Brazil’s banks have been drawn directly into the firing line of the country’s increasingly populist administration.
On March 1, president, Jair Bolsonaro, announced he would be raising the rate of the industry's social contributions (CSLL) to 25% from 20%, to offset the costs of his decision to lower taxes on diesel and domestic gas.
The change will be effective for the second half of 2021.
The increase in CSLL takes the consolidated corporate tax rate for banks in Brazil to 50%.
Shares in the country’s large banks fell by an average of 3% in the following day’s session.
However, analysts project that the impact of the tax change should be modest. Goldman Sachs estimates a range of between 0.2% and 2.7% lower net income in 2021, while JPMorgan estimates a 3% to 4% fall in earnings per share.
However, in a client note, JPMorgan warned that the measure – if extended – would lead to a 150-basis point fall in returns on equity.
Marcel Campos, financial institutions analyst at XP Investimentos, says that if the five-point increase becomes “permanent … it would impact banks’ profit and valuation by approximately 3.7%”, and that the initial sell-off was an over-reaction because “the tax rate is only effective as of July and is limited to 2021, and the congress has yet to approve the measure”.
