MCB - AXYS Group

1 MCB The Mauritius Commercial Bank Ltd AXYS Stockbroking Ltd, Bowen Square, Dr Ferri re Street, Port-Louis | BRN C07007947 Jun-13 Tel (230) 213 3475 | Fax (230) 213 3478 | Email | Overview The Mauritius Commercial Bank Ltd (MCB), the leading domestic bank, celebrates 175 years of existence this year. Given the relatively saturated and limited size of the Mauritian market, MCB embarked on a regional expansion plan over time. It is now involved throughout the Indian Ocean and in the broader Sub-Saharan Africa region.

2 As such, foreign sourced earnings account for 43% of attributable Group profit. Group Re-structure MCB plans to under a re-organisation which will also support its growth ambitions. The Group will streamline its operations into Banking , Non-Banking Financial , and Other Investments clusters. The resulting switcheroo will not result in any change in business operations, but it will leave behind a Rs3bn gap in the bank s capital base. MCB intends to bridge the gap via a Basel II compliant bond issue which AXYS believes will be fully subscribed to.

3 Several funds remain flushed with cash and sovereign yields stand at record lows. Performance Review and Prospects MCB has increased lending and as a result almost maxed out it lending capacity with a LDR of 94% in its pursuit of business development; and also to maximise yield as sovereign yields have hovered close to record lows. Stiff competition and the recent cut in Repo Rate will shrink interest margins and therefore undermine NII growth rates. MCB is expected to continue to expand its regional footprint and grow its lucrative niche of oil logistics trade financing.

4 NFCI is thus expected to grow at a sustained double digit pace. Foreign currency derived revenue is expected to grow in-line with increase trade finance, and also from the strengthening of major currencies vis- -vis the MUR. In spite of a drop in infrastructure spending, the spike in public sector wages will add pressure on private sector salaries which leads us to believe that MCB will only manage a small drop in CIR. Looking ahead, the lukewarm domestic economic environment will beget subdued growth in core banking, and lead to potentially a greater default rate on loans.

5 As for the bank s overseas operations, continued political instability in Madagascar and the precarious state the of the French economy is expected to trigger sub-par performances in Madagascar and R union. On the brighter side, Mozambique, and tourism-propelled Seychelles and Maldives should show appreciable growth. The outlook is mixed with appreciable growth potential emanating on the regional front, while higher impairments could exert adverse pressures on profitability growth. Valuation: Downgraded to Accumulate Assuming stable impairments of % of gross loans, we estimate mcb s FY14 PER to stand Its PEG ratio paints a different picture.

6 Below 1 since 2009, mcb s PEG is poised to jump to then ease to by FY14. Its FY14 PBV is forecasted at , lower than its 4Yr average of ; and although its T1 CAR is set t o stand at or higher, we do expect a deterioration of its NPL. Irrespective of fundamentals, like others in recent past, MCB could experience a speculative up-surge in the wake of its re-structuring process. Based on the above we downgrade MCB from Buy to Accumulate . Highlights 2009 2010 2011 2012 2013E 2014F Loan to Deposit Ratio [%] Net Interest Spread [bps] 630 537 514 494 468 462 Net Op.

7 Income [Rs bn] Profit after Tax [Rs bn] Earnings per Share [Rs] Dividend per Share [Rs] Att. Equity per Share [Rs] Key Metrics 2009 2010 2011 2012 2013E 2014F Cost to Income Ratio [%] Cap. Adequacy Ratio [%] Non-Performing Loans [%] Return on Equity [%] Price to Earnings Ratio [x] PE Growth Ratio [x] Price to NAV Ratio [x] Dividend Yield [%] Rating ACCUMULATE Current Price: Rs 188 CDS Code: ISIN Code: MU0008N00006 Reuters RIC: Bloomberg Ticker: MCB MP Google Finance Code: MAU:MCB Trading data 21-Jun-13 52-wk range: Rs 161 - 196 Market capitalisation: Rs bn Weight in Semdex: Weight in Sem-7.

8 No of Shares: Avg. daily value traded: Rs of which foreign buys: Rs of which foreign sells: Rs Avg. daily volume traded: 83,700 Year on Year return: All time high: Rs 196 (04-Jun-13) Selected Data CAMEL rating: 2- Moody's fin. strength: D+ Net loans: Rs bn Deposits: Rs bn Tier 1 capital: Rs bn BIS T1 risk adjusted ratio: BIS risk adjusted ratio: 2014 Growth Forecasts Loan & advances: Deposits: Net op. income: EBITDA: EPS: 1 MCB The Mauritius Commercial Bank Ltd AXYS Stockbroking Ltd, Bowen Square, Dr Ferri re Street, Port-Louis | BRN C07007947 Jun-13 Tel (230) 213 3475 | Fax (230) 213 3478 | Email | Financial Performance Core Business Having grown loans & advances by 12% against 11% for deposits, The Mauritius Commercial Bank Ltd (MCB) increased its Net Interest Income (NII) by in FY12.

9 According to its 9 Mth results to Mar-13, the bank s loans and deposits have both beaten FY13 target having increased by 12% and respectively. This will result in NII close to Rs7bn (+9%) for FY13. However, handing our loans at a faster rate than at which deposits are acquired has led to a jump in the Load-Deposit ratio (LDR). A high LDR coupled with Jun-13 s 25bps cut in the Key Repo Rate (KRR), will result in downward pressures on interest rate spreads. mcb s LDR has increased from 90% in FY11 and 91% in FY12 to on March 31st 2013.

10 Following an increase in Cash Reserves requirements by the Bank of Mauritius (BoM) and near record low sovereign yields, MCB opted to optimise interest income by maximising its loans and advances. At 94%, MCB has almost maxed out its lending capacity and will have to grow its deposits base. Given the stiff competition, and recent KRR decrease, net interest margins which fell by 20bps in FY12 are expected to shrink by a further ~30bps. Further, we project FY14 NII to grow at the reduced pace of 4%.