Mauritius shows why it could become a financial hub

 RENEE BONORCHIS | 30 MAY 2017 | BUSINESS DAY

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 lenders have been bolstered by an economy growing faster than many of the mainland countries. The central bank expects the Mauritian economy to expand as much as 4% in 2017, compared with IMF projections for an average 2.6% 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 in May 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 in 2017. The lenders trade at price-to-book ratios of 1.3 times and 1, respectively, compared with an average of 2.3 for banks in South Africa, where the top four lenders all reported lower profit for 2016. 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 banks in Nigeria — where the economy is 40 times larger than that of Mauritius — recover from a dollar shortage and low oil prices that caused soured loans to soar. In Kenya, lenders are hamstrung by interest rate caps that stifle lending and cut profit. Peers in South Africa are contending with a downgrade in the country’s debt ratings to junk while fending off political attacks.

It’s not all sunshine on the island that once the home of the now extinct dodo bird. Prime Minister Pravind Jugnauth, who also serves as finance minister, boosted spending on infrastructure 51% in 2016 after activity in the construction industry fell, the Mauritian rupee weakened and Britain’s decision to exit the EU threatened to disrupt exports in the $12bn economy, which relies mainly on sugar and textiles. The UK accounts for 12% of Mauritius’s exports and tourism.

The industry is also rebounding from the collapse of Bramer Banking in 2015 after the government said it had evidence the lender was involved in a 25-billion rupee ($718m) Ponzi scheme. SBM’s shares plummeted after Bramer’s licence 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”, Metherell said.

Another challenge might come from the country’s renegotiated double-taxation avoidance agreement with India, which introduced 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’s biggest banks had expanded in other African countries and increased cross-border lending, said Bhavik Desai, head of research at Axys Group in Port Louis.

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

MCB rose 2.5% to 248 rupees in Port Louis, taking gains in 2017 to 15%, while SBM dropped 1.1% to 7.46 rupees, paring its advance to 12%.

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 lenders. The government forecasts that foreign direct investment will increase at least 21% in 2017. The rupee has strengthened 3.4% against the dollar in 2017.

“The current government will provide a politically stable foundation to rebalance 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’s banking sector has robust capital adequacy ratios, a relatively low nonperforming loan ratio and supportive profitability.”