EUR 9.28 For Business Accounts Only

SBM Earnings Review CY16

• Recommendation: BUY. We fair value SBM at Rs8.70 offering an upside potential of ~23% in coming months.

• We calculate SBM’s Rolling 12Mth recurrent EPS to stand at Rs0.89 (+44%) resulting in

• A deteriorated Price-to-Earnings Ratio (PER) of 7.9x against 7.4x on its Sep-16 12M EPS,

• But an improved Price-to-Book Value Ratio (PBV) of 0.76x against 0.78x on its Sep-16 NAV

• Earnings Before Impairments & Taxes (EBIT) for FY16 declined to Rs3.7bn (-7%) mainly as a result of increased Amortisation charges relating to core banking system “Flamingo”

• Note that SBM’s exceptional re-statement of accounts was with respect to FY-14

Core Business during CY16

• Slow improvement in the Mauritian economy is evidenced by SBM’s tepid loan-book growth to non-banks by 4% which SBM has offset by almost quadrupling loans/placements with banks YoY from Rs1.2bn to Rs4.6bn.

• Net Interest Income (NII) was sticky growing by 3% to Rs4.4bn as a result of a tighter Net Interest Spread (NIS) of 3.85% (-7bps)

• Net Fee and Commission Income (NCFI) grew marginally to Rs1.05bn (+2.3%) as did Other Income (OI) to Rs1.01bn (+3.8%) which grew at a slower pace than expected as a result of Dividend Income slumping to Rs39M (-75%)

• Cost-Income Ratio (CIR) increased significantly from 36.3% to 42.5% as a consequence of a 21% growth in Non-Interest Expenses (NIE) essentially driven by 2x jump in DA charges stemming from SBM’s “Flamingo” system going live in Sep-16.

• The level of Impairments expectedly slumped from Rs1.9bn to Rs717M given the exceptional nature of bad debts relating to the BAI Group’s collapse in 2015. Net Impairment Ratio (NIR) returned to 0.9% which is typical for the group.

Outlook for FY17

• For its Financial Year 2016, SBM’s PAT surged by 44% to Rs2.3bn mainly due to the slump in impairments.

• SBM expects domestic growth to remain tepid and is therefore predicted to drive income growth through cross-border business and Non-Interest Income.

• Under a base case scenario, SBM is forecasted to generate Rs4.4bn (+10%) in EBITDA {where I ≡ Impairment} for FY17

• We fair value SBM at Rs8.70 using its long-term average R4Q PER of 9.7x – excluding 2015 during which the bank recorded massive impairments – against its current 7.9x.