Banks bite earnings bullet

Jo-Maré Duddy – Non-performing loans in the Namibian banking sector spiked by more than N$1.3 billion or nearly 25% from the end of March 2020 - when Covid-19 first locked down the economy - to the end of last year.

Financial soundness data published on the website of the Bank of Namibia (BoN) shows the industry’s non-performing loans (NPLs) totalled nearly N$5.4 billion at the end of the first quarter of 2020. Three months later it rose by 9% to nearly N$5.9 billion. In the third quarter, NPLs climbed by a further 12% to about N$6.6 billion. Banks ended last year with an NPL total exceeding N$6.7 billion.

A loan is regarded as an NPL when a borrower hasn’t made regular payments for at least 90 days. A significant indicator of a bank’s asset quality is its NPL ratio - the ratio of the amount of NPLs in a bank's loan portfolio to the total amount of outstanding loans the bank holds.

The banking industry’s NPL ratio at the end of December 2020 was 6.4%, slightly better than the 6.5% of the previous quarter. In both cases, however, the NPL ratio exceeded the BoN’s new supervisory intervention trigger ratio of 6.0% for times of crisis.

‘PERSISTENT INCREASE’

According to the central bank’s Financial Stability Report (FSR) of April 2021, “the persistent increase in NPLs is ascribed to unfavourable economic conditions, cash flow constraints experienced by both households and businesses and the downside risk emanating from the Covid-19 pandemic, which caused business to either scale down operations or close”.

The BoN’s financial soundness data shows the banking sector’s NPL ratio at the end of 2015 was 1.6%. The current recessionary cycle Namibia is stuck in started in 2016, when the NPL ratio was 1.5%.

The ratio has been on an upward trajectory since then: 2.5% in December 2017; 3.6% a year later; and 4.6% at the end of 2019. The situation deteriorated rapidly in 2020: in the first quarter, the NPL ratio was 5.2%, followed by 5.8% in the second, 6.5% in the third and 6.4% in the last quarter of the year.

BoN data indicates the impact of the recession and pandemic on the asset quality of the banking sector has been considerably worse than in the 2007/8 global financial crisis. At the end of 2007, the industry’s NPL ratio was 2.8%, followed by 3.1% in 2008 and 2.7% at the end of 2009.

HOME TRUTHS

Mortgages last year dominated the industry’s NPLs by far, according to the BoN’s Annual Report 2020. At the end of last year, mortgage NPLs exceeded N$4.1 billion and represented about 61% of total NPLs. In 2016, mortgage NPLs amounted to nearly N$775.3 million or 59% of all NPLs.

Mortgage NPLs increased by 24.2% year-on-year (y/y) in 2020.

According to the BoN, mortgage loans contributed significantly to the growth in the NPL ratio during the period under review. “However, this is expected given that mortgage loans make up 52.3% of the total loan book of banks,” it added.

“Current economic conditions played a rather large role in the ability of clients to service their debt, more so with lay-offs and retrenchments experienced,” the BoN said.

Overdraft NPLs totalled more than N$1 billion, jumping 59.7% y/y and representing about 15% of total NPLs. In 2016, overdraft NPLs were about N$160.2 million or around 12% of all NPLs.

NPLs in the category for personal loans, as well as other loans and advances skyrocketed by 76% and 60.8% y/y respectively and amounted to nearly N$320.6 million and N$891.7 million respectively at the end of 2020.

Instalment sales NPLs rose by nearly 17% y/y to some N$313.8 million, while NPLs on credit cards jumped by 29% y/y to nearly N$40.7 million.

OVERDUE

Overdue loans at banks totalled about N$10.5 billion at the end of 2020, about N$1.4 billion or 15% more than the previous year. In 2016, the industry’s total overdue loans were nearly N$2.5 billion.

The majority of overdue loans in 2020 – nearly N$3.97 billion or 38% of all overdue loans – were outstanding for 12 months or more. In 2019, the ratio was about 36% and in 2016 around 31%.

About N$2.1 billion was overdue for less than two months, down nearly 29% y/y. Nearly N$1.7 billion was overdue for two, but less than three months – up around 46% y/y. Loans overdue for three, but less than six months also totalled nearly N$1.7 billion, an increase of 62.5% y/y. The amount overdue for six months, but less than 12 was nearly N$1.06 billion, up some 67% y/y.

DOWN THE DRAIN

In line with the deterioration in asset quality, the write-offs in relation to profits increased last year, the BoN said in its FSR.

In 2019, commercial banks had to write off 2.47% of their profits. Last year, the figure was 11.09%. Using the BoN’s net income after tax data for the banking industry in its Annual Report 2020, that means the sector wrote off nearly N$202.2 million last year. In 2019, the figure was around N$67.6 million.

“The increase in the write-off to profits ratio reflects the recessionary economic conditions triggered by Covid-19 and is expected to improve once the economy recovers during the course of 2021 and 2022,” the BoN said.

The banking sector’s after-tax profits fell by 33.4% or some N$900 million y/y to N$1.8 billion in 2020. From 2016 to 2019, the industry’s average annual profit was nearly N$2.6 billion.

The industry was also hit by historically low interest rates. The BoN in 2020 dropped its repo rate by 275 basis points from 6.5% at the beginning of 2020 to 3.75% at present to provide relief to the domestic economy. That caused the prime lending rate to fall from 10.25% to 7.5% with a year.

The sector earned nearly N$10.7 billion in interest income in 2020, a drop of more than N$2 billion or nearly 16% compared to 2019. This is the industry’s lowest interest income since 2016.

FIRING POWER

Experts agree that, for the foreseeable future, there is no vaccine to boost the asset quality of the sector.

“Due to the sharp economic downturn, banks’ earnings and asset quality could further deteriorate as borrowers’ capacity to service loans weakens and the loan payment moratorium is lifted,” the International Monetary Fund (IMF) said in its latest Staff Report on Namibia, released in April this year.

In April 2020, the BoN implemented debt relief measures which allowed commercial banks to provide clients a repayment holiday on the principal amount for a period ranging from 6 months to 24 months based on thorough assessment of economic and financial condition of individual borrowers.

Commercials banks last year granted clients severely impacted by the Covid-19 pandemic debt relief to the tune of N$10.3 billion in total, according to the BoN’s FSR.

About N$4.5 billion or 44% of this was relief to individuals. Most of the relief – N$4.7 billion or 46% - was granted for a period of one to three months. Nearly 19% of holidays were granted for four to six months, while 4% was applicable for seven to 12 months.

“Preserving financial stability while supporting the private sector is key,” the Fund advised.

IMPAIRMENTS

In their latest review on the Namibian banking sector, released last month, Cirrus Securities said impairment levels reached record levels in the 2020 calendar year. “We believe heightened impairments are here to stay due to the ailing economy,” Cirrus added.

An impairment is commonly used to describe a drastic reduction in the recoverable amount of a fixed asset, according to Investopedia.

The latest financial results of financial institutions listed on the Local Index of the Namibian Stock Exchange (NSX) show huge increases in impairments charges y/y.

Both Capricorn Group, holding company of, among others, Bank Windhoek, as well as FirstRand Namibia with FNB Namibia as its flagship brand, released their results for the six months ended 31 December 2020.

Capricorn’s impairment charges were N$155.6 million, an increase of 186.6% y/y. FirstRand Namibia reported impairments charges of N$150.6 million, up 27.6% y/y.

SBN Holdings, owner of Standard Bank Namibia, and Letshego Holdings Namibia released their results for the 12 months ended 31 December 2020. SBN reported impairment charges of N$253.9 million, an increase of 6.2% y/y. Letshego allowed for impairment charges of N$31.3 million, up 238.7% y/y.

‘RISK HERE TO STAY’

According to Cirrus: “We therefore expect the industry loss given default to increase, leading us to believe that industry-wide higher impairments and increased credit risk are here to stay.”

The analysts added: “While the Covid-19 overlays will disappear from financials, we do not foresee credit risk returning to CY ’19 [calendar year] levels before CY ’23. This is due to our expectation that the Namibian economy will only return to 2019 real output levels in 2023.

“The result will be a prolonged economic contraction with no real expectation for imminent material GDP [gross domestic product] growth, especially on a per capita basis, resulting in a higher probability of default.”

MONITORING

According to the BoN’s FSR, the banking sector in 2020 “remained liquid, profitable and well capitalised amidst the adverse impact of the Covid-19 pandemic induced recessionary conditions”.

The central bank added: “The potential impact on financial stability originating from both liquidity constraints and asset quality deterioration in the banking sector was assessed to be medium.”

To mitigate the impact of the deterioration in asset quality, the BoN implemented additional regulatory reporting and will continue to monitor heightened credit risk going forward, it said.

The IMF, in its latest Staff Report, said the BoN strengthened reporting requirements by banks and was planning to conduct an assessment of asset classification, suspension of interest and provisioning for two systemic banks.