Banks are currently under pressure, not only from deceleration in loan growth and worsening asset quality, but also from two issues stemming from corporate tax rates: the on-going tax dispute on loan write-offs and the upcoming proposed tax deductibility only being applicable for written-off loans of more than Rp 50 million (US$3,800) with tax registration numbers (NPWPs). The 2010 tax dispute is due to a disagreement on treatment of loan write-offs referring to the Finance Ministry Decree No. 57/2010, which requires net loan write-offs post consideration of potential recoveries to be applicable for tax deductibility.
The total shortfall is estimated at Rp 3.57 trillion. This, combined with shortfall in value added tax (VAT), would require Bank Negara Indonesia (BBNI) to pay additional taxes of Rp 1.63 trillion, followed by Bank Rakyat Indonesia's (BRI) Rp 1.45 trillion, Bank Mandiri's (MRI) Rp 1.11 trillion and Bank Central Asia's (BCA) Rp 136 billion.
With the exception of BMRI, the other banks have appealed this ruling. On a more positive note, a full provision has been made for these potential payments for the three big banks except BBRI, which has so far provisioned Rp 740 billion and paid Rp 30 billion, leaving the remaining Rp 680 billion unprovisioned.
The tax department has proposed not allowing banks to have tax deductibility for loan write-offs worth above Rp 50 million without NPWPs for transactions spanning the last five years.
This potential ruling would be most likely applicable to micro and consumer loans. We believe this possible new ruling would require banks to potentially pay additional taxes ahead.
Our preliminary assessment suggests that BBCA would be least impacted due to its low non-performing loans (NPLs), while BBRI and BMRI may be the worst hit given their sizeable exposure in consumer loans and relatively high NPLs.
BNI's management has provided a preliminary assessment on this potential tax shortfall arising from this issue at around Rp 200 billion.
Although this possible tax ruling would pressure earnings for the sector, we still believe that the long-term outlook for Indonesian banks remains solid, as NPLs are likely to peak in the second quarter to third quarter this year, while loan growth should start to gradually pick up toward end of the year, before accelerating in 2016 and beyond.
Despite the adverse short-term impact of this move on the banking sector, the longer-term outlook of this tax enforcement would be positive for Indonesia's growth prospect, which would lead to greater growth for banks ahead as our tax to GDP penetration rate of less than 12 percent rises closer to Thailand's 19 percent.
Given the aforementioned policy risk, we retain a neutral rating on the sector. Note that we have not incorporated these additional tax charges into our earnings forecasts.
At this stage, we believe BBCA has limited downside tax risk with BBRI at the other end of the spectrum. This has led us to alter our investment preference in the following order: BBCA, BBNI, BBRI and BMRI.