Mauritius - Domestic Loan Growth to Buoy Financial Sector In Short Term


Friday, March 30, 2018 /07:55 AM/BMI Research 

BMI View: The effects of a lower interest rate and the Negative Income Tax will see a small uptick in asset growth over the coming quarters. In the long term we expect that the opportunities offered by the shift towards becoming a transshipment hub between China and Africa will result in more robust asset growth. 

We expect that Mauritius' banking sector will see a modest uptick in asset growth over the coming year, coming chiefly from the domestic market, as a lower central bank policy rate and the introduction of the Negative Income Tax (NIT) will facilitate a small boost in domestic borrowing. Over the same period the effects of the revision to the Double Tax Treaty (DTT) with India will see Mauritian banks' foreign liabilities decline gradually and the make-up of liabilities will be increasingly domestic. From around 2020, we expect that Mauritius' banking sector will have a much brighter outlook, as the country's move towards becoming a  transshipment and investment hub between China and Africa will begin to bear fruit, creating a number of opportunities for both internal and external investments. Furthermore, it will see the composition of liabilities become more international once again as Chinese banks open branches in Mauritius to manage their African operations.


Modest Uptick in Credit Growth In Short Term

A lower central bank policy rate will see a small uptick in asset growth, led by client loans in 2018. Client loan growth is slowly recovering after contracting for the first four months of 2017 – having reached 3.1% in September – and we expect that it will continue to increase. We expect that loan growth will accelerate because of an easing of credit conditions, due chiefly to 50 basis points worth of cuts made by the Bank of Mauritius in 2017 – resulting in a policy rate of 3.50%. Supporting this trend, we expect that the NIT's introduction in November 2017 will also bolster credit growth. The higher income and government support will likely improve the creditworthiness of around one quarter of the indigenous workforce and thereby encourage an uptick in lending (see 'Negative Income Tax To Produce Mixed Results', October 20 2018).


Foreign Liabilities To Decline Due to DTT

We expect that foreign liabilities will continue their downwards trend as a share of total liabilities because the harmonisation of Mauritian and Indian taxes on investments in the latter will gradually undermine a key support for the Mauritian banking sector. Mauritius was the largest source of foreign investment into India largely because of the DTT, and by bringing the capital gains tax on Indian investments up to Indian levels, the advantage of basing Indian financial operations in Mauritius has subsequently diminished. We have already seen foreign liabilities fall from MUR587mn (57.8% of total liabilities) in September 2013 to MUR 389mn (30.2%) in September 2017, but we expect that the revisions to the DTT will see foreign liabilities decline further.

This will be a gradual process as a grandfathering clause means that all investments made prior to April 2017 will be taxed at their former rate – leading to a short-term upswing in short-term foreign liability growth around that time – but it means that as the tax rates are gradually harmonized between April 2017 and April 2019, foreign liabilities will decline. This will see the foreign capital assume a declining share of Mauritius' liabilities and see banks rely increasingly on domestic depositors.


Asset Growth to Rise In Long Term

Asset growth will pick up considerably from the end of the decade onwards as Mauritius continues its move towards becoming a transhipment and investment hub between China and Africa (see 'Mauritius To Pivot Trade Towards China And Africa', October 17 2018). We expect that Mauritius' signing of a tripartite free trade agreement with three African customs unions, and a prospective free trade agreement with China, will create major domestic investment opportunities in sectors such as the transport and storage and insurance sectors.

As Mauritius also has fourteen double tax treaties with countries throughout Africa, it is also well placed to become a hub for Chinese investment in Africa; the Bank of China has already opened an African headquarters in Mauritius in 2016. We expect that this will see asset growth pick up much quicker from around 2020, with investments from Mauritius going into countries across Africa. We have already seen moves by Mauritian banks such as the State Bank of Mauritius to acquire a greater presence in the African credit market. Though this will not immediately counteract the impact of the Indian DTT revisions on Mauritius' financial sector, it will create major new opportunities for asset growth.


Structural Characteristics of the Banking Sector

Mauritius has utilized its geographical location and its special tax relationship with a host of other countries to build one of the most developed financial services industries in Africa. Mauritius will remain a major international financial centre as its moves towards becoming a transshipment and investment hub for Sino African trade, even as the financial sector loses some of the advantages of its relationship with India. 

Asset Quality: Asset quality is high by regional standards, but has deteriorated marginally in recent years. The sector's non-performing loan (NPL) ratio was 7.85% in Q117, up from 5.1% in 2015. This reflects deterioration in asset quality in domestic credit with an increase in impairment in credit to the private sector, from 5.8% to 7.1% in June 2016 – last available data. Provisions for NPLs had fallen slightly, although the capital adequacy ratio was healthy at 17.5%. 

Funding Structure: The banking sector's funding structure is strong, with domestic credit covered by domestic deposits. The sector's loan-to-deposit ratio (LTD) ratio stood at a comfortable 29% in September 2017, which will enable banks to issue domestic loans over the coming quarters without having to tap the debt market. 

Capital Adequacy: Mauritian banks are adequately capitalised, with the capital adequacy ratio (CAR) standing at close to 17.5% as of June 2016 – the latest available data. These rates were comfortably above global standards, such as the EU's 8.0% capital adequacy target. Banks are also phasing-in the Basel III capital framework which will improve their ability to cope with external shocks. 

Sovereign Support Capacity: We note moderate risks to the banking sector from a deteriorating sovereign backdrop. The fiscal deficit is expected to widen to 4.0% of GDP in FY2016/17 and 4.5% in FY2017/18, with increasing debt-servicing costs, which could weaken the government's ability to prop up any failing banks. The public debt-to-GDP ratio was an estimated 64.5% at end-2016 and is set to rise modestly in order to finance a number of planned infrastructure projects. Nevertheless, we note that the banking sector remains adequately capitalised thereby minimizing potential recapitalization costs. In addition, regulatory controls remain robust, which supports responsible banking practices. In April 2015, the central bank revoked the banking licence of Bramer Banking Corporation (BBCL), under section 17 of the Banking Act 2004. Authorities justified the revocation on the grounds that the capital of BBCL was seriously impaired and the bank had failed to demonstrate its ability to address capital and liquidity issues to the satisfaction of the Bank. 

Ownership Structure: The Mauritian banking sector has been predominantly owned by subsidiaries of foreign banks, controlling 55% of banking assets in 2015; however, we expect the share to fall in 2018 and 2019 due to revisions to the double tax treaty with India reducing the sector's competitiveness. Nonetheless, we expect that from the end of the decade foreign banks will once again begin taking up an increasing share of bank ownership in Mauritius as Chinese banks acquire an increasing presence on the island. As foreign owned banks tend to possess more sophisticated management and technology to mitigate risks, the banking sector will become slightly more risky in the short term due to the declining level of foreign ownership. However, we will see this trend reversing gradually in the next decade, making the shift towards domestic ownership a temporary one.

Proshare Nigeria Pvt. Ltd. 


 Proshare Nigeria Pvt. Ltd.

Related News

1.       Senegal- Robust Economic Growth to Continue

2.    National Liquidity Approaches Challenge EU Banking Union

3.    Global Growth Is Booming, Central Banks Turning Less Cautious

4.    China''s Latest Bank Regs May Support Debt Resolution

5.    Low Macro-Prudential Risk in Record Number of Markets; Bottom of Global Credit Growth Cycle

6.    Egypt Rate Cut Made Possible by Macro Stabilisation

7.    Online Banks Gain U.S. Deposit Share as Branch Banks Keep Rates Low

8.    Reality Bites on Interest Rates for Global Economy

9.    FIA Statement On Indian Exchanges Restricting Access To Indices And Data By Foreign Exchanges

10. Wage Growth Key to Continued Success of Abenomics

11. Stock Selloff Spreads Around the World

12. Biggest One-Day Fall For The Dow Jones Industrial Average

13. China Targets Bank Transparency with Latest Regulations

14. Further Improvements in Frontier Market Growth

15. Angola FX Move Signals Policy Shift, but Lacks Clarity

16. India''s Recapitalisation to Prioritise Large State Banks


Related News