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CHIEF FINANCIAL OFFICER STATEMENT

The unanticipated COVID-19 virus has created much havoc, not only in our personal lives but also on the financial standing of the corporate world including the banking sector. Despite this unparalleled situation, the Bank ensured that it maintained the delivery of services to clients on the back of fast-tracked roll-outs of digital applications.

Strong balance sheet maintained

Compared to the last financial year, which benefitted from healthy macro-economic tailwinds and financial buoyancy, this year’s results were affected by the COVID-19 pandemic but which we nevertheless managed to mitigate on the back of in-built resilience.

The Bank recorded a Balance Sheet growth of 15%. Overall, gross loans and advances grew by 2% year-on-year from MUR 30.1bn to MUR 30.7bn as at 30 June 2020 and investment securities showed a growth of 7% with the bulk of the investment in debt instruments at amortised cost, i.e. 96%. 50% of the Balance Sheet assets was in “Cash and Cash equivalents” and “Due from banks”, i.e. primarily in placements and nostros in the form of monies held with other banks.

Moreover, our customer deposit base grew by 15% to MUR 150.9bn which provided much comfort against a background of global market volatility and the threatening ramifications of the impending EU sanctions.

“As we travel through these unprecedented and challenging times, we remain shielded by our conservative and solid balance sheet, which managed to contain the Net Profit after Tax (NPAT) with a marginal 4% decrease as we remain confident in the Bank’s fundamentals.”

Despite an increase in non-performing assets by 26% to MUR 2.8bn, the Bank’s Non-Performing Asset (“NPA”) ratio remains stable approximately at 8% with a coverage ratio standing at 76%. Looking at NPA per sector, the major part resides in the Financial and Business Services sector representing 37% of total NPA.

On the regulatory side, the Bank remained well capitalized with a capital base of MUR 8.4bn, split between Common Equity Tier 1 capital of MUR 6.7bn and Tier 1 of MUR 8.0bn. The Bank’s Capital Adequacy Ratio stood at 15.15% against the regulatory threshold of 12.88% as at 30 June 2020. Furthermore, the Bank remains a Domestic Systemically Important Bank (“D-SIB”), which imposes an additional buffer of 1.00% over and above the benchmark of 11.88% that applies for non-D-SIB banks.

Income statement

The Bank’s net interest income dropped by 12% resulting from a contraction in yields along with a shift in asset mix to lower yielding assets. Indeed, the financial year was marked by a falling interest rate environment mirroring the movements in the key repo rate and LIBOR (refer to Economic Outlook section), shy growth on the loan and advances side and the plummeting of the yield of bonds.

Regarding non-interest income, we recorded a strong growth of 29% which counterbalanced the contraction in net interest income. This increase was mainly driven by enhanced commissions received on foreign transactions, increased trading income profit largely attributable to fair value gain of MUR 144.1m, profit on disposal of securities of MUR 98.0m and on a CCIRS deal which produced a fair value profit of MUR 98.9m.

We recorded a 79% increase, that is, MUR 370.7m in the impairment loss on financial assets based on the assessment of our loan book and other financial instruments. Major increase in Expected Credit Losses (“ECL”) were recorded in the stage 3 on specific NPA accounts.

For the other ECL stages, given the COVID-19 situation with uncertainty in markets, the Bank applied in its Expected Credit Losses (“ECL”) methodology a probabilistic approach based on forward looking scenarios together with a scenario-based approach assigning weights signifying the likelihood of event. Moreover, management factored in post model adjustment (management overlay) to reflect the risk of unlikeliness to pay criteria on the restructured debts impacted by the pandemic.

During the year under review the Bank recovered MUR 108.3m of loans previously written off.

On the operating expenses side, a 15% increase was noted year-on-year, with our investment in human capital, representing 56% of our total expenses. On the IT front, the increased expenditure of 34% is reflective of the Bank’s continued strategy to upgrade the technological platform. The Bank also adopted the new accounting standard, IFRS 16 – “Leases” as from 01st July 2019.

From a taxation perspective, effective tax rate dropped from 13.12% in 2019 to 8.80% for the year under review mainly due to the Government announcing new tax rates applicable to Banks.

A future that cannot be delineated

This year will not only be marked by a global recession but it will also be one of the sharpest and deepest since World War II. The global stock markets have been in their worst shape since the beginning of the financial crisis in 2008 and yields have reached record lows during the year. Our island was unfortunately not insulated from this invisible foe, with shocks in demand and supply in all the sectors of the economy.

The key words as we move into the next financial year are uncertainty and volatility, which require continuous proactive changes in the Bank’s strategy to survive this post-COVID era. We remain as ever sensitive to any asset-quality deterioration, based on the economic fallout of the coronavirus, that may lead to knock-on effects on earnings and capitalisation.

However, the Bank remains confident in its capacity to go through these difficult times on the back of a robust balance sheet characterised by ample capital, liquidity and reserves.

JENNIFER JEAN-LOUIS

Chief Financial Officer

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