Equity Analysis /

MCB Group (Mauritius): Reassuring FY19 management call. Reiterate Buy

    Rahul Shah
    Rahul Shah

    Head of Corporate & Thematic Research

    Tellimer Research
    10 October 2019
    Published byTellimer Research

    The recent FY19 management call provided comfort that there is still significant international loan growth potential for MCB Group, and that the risk profile of this portfolio is improving. We reiterate our Buy recommendation and MUR405 target price for the shares. We present our financial forecasts in the full report. Further comments on the results can be found here.

    Key highlights from the call include:

    Solid loan growth outlook. Management indicated that MUR12bn corporate notes were issued last year; including these in loans would have lifted the yoy growth rate to 19%, from 14%. Looking ahead, management sees a blended growth rate of c11%. This is built up of 15% growth in Segment B (international hard-currency lending) and 6-8% growth in domestic Segment A lending (with 10% growth in retail lending and 5-7% growth in corporate lending). We think the Segment B growth figure is conservative; MCBG is one of the highest rated African banks with good access to hard currency funding. We forecast 13% loan growth in 2020.

    Liquidity is still strong. Loans/ deposits was 74% in June-19 (including corporate notes in the numerator), up from 72% in June-18. However, the volume of liquid assets rose to MUR183bn (49% of assets) from MUR145bn last year (47% of assets). We see loans/ deposits stabilising at the current level in 2020.

    Cost/income ratio has scope to improve. FY19 revenues were boosted by some one-off items (notably fair value gains on real estate and equity investments). In addition, the group will continue to invest in IT and growth capacity. Nevertheless, management signalled that the cost/income ratio has room to improve further next year. We forecast a stable cost/ income ratio in 2020.

    Loan quality has improved. The gross NPLs/ loans ratio fell to 4.1% in June-19 from 4.5% a year ago. The Segment A NPLs ratio is 3.5% (from 3.8% last year) while the Segment B NPLs ratio is 4.3% (from 4.7% last year). Main subsidiary MCB Bank’s ratio fell to 3.8% from 4.1%. We forecast the group NPLs/ loans ratio will decline to 4.0% next year.

    Capital base is strong. MCBG’s tier 1 ratio improved to 15.8% from 15.3% last year, and CAR rose to 17.4% from 17.1%, helped by use of more RWA-efficient foreign currency liquidity instruments. MCBG may see some uplift to these capital ratios if holders of existing MUR4.5bn tier 2 notes exercise an option to convert these instruments to equity, which could lift CAR by up to 0.7% points. Even without this option, we see CAR remaining above management’s 15% target for our whole forecast period (ie to 2023f).

    Tax regime change generates some uncertainty. MCBG is now subject to the following taxes: corporate tax will be levied in three slabs (5% on profits up to MUR1.5bn, 15% on profits up to the FY17 taxable base (FY17 PBT was MUR8.4bn) and 5% on sums above this); a VAT-style levy of 4.5% of operating income; and a 2% CSR levy on profits. In combination, these could deliver an effective tax rate of close to 20% (we forecast 18%). However, with elections looming (7 November), we see potential for some of these new tax elements to change.