SBM Holdings Ltd.

We see SBMH delivering MUR447mn net profit this year; the key delta is higher risk costs due to Mauritius’ vulnerabilities to the global slowdown. Significant changes in the Board’s composition earlier this year (which saw more than half the members replaced, including the Chairman) have prompted a re-evaluation of provisioning needs; a MUR2.5bn charge was taken in Q4 19 and a further MUR0.8bn in Q1 20 (lifting the cost of risk to close to 2.5% of loans in both FY 19 and Q1 20). But the recovery phase is heavily dependent on the external environment; Bank of Mauritius projects a 12.5% GDP contraction this year.

Management comments support our positive outlook. Loan growth likely to accelerate. Kenya is seeing loan market share gains this year and this is likely to continue into 2020, via both capex and working capital facilities. Significant changes to personnel and systems have been made to try to ensure that the negative risk cost experience of the past is not repeated. Net interest income is seeing strong growth, +16% yoy in 9M 19. The growth reflects the Kenya acquisition, branch expansion in India and a shift from Contract of Determinate Duration to Contract of Indeterminate Duration for certain Mauritian staff.

Effective tax rate (23%) was lower than expected (27%). 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. The cost of risk was 126bps, above our 107bps expectation. Lending appetite remains cautious in Mauritius (particularly in Segment B). Opinions contained in this report represent those of the research department of Tellimer at the time of publication.

Domestic leader with a growing international franchise. 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. We expect delivery of sustained improvements in both these areas. 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.