Fitch flags DBN bad loans at 38%

Credit-impaired loans at the Development Bank of Namibia (DBN) accounted for 38% of its lending portfolio at the end of March 2025, Fitch Ratings has said, highlighting persistent risks to the state-owned lender's financial sustainability.

In affirming the bank's Long-Term Issuer Default Ratings at BB- with a Stable Outlook, Fitch said the deterioration reflected DBN's development-lending focus, weak economic conditions and a contracting loan book.

The proportion of Stage 3 loans, classified as credit-impaired under International Financial Reporting Standard 9, increased from 13% at the end of March 2020.

What does Stage 3 mean?

Under IFRS 9, loans are classified into three stages according to their credit risk. Stage 1 covers performing loans, while Stage 2 captures loans that have experienced a significant increase in credit risk but are not yet credit-impaired. Stage 3 comprises loans considered credit-impaired, where the lender has identified evidence that the borrower may not repay the outstanding debt in full.

DBN's annual report says the bank classifies credit as non-performing when a borrower is more than 120 days behind on a material credit obligation. Such loans attract lifetime expected credit loss provisions, reflecting the risk of losses over the remaining life of the exposure. Importantly, an impaired loan is not necessarily a written-off loan: the bank can continue pursuing repayment and recovery.

DBN's 2024/25 integrated annual report provides further insight into the deterioration. Gross loans and advances declined by 11% to N$7.46 billion in the year ended March 2025, from N$8.38 billion a year earlier.

Over the same period, gross Stage 3 exposures increased from N$2.12 billion to N$2.87 billion, representing approximately 38.5% of the bank's gross lending portfolio.

DBN itself described asset quality as a critical weakness and a significant threat to its long-term financial sustainability.

Although the bank's impairment ratio declined during the reporting period, DBN attributed the improvement partly to stronger collateral positions and the write-off of fully provided loans, cautioning that these developments had not yet translated into sustainable recovery trends.

The expected credit loss allowance fell to N$1.68 billion from N$2.22 billion. However, the bank attributed the reduction primarily to the utilisation of provisions against written-off accounts.

DBN disclosed that N$579.9 million in loans had been written off but remained subject to enforcement and recovery activities, compared with N$17.4 million a year earlier.

Fitch said DBN's lending mandate prioritises infrastructure, developmental and large industrial projects in strategically important sectors, with a smaller allocation towards small and medium-sized enterprises. The bank's exposure to these sectors, combined with difficult economic conditions, has contributed to its weak credit risk profile.

DBN has previously linked pressure on its loan portfolio to the economic effects of the Covid-19 pandemic.

Speaking to the Namibia Business Review, DBN spokesperson Jerome Mutumba said the bank's impairment ratio increased from 12% in 2021 to 26% in 2024, largely reflecting heightened credit risks during the pandemic and prolonged pressure on key economic sectors.

He said the ratio improved to 22% in the 2025 financial year, attributing the recovery to a more stable operating environment, strengthened credit risk management and enhanced recovery efforts.

Profitability remains subdued

Fitch also identified low profitability as a weakness, although DBN returned to profitability after recording losses in the financial years ended March 2022 and March 2023.

The bank's 2024/25 financial statements show that profit for the year increased by 42.5% to N$88.3 million, from N$62 million in the previous financial year.

However, net interest income declined by 25.1% to N$337.4 million from N$450.6 million, while operating income fell to N$356.1 million from N$480.5 million.

Net impairment charges on loans and advances decreased to N$126.6 million from N$287 million, helping support the improvement in the bottom line.

Fitch said high loan impairment charges had driven the losses in 2022 and 2023, with the bank returning to small profits as impairment charges eased.

The ratings agency nevertheless described DBN's cost management as sound, citing a three-year average cost-to-income ratio of 40%.

Government support underpins rating

Despite the asset-quality and profitability challenges, Fitch said DBN's ratings were underpinned by the potential for support from the Namibian government, which owns the bank in its entirety.

The agency assigned DBN a Government Support Rating of bb-, reflecting its assessment that the authorities have a high propensity to support the institution because of its important policy role, full state ownership and reliance on government-guaranteed funding.

Government-guaranteed funding accounted for 96% of DBN's total liabilities at the end of March 2025. A 17-year African Development Bank credit line, maturing in 2033, represented 77% of the bank's liabilities.

Fitch also highlighted DBN's strong capitalisation, with a total capital adequacy ratio of 79% and a tangible leverage ratio of 42.7% at the end of March 2025.

However, the agency cautioned that the government's ability to provide support was constrained by its own creditworthiness.

DBN's Long-Term ratings are equalised with Namibia's sovereign ratings, meaning a downgrade of the country would also result in a downgrade of the bank.

Fitch does not assign DBN a Viability Rating because its operations are largely determined by its policy role.