Insight into The State Bank of Mauritius Group

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The State Bank of Mauritius Group (SBM) is a leading financial services group in Mauritius with a growing international presence. It provides all services of a universal bank within a diversified business model. The lines of business include: Retail Banking, Small and Medium Enterprises and Wealth Management; Corporate, International and Investment Banking; Treasury services, e-Business and fiduciary services.

SBM started operations in 1973 and was listed on the Stock Exchange of Mauritius in 1995 and is the second largest company listed, with a market capitalisation of Rs 26 Billions (USD 830 m) as at August 2010.

Innovation, flexibility, accessibility and reliability are the key attributes that have contributed to the Group's reputation and trustworthiness. Owned by nearly 17,000 domestic and international shareholders, SBM has more than 1,100 employees and services over 375,000 customers through its network of 48 service units and counters in Mauritius, India and Madagascar. Going forward, we are laying greater emphasis on international as well as non-banking activities. We are always mindful that the quality of our human resources and service delivery makes the difference and hence, continuously invest in people, infrastructure and technology.

SBM is well entrenched in the domestic banking landscape with a diversified and loyal customer base, serviced through a large branch network by employees who are increasingly responsive to evolving client needs. Besides a broad range of savings, investment and financing products, in both local and foreign currency, we offer a large portfolio of cards, designed to suit the needs of specific customer segments. Innovation and market insights continue to drive product development. In line with the Group's diversification strategy and in view of market trends, we are now looking to further develop our Small and Medium Enterprise business as well as our Private Banking and Wealth Management services.

After a very good performance in FY 2009, with profit after tax, excluding dividend income, increasing by 35.3%, the Group faced a more challenging year ended 30 June 2010 (FY 2010), as gauged by a drop of 3.6% in profit excluding dividend. Taking into consideration lower dividend income received in FY 2010, overall profit declined by 8.2% to reach Rs 1,859 m (2009: Rs 2,025 m). In view of the volatile environment, an additional portfolio provision of Rs 170 m over and above the minimum level required by the Bank of Mauritius has been made in the statement of income. Excluding the one-off dividend income received in FY 2009 as well as the impact of this additional provisioning, profit for the year would, in fact, have increased by 3.6%.

While overall financial results are lower than last year, Group fundamentals remain solid, with liquidity and capital maintained at very comfortable levels, the cost to income ratio contained to below 40%, and the nonperforming advances ratio stood at a very commendable 1.9%. Besides, we have successfully pursued our diversification strategy as gauged by the noteworthy performance of some of the strategic growth areas, setting the scene for stronger future performance. In effect, our international business continues to expand at a significant pace, with international advances increasing by 48% and now representing 32% of total advances (2008: 18%). As a result, overall advances grew by 9.8%. Volumes have also risen appreciably in respect of the cards business and assets under management, in line with our objective of promoting fee-based income. As importantly, in addition to the broadening of the revenue base, significant capacity building initiatives continue to be rolled out to support growth in the areas of human resource, customer service, information technology, risk management and internal audit. Several enhancements were underpinned by the ongoing consolidation of the management team, another key performance driver per se.

SBM corporate governance framework

SBM was among the first companies in Mauritius and the first listed one to comply with international best practices in corporate governance as far back as 1997, well ahead of the Bank of Mauritius Guideline on Corporate Governance issued in 2001 and the introduction of the Code of Corporate Governance. SBM's Corporate Governance framework comprises its Board of Directors, Board Committees, management forums, employees, internal and external auditors, and other stakeholders. It follows industry best practices as well as established policies and procedures. SBM is highly committed to and embraces the highest standards of effective good governance practices throughout its operations. This framework is crucial in developing and sustaining a successful business and SBM requires all its employees to adopt the highest standard of business integrity, transparency, professionalism and ethical behaviour, and monitors compliance with policies and with the best practices, laws, rules and standards while conducting business.

Management Discussion and analysis

The Group's performance in FY 2010 has been below the previous year's outturn, with a 3.6% drop in operating income to Rs 3,837 m (2009: Rs 3,982 m) and an 8.2% decline in profit for the year to Rs 1,859 m (2009: Rs 2,025 m). The performance should be viewed within the context of difficult operating conditions which affected our advances portfolio, namely in respect of the domestic corporate sector, as well as exchange income Given persisting uncertainty in the outlook, notably relating to export-oriented sectors, we have also increased our provisioning charge above the minimum Bank of Mauritius requirements. Besides performance in FY 2009 - when profit after tax excluding dividend income increased by 35.3% - had benefited from a one-off dividend income of Rs 97 m. Excluding the one-off dividend income as well as the enhanced provisioning, profit after tax in FY 2010 would have increased by 3.6%.

Financial indicators remain overall sound with an improvement in the gross impaired advances to gross advances ratio from 2.0% to 1.9%, cost to income ratio maintained at below 40% and capital and liquidity at comfortable levels. Building on solid fundamentals, the Group continues to diversify its revenue base and invest in capacity building initiatives in people, processes and technology. While the increased outlays can lead to subdued profitability growth in the short term, particularly if the operating environment remains challenging, these are viewed as an investment for the future as the Group maintains a medium to long term perspective.

The Group pursues diversification and capacity building initiatives

Amidst a difficult economic context, the Group was mindful to manage risks properly. Despite competitive pressures, we focused on maintaining a quality portfolio and on achieving an appropriate risk-return balance As a result, the loan book for the domestic corporate sector contracted. Commendably, this was more than compensated by a healthy rise in the retail portfolio and, particularly, in international advances, including overseas business generated from Mauritius, which grew by 48%. Besides the international portfolio, the diversification of our revenue base was pursued through notable expansion in the card issuing and wealth management businesses. In view of a difficult economic context, we have also reviewed our e-commerce framework to provide a platform for more robust growth ahead.

Despite the uncharacteristic economic conditions, gross advances grew by 9.8% to Rs 44.8 Bn, driven by the international and, to some extent, the retail portfolios while investment in Government securities went up by 33.2% to Rs 20.2 Bn. On the other hand, deposits dropped by 3.3% to Rs 61.5 Bn as we deliberately did not pursue growth in rupee funding amidst excess liquidity, focusing instead on low cost deposits. In spite of a fall in net interest margin on the basis of declining yields on Government securities and an increasing share of lower yielding international advances, net interest income increased by 3.9% to reach Rs 2,493 m in FY 2010. Conversely, non interest income declined by a considerable 15.0% as pressures emanated from various fronts. Trading income went down as a result of tepid external trade volumes, especially in the first half of the financial year, while dividend income from our investments also dropped in view of a large one-off receipt in FY 2009, linked to the winding up of a company in which the Group invested. Moreover, the review of our e-commerce business resulted in a drop in income in FY 2010, but the improved set-up to contain risks and broaden our base should contribute to more robust growth going forward. On the positive side, fee-based income was supported by strong performances in respect of card spending and wealth management activities. Overall, operating income decreased by 3.6%, while profit for the year declined by 8.2% to Rs 1,859 m (2009: Rs 2,025 m).

The reduced bottom-line takes into consideration a provision of Rs 170 m charged to the statement of income above the minimum amount required by the Bank of Mauritius. This reflects a prudent stance in view of the possible adverse impact of economic conditions prevailing at the year-end on our credit portfolio. Should this additional amount not have been provided, profit for the year would have stood at Rs 1,998 m, that is only 1.4% below the previous year's performance. Besides, a major rise was recorded in staff costs in line with our capacity building initiatives for growth. Another factor explaining the reduction in profit is the substantial contribution of Rs 30 m to CSR.

The financial year ended 30 June 2010 has been a challenging year characterised by lingering uncertainty on the global outlook delaying investment projects at the domestic level, heightened competition amongst banks vying for business, high rupee liquidity and low yields on Government securities. Within this context, the Group posted a profit after tax of Rs 1,859 m, a decline of 8.2% compared to the previous year, on the back of increased portfolio provisioning above the minimum required by the Bank of Mauritius, above the minimum required by the Bank of Mauritius, lower dividend income, and substantial expenditure on CSR. Consequently, earnings per share stood at Rs 7.20 for the financial year ended 30 June 2010 (2009: Rs 7.84), while dividend per share remained unchanged at Rs 2.75, representing a payout of 38.2% (2009: 35.1%). Should the increased portfolio provision not be effected, earnings per share would have been Rs 7.74. The Group remained cautious in building its assets book and the capital base remained strong.

Revenue growth

Group operating income stood at Rs 3.8 Bn as at 30 June 2010, 3.6% lower than in the previous year. Excluding dividend income, Group operating income actually decreased by only 1.1% year-on-year, with growth of 3.9% in net interest income, dampened by a decline of 10.5% in non interest income. In spite of an increase in the overseas credit portfolio, revenue generated from international business declined to around 21.3% of total revenue (2009: 22.9%) in view of reduced income from e-commerce.

Shareholders' equity

Group shareholders' equity increased by 13.2% to Rs 14.7 Bn (2009: Rs 12.9 Bn) at the year-end, with the addition of the current year's profit of Rs 1.9 Bn and an increase in reserves of Rs 0.5 Bn arising from revaluation of property, partly offset by dividend payment of Rs 0.7 Bn for the financial year 2009. Net asset value per share thus increased from Rs 50.13 to Rs 56.77 at 30 June 2010, reflecting a price to book ratio of 1.4 times. Return on average shareholders' equity stood at 14.8% (2009: 17.2%) given the relatively high capital base. The Group declared a dividend per share of Rs 2.75, same as last year, in July 2010.