Mauritius Commercial Bank

Overview MCB is by far the leader of the Mauritian banking sector; and has a noteworthy presence in the Indian Ocean region. The latter is unlikely to lose its spot as leader, but the recent mushrooming of new banks is likely to nibble away at its current market share something MCB is not worried about. Financial Performance & Challenges The entire domestic banking industry, MCB included, was immune to the toxic assets which were at the crux of the credit crunch. The MCB group registered a 4.1% increase in profits after tax (PAT) from Rs 3.89bn to Rs 4.05 bn for FY 2008/09, however FY 2008/09 had been boosted by Rs 426m in exceptional gains from the sale of SRL. Thus, when factoring out this exceptional item, YoY PAT grew by a pleasing 17%. On the other hand, interim results for the first half of FY 2009/10 showed a PAT semester-on-semester decrease of 12.8%. The slowdown in overall economic activities, and reduced profits arising from dealings in foreign currencies due to the strengthening of the Rupee in Q4 2009, contributed to the interim results. However, both net interest income, and net fee and commission income increased by 5.5% and 3.2% respectively, during the six months ended Dec 31st compared to the previous corresponding period.
With respect to 2010, the Central Statistics Office (CSO), has projected a faster growth rate of 6.5% for the banking sector compared to 5.2% in 2009. However, the economic recovery for Mauritius will depend on the speed of recovery of its export markets. In line with the anticipated recovery, we expect MCB to return to its usual robust growth path during FY 2010/11. As for FY 2009/10 results, the 2nd semester is likely to perform better than the first, but we believe that it will not make up for the already experienced shortfall.

Rating
Current Price: CDS Code: ISIN Code: Reuters Code: Bloomberg Code: Google Finance Code:

BUY
Rs 133 MCB.N0000
MU0008N00006

MCBL.MZ MCB.MP MAU:MCB

08-Apr-10

Trading data
52-wk range: Market capitalisation: Weight in Semdex: Weight in Sem-7: No of Shares: Avg. daily value traded: Avg. daily volume traded: Year on Year return: All time high:

Rs 99.50 - 150 Rs 33.3 bn 22.1% 31.9% 250,375,595 Rs 15.67m 123,900 29.1% Rs 192 (15-Feb-2008)

Valuation: Buy Based on first semester results, we forecast a 9% decrease in total income for the group, resulting in an 8% decrease in PAT. As for returns, the anticipated dividend yield at the end of FY 2010 is 3.9% compared to SBMs 3.5%; and EPS is expected to dip to Rs 15.36. MCB at Rs 134, is currently trading at a forward PER of 8.7x, a discount to both SBM at 11.4x and the market at 10.4x. Its Price to Book-value ratio stands at 1.8x, higher than SBMs 1.6x. Based on the above, we recommend investors to buy the counter.
Highlights Total income (Rs bn) Profit after tax (Rs bn) Earning/Share (Rs) Div./Share (Rs) Loan:Deposit NAV per Share (Rs) 2007 11.37 2.55 9.74 2.90 77.7% 56.87 2008 13.82 3.89 15.58 4.55 73.5% 68.90 2009 13.85 4.05 16.71 5.25 81.0% 78.29 2010F* 12.61 3.72 15.36 5.25 80.8% 73.51

Balance Sheet data

Shareholders equity: Capital adequacy ratio: Non-performing loans ratio

Rs 18.57 bn 15.1% 4.80%

Forecasted data
Reduction in EPS: Dividend Yield: Price Earning Ratio : Reduction in total income:

8.1% 3.95% 8.7x 9.0%

Valuation Operating Margin Price:Earning Ratio Price:NAV Ratio Dividend Yield Return on Equity * AXYS Forecast

2007 23.7% 10.6x 1.81x 2.8% 19.1%

2008 27.6% 11.0x 2.50x 2.6% 24.8%

2009 31.8% 7.5x 1.61x 4.2% 22.7%

2010F* 32.1% 8.7x 1.81x 3.9% 20.2%

Based on current share price of Rs 133

AXYS Stockbroking Ltd

April 2010

Mauritius Commercial Bank

The Mauritius Commercial Bank Ltd (MCB)
MCB, the oldest bank in Mauritius (and amongst the first in the southern hemisphere), was founded in 1838. It is widely regarded as the local reference and leader in the banking sector. MCB enjoys a domestic deposit and credit market share of in excess of 40%. It was amongst the first companies to be listed on the Stock Exchange of Mauritius (SEM), and is today amongst the most traded and liquid securities on the bourse. MCB is the largest company on the SEM by market capitalization which stands at 22.5% or Rs 33.8 bn. MCB has around 700k unique customers, over 18k shareholders, and some 2,600 employees. The bank has a regional presence in the form of foreign branches, subsidiaries, and associates. It is present in Madagascar, Moambique, Seychelles, Maldives, Runion, and Mayotte. In addition, the bank has representative offices in Paris and Johannesburg. The figures below depict MCBs local and foreign subsidiaries, with effective the holding in associates listed in brackets. Table 1 below lists the top ten shareholders of the company. In December 2007, its constitution was amended to lift the ceiling on share ownership by a single entity, however the Bank of Mauritius (BoM), imposes a 10% limit. Shareholder
Mauritius Union Assurance Anglo-Mauritius Assurance Society POLICY PAD SSLN c/o SSB Boston Old Mutual Life Assurance State Street Bank & Trust Co a/c The Africa Emerging Markets Fund NPF RHT Investments La Prudence Mauricienne Assurances Pictet et Cie a/c Blakeney LP Others Total

Shares [M] 8.0 7.2 5.7 5.0 4.3 4.2 3.7 3.2 3.2 2.7 203.2 250.4

% of Total 3.2 2.9 2.3 2.0 1.7 1.7 1.5 1.3 1.3 1.1 81.2 100

Table 1. Top 10 Shareholders in MCB

Financial Performance

For its FY ended June 30 2009, MCB registered a marginal increase in profit after tax (PAT) from Rs 3.9bn to Rs 4.0bn. Earnings per share (EPS), excluding exceptional items increased from Rs 15.58 to Rs 16.71, and its price to th earnings ratio (PER) - as at 30 June - decreased from 11.0x in 2008 to 7.5x in 2009. Expectedly, higher dividends per share (DPS) at Rs 5.25 (up from Rs 4.55) were handed out. However, a minor deterioration was noted in the loans to deposit ratio which increased to 82.7% from 75.6%. Alternatively, the percentage of non-performing loans improved to 4.8%, down from 5.8%. The first half results for FY 2009/10, were in line with prevailing economic conditions. The groups semester-onsemester PAT decreased by 12.8% from Rs 1,944.8m to Rs 1,695.0m. However, net interest income increased by 5.5%; and net fee and commission income edged higher by 3.2%. Rationalisation of the Performance Given the market conditions prevailing in FY 2008/09, MCBs performance during FY 2008/09 is a highly commendable one. MCB interest income leveled off at Rs 10.3bn but interest expense decreased by 13.2% to Rs 5.3bn. A reasonable explanation for this behaviour lies within the 250 basis points reduction in the key repo rate by the Bank of Mauritius to 5.75%. The operating income for the group improved to Rs 8.3bn (+11.0%), partially due to the 13.7% rise in profit arising from dealing in foreign currencies. The bank's increased cost base can be April 2010 2

th

Figure 1. MCB local subsidiaries and associates

Figure 2. MCB foreign entities

AXYS Stockbroking Ltd

Mauritius Commercial Bank

attributed to investments in technology, and infrastructure. All in all, attributable profits improved from Rs 3.69bn to Rs 3.96bn (+7.3%). With respect to results for the first half of FY 2009/10, the decline came from a 45% drop in other income. This drop is primarily due to a strengthened Rupee, which led to reduced profits from Forex dealings and losses from holding forex. Scorecard Below is the financial scorecard provided by the MCB group. Risk Assessment MCBs capital adequacy ratio (CAR) dipped from 16.9% to 15.1%; in line with the Mauritian banking industrys CAR, which declined from 15.1% to 14.7%. Most of a commercial banks risk is captured under a single key performance indicator: the CAR. The latter measures a banks capital resources against its risk-weighted assets; which the BoM requires to be at a minimum level of 10%. The CAR was calculated under the Basel I standard until FY ended 2008, after which, the BoM required the adoption of Basel II standards. Basel II, which includes refinements such as additional deductions both from Tier 1 and Tier 2 capitals, better captures the risk profiles of the domestic banking sector. Further, the BoM amended its credit concentration risk guidelines in December 2008 to further strengthen the industry. In this respect, MCB lies well within imposed limits with a properly diversified cross-sectoral mix of loans and advances.

Figure 4. MCB's loans and advances portfolio by sector

Forward Performance
MCBs top & bottom lines Going forward, there continue to be no direct threats to the local banking sector. However, the banking sector will remain quiescent in-line with the fragile and a vulnerable pick up of the economy. We forecast the MCB group total income to contract by around 9% to Rs 12.6bn and PAT to drop by 8% to Rs 3.7bn Domestic Operations MCBs corporate banking strategy focuses on reinforcing and broadening its client base, and it is committed to supporting various sectors thus contributing to economic 3

Figure 3. MCB's financial scorecard

An analysis of the scorecard targets suggests the group expects to perform less well than during FY 2009/10 in line with the slowdown of the economy and its resulting spillover effect on banking activities.

AXYS Stockbroking Ltd

April 2010

Mauritius Commercial Bank

recovery. On the retail banking side, the bank has introduced new packages targeted at different age groups, such as the 18-25, and education plans. Its way forward is likely to involve exploiting such niche market opportunities. MCB is well positioned to stay the leader in the card business especially with its pursuit of diversified growth as exemplified by the recent introduction of AMEX, and agreement with China Union Pay. Also, MCB continues to enhance its service offerings. The recent refurbishment of its branches, and the implementation of a new core banking system follow along those lines. Overseas Operations MCBs foreign entities, other than associate BFCOI, are expected to continue to suffer. Segment B (foreign) income represents about 35% of revenue, of which a little more than half (17.5% - 20%), comes from its foreign entities. BCFOI which operates principally in state subsidized French overseas territories, makes up the lions share of income from overseas operations, is a joint venture with Socit Gnrale. BCFOI is in expansionary mode, as exemplified by steady gains in market share and the openings of four new branches in Runion in 2008. It is expected to provide a boost to MCBs bottom line. The groups overseas subsidiaries are operating in a difficult environment. The Seychelles is undergoing fundamental structural reforms following the receipt of an IMF standby agreement and the SCR was recently devalued by 50%. Madagascar remains politically unstable after the coup. However, the bank remains cautious with its expansion in Africa. It is working with selected banks, mostly in the SADC region, generally to confirm oil import letters of credit for short maturity. Foreign Participation For the first time in five years, foreign investors were true net sellers of MCB to the tune of Rs 65m for calendar year 2009. We say true because the bank registered net foreign purchases worth Rs 418m, excluding the 2006 buy back of Lloyds share in MCB. In 2009, the bank fared far better than its peer which recorded net sales amounting to Rs 113m, and the rest of the market. Total foreign purchases on the counter amounted to Rs 1.40bn, while total foreign sales reached Rs 1.47bn. Foreign investors make up around 20% of the companys shareholding, this figure had previously fallen to 10% following the 2006 Lloyds buy back. Figure 6 below shows foreign participation on the official market.

Figure 6. Net foreign participation

Valuation & Recommendation

The Mauritian banking sector is well regulated, relies primarily on deposit funding and is free of the toxic assets at the heart of the meltdown down of the financial industry. Additionally, there exists no forthright threat to the domestic banking system. However, global recovery remains fragile, most stimulus measures in developed and emerging economies come to an end in 2010; and several governments across the globe are expected to curtail spending due to increasing sovereign debt. The small export oriented Mauritian economy is likely to suffer from a slow and long worldwide recovery. MCB is a well anchored company inside the Mauritian landscape; yet we forecast a decrease in total income, and a decline in PAT for FY 2009/10. We attribute this drop primarily to the reduction in profits arising from dealing in foreign currencies. The bank is nonetheless expected to remain a key player in the economy, and return to a growth path during FY 2011. Based on first semester results, we forecast a 9% decrease in total income for the group, resulting in an 8% decrease in PAT. As for earnings, EPS is expected to dip to Rs 15.36, and the forward PER is expected to stand at 8.7x compared to SBMs 11.4x and the markets present 10.4x. Additionally, MCB at Rs 134, is trading at Price to Bookvalue ratio of 1.8x, higher than SBMs 1.6x. Based on the above, we recommend investors to buy the counter.

Share Performance
The counter is currently trading at Rs 133. This represents a year on year positive return of 29.1%. By contrast, for the same period, the Semdex gained 45.2%, and SBM 47.6%. Its share price outperformed the domestic market during the crux of the crisis; but, it rose in-line with the Semdex during the rebound; and, it has since the end of 2009, underperformed compared to the benchmark as shown in figure 5 below.

Figure 5. MCB share performance

AXYS Stockbroking Ltd

April 2010

Mauritius Commercial Bank

AXYS Stockbroking Ltd Bowen Square, 10 Dr Ferrire Street, Port Louis Tel: (230) 213 3475 Fax: (230) 213 3478 Email: [email protected] Url: http://www.axysstockbroking.com

Bhavik Desai [email protected] Vikash Tulsidas [email protected]

AXYS Stockbroking Ltd has issued this document without consideration of the investment objectives, financial situation or particular needs of any individual recipient. Recipients should not act or rely on any recommendation in this document without consulting their financial adviser to determine whether the recommendation is appropriate to their investment of this document. This document is not, and should not be construed as, an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. This document has been based on information obtained from sources believed to be reliable but which have not been independently verified. AXYS Stockbroking Ltd makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. AXYS Stockbroking Ltd and its officers, directors and representatives may have positions in securities mentioned in this document, or in related investments, and may from time to time add to or dispose of such securities or investments. AXYS Stockbroking Ltd is a member of the Stock Exchange of Mauritius and is licensed by the Financial Services Commission.

AXYS Stockbroking Ltd

April 2010

State Bank of Mauritius

Overview
SBM is the number two in the Mauritian banking sector; and has both regional (Madagascar) and international (India) presence. The latter is unlikely to increase its market share, especially with the recent arrival of new banks. Instead, it is in a phase of consolidating its position on the domestic market, and readjusting its growth strategy both locally and in India.

Rating
Current Price: CDS Code: ISIN Code: Reuters Code: Bloomberg Code: Google Finance Code:

ACCUMULATE
Rs 77.50 SBM.N0000
MU0040N00009

Financial Performance & Challenges

The entire domestic banking industry, SBM included, was immune to the toxic assets which were at the crux of the credit crunch. The SBM group registered a marginal decrease in profits after tax (PAT) from Rs 2.11bn to Rs 2.03bn, but net interest income increased by 17.4% on the back of reduced interest expenses. As for the interim results for the first half of FY 2009/10, semester-on-semester PAT showed a decline of 12.0%. The slowdown in economic activity across the board, and drop in dividend income, contributed towards the interim results. However, net interest income increased by 7.6% for the six month period ending 31 Dec 2009. With respect to 2010, the Central Statistics Office (CSO), has projected a faster growth rate of 6.5% for the banking sector compared to 5.2% in 2009. However, the Mauritian return to a higher growth path will depend on the recovery speed of its export markets. The second semester will probably be better than the first, but banking as usual is unlikely to make up for the already incurred shortfall in dividend income. Going forward, the traditionally prudent SBM is looking to increase and diversify the product holdings within its existing client base, and pursue an expansion in its card and e-commerce businesses. We thereby foresee a shift from a cost management strategy to a revenue generation one for SBM.

SBML.MZ SBM.MP MAU:SBM

08-Apr-10

Trading data
52-wk range: Market capitalisation: Weight in Semdex: Weight in Sem-7: No of Shares: Avg. daily value traded: Avg. daily volume traded:

Rs 50 - 83 Rs 23.5 bn 15.6% 22.6% 303,740,223 Rs 5.56m 79,400 47.6% Rs 105 (20-Feb-2008)

Valuation: Accumulate
Based on first semester results, we forecast a 9.5% decrease in total income for the group, resulting in an 9.2% decrease in PAT. As for returns, the anticipated dividend yield at the end of FY 2010 is 3.5% compared to MCBs 3.9%; and EPS is expected to dip to Rs 7.18. SBM at Rs 77.50, is trading at a forward PER of 10.8x, which is at a premium to both MCB at 8.7x and the market at 10.4x. Stripping off Mauritius Telecom and SICOM, SBMs book value is expected to reach Rs 44.84 at the end of FY 2009/10, but stands at Rs 49.67 inclusive of MT and SICOM. That is, SBM is trading at a price to book value ratio of 1.6x which is lower than its peers 1.8x. Based on the above, we recommend investors to accumulate the counter Highlights Total income (Rs bn) Net Income (Rs m) Earning/Share (Rs) Div./Share (Rs) Loan:Deposit NAV per Share (Rs) 2007 5.90 1.51 5.03 2.10 61.5% 36.86 2008 7.40 2.11 8.19 2.55 65.0% 42.50 2009 6.93 2.03 7.84 2.75 66.8% 50.13 2010F* 6.27 1.86 7.18 2.75 65.6% 49.67

Year on Year return: All time high:

Balance Sheet data

Shareholders equity: Capital adequacy ratio: Non-performing loan ratio

Rs 12.94 bn 24.0% 2.0%

Forecasted data
Reduction in EPS: Dividend Yield: Price Earning Ratio : Reduction in total income:

8.4% 3.55% 11.4x 9.5%

Valuation Operating Margin Price:Earning Ratio Price:NAV Ratio Dividend Yield Return on Equity * AXYS Forecast

2007 28.7% 10.1x 1.37x 4.2% 17.7%

2008 31.6% 11.7x 2.26x 2.7% 21.4%

2009 32.9% 8.9x 1.40x 3.9% 17.2%

2010F* 32.7% 10.8x 1.56x 3.5% 14.2%

Based on current share price of Rs 77.50

AXYS Stockbroking Ltd

April 2010

State Bank of Mauritius

State Bank of Mauritius Ltd (SBM)
SBM, the second largest bank in Mauritius, was founded post independence in 1973. It is widely regarded as the bank of the people for the people, given its 5% direct and 38% indirect shareholding by the state. SBM enjoys a domestic deposit market share just under 24% and domestic credit market share of about 23%. It was listed on the Stock Exchange of Mauritius (SEM) in 1995, and is today amongst the trinity of most traded and liquid securities on the bourse totaling a market capitalization of 15.4% or Rs 23.7bn. SBM has around 340k unique customers, over 17k shareholders, and some 1,100 employees. The bank has a noteworthy regional presence via its foreign entities, subsidiaries, and associates in Madagascar, and India. Also, the bank maintains a strategic interest via shareholding in State Insurance Company of Mauritius Ltd (SICOM) [20%] and Mauritius Telecom Ltd (MT) [19%]. Figure 1 below shows SBMs local subsidiaries, with the effective holding in associates listed in brackets. Shareholder
NPF SBM - Treasury Shares SICOM Govt of Mauritius SSLN c/o SSB Boston Old Mutual Life Assurance State Street Bank & Trust Co a/c The Africa Emerging Markets Fund Pictet et Cie a/c Blakeney LP Anglo-Mauritius Assurance Society DBM Pictet et Cie a/c Heviben LP Others Total

Shares [M] 49.2 45.6 44.1 15.0 10.0 8.1 6.7 6.6 5.8 4.6 108.1 303.7

% of Total 16.2 15.0 14.5 4.9 3.3 2.7 2.2 2.2 1.9 1.5 35.6 100

Table 1. Top 10 Shareholders SBM

to Rs 2.0bn. Earnings per share (EPS) excluding exceptional items dipped from Rs 8.19 to Rs 7.84, whilst th its price to earnings ratio (PER) as at 30 June decreased from 11.7x in 2008 to 8.9x in 2009. Consequently, dividends per share (DPS) were higher at Rs 2.75 (up from Rs 2.55). However, the loans to deposit ratio registered a slight deterioration increasing to 66.8%. On the risk side, the ratio of gross impairment to gross advances improved by 40 basis points to 2%. The first half results for FY 2009/10 at SBM were in line with prevailing economic conditions. The groups semester-on-semester PAT declined by 12.0% from Rs 1,257.2m to Rs 1,106.5m; however, net interest income improved by 7.6% to Rs 1,242.2m. Rationalisation of the Performance Given the market conditions during FY 2009/10, SBMs performance is a highly commendable one. Its interest revenue leveled off at Rs 5.3bn, but interest expense fell by 10.7% to Rs 2.9bn. The reduction of 250 basis points in the key repo rate by the Bank of Mauritius (BoM) to 5.75%, is the plausible explanation. In fact, the results for FY 2007/08 had been boosted by a large one-off dividend income given by MT. Thus, excluding this item, PAT actually grew by 35.3% YoY, due to higher business volumes. With respect to results for the first half of FY 2009/10, the decline was primarily the result of a Rs 134m reduction in dividend income, and partially due to the drop in international trade which led to reduced forex earnings. Also, SBM has admittedly made inefficient use of its capital base in the past, due to over prudent risk policies 2

Figure 1. SBM domestic and foreign bodies, subsidiaries, and associates.

Table 1 below depicts the top ten shareholders of the firm. The company constitution disables the direct/indirect ownership of more than 3% of the company by a single investor without the consent of the board; however, those who already owned a larger share were allowed to maintain their shareholding levels. The top ten shareholders constitute 64.4% of the total ownership.

Group Financial Performance

During its FY ended June 30 2009, SBM registered a marginal decrease in profits after tax (PAT) from Rs 2.1bn AXYS Stockbroking Ltd
th

April 2010

State Bank of Mauritius

as exemplified by its non-performing assets ratio which stands at 1.6%, and its capital adequacy ratio at 24%. Scorecard Below is the financial scorecard provided by the SBM group.

Figure 3. SBM's loans and advanced portfolio by sector

Forward Performance
SBMs top and bottom lines Going forward, there continue to be no direct threats to the local banking sector. However, the banking sector will remain quiescent in-line with the fragile and a vulnerable pick up of the economy. We forecast the SBM group revenue to contract by around 9.5% to Rs 6.3bn and net income to drop by 9.2% to Rs 1.86bn Macroeconomic overview The Central Statistics Office (CSO) has forecast that Mauritian economy will grow by 4.3% at market prices in 2010 compared to 2.2% in 2009 (and 5.1% in 2008). The banking sector is projected to grow at an increased rate of 6.5% in 2010, higher than the crisis level of 5.2% (14% in 2008). This slight pick-up is pinned on to an anticipated increase in currently subdued economic activities across the board. Monetary Policy The latest Monetary Policy Committee (MPC) kept the repo rate unchanged at 5.75% despite pressure from the export oriented enterprises and the services industries. Domestic Operations SBM is first and foremost consolidating its present position. It aims to increase both retail and corporate penetration; and to increase client portfolios to more than one SBM product. The bank is also trying to increase its card business, and renew its e-commerce business. For doing so, the bank has hired aggressively to re-do its HR 3

Figure 2. SBM's financial scorecard

An analysis of the scorecard targets suggests the group expects to perform less well than during FY 2009 in line with the slow down in banking activities. Risk Assessment SBMs capital adequacy ratio (CAR) edged higher from 21% to 24% despite the adverse economic conditions; in contrast to the Mauritian banking industrys CAR, which declined from 15.1% to 14.7%. Most of a commercial banks risk is captured under a single key performance indicator: the CAR. The latter measures a banks capital resources against its risk-weighted assets; which the Bank of Mauritius (BoM) requires to be at a minimum level of 10%. The CAR was calculated under the Basel I standard until FY ended 2008, after which, the BoM required the adoption of Basel II standards. Basel II, which includes refinements such as additional deductions both from Tier 1 and Tier 2 capitals, better captures the risk profiles of the domestic banking sector. Further, the BoM amended its credit concentration risk guidelines in December 2008 to further strengthen the industry. In this respect, SBM lies within imposed limits with a well diversified crosssectoral mix of loans and advances, as shown in Figure 3 below.

AXYS Stockbroking Ltd

April 2010

State Bank of Mauritius

policies and marketing strategies. The banks cost base is likely to grow due to the additional HR costs, infrastructure investment, and the renovation of its local branches. Overseas Operations SBMs foreign entity in Madagascar is expected to continue to suffer, whilst the Indian subsidiary is set to continue expanding. The combined Indian and Malagasy operations currently represent a small fraction of the groups loans and advances, but it is expected to grow in time. Madagascar remains politically unstable after the coup, whilst the Indian economy continues to grow well above the global average. SBM intends to diversify its product offerings in India, and use it as a platform for trade finance, and wealth management. The banks strategy on the sub-continent is not to become another commercial bank, but to become a key player in managing the wealth of the emerging upper-middle class. Thus, Indian operations which we believe will be the future growth area for the bank, is expected to boost to both top and bottom lines.

Figure 5. Net foreign pariticipation

Valuation & Recommendation

The Mauritian banking sector is heavily regulated, relies primarily on deposit funding and free of the toxic assets at the heart of the meltdown down of the financial industry. Additionally, there exists no forthright threat to the domestic banking system. However, global recovery remains fragile, most stimulus measures in developed and emerging economies come to an end in 2010; and several governments across the globe are expected to curtail spending due to increasing sovereign debt. The small export oriented Mauritian economy is likely to suffer from a slow and long worldwide recovery. SBM is an integral part of the Mauritian landscape but suffers from inherent structural problems arising from state ownership. Traditionally, the bank has adopted a prudent approach, thus it is attempting to shift its strategy towards revenue generation, and away from its cost management position. SBM also maintains strategic investments in SICOM (20%), and MT (19%). The latter is expected to be listed on the SEM sooner or later; thereby unlocking shareholders value going forward. We forecast reduction in both total income, and PAT for FY 2009/10. We attribute this decline to be primarily due to the significant decrease in dividend income from associates. Nonetheless, SBM will remain a key player in the economy due to its sizeable market share; and return to a growth path during FY 2011, and possibly even fare above expectations if it succeeds in its new endeavours in the card business, e-commerce, and trade finance & wealth management in India. Based on first semester results, we forecast a 9.5% decrease in total income for the group, resulting in an 9.2% drop in PAT. As for earnings, the EPS is expected to dip to Rs 7.18 (-8.4%), and the forward PER is expected to stand at 10.8x compared to MCBs 8.7x and the markets present 10.4x. Additionally, SBM at Rs 78 is trading at a premium to the projected book value of Rs 49.67, and NAV per share with MT and SICOM factored out at Rs 44.84. Its price to book value ratio at 1.6x, is lower than MCBs 1.8x. Based on the above, we recommend investors to Accumulate the counter. 4

Share Performance
The counter is currently trading at Rs 77.50. This represents a year on year positive return of 47.6%, which is higher than the Semdex (+45.2%) and MCB (+29.1%) for the same period. Its share price outperformed, for the most part, both its peers and the benchmark both during the crux of the crisis, and during the rebound, as shown in the figure 3 below.

Figure 4. SBM share performance

Foreign Participation For the first time in five years, foreign investors were net sellers of SBM to the tune of Rs 113m during calendar year 2009. Total foreign purchases for the period amounted to Rs 778m, while total foreign sales were worth Rs 891m; which represent 25% of the total foreign turnover. This sell was in-line with prevailing market conditions on the local stock exchange which recorded total net foreign sells worth Rs 380m. Figure 4 below shows the level of foreign participation on the official market. AXYS Stockbroking Ltd

April 2010

State Bank of Mauritius

AXYS Stockbroking Ltd Bowen Square, 10 Dr Ferrire Street, Port Louis Tel: (230) 213 3475 Fax: (230) 213 3478 Email: [email protected] Url: http://www.axysstockbroking.com

Bhavik Desai [email protected] Vikash Tulsidas [email protected]

AXYS Stockbroking Ltd has issued this document without consideration of the investment objectives, financial situation or particular needs of any i ndividual recipient. Recipients should not act or rely on any recommendation in this document without consulting their financial adviser to determine whether the recommendation is appropriate to their investment of this document. This document is not, and should not be construed as, an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. This document has been based on information obtained from sources believed to be reliable but which have not been independently verified. AXYS Stockbroking Ltd makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. AXYS Stockbroking Ltd and its officers, directors and representatives may have positions in securities mentioned in this document, or in related investments, and may from time to time add to or dispose of such securities or investments. AXYS Stockbroking Ltd is a member of the Stock Exchange of Mauritius and is licensed by the Financial Services Commission.

AXYS Stockbroking Ltd

April 2010