Company Analysis - Commissioned /

SBM Holdings: Asset clean-up drives positive ROTE outlook

    Rahul Shah
    Rahul Shah

    Head of Financials Equity Research

    Tellimer Research
    16 August 2019
    Published by

    Domestic leader with a growing international franchise. State Bank of Mauritius Holdings Ltd (SMBH) is the second-largest financial institution in Mauritius, with close to one-quarter of the market for customer loans and deposits. It is on-the-ground in Kenya, India, Madagascar and the Seychelles, and also sources international hard-currency loans. SBMH has US$6.7bn total assets, US$480mn market cap and US$95k 6-month ADV.

    We forecast 27% CAGR earnings growth to 2023. Key drivers include 11% CAGR in loans, lower credit risk costs and a lower tax rate. We see the cost/income ratio peaking in 2020, then gradually improving. We forecast return on tangible equity (ROTE) rising to 12.9% in 2023, though this is still well below the performance of MCB Group, SBMH’s closest peer.

    Discounted valuation, rapid EPS growth to attract investor interest. SBMH trades at 0.6x 2019f tangible PB, 7.4x 2019f PE and 6.2x 2020f PE. This is a sizeable discount to regional peers (0.8x 2019f PB) – we think this reflects the recent poor financial performance of the business (5.9% ROTE in 2018) and uncertainty regarding the asset quality of the franchise. We expect delivery of sustained improvements in both these areas.

    Senior management is tackling historical risk management failings. Andrew Bainbridge joined as Group CEO in January 2018 and has overhauled the risk management processes, overseen a significant clean-up of the balance sheet and shaped SBMH’s positioning as an Indian Ocean Rim bank. Mr Bainbridge has announced his intention to step back from the role of CEO as of this month, but will remain as a Non-executive Director until year-end. We understand that the search for a new CEO is well underway.

    Cheap domestic funding can support profitable international growth. One of SBMH’s key competitive advantages is its ability to raise low-cost deposit funding in Mauritius (both in MUR and foreign currencies such as EUR and US$), a reflection of its extensive local distribution network (43 branches), well-respected brand and strong mass-market positioning. Cheap funding costs should facilitate low-risk lending, both domestically and abroad; we think Segment B lending will resume its growth in H2 19.

    Key risk factors. Upside risks include the potential for provision write-backs against the large stock of NPLs, a repeal of the loan rate cap in Kenya and an improvement in the domestic growth environment. Downside risks include the potential for more NPLs to be identified, political uncertainty (given that this is an election year), and the risk of MUR currency volatility (twin fiscal and current account deficits).

    This report has been commissioned by SBM Holdings Ltd (SMBH) and independently prepared and issued by Tellimer for publication. All information used in the publication of this report has been compiled from information provided to us by SMBH and publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Tellimer at the time of publication. The sponsor has had no editorial input into the content of the note, and Tellimer’s fees are not contingent on the sponsor’s approval of the research.