Analysis and Recommendations
This chapter covers industry, financial and business analyses and is organised as follows:
Under industry analysis:
- Porter's Five Forces- Analysis of the structure of the banking sector.
- Comparative analysis- MCB's performance vs banking sector averages.
- Z-Score Results- Analysis of MCB Z-Score and compared to the banking sector's Z-Score.
Under financial and business analysis:
- Ratios analysis of MCB Financial Performance in terms of capital adequacy, asset quality, profitability, efficiency, liquidity, solvency, and investment returns.
- Comparative analysis- MCB's performance v/s SBM's performance.
- SWOT analysis- Analysis of the internal and external factors influencing MCB's performance.
- PESTEL analysis- Analysis of the macro factors influencing MCB's performance.
Based on the different analyses, a conclusion is drawn on the exceptionally poor financial and business performance and the reasons for its difficulties. Recommendations are made with a view to improve performance.
Porter Five Forces
Threats of new entrants: High
The Banking Act 2004 of Mauritius allows international banks to join the local banking industry, which implies that local banks may face increased competition from overseas banks. Newly established foreign banks are likely to provide higher quality services to improve their market position (Deeljore, 2012). Consequently, existing local banks are concerned that their performance may decline and may lose some of their market share to these newcomers (Moothoor, 2012). As a result, the threats of new entrants are high. Warwick Private Bank and Bank of China (Mauritius) Ltd were the last two banks to integrate the banking sector.
Power of buyers: High
Government, individual and businesses are the primary clients of a bank. These are depositors who place their money in banks to receive an income in line with the savings interest rate offered by the institution. These deposits enable banks to generate revenues through loans. Savers, therefore, have considerable bargaining power because they have the right to decide in which bank to place their funds (Deeljore, 2012).
With 19 banks operating in Mauritius, clients have the option of selecting the one that offers them the lowest interest rates on loans, as well as the lowest commissions and fees for its services. Furthermore, most banks publish information on their banking products, services, and interests. This allows clients to evaluate the benefits, guide their decision-making on borrowings and savings, and switch from one bank to another for better services. Thus, customers have minimal switching costs and have strong bargaining power.
Power of suppliers: Low
Capital is the primary resource of any bank (Dhurmeea, 2014). Deposits, shareholders’ investments, and interbank loans are the key sources of capital for banks. With sufficient capital in hand, the bank can service the demands of its borrowers and meet the withdrawal expectations of its depositors. Mauritius' banking sector liabilities include deposits from both residents and non-residents, which account for 76.7% of total banking sector liabilities (BOM, 2021). Banks are highly dependent on deposits in order to provide loans. Therefore, their bargaining power remains low.
Threats of substitutes: High
Despite the severe competition, the banking sector in Mauritius is not threatened by alternatives to its products, such as bank loans and savings accounts. This is mostly because each bank determines its own interest rate, based on the Key Repo Rate (KRR), set by the Monetary Policy Committee (MPC) of the central bank. Customers may be influenced to switch as some banks provide more flexible and advantageous lending facilities. While SBM only offers a five-year payback duration on personal loans, MCB offers an extended repayment option of up to seven years.
Non-banking institutions such as insurance and mutual funds pose some dangers to the activities of banks as they do sell similar products and services. CIM Finance, a non-banking financial organisation, provides comparable services as a bank: deposits accounts, credit cards, and leasing facilities. Hence, the threats of substitution are high.
Competitive rivalry: High
In 2003, there were ten commercial banks in Mauritius. In 2013, there were twenty-one commercial banks in operation. This represented a more than twofold increase in commercial banks within ten years. As the number of banks continues to grow in the sector, banks are having difficulties maintaining their market position (Dhurmeea, 2014). Banks are in a fierce battle for the same customer base, and the stakes are high. In other words, the banking industry is very competitive.
As an example, consider the two largest banks in Mauritius, MCB and SBM, which are in a tight race with one another for market share and profitability. Some 30 years back, MCB developed the "MCB Rupys Account" for children aged between 0-17 years, which entitled them with several exciting gifts and be eligible to preferential rates. To stay up with this competition, SBM launched the "SBM Amigos Account," which offers almost similar advantages as the "MCB Rupys Account" (Moothoor, 2012).
MCB's Performance v/s Banking Sector Averages
MCB's performance has been consistent with the banking industry average in terms of many metrics. Comparing MCB's performance to that of the industry norms, MCB noted fewer non-performing loans as a percentage of total loans, better ROA and ROE, lower non-interest expenditures as a percentage of gross revenue, and higher loan to deposit ratios.
Nonetheless, MCB's ROA decreased by 0.4% in 2021, while the average ROA for the banking industry rose by 0.2%. Furthermore, in 2021, the average ROE for the banking industry rose by 3.2%, while MCB's ROE decreased by 2.2%. From 2019 to 2021, MCB's liquid assets to short-term liabilities and capital to assets were much lower than the industry average. Regarding regulatory capital to total assets and total loans to deposits for the years 2019 through 2021 in the banking industry, MCB's ratios are quite similar.
MCB's Z-Score v/s Banking Sector Average Z-Score
The banking sector plays an important role in Mauritius, and by the end of June 2019, its total assets represented around 278.7% of GDP 2019 (BOM, 2019). It is clear from the graph above that MCB has a better financial position and a more stable banking system than other banks, as shown by its Z-score being higher than the sector average.
Due to the outbreak of the COVID-19, global economic and financial environment has worsened, banking and financial operations have diminished, and the amount of investment has been dwindling. From 2019 to 2020, the Z-score of both the banking industry and MCB fell by more than 50%, indicating a significant decline in the soundness and stability of banks. In 2021, the banking industry remained vulnerable to an unpredictable operating environment. For 2020 and 2021, MCB had a worse Z-score than the banking industry, thus signalling a poor performance from MCB.
Ratio Analysis
Staggering Loans and Advances
From Rs 766,900 million in 2019 to Rs 862,300 million in 2021, the banking sector's loans and advances have continued to grow. Additionally, the total amount of loans and advances given by MCB has grown, going from Rs 350,550 million in 2019 to Rs 481,179 million in 2021. This increase is being fuelled by the continued expansion of banks' cross-border activity as well as ongoing double-digit growth in foreign currency loan originations.
However, owing to the persistent uncertainty connected with the pandemic and the resulting economic disruptions, MCB reported only a 9% increase in its loans in 2020 against 21% in 2019. This was attributable to the unfavourable effect of the pandemic on demand for credit.
Soaring Deposits
When it comes to financing, banks have relied mostly on depositors. The total deposits have risen steadily since 2019 and reached Rs 1,465,300 million for the banking industry in 2021. According to the most recent data, the deposits at MCB also increased, from Rs 314,377 million in 2019 to Rs 475,484 million in 2021.
Increased deposits from global businesses and non-residents, as well as from households, accounted for most of the growth in deposits. MCB's foreign currency deposits climbed by 55.8% due to the depreciation of Mauritian rupees and the commercial efforts of MCB in mobilising more foreign funds.
Satisfactory Capital Buffers
MCB's capital resources are enough to satisfy the demands of its stakeholders, including regulators, clients, and counterparty banks. The bank's capital position has been constant between 2019 and 2021. As at June 2021, MCB's Tier 1 capital and CAR remained at 15.8% and 16.8%, respectively, despite the significant expansion in risk-weighted assets tied to the bank's worldwide operations. This was higher than the minimum regulatory requirement of 11.25%.
Nonetheless, more capital is required in order to run more effectively, increase business performance, and preserve or enhance its banking ratings. As a result, MCB increased its stated capital by Rs 2 billion via a rights issue, with the proceeds from the first offering of Notes under the Group's Multi-Currency Note Program being used to fund the injection (MCB, 2021).
Slightly Improved Asset Quality
The NPL-to-Gross Loans and NPL-to-Net Loan ratios fell throughout the period under consideration. The comprehensive credit risk management procedures implemented by MCB, the re-opening of Mauritian borders, and the issue of a revised Guideline by the BOM for the write-off of non-performing loans all contribute to this falling trend being confirmed. The COVID-19 support measures, including loan moratoria and wage assistance programmes, contributed considerably to the repayment of loans taken by individuals and businesses.
However, MCB increased its Expected Credit Losses (ECL) provisioning buffers, which grew from 0.9% in 2019 to 2.7% in 2021, in order to absorb the knock-on effects of COVID-19 and economic shocks on the bank. It signals a potential increase in credit risk on future operations, as noted by an increase in the cost of risk from 0.6% in 2019 to 1.4% in 2021, which is partially explained by an increase in expected losses and impairment charges. A provisioning coverage ratio that is growing but still below 70% indicates that MCB's asset quality may be at risk. MCB may be impacted by non-performing loans, especially with regards to the high concentration of lending linked to slow-growing sectors such as property development, manufacturing, and tourism.
Declining Profitability Levels
From 2019 to 2021, the Net Interest Margin (NIM) for MCB and SBM has fallen. This is explained by a decrease in the Key Repo Rate, set by the MPC at 1.85%. Since the beginning of 2019, the yield on interest-earning assets has fallen for both MCB and SBM. This is mostly due to decreased margins on international operations, which have fallen in tandem with the decline in LIBOR.
While MCB's ROA has dipped from 2.4% in 2019 to 1.4% in 2021, SBM's ROA has risen from 0.5% to 0.9% since the start of 2019. SBM's ROE has increased from 2.8% to 10.2%, whereas MCB's ROE has decreased from 18.2% to 11.7%. The disparity may be explained by the decline in earnings at MCB and the rise in profits at SBM, respectively. Over the period under review, MCB's negative results were primarily driven by its declining profits, which were caused by a decline in annualised average net interest income margins, as well as a higher expenditure pool, which consisted primarily of higher impairment losses and higher interest-based expenses.
Both MCB and SBM's gross interest margins have risen above the industry average from 2019 to 2021. In addition to a rise in interest spreads, banking fees and charges, both banks have been increasing their investment in low-risk securities, which accounts for the steady growth.
On one hand, MCB has seen a steady decline in its operating profit margin, while on the other hand, SBM has experienced an increase. This decline is explained by its inability to control its operational costs and increases in net impairment of its financial assets.
Management Inefficiency
MCB's cost-to-income ratio dropped to 32.5% in 2020 from 33.7% in 2019 before surging to 34.1% in the following year. Non-interest expenses have grown faster than operating income, which is largely to blame for this trend. SBM follows a similar trend. In 2020, MCB’s profit on exchange grew by 19.5%, while its net gain from financial instruments held at fair value after the depreciation of rupees against foreign currencies boosted operational income by 25.3% (MCB, 2020). The 5.6% rise in MCB’s operating expenses in 2020 comprises a 2.9% increase in employee expenditures and a 21.3% increase in depreciation and amortisation charges (MCB, 2020).
However, in 2021, MCB’s operating income fell by 17.2%, mostly attributable to a decline of 11.9% in profit on exchange and net gain from financial instruments carried at fair value amid market volatility, as well as net losses on sales of financial instruments (MCB, 2021). MCB’s operating costs climbed by 7.5%, driven by a 4.4% increase in employee expenditures, an 18.5% increase in depreciation and amortisation charges, and a 9% increase in IT and software maintenance costs (MCB, 2021).
Adequate Liquidity Buffers
Under the transitional arrangements established by the BOM, the Liquidity Coverage Ratio (LCR) increased to 100% as at 31st January 2020. MCB performed comfortably over the LCR standards from 2019 to 2021, above the required LCR level. However, it recorded a consolidated LCR of 322% in 2021, which is equal to a liquidity surplus of around Rs 79 billion over-stressed total net cash outflows, marking a 39.2% decrease in its liquidity surplus from the previous year. A consolidated LCR of 503% was recorded in 2020, equating to an excess of about Rs 110 billion over-stressed total net cash outflows over the previous year.
MCB reported a Net Stable Funding Ratio (NSFR) of 133% in June 2021, which exceeds the minimum level of 100% recommended by Basel III. This represents an increase from 124% in 2020 and 123% in 2019, respectively. MCB has a greater LCR and NSFR than SBM, even though both banks satisfy the Basel III capital standards.
Between 2019 and 2021, both MCB and SBM's Loan-to-Deposit and Net Loan-to-Total-Assets ratios dropped, thus reflecting a fall in lending by both banks. Due to the high level of uncertainty in the economy and a lack of business confidence, households and corporations are more inclined to hoard money and avoid borrowing and investing.
Controlled Solvency
According to the Basel III criteria, the Tier 1 Leverage must be at least 3%. MCB's Tier 1 Leverage fell from 10.9% in 2019 to 9.5% in 2021. SBM has also recognised a decline in its Tier 1 Leverage and Tier 1 Capital during the period under consideration. Tier 1 Capital for a bank must be more than 6% of risk-weighted assets under Basel III. MCB's Tier 1 Capital fell from 21.9% in 2019 to 20.0% in 2021, but it was still well above the minimum requirement.
Dwindling Returns
MCB shareholders have seen a gradual decline in their earnings because of declining profitability and cutbacks on dividend payments from 2019 to 2021. The earnings per share have decreased from Rs 12.7 in 2019 to Rs 10.7 in 2021, a decrease of 33%. From 4.7 times in 2019 to 3.7 times in 2021, the dividend cover has also decreased. There is also a drop in dividend yield from 3.9% in 2019 to 3.2% in 2021.
SWOT Analysis
Strengths
Market-leading position
In Mauritius, MCB continues to grow its market share while also contributing to its ongoing socio-economic progress. Around 47% of the local currency deposits and 40% of the domestic credit are held by MCB. It has 40 branches, 182 ATMs, 11,100 POS terminals, more than 264,100 Internet Banking users, and more than 397,600 MCB Juice members. MCB's key principles of Integrity, Customer Care, Teamwork, Innovation, Sustainability, and Excellence have been recognised with several awards (MCB, 2021).
Weaknesses
Few branches operational during lockdown
Only 14 of the bank's 40 branches were open to cater for its clients’ banking needs, and the bank revised its operation hours to prevent the spread of the virus among its customers. A decrease in performance was noted because of a lower level of activity during these periods resulting from restrictions on mobility of people and government authorisation for movement based on alphabetical surname.
Significant impairment of financial assets
Following the COVID-19 pandemic, increases in the net impairment of financial assets negatively impacted MCB's performance due to increasing credit risk. Consequently, earnings for the years 2019 through 2021 have declined continuously.
The downgrade of MCB’s long-term deposits
In March 2021, Moody's Investors Service reduced Mauritius Government's long-term issuer rating from Baa1 to Baa2 with a negative outlook in light of the pandemic's major effects. Subsequently, MCB's long-term bank deposit and issuer ratings were downgraded from Baa2 to Baa3 with a negative outlook. The primary reason for this drop in the rating was Moody's downgrade of Mauritius' Macro Profile from "Moderate-" to "Weak+", largely driven by the possible effect of a weaker economic environment. Consequently, it resulted in a decline in performance for MCB.
Opportunities
Expansion for a global clientele
To broaden its client base, MCB may leverage its diverse network of correspondent banks, including more than 100 throughout Africa, its investment-grade status, and its worldwide network of subsidiaries and associates, as well as its network of Representative Offices. After being upgraded to Advisory Office under Category 4 in Dubai International Financial Centre (DIFC) in September 2021, MCB was better equipped to serve a larger pool of international corporations in targeted market segments (MCB Group, 2021). However, excessive international exposure may result in higher credit and sovereign risks, which in turn may impact negatively on MCB's performance.
Technological paradigms
In the wake of the pandemic, electronic channels, digital payments, and e-commerce platforms have seen a significant increase in adoption, providing an opportunity for MCB to accelerate the development and implementation of its digitally enabled products and services, among other things. Since 2020, MCB has created digital solutions such as "JuiceByMCB", MCB Juice Pro, Express Overdraft, and Punch to assist its customers during lockdown periods. However, these products are exposed to cyber risks, which may disrupt banking operations.
Threats
EU and FATF sanctions
The Financial Action Task Force (FATF) added Mauritius to its list of 'jurisdictions under heightened surveillance' in 2020, while the European Commission (EU) classified the country as a High-Risk Third Country on its updated list of High-Risk Third Countries in 2019. Many shortcomings were noted, including the failure to adopt Risk-Based Supervision, the inability to get correct basic and beneficial ownership information, and the ineffective application of financial penalties. Being a major player in the banking sector, MCB’s performance has negatively been impacted upon due to the flight of foreign money out of Mauritius, international investors’ choice to set up businesses overseas and strict scrutiny of transfers regarding foreign exchange transactions, deposits and loans.
Sectoral challenges
The manufacturing, property development, and tourist industries are expected to record low sector-wise growth rates in 2022. There are a variety of factors that might contribute to this, including poor economic growth, unfavourable changes in export markets and supply chains, productivity problems, and cost inflation. At the same time, their indebtedness seems to be on the rise, which is of much concern. The relative weight of the underlying industries in MCB’s loan portfolios suggests that the default risk is substantial. It should be closely monitored, otherwise, MCB’s performance might worsen in future.
Double Taxation Avoidance Agreement (DTAA) with India
An amendment has been made to the DTAA with India. Capital gains from the sale or transfer of shares of an Indian firm purchased by a Mauritian tax resident would be taxed in India under a new treaty signed by the two countries. There are no capital gains taxes on investments made before 1st April 2017; any earned after that date was taxed at a 50% reduction on the Indian tax rate, which is 7.5% for listed stocks and 20% for unlisted. The protocol's full tax effect was felt by investors starting on 1st April 2019, when capital gains were taxed at the full 15% in Mauritius and 40% applicable in India (Marbury, 2016). Other international financial hubs may try to attract funds away from Mauritius as DTAA changes, thereby impacting MCB's performance.
PESTEL Analysis
Political
Lockdowns
Following the discovery of the first positive cases, Mauritius was placed under two lockdowns: from 23rd March 2020 to 30th May 2020 and from 10th March 2021 to 30th April 2021, and the government enforced a severe curfew order for the whole country. The two lockdowns have significantly impacted MCB's dismal performance from 2019 to 2021. Nonetheless, MCB has implemented "Work From Home" policies and procedures to ensure the continuation of operations.
Economic
Economic contraction
Pandemic effects and strict measures severely hit economic activity in 2020, with a real GDP contraction of 14.9% in Mauritius. Companies' revenue-generating potential, profitability and creditworthiness have been negatively impacted throughout critical economic sectors, thus giving rise to potential defaults. Additionally, clients' lack of confidence in the face of a slowing economy lowered their demands for loans. This resulted in a 15.5% decline in MCB's profitability in 2020, contributing to the company's dismal performance.
In 2020, the average weighted yields on short-term securities went in a clear downward direction. The BOM stopped issuing short-term securities and lowered the KRR by 165 basis point down to 1.85% to support the flow of credit in the economy. Low interest rates have pushed down net interest margins and reduce MCB’s capacity to generate substantial profits.
Social
Health and safety
With the emergence of the COVID-19 pandemic, the safety of staff and customers was paramount. Thus, MCB adopted stringent sanitary and hygiene measures in accordance with World Health Organization and local government protocols to maintain safe working conditions across its facilities. A controlled entry system was implemented, with calibrated non-contact thermometers for body temperature screenings; social distancing markings at entrances and service counters to improve queue management; protective glass screens separating customers from tellers to ensure maximum protection; regular cleaning and disinfection of its premises and equipment; compulsory wearing of masks within premises and distribution of hydro-alcoholic to customers upon entry in the premises (MCB, 2021).
Technological
Digital and contactless channels
Customers may conduct their normal banking activities from the comfort of their own homes using the mobile banking platform "JuiceByMCB" and Internet Banking solutions, which are both safe and easy. Customers were able to use "JuiceByMCB" and online banking services throughout both lockdowns, which was convenient. Since the beginning of lockdowns, MCB has raised the limit for contactless payments from Rs 500 to Rs 2,500 per transaction. The number of connected transactions has more than doubled during this time span.
Environmental
Climate Change and Global Warming
People's present lifestyles and consumption patterns contribute to global warming and climate change by emitting carbon dioxide and other greenhouse gases, which will destroy many ecosystems. Through the online carbon compensation platform "Klima Neutral," MCB seeks to reduce its carbon emissions and then offset the resulting emission increases by investing in environmentally and socially responsible initiatives. In addition, MCB aggressively encourages its clients to take advantage of e-statements. "MCB Digidesign", a signature tool was developed with Adobe to optimise procedures and decrease paper consumption. Financing for electric and hybrid automobiles has been made easier via a new scheme called "GreenDrive."
Legal
COVID-19 (Miscellaneous Provisions) Act 2020
The Bank of Mauritius Act 2004 was amended by the COVID-19 (Miscellaneous Provisions) Act 2020 with the goal of stabilising the economy. Up to $ 2 billion from the central bank’s reserves was set aside for the creation of Mauritius Investment Corporation (MIC). Nearly Rs 4 billion in working capital loans have been provided by MCB and MIC to selected large corporates in order to help them maintain business continuity and keep their workforce in employment.
Conclusion and recommendations
From 2019 to 2021, MCB's overall performance and banking stability deteriorated due to the impacts of COVID-19, Moody's downgrading, adverse changes in DTAA with India, socio-economic consequences of the pandemic, highly-indebted economic sectors and the blacklisting of Mauritius by FATF and EU Commission.
From the performance analysis, it was noted that the profitability of MCB has been decreasing significantly. The cost-to-income ratio shows that MCB's financial control efficiency has deteriorated from 2019 to 2021. Shareholder returns at MCB have also fallen, according to investor ratios. There has been a rise in MCB's cost of risk, impairment charges, and projected credit losses since 2019. From 2019 to 2021, MCB's liquidity have fluctuated while its solvency has decreased, even if they are over the minimum requirements. Despite this, a rise in CAR from 2019 to 2021 helped to keep MCB's financial footing solid. In addition, the NPL ratios of MCB improved somewhat from 2019 to 2021.
The following recommendations have been made to enhance MCB's poor performance.
- A prudent strategy focused on keeping clear from high-risk speculative deals and supporting businesses engaged in productive activities, which will generate a continued rise in income may boost ROA and ROE.
- Investment in modern banking software and technologies to enable more efficient delivery of products and services may improve cost-to-income ratio.
- MCB to conduct a detailed analysis of its customers’ metrics to improve the banker-customer relationship in order to generate a higher wallet share and thus more business.
- MCB to leverage on its prominence in the banking sector, to develop and market innovative and user-friendly products and services, in particular, e-banking solutions in order to attract new customers.