Mauritius has long punched above its weight. The small island, located far into the Indian Ocean with a population of just 1.3 million and no natural resources to speak of, is one of Africa’s wealthiest countries on a per capita basis, while its financial system is among the most sophisticated on the continent. The country’s domestic loans-to-gross domestic product (GDP) ratio is about 70%, far higher than that of almost every other African country. And its two biggest locally owned banks have investment-grade ratings, which is a rarity for the continent’s lenders.
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Mauritian banks have had to cope with a slowing economy in recent years, however. Real GDP growth fell from 5.5% in 2008 to 3.3% in 2009 and has since remained at similar levels, mainly because of the island’s exposure to struggling Europe, which buys 60% of Mauritius's exports and provides most of its tourists. Despite this environment, the country's banks have mostly proved resilient, maintaining fairly high profits and keeping non-performing assets low.
Rundheersing Bheenick, governor of the Bank of Mauritius, the country's central bank, says the banking sector’s performance is in part down to Mauritius having quickly tapped new export markets to cushion itself against Europe’s woes. “The resilience that the economy has shown has taken quite a few people by surprise,” says Mr Bheenick. “We’ve been quietly diversifying from the eurozone. This has had a knock-on effect on the financial sector. Banks have been doing very well and some have even increased their profitability during the crisis.”
Testifying to this, so-called segment A activity – business carried out with Mauritian residents and which differs from segment B banking, which refers to activities with international customers, typically denominated in foreign currency – has been robust, expanding at roughly the same pace as nominal GDP. “When you look at segment A assets, growth has been reasonably fast since 2009,” says Ronak Gadhia, equity analyst at frontier markets securities firm Exotix. “There’s been average loan growth of about 9.5% to 10%. It’s not super growth like you see in Kenya or Nigeria, but, given where the economy is, it’s still strong growth.”
Tightening bond yields
Within segment A, banks have been expanding their loan books to bolster earnings. This strategy has been necessitated by rates on government bonds falling amid the economic slowdown (although a central bank ruling from 2011 that limits the amount of sovereign paper banks can hold, as part of attempts to boost credit growth, has also played a part). Yields on three-month T-bills were as high as 9% in 2008, but today are barely above 3%.
Banks have reacted by decreasing the proportion of their assets held as government securities and increasing lending to the private sector. This has been the case with both Mauritius Commercial Bank (MCB) and State Bank of Mauritius (SBM), which dominate the segment A banking industry and have a combined market share of about 60% for loans and deposits. Loan expansion at MCB, the biggest Mauritian bank, has averaged 10% for the past three years. SBM has been more aggressive, with its segment A credit book growing by more than 20% in 2012.
The construction and tourism sectors have been among the main beneficiaries of this shift. The former, which includes mortgages, has seen its share of banks’ lending rise from 16% in 2006 to 26% at the end of 2012, according to Exotix. Household loans have almost trebled in that time.
Segment A loans have thus been climbing quickly as a proportion of economic output, from 54% in 2007 to 67% today. Mr Gadhia thinks there is still a way to go and the figure could reach almost 80% by 2017. “There’s still a lot of scope for growth,” he says. “In most mature economies, the loans-to-GDP ratio is well over 100%.”
Banking on technology
That the Mauritian local market seems far from saturated is one reason why several new banks have been established in the past five years, with more than 10 now operating in segment A. Some of those, such as BanyanTree Bank, created in 2012, tout their technological innovation and use of electronic banking channels, particularly the internet. Not only does this keep their costs in check, but they believe it will entice corporate and retail customers wanting distribution channels that are easier to access than physical branches.
Yet while Mauritians are increasingly embracing internet banking – the monthly value of such transactions rose from less than MRs10bn ($310m) in 2007 to almost MRs100bn in February this year, according to the central bank – analysts are largely sceptical that new entrants can make much of an impact on the country’s banking landscape. MCB and SBM not only have a huge market share, but they already invest heavily in technology and electronic banking channels to make sure their customers stick with them. “The business model of the smaller players is hard to understand,” says one local economist. “They lack economies of scale and will struggle to provide much that the established players don’t already.”
Several banks are focusing on overseas operations. AfrAsia Bank, a mid-sized lender launched in 2007, aims to exploit growing trade and investment flows between Africa and Asia. Mauritius is well positioned to take advantage given its double-taxation avoidance agreements (DTAAs) with roughly 40 countries. For a long time, these have served it well – Mauritian-registered companies were the source of more than 40% of foreign direct investment (FDI) into India in the 2000s, while the island is the preferred route for Indian investments into Africa.
Mauritius has recently been expanding its network of DTAAs to Africa and in 2012 reached deals with Nigeria, Kenya and the Democratic Republic of Congo. Analysts say this will further boost the island’s appeal as a conduit for investments into some of the continent’s fastest growing economies.
Hub for Africa
Antony Withers, chief executive of MCB, says that FDI into Africa is something Mauritius should exploit – given the advantages it has in the form of a mature banking system, political stability and a large pool of financial professionals – to become a major hub for investing on the continent. “We’re very actively looking to participate in these investment flows,” he says. “Mauritius is where Singapore was 20-odd years ago before it established itself as an investment and financing destination for south-east Asia. Mauritius has the same opportunity to really become an offshore jurisdiction for structuring investment into Africa.”
MCB’s overseas business, which will likely account for more than half of its pre-tax profits in a few years, up from 43% in 2012, is growing in other ways too. The bank has subsidiaries in Mozambique and the Indian Ocean islands of Madagascar, Seychelles, Maldives and Réunion. And its segment B activities are on the rise as it positions itself to handle trade finance, payments and cards operations in Africa.
With trade finance, much of MCB’s focus is on providing letters of credit for energy imports. It has been able to win more business in recent years because of the void left by several US and European banks cutting their lines to sub-Saharan Africa and its high credit rating of Baa1 (equivalent to BBB+, or three notches above speculative grade) from Moody’s, a level very few African banks can match.
Mr Withers says trade finance is the first step to deepening MCB’s relations with banks on the continent and doing other business with them. “We now have more than 120 active correspondent bank relationships in 34 countries in Africa. We’re doing classic short-term trade finance with 64 of them. As recently as six years ago, we were doing such trade finance business on a meaningful basis with only nine or so banks in seven African countries,” he says.
“Once we’ve established a relationship with a particular bank, we look to do other things with them, such as international payments. In Ghana, we’re operating all the ATMs and [point-of-sale] machines for a local bank,” adds Mr Withers.
Offshore banking
Mauritius has long been attractive to international banks as an offshore financial centre, largely thanks to its open economy, DTAAs and favourable tax laws. HSBC, Standard Chartered, Barclays, Standard Bank and, to a lesser extent, Deutsche Bank are all involved in segment B, which makes up 60% of Mauritius’s total banking assets and is equivalent to 170% of its GDP.
Investment into and from India still provides a significant amount of segment B business. But sub-Saharan Africa is increasingly important, fuelled by investors wanting exposure to what is one of the world’s most buoyant regions economically. South Africa’s Standard Bank entered Mauritius in 2001 to exploit this trend. “Standard Bank chose to come to Mauritius because of our Africa franchise,” says country head Lakshman Bheenick (who is no relation to the central bank governor). “Mauritius has been used to support that and our clients who need to set up in Mauritius for their global investment opportunities.”
He says Standard Bank Mauritius, which has more than $2bn of assets, will continue to expand as long as Africa attracts outside investment. “If the global economy is stable, we will grow,” he says.
Barclays and HSBC, the two international banks with the longest presence on the island, have a fairly big segment A presence. Standard Chartered, which has been in Mauritius since 2002, started segment A banking for the first time this year, mainly to cater to local companies venturing abroad.
“Mauritian corporates are now looking regionally. They want to grow into Africa and India. So there is a requirement for a bank like us that’s present in those two places to [service them],” says Sridhar Nagarajan, chief executive of Standard Chartered in Mauritius. “The trend is for international banks to embed much deeper into the Mauritian domestic wholesale banking sector.”
There is less of a likelihood that international banks will seek to tap into Mauritius’s retail market, mainly because of its small size and the fact it is highly competitive. “With 1.3 million inhabitants and almost 12 banks operating aggressively in the domestic segment, the opportunities are limited,” says Mr Bheenick of Standard Bank. “You need to be very bold to go into that space and it would require extensive investment.”
Reforms and regulation
The Mauritian banking sector is one of the most robust and well regulated in Africa. The sector’s capital adequacy ratio stood at 17% in September 2012, well above the central bank’s minimum requirement of 10%. And the non-performing loans ratio was only slightly more than 3%.
Prudential reforms are taking place, however. The Bank of Mauritius is considering stricter rules regarding lending to the construction sector, which has been volatile in the past two years. It has sent a consultation paper to banks and, depending on their feedback, could enforce loan-to-value limits for building projects. “We don’t really have much of a problem,” says the central bank’s Mr Bheenick. “But we do want to come forward with some macroprudential measures to discourage the exuberance that was visible at one time in lending for shopping malls and commercial property.”
The central bank has drawn up plans to introduce a deposit insurance scheme covering segment A deposits. The details, such as whether corporate as well as retail claims are included, will be decided by legislators. But the governor says that banks taking domestic deposits will probably have to pay a “small levy” to fund the scheme.
Resolution process
Other reforms are targeting Mauritius’s bank resolution regime. The governor says the current one is inadequate, citing the fact that the resolution process for the liquidation of Mauritius Co-operative Central Bank, which was closed as long ago as 1996, is yet to be finalised. “When I became governor [in 2007], I discovered that we still have a contingency provision on our books for that bank,” says Mr Bheenick. “This, obviously, is not good enough.”
He adds that the new regulations will take into account the increased complexity of Mauritian banks that has come about with their expansion into other jurisdictions. “Now that our banks are going across borders, we need to have a resolution regime that works across borders,” he says.
The central bank has, moreover, stipulated that banks must separate their local deposit-taking arms from their foreign subsidiaries and non-banking activities. Both MCB and SBM will restructure as a result, creating holding companies and establishing different entities for their various operations, which analysts doubt will affect their earnings much.
The implementation of Basel III is also on the agenda. Last October, the Bank of Mauritius issued the country’s banks, which have operated under Basel II since 2008, a consultation paper on the latest Basel regime. It hopes a final framework will be agreed by early 2014.
Mauritian banks are not as profitable as their counterparts in countries such as Nigeria and Kenya, where lenders routinely makes returns on equity (ROE) of 25% or more and have net interest margins of more than 7%. Yet they are hardly sluggish, especially when considering they operate in a slower growing economy with lower interest rates than those found in most of the rest of the continent.
In April, Exotix forecasted that Mauritian banks would make an average ROE this year of almost 16.5%, a level to provoke envy in many developed world banks. The fact they can count themselves as being among the safest banks in Africa, a status likely to be enhanced with the many reforms being led by the Bank of Mauritius, only adds to their appeal. Unlike many other places in the region, those putting their money into Mauritius can sleep easy.
