Kee Chong Li Kwong Wing: “Our aim is to at least double the size of our assets and profits”

Despite sailing in troubled waters due to substantial impairment in 2015, a large chunk of which is linked to the BAI scandal, SBM Group is still in a strong financial position. Indeed, the bank enjoys strong liquidity and capital levels, points out the Chairman of SBM Holdings. He is confident the Group will rebound and unlock its growth potential.

BUSINESSMAG. I would like to start with a burning issue. The nTan Corporate report underlines the need for a review of the legal framework for the financial sector so as to enable regulatory authorities to act more effectively as watchdogs and to keep financial fraud cases under control. What is your take on the report?

The nTan report is a limited interim report and reading it is like opening a Pandora’s box. There are surely many more transactions, related activities and ramifications that remain to be disclosed, uncovered, investigated or validated. We can only draw meaningful lessons once these facts surface. For the time being, we can say that the report sheds light on three key issues. Firstly, the role of regulators, who have turned a blind eye on the many dysfunctions and failings of a system they were duty-bound to control. Secondly, the role of external auditors, who appeared to have been overly lenient, lacking in courage and short of professional conscience. And, thirdly, the role of financial operators, particularly the fat-cat professionals, who seemed to have all been caught in a huge con game. They include the bankers who advanced the funds and cleared the transactions, financial counsellors who advised clients, legal advisers who vetted the schemes and documents, accountants and valuation experts who drew up the figures, internal controllers who scrutinized processes to ensure regularity, Board Directors who acted more like rubber stamps and so on. No one wants to point fingers at the other, while the shrewdest of them preferred to shy away like the legendary monkey: hear nothing, see nothing, say nothing!

At the heart of the problem is the notion of conflict of interest operating at all levels and the “revolving door” phenomenon, whereby top guys (the same ones from a Group) can switch posts merrily from one institution to another, including even the regulatory body. And what would you say of a legal adviser, if he would represent all the different parties associated with a Group, from its operating financial entities to its owners and families, from its financial regulators Bank of Mauritius and Financial Services Commission, to its third party funding institutions and all?

I get a feeling while reading between the lines of this report that cronyism was the order of the day, with “omerta” as the leitmotiv. Whilst a lot of facts have been laid on the table, there is a revolting sense that many pieces of the puzzle are missing.

BUSINESSMAG. Given the numerous Ponzi schemes (Sunkai and White Dot) and, more recently, the BAI case involving a fraud of more than Rs 25 billion, how necessary is it to sanitize the financial sector?

Financial services revolve around the principle of trust. If trust is broken, then the whole sector will find itself in shambles. Hence, like Caesar’s wife, any financial services sector must be seen to be above suspicion. Having said this, I would also like to point out that regulators around the world are grappling with the right balance between regulation and financial inclusion cum innovation. On the one hand, they are aware that regulation is an essential ingredient to preserving the integrity of the sector in the eyes of the On the other, they are wary of stifling innovation and growth through over-regulation. As it opens up to international business, Mauritius could find it increasingly challenging to achieve this balance, especially when financial literacy is low and public gullibility overrides social intelligence and the rule of “Caveat emptor” (let the buyer beware).

BUSINESSMAG. The results of SBM Group have been significantly impacted by the BAI scandal. Over the last 12 months, the SBM share price has declined by around 26% to 6½ year lows, representing a loss in market value of some Rs 4.6 billion for the group. Since your appointment as Chairman of SBM Holdings Ltd, it would seem you are walking on hot coals…

My chairmanship at SBM indeed started off in a very challenging way, just after the passage of financial cyclone BAI. Several factors, some of which beyond our control, have contributed to the sub-optimal performance of SBM in the year 2015. Firstly, we have been hit by substantial impairment, a large chunk of which is linked to the defunct BAI. But we are confident that we are now adequately provisioned in respect to this Group. We have also had a few hiccups in respect of our cross-border exposures, which have also been adequately provisioned.

Another area of concern relates to the technology transformation programme. As you must be aware, we have embarked on an avant-garde IT Transformation Project since 2012. The objective is to replace the existing technology with a view to provide enhanced on-line integrated services to our customers. Given the complexity of the initiative, we have encountered delays as communicated to our shareholders. We are working with the external auditors to determine the appropriate accounting treatment, but this should not affect the group’s fundamentals.

Talking of fundamentals, I should say that those of the SBM Group remain solid. If we exclude the charge for impairment, as well as one-off factors which had boosted the 2014 results notably gain on sale of securities, the performance for the first nine months of 2015 would be 12% higher compared to the same period in 2014. While I cannot disclose the full-year results at this juncture, we are likely to see the same trend in respect of the underlying fundamentals. Alongside the financials, it is worthwhile noting that despite the increase in impairment in 2015, asset quality metrics have been contained at acceptable levels, and are in fact stronger than peers. The bank continues to boast a solid market share and currently enjoys strong liquidity and capital levels, even after accounting for the requirements of Basel III, which puts it on a sound footing for further growth, while maintaining its dividend payments. Besides, the bank’s ratings by Moody’s have remained sound.

This begs the question whether there is a disconnect between stock price movements and underlying fundamentals. To be honest, this phenomenon is not unique to SBM or Mauritius. In fact, the disconnect between economic reality and stock market movements, or exchange rates gyrations for that matter, has been a recurring theme at the recent World Economic Forum Annual Meeting at Davos, last month. For instance, we have been seeing massive pull off of foreign funds from stock market across emerging markets as a result of growing risk aversion and dollar strength, in turn linked to expectations of a meltdown of the BRICS economies following the commodities and oil price rout. Even in frontier markets like the Mauritius stock exchange, a large chunk of the disinvestments has been driven by foreigners. Logic would suggest that there should be closer alignment to the fundamentals over time. In these choppy waters, savvy investors are known to be out there, bottom fishing.

BUSINESSMAG. What are the steps that the group intends to take to rebound from this situation and reassure market players?

I believe that SBM has significant growth potential and we are currently working towards unlocking it, building on the Group’s sound fundamentals and strong capital resources. We recently commissioned McKinsey & Company, a leading global strategy consulting firm, to review our strategy. The McKinsey report has strengthened my conviction that there is potential for our Group to grow further and develop its activities, in both banking and non-banking, in the local economy and regionally. Based on the findings of the report, the Group will be focusing on five key pillars namely: consolidation, diversification, regionalisation, modernisation and capacity building.

Whereas our established businesses such as Retail banking, SMEs and Corporate banking are faring relatively well, we believe that we can reach further heights by better understanding the changing needs of our clients and hence, developing tailor-made solutions for them and delivering these services in a proactive manner. On the diversification front, we plan to significantly grow our share of global business Segment B and non-banking income through new products and services, in line with customer needs. Regionalisation is also another key lever, whereby we internationalise our services, whether through cross-border lending or overseas presence and operations. All these initiatives will involve developing new structured products, but also designing more efficient processes and deploying through alternative channels. This leads me to our focus on modernisation, whereby updated techno-logy and new skills, key elements of our capacity building initiatives, will interact to make life easier and smarter for our customers. Appropriate weight is also being placed on strengthening our risk management framework in line with the new business areas and economic environments, as well as evolving market conditions.

I must emphasize that human capital is key to the execution of our strategy. This is why we have embarked on a recruitment drive to take on board more skills, while enhancing our talent development capabilities. In that light, we intend to launch a Training Academy for the financial services sector to upgrade skills within the Group as well as at the country level. On the softer side, we are striving to empower all employees to work as a team towards our set objectives. That is why I have reached out to them, communicating our strategy at the ground level, not from an ivory tower. As opposed to a one man knows all and controls all approach, I prefer a collaborative approach where employees are consulted, empowered and made part of the strategy process. This is starting to have a healthy transformational effect on our key resource, our manpower.

As the impact of one-off items wears off and business volumes grow in line with our strategic initiatives, profit levels are expected to be back in line with prior trends, albeit tempered somewhat by an expected increase in costs related to personnel and technology. We should note however that these represent investment into the future, and in the next few years, our aim is to at least double the size of our assets and profits. I am confident that we shall reach our goals.

BUSINESSMAG. In the past few weeks, SBM group seems to have become more aggressive on the market. Following the launch of its Ecoloan in partnership with Agence Française de Développement, it more recently launched the Maharaja Fund through SBM Capital Management, whereby one can invest in three sub-funds on the Indian market. Do these indicate that SBM will, in future, be closer to the market?

You are already seeing signs of a revamp in our strategy. The launch of SBM Maharaja Fund is in line with our objective to grow our asset management and private banking arms.

This ‘Umbrella Fund’ proposes three sub funds namely: a Bond Fund, an Equity Growth Fund and a more risky Property Fund. This selective menu of Funds boasts to be the first of its kind in Mauritius and we have appointed Kotak Mahindra Asset Management Company Ltd, a subsidiary of Kotak Mahindra, which is one of India’s leading financial institutions, to act as our investment advisor. We recognise that customers have now become more sophisticated and financially savvy, and are actively following what is happening on the international scene. We are providing them with more adapted and innovative investment pro-ducts to suit different risk profiles.

We just launched a path-breaking packaged Green Loan on the market that put our bank in the forefront of product innovation. Importantly, the product also showcases our commitment to the community, particularly as regards sustainability matters. In the future, you will certainly see more of these innovative products and services across our different lines of business such as corporate, SME, retail and cross-border in response to customer needs and in line with broader community uplifting. We shall be launching another loan package to be known as the Blue Loan, tailored to meet the needs of the emerging sector of the Ocean economy, with its industrial fishing and maritime hub.

BUSINESSMAG. The SBM group also has operations in Madagascar and India. There is a perception that, while the group has positioned itself in these geographies, the international angle lacks ambition. Should the group not be moving up a gear on the international scene?

Indeed, a key pillar of our strategy is to grow our international business and we have embarked upon a series of initiatives to that effect. In the first instance, we have just signed partnership agreements with reputed financial institutions, including regional agencies like PTA Bank and AFREXIM, to increase participation in cross-border deals, particularly in Africa while building capacity to eventually source our own deals in those markets. We will also expand our international footprint whether through representative offices – to help secure cross-border deals and cross-sell our products in target markets – or by establishing our own banking operations. In this context, we are also exploring the possibility of acquiring a stake in a bank in East Africa, particularly Kenya, with the engagement of local partners. Our initiatives to increase business in the African continent epitomize our belief and confidence in Africa’s growth story, and seek to capitalize on the ambition of the Mauritian authorities to position our country as a gateway to Africa and as a conduit for trade flows between Asia and Africa. We will also be active on the non-banking front, which is a key area of focus going forward and will act as a springboard for clients to invest in Africa and other high-growth regions. In this respect, we will soon be launching an Africa Value Fund, which will focus on listed equities in Africa, as well as a Private Equity Fund. In the same vein, we have started offering securities trading on the Kenya Stock Exchange, thereby extending the extensive list of international markets on which we offer these services.

We are also not forgetting the Indian Ocean Islands. Our return on capital in Madagascar has shown signs of improvement and we are looking to expand our business there, as testified by the opening of two additional branches last year. We have also applied for a banking licence in Seychelles, where despite its small size, returns are quite attractive.

In India, we have been, for long, hampered by a small branch network. We now have received RBI approval to set up a fully owned subsidiary, which will allow us to expand our branch network and, thus, have a stronger customer base. We would start the implementation of the India Expansion Strategy once our systems are live there, by beginning of 2017.

For the longer term, we have placed an option on Myanmar, following the removal of international sanctions and the onset of institutional reforms. We are also planning to set up Rep Offices in Dubai, Jo’burg and London.

BUSINESSMAG. Coming to the SME sector, we know that SBM has a dedicated service, namely SBM SME Banking. With the setting up of MauBank, which would propose attractive plans to SMEs, such as a low interest rate of 3.4%, how would SBM react? Will there be a partnership between the two institutions given that the State initially has a controlling stake in SBM?

In line with the government’s thrust to promote SMEs as the backbone of the economy, SBM is already restructuring its SME business segment to ensure that we have a strategic focus. We are already packaging a number of products such as treasury, leasing, trade finance and bancassurance to better serve SMEs with more value-adding services and give them exposure to new techniques that can be suitably applied to their businesses.

However, SBM is a listed company and not a charitable institution. It has a solid capital base, large liquidity and robust processes. If there are any win-win benefits to be gained from a partnership with MauBank in a SME funding project, why say no? As we say in French, “on a toujours besoin d’un plus petit que soi”, even if the Minister of Finance has launched MauBank as our national double-headed lame duck.

BUSINESSMAG. In the same vein, we are currently operating in a low interest environment since the reduction in the Repo rate to 4.4%. How do you think this situation would encourage investment, which has been extraordinarily low in recent years, to pick up?

A low interest rate is unfortunately not the only factor which would help boost investment. In fact, interest rates have been low for a few years now and still the investment rate has remained low. Worse, excess liquidity has been persisting in the banking sector, meaning that there is a lack of demand in key areas of the economy. In our quest to become a high income economy, it is imperative to get the investment equation right. Otherwise, we might be stuck in the middle income country trap. Whereas the government is committed to improving the business climate and has undertaken steps to boost demand through massive investments in the port and smart cities among others, it may take time for these projects to come to fruition. In parallel, we should also address challenges at the level of demographics, productivity and skills. One avenue is to consider positioning the country as a haven for specialized global talents (especially in finance, smart technology, bio-engineering and health sciences) looking for a good quality of life. In addition to providing additional demand for goods and services, these talents would be targeted to launch new industries and, in the process, transfer knowledge to our local labour.

 BUSINESSMAG. From a macroeconomic standpoint, how would Mauritius perform in 2016?

After clocking a lacklustre growth rate of 3.4% in the last two years, we should see an upturn in 2016, particularly now that the Prime Minister is personally involved in making things happen on the economic front and the government is committed to improving the ease of doing business and to creating a feel good factor.

The tourism industry is expected to remain a key contributor to growth on the back of initiatives taken to diversify markets and improve air access. Other service industries such as ICT, business activities and financial services should also continue to do well in line with the ongoing drive to modernize our business and financial services sector, and improve connectivity. On the other hand, the performance of the manufacturing sector would remain difficult, reflecting concerns regarding productivity, skills and global competition. Barring unfavourable weather conditions, the sugar sector should experience a technical rebound this year after a drop in 2015, but the long term future of the sector needs to be rethought given underlying challenges, notably relating to loss of preferences and low prices on the global market. As mentioned earlier, initiatives taken to boost port and real estate development will take some time to materialize and, consequently, a strong recovery in the construction sector – already in the doldrums – is also not expected this year. Unclogging this sector might require some special efforts and incentives from the Government. This could take the form of a robust Special Stimulus Package to be worked out urgently with the banks for the construction industry.

Furthermore, building a platform for attracting global talents, developing new industries and boosting productivity would enhance the country’s growth capacity going forward. This could also help address the problem of youth and educated unemployment, if well planned. Low commodity prices on international markets are likely to translate into inflation remaining in the low single digit and the trade balance getting some reprieve. As regards exchange rates, after a substantial depreciation of the rupee in 2015, relative stability would be expected in 2016, particularly as the likelihood of aggressive hikes in the Fed Funds Rate in the US has faded, implying a potentially less strong dollar. As you are aware, things can rapidly change on the international front, which would certainly alter the prognosis for Mauritius.

BUSINESSMAG. Do youstill believe in the second economic miracle?

If you have faith, miracles are possible. Tiny Mauritius has always been blessed by God. We have, over the years, had many Godsends in our favour such as the Sugar Protocol, the Multi Fibre Agreement, the Double Taxation Avoidance Treaty with India, AGOA, the SADC preferential trade agreement. All these have saved and helped the country move forward. We now have free healthcare, free education, free transport for the students and aged, universal old age pension, subsidies on some essential commodities and services (like rice, cooking gas, water & electricity), social welfare and housing benefits, and other freebies. The miracle goes on. Mauritians are looking for another manna falling from heaven. Don’t ask me what that is! You just have to believe in your stars!

Mauritius got its independence in 1968, which was the Year of the Monkey, just as this year. Let’s hope that, like the monkey, Mauritius will always be resilient, full of tricks, will swing from opportunity to opportunity and will not be trapped by anyone, be it a lion or a shark.