Lessons from Mauritius

Mauritian banks are becoming beacons of growth and stability in sub-Saharan Africa.

Unscathed by the vagaries of the oil price and unhindered by the political battles that have roiled some of their continental peers, the Indian Ocean island’s banks have been bolstered by an economy growing faster than many of the mainland countries.

The country’s central bank expects the economy to expand as much as 4 percent this year, compared with International Monetary Fund projections for an average 2.6 percent for the continent.

“Mauritius benefits from favourable business policies, which significantly enhance the appeal of the economy from a trade and investment perspective,” said Craig Metherell, an analyst at Avior Capital Markets in Cape Town. “The stability the country offers is appealing when compared with other volatile African markets.”

Already considered by the World Bank as the easiest place to do business in Africa, Mauritius passed a law this month to promote cross-border trade and remove licensing bottlenecks, which may spur demand for credit and help soak up excess cash held by banks

The country’s two biggest stocks and largest banks, MCB Group and SBM Holdings, reported increased profit in 2016 and forecast more earnings growth this year.

The lenders trade at price-to-book ratios of 1.3 times and 1 respectively, compared with an average of 2.3 for South African banks, where the top four lenders all reported lower profit for last year. Johannesburg-based Standard Bank Group has almost 16 times the amount of assets as MCB.

“Mauritius, with its reputable and strong regulatory framework alongside a sophisticated banking platform, has the potential to become a financial hub,” Neeraj Umanee, a manager at Swan Securities in Port Louis, the Mauritian capital, said on May 19.

That comes as Nigerian banks — with an economy 40 times larger than that of Mauritius — recover from a dollar shortage and low oil prices that caused bad loans to soar.

In Kenya, banks are hamstrung by interest-rate caps that stifled lending and cut profit, while banks in South Africa are contending with a credit downgrade in the country’s debt ratings to junk while fending off political attacks.

It’s not all sunshine on the island once the home of the now-extinct dodo bird. Prime Minister Pravind Jugnauth, who also serves as finance minister, last year boosted spending on infrastructure by 51 percent after activity in the construction industry fell, the Mauritian rupee weakened and Britain’s decision to exit the European Union threatened to disrupt exports in the $12 billion economy, which relies mainly on sugar and textiles. The UK accounts for 12 percent of Mauritius’s exports and tourism.

The industry is also rebounding from the collapse of Bramer Banking Corporation in 2015, after the government said it had evidence the bank was involved in a 25 billion-rupee ($718 million) Ponzi scheme. SBM’s shares plummeted after Bramer’s license was revoked and, along with MCB, it experienced a lull in loan applications as consumers cut back on investments and let deposits accumulate.

In spite of the events of 2015, “funding growth has remained robust and this mix has led to the problem of excess liquidity in the banking sector,” Avior’s Craig Metherell said.

Another challenge may come from the country’s renegotiated double-taxation avoidance agreement with India, which introduces taxes on capital gains from Indian firms headquartered in Mauritius, analysts at BMI Research said in a May 23 note. This could slow asset and deposit growth.

To counter these difficulties, Mauritius’ biggest banks have expanded in other African countries and increased cross-border lending, said Bhavik Desai, head of research at Axys Group in Port Louis.

MCB wants to be seen as the bank of choice in the region for trade finance, payments and card operations, while SBM has started its regional expansion into East Africa through the acquisition of troubled Fidelity Commercial Bank of Kenya, he said.

MCB rose 2.5 percent to 248 rupees in Port Louis, taking this year’s gains to 15 percent, while SBM dropped 1.1 percent to 7.46 rupees, paring its advance this year to 12 percent.

A drop in external debt, an increase in tourist arrivals and interest rates at their lowest level in more than a decade may also help the island country’s 23 licensed banks. Foreign direct investment is forecast by government to increase at least 21 percent this year. The rupee has strengthened 3.4 percent against the dollar so far this year.

“The current government will provide a politically stable foundation to re-balance the economy and to expand the financial-services sector,” said Robert Besseling, Johannesburg-based director at Exx Africa, which advises companies on business risks. “Mauritius’ banking sector has robust capital adequacy ratios, a relatively low non-performing loan ratio, and supportive profitability.”

Bloomberg

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