Are the proposed tax reforms a boon or a bane for Philippine banks?

Taxes on interest income could be reduced to 10%.

Among the five proposed packages of tax reforms, package four would likely have a more direct impact, according to Maybank Kim Eng, as it involves a reduction of the tax imposed on interest income on peso deposits and investments to 10% from 20% presently.

"This will be partially offset by harmonizing the tax on other financial instruments and increasing the tax on stock trading to 1% from 0.5% of the gross selling price."

Here's more from Maybank Kim Eng:

The DOF estimates package four will result in a net loss of PHP1b for the government, and is targeted for passage in Jan 2019. We believe it would generally have a neutral to positive impact for the banking industry. Our top picks in the sector are big banks BDO Unibank, Inc and Metrobank for their better loan mix and bigger branch network for broader-based growth.

Reducing taxes on interest income would benefit depositors. This would provide banks with opportunities to mobilize savings and investments, which could either boost deposits or fee income.

The tax proposal is at an early stage and details are not yet available. In our view, we recommend closely monitoring whether rules would apply to: 1) income from investments in PH government bonds and securities (GS); and 2) long-term bonds as investments with five-year tenors and above that are tax- xempt. The first point would likely have a positive impact on earnings as nearly 20% of banks’ resources are placed in investment securities.

Banks largely differ on currency mix of investments, but 80% are in GS. Point 2 would be slightly negative as banks would need to increase interest cost as it lose tax advantage against corporate bonds.