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A proposed change to the way Egypt taxes Treasury bill holdings may not hit bank profits as hard as initially thought, the research arm of Cairo-based investment bank EFG-Hermes said.
Wednesday 28, November 2018
(Bloomberg)--News that the government was closing a lucrative tax loophole, announced late last week, had battered banks’ shares in recent days, especially those of Commercial International Bank. CIB, which accounts for almost a third of the benchmark EGX30 index, fell 12 per cent in the five days through Monday to the lowest level in nearly a year.
EFG had initially estimated that CIB’s 2018 earnings would fall by 26 per cent due to the changes in the way the tax is calculated and recommended shorting banking stocks. It now says that given the proposed changes won’t be retroactive and won’t apply to government debt bought before the decision is implemented, the full impact won’t be felt until 2020.
If the changes are approved by parliament by the end of the year, “this would give CIB time to change its balance sheet composition, so as to make it more tax efficient.”
Analysts say that Egyptian debt accounts for around 35 per cent of banks’ assets. That’s a reflection of the symbiotic relationship between the banks and the government, which has relied on debt sales to help plug the budget deficit.
Appetite for local government debt has dropped since the changes were announced, and yields have edged up. The following chart shows the divergence between bids submitted and accepted on three-month bills, including the latest sale in which investors were seeking yields, in some cases, higher than 23 per cent.