy.  

Meanwhile, the net interest income of the group, the difference between what the company earned from its loans, leases and other financial assets and what it paid for the deposits and other funding sources such as corporate borrowings, rose by some healthy 30.4 percent year-on-year (YoY) to Rs.4.25 billion. 

The total operating income of the PLC group, which also has an insurance subsidiary, rose by 28.3 percent year-on-year (YoY) to Rs.5.85 billion. PLC has a 75 percent stake in People’s Insurance PLC. 

The impairment charges for the period under review stood at Rs.498 million, up 10 percent YoY. 

However, the company in a separate note said its impairment provisions would have increased by between 10 to 20 percent had it reported provisions under the new Expected Loss Model of recognising and measuring possible bad loans under the IFRS 9 on financial instruments, which came into effect from January 1, 2018. 
While the company is expected to report its full-year financial performance and position under IFRS 9, the quarterly results are prepared in line with the earlier accounting standard under the Statement of Alternative Treatment allowed by the Institute of Chartered Accountants of Sri Lanka for interim reports. 
Meanwhile, for the nine months ended December 31, 2018, PLC reported earnings of Rs.2.28 a share or Rs.3.6 billion, up 28.5 percent YoY.
The group recorded a 9.6 percent growth or Rs.13.6 billion in its loans and leases while the deposits reported a modest growth of 6.4 percent or Rs.4.4 billion. 
The company bridged the gap through short and medium-term borrowings. 

People’s Bank has a 75 percent stake in PLC. 

The Employees’ Provident Fund has a 5.43 percent stake in the company being its second largest shareholder.