Mauritius’ Banking Sector: Overview, Challenges and Opportunities

Banking Sector Overview
Over 20 banks operate in Mauritius and, in addition to traditional banking services, they offer a range of specialised services ranging from custodial services to cross-border activities. Half of these banks offer retail banking services to residents – a space dominated by a couple of players – while the rest focus on specialised international banking services and also include a couple of purely private banks. In Mauritius, the domestic operations are typically referred to as “Segment A” (SegA) while non-resident operations are referred to as “Segment B” (SegB). Mauritian owned banks with large SegA operations are very conservative in their approach which made them resistant to shocks from the Great Financial Crisis of 2008 (Great Crisis), while banks with large SegB operations have been highly focused on providing services to Global Business Companies (GBC) which has made them largely immune to the domestic economic environment whose landscape has been challenging. 

The Backdrop
Mauritian GDP growth has slowed from above 5% prior to the Great Crisis to hover at ~3.6% in recent years until a further slowdown to 3.0% in 2015. In years surrounding the Great Crisis, the economy had been doped by public infrastructure and private constructions mostly funded by borrowed money. For the past five consecutive years, the construction industry has contracted but a resilient financial industry has been a key sector to keep the economy growing albeit at a tepid pace. 2014 was an electoral year in which investment slowed as economic players adopted a wait-and-see stance until after the General Elections.

The new government began its tenure with ambitious growth targets and reviewing existing policies. The most significant event of 2015 was the demise of the BAI Group – a conglomerate which operated a Life Insurer and a Bank in addition to a consumer goods and healthcare division. Swift actions helped stymie contagion; however, business morale appeared to take a hit then improve in the wake of the latest  National Budget 2016/17 was presented in late Jul-16. Earlier this year, the Financial sector – like textiles and sugar industries before it – was dealt a blow when the Indo-Mauritian Double Taxation Avoidance Agreement (DTA) was renegotiated giving India the rights to fully apply its tax on capital gains as from Apr-18. The Global Business sector has relied strongly on this DTA to fuel its growth and has been given just a few months to re-invent itself and/or diversify operations away from a heavy reliance on the treaty with India.

Segment A
Against an unfavourable backdrop, the banking sector has shown resilience averaging 6.8±0.1% of GDP since the Great Crisis and growing at 5.5±0.1% in recent times despite the recent shakeups. Lending has grown in-line with the economy having averaged 81±0.9% of GDP since 2012. A little over a quarter of all credit is geared towards the “Construction” sector which in addition of Property Developers also includes Personal Mortgages, followed by Tourism [15%] and Category 1 Global Business Companies [14%] (GBC1) and Traders [10%]. Credit quality has deteriorated with the ratio of Non-Performing Loans (NPLs) doubling to 8% between 2010 and 2015. With the average Tier 1 Capital Adequacy standing above the regulatory minimum of 10% at 12.1% for domestic banks, they are expected to withstand shocks. Nonetheless, the Bank of Mauritius (BoM) – the Central Bank – has identified the “Systemically Important Banks” and has required they hold an additional capital surcharge between 1-2.5%.

In essence, the domestically focused banks who have traditionally adopted a conservative business model are deemed to be sound, resistant to shocks and able to absorb impairments incurred on their respective deteriorating loan books. Our primary concern is therefore not on the strength of banks but their ability to grow: Return on Assets (RoA) has more than halved from 3% in 2012 to under 1.5% in 2015. In fairness, this was in part a consequence of a set of specific external loans going sour followed by impairments in the aftermath of the BAI Group’s collapse.

The limited ability for banks to grow domestically is primarily related to the small nature of the Mauritian economy and slowing private investment amid an uncertain outlook. A renewed “Feel-Good” factor was apparent – with the benchmark index, ALEX 20, which regroups the 20 most liquid stocks surging 6% in under 3-Weeks and in the process breaking out of a “Bear” spell – following the National Budget. Reflecting this is the fact loan book growth for the large banks has ground to a halt in 2016. 

In addition to macro-factors, the increasing visibility of smaller players and their aggressiveness is nibbling away market share as exemplified by ABC Banking Corporation Ltd (ABCB) growing its loan book by 30% YoY as at Jun-16. Another factor hurting loan book growth is the burgeoning corporate debt market – inexistent five years ago – of which some Rs13bn are listed and tradeable on the Stock Exchange of Mauritius (SEM). Interest for this market segment by multi-nationals is dwindling: HSBC unsuccessfully attempted to sell is retail business a few years back while Barclays has announced that it intends to pull out of Africa altogether.

Their inability to effectively redeploy growing deposits – which grew strongly in 2015 for the “safer” banks in the BAI aftermath – coupled with low yields on government T-Bills, Notes and Bonds has pushed banks to increase fees, especially for premium banking services. Banks are increasingly offering premium services and growing private banking/wealth management arms which are services specifically single-out by the Board of Investment (BoI) as areas where “opportunities exist”. Further banks are being less conservative and increasingly investing in securities but the biggest potential for growth lies beyond the island in cross-border services.

The relatively small size of domestic banks – even the larger ones – means they are ill-positioned to on their own go against continental players. The oldest and largest Mauritian bank, The Mauritius Commercial Bank Ltd (MCB) – Baa3 rated by Moody’s – has expanded its presence throughout the Indian Ocean (Seychelles, Maldives, Madagascar) and partnered with Société Générale (SocGen) in neighbouring Réunion island and Mozambique. MCB recently took a back-seat on Mozambique in-line with its strategy to be a “bank of banks” i.e. a banking services provider for continental peers rather than to take them head on. MCB has thus grown its overseas operations which now account for about a third of its profits. The part State-owned, State Bank (Mauritius) Ltd (SBM) – the 2^nd largest bank – is also rated Baa3 by Moody’s and had been looking to expand its continental presence in recent years but has yet to find the right fit. SBM has given a greater focus to its expansion in Asia, especially given its existing presence in India, by opening a representative office in Myanmar and most recently setting up shop in Seychelles.

Segment B
SegB banking operations in Mauritius are expected to take a substantial hit starting 2017 when the renegotiated Indo-Mauritian DTA comes into effect. Over 60% of lending to non-residents is geared toward Asia (mostly India) with non-resident banking assets roughly twice the size of domestic assets. Both the International Monetary Fund (IMF) in its Article IV consultation and Moody’s a recent assessment have warned that banks could experience significant withdrawals resulting in liquidity constraints but more importantly in structural changes to the nature of the economy whose Current Account Deficit (CAD) overshadowed by a positive Balance of Payments (BoP) driven by flows relating to GBCs and luxury real-estate developments.

Domestic banks have very limited exposure to Indo-Mauritian DTA specific funding and will likely not face any issues. Subsidiaries or branches of big-names are also unlikely to face issues given that they are expected to receive injections from the parent company in case of need. 2017 spells the end of an era for the GBC sector which in the short term will result in a shrinking of the sector leading to potential departures by select banks operating within this space today. The spill-over effects from these departures, subsequent loss of few but high paying jobs, are expected to have an adverse effect on the credit quality of personal loans and lower consumption.

Prospects
In conclusion, both SegA and SegB banking are each facing challenges for a growth of a different nature. SegA growth is stalling due to the limited size of the Mauritian market and tepid economic growth, while SegB is expected to contract as a consequence of structural changes. The Mauritian entrepreneur has often forsaken¹[ short-term gains for long-term growth and it is with this mindset that we expect local players to take their business abroad or expand their SegB operations right here from Mauritius. The gradual shift noted towards broader diversification of banking assets as well as the introduction of custodial and premium banking services are a nod in this direction. With regards to international players, several have business models that do not rely at all on the Indo-Mauritian DTA but instead focus on cross-border services offered to clients investing in Africa or African clients investing internationally. We, therefore, expect to lose some players in the short term, others alter their business models, but in the medium-to-long term continue to grow given the level of investment required on the continent in the decades to come.

¹Most famously when the Sugar industry signed up for a long-term sugar contract at lower prices while world prices were soaring in the 70s.

This article features in the October Edition of INTO AFRICA Magazine, a special focus on the Banking Sector in Africa, with an overview of the current trends and opportunities in the Sector.

Contributor’s Profile
Bhavik Desai leads the equity research and valuations department at AXYS Stockbroking which he joined in His primary foci are Mauritian equities and the burgeoning Mauritian fixed income market. Prior to joining AXYS, Bhavik worked on the implementation and monitoring of corporate strategies for the Office of the CEO at SAP Labs LLC in California. Bhavik holds a Double Bachelors in Arts in Physics and Astrophysics from the University of California, Berkeley.