Karachi: The Lahore High Court has struck down the amendments to the Workers Welfare Fund (WWF) introduced through the Finance Acts, 2006 and 2008.
According to AKD Securities Limited, considering that banks/insurance companies have been paying WWF (2% of accounting profit before tax or taxable income, whichever is higher) since 2008, they could be eligible for a refund from FBR. Should this come to pass, AKD Securities estimates that AKD Securities’ coverage banks could benefit from 1) a one-off refund (EPS impacts range from 4%-8% of base-case CYI1F EPS estimates) and/or 2) a recurring benefit in that WWF charges will not be expensed going forward. That said, AKD Securities believes recourse for the FBR includes 1) lodging an appeal with the Supreme Court and/or 2) passing these amendments through Parliament outside of a Finance Bill. At current price levels, AKD Securities retains AKD Securities’ Overweight stance on Banks where AKD Securities notes that earnings momentum is strong and that Pakistan Banks tend to post their best momentum is strong and that Pakistan Banks tend to post their best price performance in the Jan-Mar quarter (when full-year results/payouts are announced). Going by this, AKD Securities recommends investment in banks with at least a 3m-6m investment horizon.
|PKRmn||WWF||Base Case Impact as % of|
|Bank||2008||2009||2010||1HCY11||Total||EPS Impact||CY11F EPS base case||EPS|
|Source: Company Reports & AKD Research|
What is the WWF? The Workers Welfare Fund Ordinance, 1971 provides for the establishment of e Workers Welfare Fund (WWF), primarily for providing residential accommodation to workers. Following amendments through the Finance Bill, since 2008 banks/insurance companies have been paying WWF @ 2% of accounting profit before tax or taxable income, whichever is higher. This amount is deposited with the FBR as a special purpose fund. Now, the Lahore High Court has ruled that the amendments introduced through Finance Acts 2006 and 2008 are unconstitutional in that the WWF charges are a fee not a tax, implying these amendments are outside the scope of the Finance Bills. Going by this, AKD Securities understands that banks/insurance companies could be eligible for a WWF refund (EPS impacts detailed above). That said, recourse for the FBR could include 1) lodging an appeal with the Supreme Court and/or 2) passing these amendments through Parliament outside of a Finance Bill. AKD Securities retains AKD Securities’ Overweight stance on Banks where AKD Securities has a preference for the larger banks (Big-5 + selected medium banks).