Moody's: Banks - Mauritius: Resilient Economy, Strong Capital Provides Support but Offshore Sector Holds Liquidity and Asset Quality Risks

While Mauritian banks are supported by their strong capital buffers and the country's resilient economy, they face risks stemming from their large offshore exposure and asset quality pressures, Moody's Investors Service said in a report published today.

Mauritius has stable operating conditions, with real GDP expected to grow by 3.5% in 2016, supported by public investment and low oil prices. Moody's expects credit growth of 6%-7% will support banks' profitability which will remain broadly flat in 2016, and the banks' sound capital ratios.

''We expect the sector's Tier 1 capital ratio to remain strong, at around 16% by end-2016, supported by moderate growth in risk-weighted assets and relatively low dividend pay-outs'', said Elena Panayiotou, Assistant Vice President -- Analyst and co-author of the report.

Mauritius's offshore sector, however, is a source of vulnerability for the economy and the banks. The offshore sector, which according to the International Monetary Fund holds assets worth more than $630 billion, is vulnerable to any revision of the Double Tax Avoidance Agreement Treaties, an intensification of efforts to counter tax avoidance or a significant increase in the country's tax rates.

"Any disruption to the offshore sector would expose the Mauritian economy and banking sector to contagion risks," adds Constantinos Kypreos, a Vice-President and Senior Credit Officer. For banks, offshore deposits account for a significant proportion of the total liabilities (in excess of 40%), hence any significant withdrawals would affect their funding bases, leading to deleveraging pressures.

Another source of vulnerability for the Indian Ocean island's banks are the high concentrations of loans to local conglomerates. Problems at one company can affect the whole conglomerate, which is typically exposed to numerous banks.

Problem loans comprised 7% of gross loans as of September 2015. Moody's expects credit risks to remain high due to sizeable borrower concentrations, heavy exposure to the troubled construction sector and offshore lending estimated at 53% of total loans, primarily in India and Africa.