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Surcharge Tax to lower bank dividends

20 Feb 2022

  • Medium to lower category banks to pay low dividends, high scrip
  • Bank liquidity levels to take a hit due to tax
By Imesh Ranasinghe  Medium to lower category commercial banks in Sri Lanka will award lower dividends per share or higher scrip dividend in the face of the proposed Surcharge Tax, according to First Capital Head of Research Dimantha Mathew. On Thursday (17), Sampath Bank PLC declared that it would be giving Rs. 4.25 dividend per share, which is close to 50% increase from last year’s Rs. 2.75. Mathew said that all the banks had done better this year than the previous on profitability, but added that the proposed  25% one-off Surcharge Tax would impact the net assets of the banks, which would in turn have an effect on their P&L statements. He said that the liquidity level of the banks would also be impacted by the tax as most of the private commercial banks had a lot of liquidity at the moment.  “There is a high possibility that medium to lower banks would award a lower dividend or higher scrip dividend,” he noted. However, he said that with Sampath giving higher dividends than last time there would be pressure on other leading commercial banks such as HNB and Commercial to give a higher dividend. HNB awarded a Rs. 8 dividend per share for 2019 and 2020 with a dividend payout of 27% and 31% respectively, while Commercial Bank has announced  Rs. 6.50 per voting and non-voting share for the financial year 2020, involving a cash dividend and a scrip dividend.The cash dividend will be Rs. 4.50 and the balance in the form of scrip, which has been consistent since 2016.  Speaking to The Sunday Morning Business, the CFO of a leading private commercial bank said that the Surcharge Tax would impact the capital adequacy of the bank, meaning that banks would have less profits coming through, which would have an impact on the accumulation of the capital. “There can be so many ramifications but the most important ramification would be the reduction in the capital adequacy level,” he added. On dividends, he said since the banking sector share prices had been slashed heavily over the last three to four years, there would be an obligation to take care of shareholders. “The risk of going for a higher dividend despite the Surcharge Tax depends on the amount of capital adequacy they have,” he said. Frontier Research Product Head – Macroeconomic and Thematic Research Chayu Damsinghe said that the proposed Surcharge Tax could broadly affect anywhere between 60-70% with the total taxes as it was not clear how the tax would be applied.


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