NPLs come home to roost

Jo-Maré Duddy – Non-performing mortgage loans have skyrocketed from nearly N$775.3 million in 2016, the beginning of Namibia’s current cycle of recession, to about N$4.1 billion at the end of September last year.This is but one set of statistics illustrating the woes of home owners – and by implication, commercial banks – in an economy scarred by recession and the Covid-19 pandemic. Others reflecting the predicament of the property market include the dropping annual growth in mortgage loans extended by commercial banks and the shrinking increase in average house prices.“The stagnant economy, overleveraged households, business cash-flow constraints and increased unemployment have decreased any probability of a near-term property market recovery,” says Cirrus Securities.Bank of Namibia (BoN) data shows non-performing loans (NPLs) pertaining to mortgages at local commercial banks spiralled upwards by about 426% from 2016 to the end of September 2020, while total mortgage loans only increased by about 24%.In 2016, nearly 1.8% of banks’ total mortgage loans were NPLs. By the end of the third quarter of last year, the figure was 7.5%.At the end of 2016, about N$464.6 million or 1.06% of all mortgage loans were overdue for 12 months and more. At the end of September 2020, it was nearly N$2.5 billion or 4.6%. BoN stats show 2017, 2018 and 2019 were the toughest years. NPLs rose by nearly 68% year-on-year in 2017, followed by 57% in 2018 and 63% in 2019. In contrast, total mortgage loans grew annually by 8.6% in 2017, by 6.4% in 2018 and by 5.5% in 2019.HEAVYWEIGHTMortgage loans make up 54.5% of the total loan book of the banking industry, and as such the asset class is expected to dominate the composition of NPLs, the BoN responded to questions by Business7.NPLs are “significantly impacted by the prevailing economic conditions and the fallout of Covid-19 affecting both households and businesses income and cash flows”, the deputy director of corporate communications at the central bank, Kazembire Zemburuka, said.At the end of March 2020, the BoN announced a number of relief measures to mitigate the impact of the lockdown and the global Covid-19 pandemic. These included debt holidays for businesses and households of between 6 and 24 months granted on merit by commercial banks. These holidays applied to the principal amount and interest and are granted at commercial banks' discretion.The BoN also reduced the capital conservation buffer rate to 0% for at least 24 months to support banking institutions to supply credit to the economy. “The capital conservation buffer will enable banking institutions to use the capital they have built up during good times, to use during times of distress,” the central bank said at the time.DEBT RELIEFFrom March 2020, when government enforced the beginning of a partial lockdown which later became a national lockdown, to the end of September 2020, the latest available data, mortgage NPLs increased by about N$540 million.According to Zemburuka, the value of mortgage loans on which debt relief was granted increased from about N$5.25 billion in May to around N$7.79 billion at the end of last year.In its Economic Outlook 2021, Cirrus said although banks provided aid at the start of the lockdowns, payment holidays were generally only scheduled for six months. “Most borrowers would therefore have needed to start repaying their facilities in a challenging operating environment. This could potentially lead to further increases in non-performing loans and higher impairment charges on 30 June 2021. Namibian banks are therefore expected to, again on a case-by-case basis, extend further payment holidays where needed,” Cirrus said.CAPITAL ADEQUACYZemburuka said the banking industry’s capital adequacy remains adequate to cushion against any unexpected losses in the form of credit defaults.“Commercial banks have made sufficient regulatory provisions or International Financial Reporting Standard 9 [IFRS9] overlays to absorb negative movements in non-performing mortgage loans,” he added.In the BoN’s latest Financial Stability Report, released last April, the central bank flagged higher NPLs as an increased risk probability for 2020. The impact of this, according to the central, was “medium”.“Asset quality, as measured by the non-performing loan (NPL) ratio, continued to deteriorate during the period under review and therefore, poses a credit risk to the banking sector,” the report stated.The overall NPL ratio deteriorated from 3.6% in 2018 to 4.8% in 2019.“The NPL ratio has been increasing exponentially since 2017, exceeding the 4.0% trigger point for supervisory action from the Bank of Namibia; however, it is still below the historical highest of 11.2% recorded during 1998,” the report stated.NPL RATIOFinancial results released recently give an indication of how the situation further deteriorated last year. Capricorn Group, with Bank Windhoek as its flagship brand, reported that its overall NPL ratio rose from 4.7% in the six months ended 31 December 2019 to 5.2% in its past half-year.Zemburuka said the banking industry’s NPL ratio increased by 1.6 percentage points over the past year, from 4.8% to 6.4%. “However, the Bank has observed a decline in the ratio during the last quarter of 2020, as a result of improvement in repayments by customers and the strategies implemented by commercial banks in terms of recoveries,” he said.Cirrus believes “many” mortgage loans have been impaired, and therefore no longer formed part of the NPL calculation. “However, the increase in later period arrears is concerning – indicating that there is ongoing difficulty, and more loans are likely to be impaired, despite efforts by the banks to provide relief (whether in terms of payment holidays or loan renegotiations),” Cirrus says.The analysts also believe banks have opted to renegotiate loans as opposed to repossessing properties and increasing supply on the housing market.According to Zemburuka, the BoN is monitoring NPLs. “When appropriate, policy measures shall be considered on a macroprudential level to avoid systemic risk,” he said.‘SURE BET’“Property in Namibia has been a relatively sure bet for the first 25 years after independence, with particularly strong appreciation prior to the global financial crisis and thereafter when the Namibian economy reported strong growth for the first half of the 2010s,” according to Cirrus. Accommodative monetary and fiscal policy also sustained the property market for much of the last decade, which coincided with historically low interest rates in a strong growth environment, the analysts continue. “After such a healthy run from 1997, a correction appeared inevitable,” they add.According to Cirrus, the shortage of housing amid strong demand resulted in the sustained appreciation for the housing market, particularly in Windhoek. FNB Namibia Housing Indices clearly illustrate this. At the end of 2017, the average house price in the country was N$1.187 million – 45.6% higher than in 2012. In Windhoek, the average price in 2017 was N$1.614 million, up 64.4% over the five-year period. Walvis Bay’s increase was 71.5%, while Ongwediva recorded a figure of 62%. In Keetmanshoop, the average price was nearly 31% more.POST 2017According to Cirrus, the market dynamics shifted gradually as demand slowed and supply had a latent increase with many large residential construction projects coming to completion.“Several factors worked together to result in the correction we have been witnessing since late 2017,” the analysts say. “Angolan buyers and renters started withdrawing from the Namibian property market in 2014. The oil price crash of that year resulted in a slowdown of the Angolan economy from which it has struggled to recover, as well as a shortage of foreign currency – which has made external transactions (such as buying Namibian properties) far more difficult. In 2016, Namibia’s economy started faltering. Cirrus elaborates: “Employment stagnated as its quality deteriorated. As government finances came under increasing pressure, fiscal consolidation was introduced and wage increases for the civil service slowed (and were later halted), meaning there was little or no wage growth for nearly a third of the formally employed workforce.”Following economic growth of 4.3% in 2015, Namibia’s gross domestic product (GDP) registered no expansion year-on-year in 2016. In 2017, it contracted by -1%, followed by positive growth of 1.1% in 2018 and -1.6% in 2019. The BoN growth forecast for 2020 is -7.3%, the biggest contraction in Namibia’s history.Data by the Namibia Statistics Agency (NSA) shows compensation of employees in the country rose by 7.7% year-on-year in 2017. In 2018, it increased by 6.2%, followed by 1.9% in 2019.According to the NSA, Namibia’s gross national disposable income in 2017 rose by 10.2% on an annual basis, followed by 3.5% in 2018 and 0.7% in 2019.Analysts agree that around 40% of Namibia’s workforce currently is unemployed.OUTLOOKCirrus maintains that pressure on household incomes will likely keep the residential property market in deflationary territory.“The highly indebted consumer leaves little room for mortgage loan growth,” they say.According to the BoN’s Financial Stability Report of last April, household debt to disposable income increased to 97.7% in 2019, up from 92.9% the previous year.Given that residential mortgages make up more than half of commercial credit extension, Cirrus says it doesn’t anticipate aggressive increases in credit extended to individuals.‘The only viable catalyst to spark appreciation in the property market would be a meaningful and continued improvement in household incomes. This, in turn, requires an uptick in employment and salaries/wages, two factors we do not expect to improve meaningfully in the medium term unless we see a sudden policy U-turn,” Cirrus says.

NPLs come home to roost

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Namibian Sun 2025-05-09

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NPLs come home to roost

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Namibian Sun 2025-05-09

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