SBMH (Not Rated) reported Q3 19 net profit of MUR260mn, below our MUR366mn expectation (no Bloomberg consensus). An interim dividend of MUR0.10 was announced (flat yoy). Although core revenues were strong, the main reason for the profit shortfall was higher operating costs and weaker balance sheet growth. The shares are trading at 0.6x 2019f PB and 6.1x 2020f PE. We expect there to be a results conference call next week.
- Net interest income was better than forecast (lower than expected funding costs)
- Fee income was also better than our estimates, pointing to a sustained recovery in activity levels
- Effective tax rate (23%) was lower than expected (27%). Note, however, that following the 2019 Finance Act some tax items are now included in operating expenses (see below)
- Net impaired loans/ net loans ratio was 5.4%, from 6.4% at end-18 and 5.9% at June-19
- Asset growth (+6% yoy) was below our 9% expectation, with both loans (+2% yoy) and deposits (+5% yoy) weaker than we had forecast
- Operating costs (+32% yoy) were higher than expected, largely due to a special levy which is not included in the tax line, and a MUR204mn India cyber-attack provision, over 80% of which will be reversed in Q4 based on recoveries to date. Cost growth also reflected last year's Kenya acquisition
- The cost/income ratio came in at 71.3% versus our 65.2% expectation. This ratio has now been deteriorating for four years (36.3% in 2015)
- The cost of risk was 126bps, above our 107bps expectation.
Management outlook comments
Management noted that GDP growth forecasts in SBMH's markets of operation had been downgraded. Lending appetite remains cautious in Mauritius (particularly in Segment B). The cost/ income ratio should improve in future as recent investments drive better revenue generation. Recovery of impairments is expected in Kenya. Overall, a significant improvement in profitability versus last year is expected by management. (We note that although 9M 19 profit is up just 5% yoy, Q4 18 was loss-making; we forecast 59% yoy profit growth in FY19f).
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