MCB GROUP

Q2-FY19 EARNINGS

REVIEW

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DISCLAIMER

AXYS Stockbroking Ltd (ASL) has issued this document without consideration of the

investment objectives, financial situation or particular needs of any individual

recipient. ASL will not be under any liability for loss or damage of any kind

whatsoever arising in connection with the contents 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. ASL makes no guarantee, representation or warranty and

accepts no responsibility or liability as to its accuracy or completeness. ASL is a

member of the Stock Exchange of Mauritius and is licensed by the Financial Services

Commission.

CONTENTS

EXECUTIVE SUMMARY 4

KEY FINANCIALS 5 – 11

BALANCE SHEET 6 – 8

INCOME & RETURNS 9 – 11

APPENDIX 12 – 16

GLOSSARY 13 – 15

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#REF!#REF!#REF!#REF!#REF!

RATING

BUY

4

EXECUTIVE SUMMARYMCB GROUP RATINGS UPDATE

o We revise our Fair Value (FV) for MCB to Rs347.77 (-3% on

previous FV) following the publication of its H1-FY19 results

reflecting the slower growth in Q2-FY19 as compared to Q1-FY19.

This continues to represent a 27% upside on its closing price on Feb

13th of Rs274

o We therefore maintain a “BUY” rating on MCB

o Q4-18 was a record quarter for MCB in terms of EBIT (+19%) and

PAT (+10%). Both have been boosted by a surge in NII (+26%) on

the back of international activities, and stable Impairment ratios

o We jettison traditional IFRS-based Return KPIs this quarter which we

replace with Basel III inspired Return Metrics on Slide 11

FAIR VALUE

Rs347.77

80

100

120

140

Seri

es

= 1

00 o

n 1

2-F

eb-1

4

MCB ALCAPEX-12

SEMDEX

HOLDReduceSELL Acc. BUY

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DEAR COLLEAGUE AND POWERPOINT AFFICIONADO

KEY FINACIALS

BALANCE SHEET

|

Equity Interbank Liab Depos Market Liab Other Liab

Interbank Assets Loans Market Assets Other Assets

49 65 82 70 68

156

164 167 181

224

43

52

67 94

99

17

19

20

24

27

266

299

336

370

417

Q4-14 Q4-15 Q4-16 Q4-17 Q4-18

35 40 45 51 55

35

205

238

265

290

307

266

299

336

370

417

Q4-14 Q4-15 Q4-16 Q4-17 Q4-18

7

BALANCE SHEETASSET & LIABILITY MATCHING

Q4-14 Q4-15 Q4-16 Q4-17 Q4-18

ASSETS & LIABILITIES [Rs bn]

+12%

o MCB’s balance sheet has grown at

an annualised (ann.) rate of 12% since

2014

o MCB is principally funded through

customer deposits [77% of total

assets] which it has increasingly re-

deployed into markets whose share

of total assets has increased from 16%

in 2014 to 24% in Q4-18

o Deposits have grown at an ann. rate

of 11% since 2014 and Loans at a

slower 9%. On a QoQ basis, Deposits

edged up by 6% against an 24% surge

in Loans – on the back of

foreign/international lending – which is

expected to translate into higher

Interest Income

key

ASSETS are on the Left

LIABILITIES on the Right

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156 164 167

181

224

57

73

77 79 78

Q4-14 Q4-15 Q4-16 Q4-17 Q4-18

Loans [Rs bn] NIR [bps]

8

BALANCE SHEETDEPLOYMENT, EFFECTIVENESS & QUALITY

76 69

63 62

73

95 88 86

93

102

4.2

4.3

4.4

3.9

4.0

Q4-14 Q4-15 Q4-16 Q4-17 Q4-18

LDR [%] LDR w Mkt [%] NIS [%]

DEPLOYMENT & EFFECTIVENESS QUALITY

o Strong growth in deposits against tepid local demand for credit led to a

steady decline in the LDR to 62% in Q4-17 which only returned to 73%

in Q4-18 on the back of an acceleration in international activities linked

to Energy, Commodities & Structured Finance. Consequently, the LDR

including investment in securities shows full deployment of funds at

102%

o Unsurprisingly therefore – albeit below 2016 levels – interest rate

spreads/margins (NIS) experienced a marginal uptick

o As previously discussed loans have grown at an annualized rate of 9%

since Q4-14 to Rs224bn boosted by international operations

o After a deterioration of loan book quality as evidenced by the jump in

Net Impairment Ratio (NIR) in 2015 into the 70s, the rate has since

hovered at ~78bps

INCOME & RETURNS

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3,386 3,641

4,051 4,326

4,941

1,389 1,470 1,615 1,831 1,974

4140 40

42

40

4948

49

52

46

Q4-14 Q4-15 Q4-16 Q4-17 Q4-18

Op Income [RsM] NIE

CIR [%] Core CIR [%]

2,045 2,176 2,421

2,619

3,292 788 875

881 904

1,032

553 591

749 803

616

3,386 3,641

4,051 4,326

4,941

Q4-14 Q4-15 Q4-16 Q4-17 Q4-18

NII [RsM] NFCI [RsM] OI [RsM]

10

INCOMEGROWTH & EFFECTIVENESS

OPERATING INCOME EFFECTIVENESS

o Since Q4-14, NII has grown at an ann. rate of 13% to Rs3.29bn growing

at an accelerated 26% QoQ boosted by greater international lending as

well as higher yield on government securities

o Over the same period, NFCI has grown at an ann. rate of 7% to

Rs1.03bn and a stronger 14% QoQ on the back of a pick up in trade

finance, and its capital markets division

o Other Income (OI) has grown by 13% ann. peaking at Rs802M in Q4-17,

then plunged to Rs616M (-23%) this quarter mainly due to the absence of

gains on sale of investments

o While Operating Income (Op. Inc) has been growing at an ann. rate of

10% these past your years to a record Rs4.9bn, Non-Interest Expenses

(NIE) have grown at a slightly slower 9%. Consequently, MCB’s Cost

Income Ratio (CIR) which has averaged 40% in recent years peaking at

42% in Q4-17 but has since returned – i.e. improved – to 40%

o Similarly, Core CIR, i.e. CIR excluding OI have averaged 48% since 2014,

peaked at 52% in Q4-17 thereafter returning to 48%

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13.5 14.4

15.6 16.0 15.7 15.9

17.0

18.3

18.3 17.6

Q4-14 Q4-15 Q4-16 Q4-17 Q4-18

CET1 CAR [%] CAR [%]

24 2423

22

182.4 2.4

2.6

2.8

2.5

RAROC [%] RORWA [%]

140 159

180

204 220

19.91 24.98

27.90 29.20 33.10

Q4-14 Q4-15 Q4-16 Q4-17 Q4-18

NAVPS [Rs] Adj. R4Q EPS [Rs]

18.8

17.3

17.0

16.7

17.0

ROTE [%]

11

RETURNS & KEY INDICATORSSHAREHOLDER & RISK-ADJUSTED

SHAREHOLDER RISK ADJUSTED

o NAV has grown at an ann. rate of 12% since 2014 to a record Rs220, i.e.

PBV of 1.24x down from 1.31x a quarter ago

o Adj R4Q EPS has grown at 13.5% over the corresponding period to its

highest ever Rs33, i.e. corresponding to a PER of 8.3x which is its lowest

since Q1-17!

o Return on Tangible Equity (ROTE) which had been slipping year after

year, experienced a slight uptick to 17%

o As a consequence of the recent increased lending and implementation

Basel III, both MCB’s CET1 CAR and CAR have slipped to 15.7% and

17.6% respectively therein shrinking its buffer above regulatory minima

from ~5.0%-pts to ~3.3%-pts

o Return on Risk Weighted Assets (RORWA) has declined to 2.5%

after having steadily risen in recent years – reflecting greater investments

in Govies between 2016-17 – as a result of the significant growth in loans

o Risk Adjusted Return on Capital (RAROC) on the other hand, has

been steadily declining in recent years in spite of growing profits thereby

spelling out the non-negligible impact of Basel III requirements on bank

profitability

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DEAR COLLEAGUE AND POWERPOINT AFFICIONADO

APPENDIX

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GLOSSARYA – I

WHAT IT MEANS BRIEF EXPLANATION

Adj. Adjusted Usually adjusted for non-recurrent and/or exceptional items

Assoc. Associate A company in which MCB has an appreciable but non-controlling stake

Att. Attributable Usually refers to NAV or PAT which is attributable to shareholders of MCB

Basel III 3rd iteration of banking regulations developed by Bank for International Settlements

CAR Capital Adequacy Ratio Total Equity as computed under Basle III instead of IFRS measured against RWA

CET1 Core Equity Tier 1 Core Equity as computed under Basle III instead of IFRS

CIR Cost Income RatioThe inverse of a margin whereby we measure the efficiency as Costs measured against Income rather than Net Income over

Revenue

Core CIR Core Cost Income Ratio CIR as measured against Operating Income less Other Income

EBIT Earnings before Impairment and Taxes Operating Profits before credit impairments and taxes

EPS Earnings per Share Profits after Tax attributable to shareholders typically calcultated on a re-current basis, i.e. excluding exceptional items

FV Fair Value What we calculate to be MCB's valuation per share

FY-19 Financial Year ended June 2019

H1 1st half of Financial Year

IFRS International Financial Reporting Standards

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GLOSSARYK – P

WHAT IT MEANS BRIEF EXPLANATION

KPI Key Performance Indicator A measure of operational or financial performance

LDR Loan to Deposit Ratio Measures the rate of deployment of deposits in the form of credit facilities

LDR w MktLoan to Deposit Ratio including (with) Investments &

Borrowings from capital markets

Measures the rate of deployment of deposits and borrowings from markets in the form of credit facilities and investments in

capital markets

MCB MCB Group Ltd The largest banking & financials services group in Mauritius both by Market Cap. & Assets

NAV Net Asset Value Also referred to as "Book Value" or "Equity"

NAVPS Net Asset Value per Share Net Asset Value attributable to shareholders

NFCI Net Fee and Commission Income Fees & Commissions earned from assets less Fees & Commissions paid on liabilities

NIE Non Interest Expenses All operating expenses including depreciation and amortisation excluding impairments of credit facilities and taxes

NII Net Interest Income Interest earned from assets less interest paid on liabilities

NIR Net Impairment Ratio Measures the fraction of net credit facilities written off by the bank on an annualised basis

NIS Net Interest Spread Measures the annualised effective margin/spread between costs of funds and interest rate earned on lending and investments

OI Other Income All other income earned including from dealing on markets

PAT Profits after Tax

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GLOSSARYQ – Z

WHAT IT MEANS BRIEF EXPLANATION

Q2 Financial Year 2nd Quarter Usually used in text to refer to the financial year quarter under review

Q4 Calendar year 4th quarter Usually used in charts to allow for comparison against peers with different financial year end

QoQ Quarter on Quarter Typically compares a performance in a given quarter against the previous corresponding quarter

R4Q Rolling Four Quarters Effectively the sum of most recent four quarters

RAROC Risk Adjusted Return on CapitalA measure of the impact of regulation and risk on returns. Calculated as Net Income using expected impairments over the

Minimum Capital required by the bank

RORWA Return on Risk Weighted Assets Replaces the traditional Return on Assets KPI by substituting RWA for Total Assets

ROTE Return on Tangible Equity Replaces the traditional Return on Equity KPI by subsituting NAV for CET1

RWA Risk Weighted Assets Assets of the bank adjusted for the risk profile of each investment and/or credit facility

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REFERENCES & AUTHORS

REFERENCES AUTHORS TRADING

For buying or selling stocks, bonds

and ETFs please liaise with:

Adlette RIOUX or

Akash BABOOLALL or

Melvyn CHUNG KAITO

Bhavik DESAI

Head of Research

Yuviraj A. PUTTEN

Investment Analyst

MCB Group Ltd, ‘Annual Reports’ &

‘Abridged Financial Statements’ &

‘Management Statements’ [2012-2018]

RATING SCALE

ReduceSELL HOLD Acc. BUY

> 12%< -12% ± 5% + 5-12%- 5-12%

6th Floor, Dias Pier Building, Le Caudan

Waterfront, Caudan, Port-Louis, 11307

(230) 405 4000

research@axys-group.com

www.axys-group.com

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