Page 37 - Capricorn IAR 2020

2020 INTEGRATED ANNUAL REPORT
The regulators announced the following support to the banks as a result of COVID-19:
• The Bank of Namibia relaxed the Determination on Liquidity Risk Management whereby banking institutions are required to ensure that their cash inflows match the cash outflows expected within zero to seven days. The limit has been relaxed so that expected outflows may exceed inflows, but not more than the excess liquidity above the regulatory limit.
• The Bank of Botswana announced the following measures to support liquidity of banking entities in Botswana:
− The cost of accessing overnight funding by licensed
commercial banks from the Bank of Botswana Credit Facility is now provided at the prevailing bank rate, without the previous punitive 6 percentage points above the bank rate
− Repo facilities previously available only on an overnight basis will be offered against eligible securities with maturity of up to 92 days
− Subjecttocompletingregulationsandarrangementsrelating to valuation and custody, the collateral pool for borrowing by licensed commercial banks from the Bank of Botswana was extended to include all corporate bonds listed and traded
on the Botswana Stock Exchange
• The Bank of Zambia launched its Targeted Medium-Term Financing Refinancing Facility, initially set at ZK10 billion. This will offer liquidity support to financial service providers for onward support to various players in targeted sectors of the Zambian economy.
How are we managing credit?
Net asset value increased by 8.5%
and return on assets settled at 1.6%
Asset quality has always been a key focus of the Group. The challenging economic environment resulted in increasing scrutiny of the asset books of financial institutions. The measures taken to limit the spread of the virus impacted different customers and sectors in different ways. The travel, tourism, hospitality and construction sectors were most severely affected by restrictions. Read more about our efforts to support customers in the Group CEO report from page 23.
Among the four major banks in Namibia, Capricorn Group has the most diversified exposure to sectors in its loan portfolio. This means that the severity of the impact on asset quality is spread, but at the same time, the Group has a significant exposure to trade and accommodation.
Capricorn Group loan portfolio per sector
Lending has always been the core strength of Bank Windhoek’s business activities, and has been gaining scale at Bank Gaborone. Bank Windhoek’s gross advances increased by 4.9% to N$33.4 billion, despite low demand for credit from the private sector over the past year which was 75% above private sector credit extension of 2.8%. The growth was mainly due to commercial loans.
Bank Gaborone increased gross advances by 11.5% to BWP4.7 billion as the bank continued to grow market share. Growth in advances was mainly attributable to commercial and mortgage loans.
Entrepo increased loans and advances by 19.0% to N$1.2 billion.
Demand was particularly muted towards the end of the financial year as the COVID-19 impact compounded recessionary economic conditions.
Current adverse economic conditions have seen a substantial increase in non-performing loans (“NPLs”) across the industry. The Group has also seen an increase in NPLs, but not to the extent reported by most financial institutions across the Southern African Development Community. The Group’s total NPLs increased from N$1.6 billion to N$1.9 billion over the financial year resulting in an increase in the NPL ratio from 4.1% to 4.7%. The increase is mainly the result of:
• Bank Windhoek NPLs increased by 20.5% from N$1.22 billion to N$1.47 billion. This was mainly due to deterioration seen during the last quarter of the financial year and is spread across a large number of clients.
• Bank Gaborone had an increase in NPLs of 15.3% to BWP291.2 million. This was mainly due to a deterioration
of the loan book across all sectors amplified by the COVID-19 pandemic during the last quarter of the financial year.
The increase in impairment charges of 146.1% is mainly due to the prudent approach applied given the current economic circumstances and the requirement of IFRS 9 to be forward looking in the calculation of expected credit losses. The economic overlay applied contributed 45% of the increase which is not reflective of the Group’s asset quality. As a result of the significant higher increase in impairment charges compared to the increase in NPLs, the NPL coverage ratio increases from 47.3% to 49.0%.
3%
Mining
3%
Transport and communication
4%
Building and construction
6%
Agriculture and forestry
10%
Finance and insurance
11%
Trade and accommodation
4%
Other
2%
Manufacturing
Impairment charges
IFRS 9 Base Model Charges IFRS 9 Overlay
N$’000 Stage 1 and 2
73,607
3,908 69,699
N$’000 Stage 3
230,764
164,046 66,718
N$’000 Total
304,371
167,954 136,417
Our focus remains on prudent and proactive credit risk management through a decentralised credit model. Read more about actions taken in the risk report from page 69.
How are we protecting earnings
quality?
31%
Individuals
Sustained profitability across most sectors came under pressure towards the end of the year as lockdown severely impacted demand and economic activity across the world. The lowering of interest rates as part of stimulus packages had a significant impact on interest income while the impact on cost of funding is delayed and does not adjust to the same extent as on the income side. This resulted in material margin compression. With a large part of our operating cost fixed, operating margins have to suffer.
13%
Government
13%
Real estate services
Source: Namibia Banking Review: Impact of COVID-19 – IJG Securities, May 2020.
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