Section A

The consolidated and separate financial statements of the Group’s and the Bank’s operations in Mauritius presented in this annual report have been prepared by management, which is responsible for their integrity, consistency, objectivity and reliability. International Financial Reporting Standards of the International Accounting Standards Board as well as the requirements of The Companies Act 2001 of Mauritius, The Banking Act 2004 (amended August 2020) and the guidelines issued by the Bank of Mauritius, have been applied in the preparation and fair presentation of the financial statements for the year ended 30 June 2020 and management has exercised its judgement and made best estimates where deemed necessary.

The Group and the Bank have designed and maintained its accounting systems, related internal controls and supporting procedures, to provide reasonable assurance that financial records are complete and accurate and that assets are safeguarded against loss from unauthorised use or disposal. These supporting procedures include careful selection and training of qualified staff, the implementation of organisation and governance structures providing a well-defined division of responsibilities, authorisation levels and accountability for performance and communication of the Bank’s policies, procedure manuals and guidelines of the Bank of Mauritius throughout the Bank.

The Bank’s Board of Directors, acting in part through the Audit Committee, Conduct Review Committee, Corporate Governance Committee, Credit Committee, Risk Management Committee and Technology, Digitalization and Platforms Committee, which comprise executive, non-executive and independent directors, oversee management’s responsibility for financial reporting, internal controls, assessment and control of major risk areas, and assessment of significant and related party transactions.

The Bank’s Internal Auditors, who has full and free access to the Audit Committee, conduct a well-designed program of internal audits. In addition, the Bank’s compliance function maintains policies, procedures and programs directed at ensuring compliance with regulatory requirements.

Pursuant to the provisions of The Banking Act 2004 (amended August 2020), the Bank of Mauritius makes such examination and inquiry into the operations and affairs of the Bank as it deems necessary.

The Bank’s external auditors, Deloitte, have full and free access to the Board of Directors and its committees to discuss the audit and matters arising therefrom, such as their observations on the fairness of financial reporting and the adequacy of internal controls.

INDERJIT SINGH BEDI

Interim Chairperson

SANJIV BHASIN

Chief Executive Officer

JOAN JILL WAN BOK NALE

Director

While the health crisis we are confronted with supersedes all other topics in this year’s annual report, the core principle of value creation during the economic disruption as we deal with the spiraling effects of this pandemic remains of top priority in the Bank’s agenda. We have vowed to keep clients at the absolute center of everything we do as we go all out in delivering tailored services, adapted advice and consequential capital to path our clients towards success and their ultimate well-being.

Treasury and Markets’ gross operating income grew by 9% year-on-year, spearheaded by a record performance on the Trading Income side. Trading Income finished in excess of MUR 1.2bn, showcasing a year on year growth of 35%. We saw solid performance on both the FX side and the Money Markets/Fixed Income side of the business, supported by our Structuring desk. Indeed, the bank closed a landmark deal being the first ever USD/MUR Cross Currency Interest Rate Swap (“CCIRS”) in the Mauritian market. Given a sudden reversal in market interest rates, the Treasury and Markets team was also able to position the balance sheet so as to limit the adverse impact of the reduction in interest rates - further shoring up Net Interest Income performance for the bank. The Treasury and Markets team also closed the IBL Bond Issuance mandate for a total amount of MUR 4bn.

The four key pillars within the Treasury and Markets cluster are Treasury, Financial Institutions, Custody and Securities Services and Debt Capital Markets. Our goal is to ensure that our client facing and support functions are aligned to consistently provide our clients with best in class services. Treasury and Markets’ prerogative is to provide clients with tailored solutions by reinforcing ABL’s position as the market makers for foreign exchange, interest rate, debt, and other structured derivatives. ABL further consolidates its stance as an innovative Financial Markets service provider catering not only to Mauritian demands but also effectively meeting financial requirements in the regional sphere.

Its local expertise, global access and balance sheet scale allows the Bank to provide clients with a range of financial instruments to meet their risk management, investment and trading needs. Managed by a team of professionals with decades of experience, Treasury and Markets is committed to satisfy its clients’ commercial and investment needs.

The future is riddled with uncertainty. Other than a global recession, the COVID-19 pandemic has created significant turmoil in global markets whereby we are expecting to see increased volatility in financial markets for the foreseeable future. The severe contraction of the local economy coupled with potential EU sanctions on the Mauritian jurisdiction, will also present another set of challenges for the banking sector. Given the increasingly challenging landscape, our focus shall be on shoring up risk taking by adopting a “Risk and Capital” preservation strategy, as prescribed by our Board. We nevertheless remain ready to support our stakeholders and will keep abreast of market developments, so as to identify the right opportunities.

On 1 September 2020, of the 25,298,875 cases reported globally so far, 53% are in Americas. This is followed by Europe and South East Asia with 4.2m cases respectively. The number of deaths stood at 847,602 which were mainly caused by community transmission.

Coronavirus has already impacting global markets, with economic impacts felt beyond China and other effected countries. Stock indices tumbled, spooked by reports that the coronavirus outbreak that emerged in China is spreading to countries including Italy, Iran and South Korea. Trading in stocks across world markets remained choppy, reflecting hope that the economic fallout might be manageable. The markets’ movements mirror the uncertainty that prevails and persists not just in the U.S. but all over the world. Several weeks into the coronavirus outbreak that has brought the world’s second-largest economy to its knees, some of the most basic aspects of the virus remain unknown.

In its June 2020 report, the IMF projected that the global growth will shrink to –4.9% in 2020, as compared to 2.9% in 2019. The COVID-19 pandemic has had a negative impact on activity in the first half of 2020, and the recovery speed is uncertain.

However, it is important to acknowledge that the global economy was already facing some difficulties prior to the COVID-19 pandemic.

The COVID-19 pandemic started as a sanitary crisis but soon became a global multidimensional crisis. Global economies have been badly hit including Mauritius. The IMF forecasted the Mauritian economy to contract to -7% for 2020 . Even though Mauritius has a diversified economy , it nevertheless remains vulnerable to global economic trends. Due to the lockdown and closure of our borders, many of our sectors like the tourism, manufacturing and trade industries have been badly impacted.

However, over the past few months, we have seen substantial support from the Government of Mauritius and the Bank of Mauritius (as shown below). The government has used fiscal stimulus and eased monetary policies in order to support our economic operators during this unprecedented time. Through the Government support measures, we have observed the prevention of large-scale bankruptcies in the economy. The setting up of the Mauritius Investment Corporation Ltd (“MIC”) by the Bank of Mauritius further complements the Bank’s Support Program. The main objectives of the MIC are to support employment, investment and exports.

As countries have tightened their border controls, this pandemic has forced us to rethink the sustainability of an export-led economy. In the Budget 2020/21, we have noted that the Government has encouraged local production, diversified into strategic sectors like the Blue economy and pharmaceuticals as well as promote sustainable development 5. Even though Mauritius has been able to contain the impact of the COVID-19 pandemic, there are still some perceived risks looming for the FY21.

⁵ PwC Budget Brief 2020

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.

Statement of Profit or Loss and Other Comprehensive Income – Total Operating Income

AfrAsia Bank reported a net interest income (“NII”) of MUR 2.0bn, that is, 12% lower than in the prior year. The year-on-year decrease was mainly driven by higher interest expense of MUR 1.1bn (2019: MUR 0.9bn). This effect was mainly on the back of the COVID-19 pandemic creating trade related uncertainty plunging the average volume and balances of placements and bonds due to financial market volatility and erosion of market value both in the domestic as well as international markets. Terms of many financial assets had to be renegotiated leading to dwindling interest income on customer grounds. While the Bank coped to manage its interest income, the growth in interest expense was the final knockback which dragged the net interest income down.

The Bank’s asset base grew by 15% (MUR 20.6bn) and reached MUR 160.5bn by end of this year under review. This growth was primarily in cash and cash equivalents and due from banks and investment securities, while loans and advances and other assets were relatively stable when compared to last FY.

The bisection of the asset book sat in cash and cash equivalents and due from banks with an increase of MUR 16.5bn in 2020 as compared to the prior year. Investment securities increased by MUR 3.4bn (7%) primarily to upper possession of debt instruments at amortised cost; representing 30% of total assets.

Other assets, with its foremost component being mandatory balances with the Central Bank (MUR 2.2bn), did not experience major change. Furthermore, the proportion of the Bank’s total assets to Segment B represented 65% in 2020 which represents a slight increase when compared to 64% in 2019.

While the COVID-19 pandemic started as a sanitary crisis, its repercussions have cascaded to the overall global economy, resulting in a multidimensional crisis. In order to avoid a systemic financial crisis, we have seen an unprecedented government intervention worldwide. As compared to the 2008 Financial Crisis, Governments have been using banks as a transmission mechanism to implement their support and relief measures.

The Bank’s risk appetite is defined by a risk appetite framework set by the Board. It aids to emphasise its strong risk culture and helps define thresholds to manage aggregate risks through an acceptable scale.

In line with Bank of Mauritius Guidelines on credit and country risk management, the Board has established a set of policies and procedures in respect of cross-border activities, which clearly translate to the Bank’s strategic goals and risk parameters.

Both the local and global economies have been severely impacted since the outbreak of the COVID-19 pandemic and this will impact capital adequacy and Stress test requirements of banks. In view of the unprecedented circumstances relating to the COVID-19 outbreak, the European Banking Authority (“EBA”) has decided to postpone the EU-wide stress test until 2021. This move was mirrored by the Bank of England, which announced the cancellation of stress testing requirements for eight major UK banks. The objective is to facilitate and incentivise the disbursement of credit to meet households and business requirements and still meet regulatory ratios.

In this current economic environment, similar to other banks, it was quite challenging for ABL to conduct stress-tests and estimate provisions under the IFRS 9 standard; as forward-looking judgement on possible losses from loans is very challenging and uncertain.

Notwithstanding the above challenges, the Bank has been guided by its Board in conducting a number of “Stress-Test Scenarios” or “What-If Scenarios” in order to assess potential balance sheet and profit or loss impact.

The mitigations are in line with the regulatory Internal Capital Adequacy Assessment Process (“ICAAP”) mitigation plan. ICAAP is an internal review requirement that evaluates capital adequacy, capital management and planning at banks with a specific focus on core risk factors.

The independent status of the Risk Management function is supported by a governance structure that provides for escalation of risk issues to senior management, Board sub-committees and the Board of Directors, as appropriate.

Risk Management Committee

Fixed Line
Direct reporting to the CEO/Committee

Dotted Line
Operationally reports to the Board Committee

Fixed Line
Direct reporting to the CEO/Committee

Dotted Line
Operationally reports to the Board Committee

Management Credit Committee ("MCC")

Assets and Liabilities Committee ("ALCO")

Impairment Management Committee ("IMC")

Risk Management Committee ("RMC")

Risk can be defined as the uncertainty of an event to occur in the future. In the banking context, it is the exposure to the uncertainty of an outcome, where exposure could be defined as the position/stake banks take in the market. The main type of risks faced by the Bank are as follows:

The Bank has structured the responsibilities of credit risk management so that decisions are taken as close as possible to the business, whilst ensuring that there is an adequate segregation of tasks. Credit policies and processes are in place to ensure the effective monitoring and managing of credit risk in compliance with the Bank of Mauritius guidelines and AfrAsia Bank’s risk appetite.

The key focus of the Bank’s credit risk management approach is to avoid any undue concentrations in its credit portfolio, whether in terms of counterparty, group, portfolio, and country. The Bank has always kept its large exposures within the regulatory limits. For instance, our concentration ratio of large exposures above 10% was 200.65% as at 30 June 2020, well within the regulatory limit as shown below:

As a fundamental credit principle, the Bank does not generally grant credit facilities solely on the basis of the collateral provided. All credit facilities are also based on the credit rating, source of repayment and debt-servicing ability of the borrower. Collaterals are taken when required by the bank to mitigate the credit risk. The collateral is monitored on a regular basis with the frequency of the valuation depending on the liquidity and volatility of the collateral value.

Enforcement legal certainty of enforceability and effectiveness is another technique used to enforce the risk mitigation. Where a claim on counterparty is secured against eligible collateral, the secured portion of the claim is weighted according to the risk weight of the collateral and the unsecured portion against the risk weight of the counterparty. To mitigate counterparty risk, the Bank also requires close out netting agreements. This enables the Bank to offset the positive and negative replacement values of contracts if the counterparty defaults. The Bank’s policy is to promote the use of closeout netting agreements and mutual collateral management agreements with an increasing number of products and counterparties in order to reduce counterparty risk.

As an indication, claims secured by cash and other charges represent 60% of the asset book, whilst unsecured portions account for 40% of total asset book. The value of collateral and other credit enhancements received on loans and advances as at 30 June 2020 is MUR 18.4bn (2019: MUR14.7bn and 2018: MUR18bn). All other financial assets are unsecured except for collateralised placements The main types of collateral obtained are as follows:

The Group and the Bank also request for personal guarantees from promoters, directors, shareholders and also corporate and cross guarantees from parent and sister companies.

Liquidity and funding risk are the risk that the Bank will be unable to meet its daily cash and financial obligations as they fall due or do so at materially significant costs. Liquidity risk arises from mismatched cash flows related to the Bank’s assets and liabilities as well as the characteristics of some products with ambiguous maturities.

The Bank’s primary objective as a financial institution is to manage liquidity such that it supports the Bank’s business strategy and allows it to honor its commitments when they come due, even under stress. This is done primarily by implementing a liquidity risk policy framework approved by the Board, which establishes a risk appetite, triggers, risk indicators, monitoring structures and escalation trees. 

The Bank’s Assets and Liabilities Committee (“ALCO”) under guidance from the Board Risk Committee (“BRC”) is responsible for the assessment, monitoring and management of the Bank’s liquidity risk and strategy and ensuring compliance with both internal and regulatory limits.

As per the principles outlined in the Bank’s liquidity risk policy, the following approach is adopted to manage liquidity risk both under a business-as-usual and stressed scenario.

The Bank publishes the LCR on a quarterly basis and reports to the Bank of Mauritius on a fortnightly basis.

The Bank of Mauritius adopted the following phased in approach to the LCR requirement:

The following table provides average LCR data, calculated using month end data for the quarter ended 30 June 2020. The bank’s average LCR was 349%, well above the 100% regulatory requirement, demonstrating a robust liquidity position.

¹ The quarterly average of monthly observations is based on April to June 2020 month end figures.

² The quarterly average of daily HQLA is based on close of day figures over the 1st April 2020 to 30th June 2020 period.

The Top 10 Principal Risks of the Bank have been evaluated where all departments were requested to provide their assessment through a rating exercise with regards to their actual business activities. The snapshot below depicts the inherent risks of the Top 10 Principal Risks in terms of likelihood and impact.

The diagram below depicts the trends of the Top 10 Principal Risks between the FY 2017/2018, FY 2018/2019 and FY 2019/2020. Fight against Financial Crimes, Challenging Economic Environment and Regular Changes in regulatory guidelines which position themselves first, second and third among the heightened risks during this financial year. On the other side risk associated with Existing IT Platform and Cyber Security which were previously positioned first and second in previous year have moved to fifth and fourth position respectively. Talent Management which was placed third in the previous financial year has moved to the tenth place.

The Bank is taking appropriate actions to mitigate the inherent risk in these areas. No major movement observed for the other remaining risks identified and they are containable within the Bank’s risk profile.

AfrAsia always promotes a culture where operational risk is everyone’s responsibility. Operational risk (“OR”) is the risk of achieving our strategy or objectives as a result of inadequate or failed in internal processes, people, and systems or from external events which can lead to adverse customer impact, reputational damage, litigation or financial loss. Operational risk is inherent in the day to day operations, activities and products and services which the Bank offered.
The Bank has a well-defined structure for operational risk that complies with regulatory and best practice requirements and is aligned with the risk culture and the risk profile of its activities. This is supplemented through an operational risk charter and operational risk framework which include the three lines of defense (BUs, Control Units, and Internal/External Auditors) and involvement of senior management ensuring the coverage that all operational risks are efficiently managed across its activities.

The OR framework includes a risk control self-assessment (“RCSA”) process, risk impact likelihood matrix, key risk and control indicators, Early Warning Indicators (“EWIs”), a robust operational risk event management tool and escalation process, scenario analysis, audit recommendations, external information sources (external events or industry reports) and operational losses process.

AfrAsia continuously improve operational control procedures to keep pace with new regulation and best practice in the market through holistic follow up of risks and their mitigating controls.

The AfrAsia fosters awareness and knowledge of operational risks at all level of organizations through its risk pro-culture. During the financial year ended 30 June 2020, a number of different training sessions were conducted using the e-learning platform (“LMS”) and face to face sessions which addressed general knowledge of operational risk.

AfrAsia calculates its minimum (Pillar I) operational risk capital requirement using the Basic Indicator Approach (BIA) where the capital charge is 15% of average gross income over the last 3 years. AfrAsia has an Early Warning Indicators (“EWIs”) for Operational Risk Loss which is 0.1% to 1.0 % of gross income.

The Operational Risk Radar depicts the position of operational risk incidents with operational losses according to the Basel Event Classification under the four-quadrant people, process, system and external factors vis a vis the Early Warning Indicators (“EWIs”) set.

At AfrAsia, Information Technology is more geared towards enabling sophisticated product development, better market infrastructure, and helps the Bank reach geographically distant and diversified markets. The Bank leverage maximum effort on FinTech to keep pace in the digitalized market while keeping aligned to its IT Security policies.

Business Continuity Management (“BCM”) Policy includes plans to mitigate operational risks, and as a commitment to continue business to our shareholders, customers and employees. Business Impact Analysis, Business Recovery Strategies and Emergency Response plans are defined and implemented to provide for a Disaster Recovery site with data being updated as per preset recovery time objectives. This minimizes operational, financial, legal, reputational and other material consequences arising from any disruption to the primary IT infrastructure.

The BCM policy reviewed in May 2019 is in line with the Business Continuity Institute Good Practice Guidelines 2018 (“BCI GPG 2018”), which is built on ISO requirements namely ISO 22301:2012 for business continuity management and ISO/TS 22317:2015 for Business Impact Analysis (BIA).

The management team of the Bank is committed to the following statement:

“We will take all necessary measures to ensure the continuity of business operations and to minimize recovery time in the case of disaster (natural or otherwise) or in the event of an emergency.”

The Bank has a BCM Steering Committee to review the processes after each testing exercise and to review the policy every year with a view to continuously improve resilience. The ultimate objective is to cater for any eventual disruption of operations to be restored within a minimum lapse of time such that the Bank resumes to normal operations within a reasonable time frame.

At least one BCM test is performed annually for all critical infrastructure involving all functions and user groups of the Bank to ensure the effectiveness of the processes and the readiness of the infrastructure and people. The Bank has adopted a cyclical approach residing on the four pillars: Readiness, Prevention, Response and Recovery /Resumption to continuously improve on the BCM and attain an efficient and acceptable level. Rigorous administration and maintenance, as well as any event experienced, will necessitate revisions and/or plan additions. The strategy adopted for an efficient BCM is to continuously test, train, evaluate and maintain the BCP.

The BCM policy is in place for moving towards a better resilient framework to protect the interest of all stakeholders of the Bank. During the COVID-19 lock down period, the Bank followed our BCM policy and Government of Mauritius and World Health Organization protocols. The Bank also adapted our customer services among others, to be more gear towards technology, while maintaining our controls to run the Bank’s operations. Furthermore, we applied strict sanitary measures and perpetuate our usual awareness campaign to keep our staffs informed about the evolving situation and kept employee welfare.

Bank’s operations. Furthermore, we applied strict sanitary measures and perpetuate our usual awareness campaign to keep our staffs informed about the evolving situation and kept employee welfare.

Customer Risk is the risk associated to the Customer profile, product and services/transactions, channels, jurisdictions and segmentation among others. To better address and effectively manage KYC/AML Risk, the AML desk has been revamped and attached under the risk management arena.

The AML desk as a second line of defense ensures the implementation of effective AML framework with adequate processes and controls with a view rendering its products and services away from financial crimes and tracked down effectively and promptly suspicious transactions.

The Bank is continuously enhancing its processes on a risk-based approach to tackle customer due diligence requirements, apply best practices for customer onboarding, leverage on tools and techniques to efficiently monitor transactions and detect any anomalies.

To perform its daily activities effectively, the Bank depends on in house and external technology to ensure that customer risks are captured and mitigated accordingly.

The total asset book witnessed a growth of MUR 20.6bn for the year ended June 2020 versus the same period in 2019. The total risk weighted assets as at end of the current financial year stood at MUR 55.4bn, demonstrating an increase of 14% in comparison to MUR 48.7bn as at end of June 2019. Despite the recognition of a net profit after tax of MUR 1.5bn in retained earnings, the capital adequacy ratio fell from 15.85% to 15.15% as at end of June 2020 on the back of an increase in risk weighted assets of MUR 6.7bn. The capital adequacy ratio was well above the regulatory limit of 12.88 % for the year 2020. The regulatory limits include a capital surcharge of 1.00% in 2020, given that the Bank is classified as a Domestic Systemically Important Bank.

Analysis by risk type:

• Credit Risk:  MUR 49.9bn
• Market Risk:  MUR 0.3bn
• Operational Risk:  MUR 5.2bn

The Board of Directors (Board) deems that endorsing quality norms and beliefs of good governing practices in the Bank provide a solid bedrock for sustainability, a long-haul value creation for all of its stakeholders and a culture of transparency. The Board entrusts its powers through its leadership in the hierarchy eulogising elevated standards of corporate governance to direct and supervise the conduct of the business and the affairs of the Bank ethically and effectively.

AfrAsia Bank Limited (the “Bank” or “AfrAsia Bank” or “ABL” or “AfrAsia”) has, through its Board of Directors, taken the required steps to ensure compliance with the principles set out in the National Code of Corporate Governance and explained how these principles have been applied to with the exceptions of those disclosed in the “Statement of Compliance” on page 73 along with underlying principle behind the non-compliance.

Further to a re-constitution of its Board of Directors post year end, some resignations and appointments were noted post year end for which the details can be found throughout the report.

Disclosures pertaining to the eight principles of the Code have been made in different sections of the Annual Report, as outlined below:

ABL, a public company incorporated on the 12^th of January 2007, holds a banking licence which was issued on the 29^th of August 2007. Its core banking and transactional capabilities are in Mauritius along with a representative office in South Africa. It is a Public Interest Entity (“PIE”) as per the Financial Reporting Act 2004 and adheres with the requirements of the relevant rules, regulations and legislations.

The Bank operates under the aegis of a unitary Board, collectively geared in guiding and directing the organisation to take the necessary steps to adhere, to the best of the Board’s knowledge, to all legal and regulatory requirements, such as:

• The eight principles issued by the National Committee on Corporate Governance in its “National Code of Corporate Governance for Mauritius (2016)” (the “Code”);
• The Banking Act 2004 (amended August 2020) issued by the Bank of Mauritius (“BOM”);
• The “Guidelines on Corporate Governance 2001” (revised October 2017) issued by BOM; and
• The provisions of The Companies Act 2001 in Mauritius.

ABL has in place a Conduct and Ethics Policy and in line with same, it is committed to employing the right people and to promote a culture of mutual respect and ethical behavior. Employees and Directors are expected to treat each other with consideration and respect and are not permitted to engage in conduct which is hostile or offensive to another person. The Bank promotes transparency and all staff and Directors are made aware and accountable of their responsibilities.

A copy of the Bank’s Conduct and Ethics Policy is available on its website.