Namibia’s leading banks have been left largely undamaged by the country’s recession, remaining profitable and embracing digitalisation. This comes despite a rise in non-performing loans (NPLs), as small business clients continue to endure tough economic conditions.
The southern African country has eight licensed commercial banks, with four large conglomerates – First National Bank (FNB), Standard Bank, Nedbank, and Bank Windhoek – holding about 98% of total bank assets, according to figures from the International Monetary Fund (IMF). Of these four, only Bank Windhoek is predominantly owned by local shareholders, with FNB, Standard Bank and Nedbank all having close ownership and funding links to South Africa.
The Namibian subsidiary of another South African company, Old Mutual, is also the country’s biggest asset manager and life assurer.
State of emergency
Namibia has been mired in a deep recession since late 2016, due to factors including falling commodity prices, declining rainfall and the struggles of its neighbour and major trading partner South Africa. The government has forecast economic growth of 0.3% in 2019, while the IMF and other observers predict the country will remain in a mild recession before returning to growth in 2020.
Meanwhile, the country is in the throes of a severe drought, which led president Hage Geingob to declare a state of national emergency in May 2019, the third such declaration in six years.
Despite such travails, the banking sector remains in relatively good health by most metrics. Commercial banks’ total income jumped to N$9.6bn ($674m) in 2018 from N$8.9bn in 2017, according to Bank of Namibia, the country’s central bank. Net interest income – which represented more than 50% of total income – increased by N$269m to N$5.4bn in this timeframe, while operating income went up by N$448m to N$4.2bn.
“Despite the weak growth of the economy, the banking sector performance remained sound [in 2018],” said Ipumbu Shiimi, governor of the Bank of Namibia, in the central bank’s annual report for 2018. “All banking institutions remained adequately capitalised, with sufficient buffers to cushion against any banking risks. The banking sector liquidity situation was fair and stabilised, due to the availability of more funds in the system by virtue of government payments and regulatory changes on domestic asset requirements for institutional investors.”
The banks’ liquid assets ratio rose to 15.6% at the end of 2018, up from 14.6% the year before, and remained well above the statutory requirement of 10%, according to Bank of Namibia. The total risk-weighted capital ratio (RWCR) improved to 16.7% in 2018 from 15.5% in 2017, while the Tier 1 RWCR increased to 13.8% in 2018 from 12.6% in 2017.
NPL struggle
Namibian banks have not been completely untouched by the recession, however, as local business woes continue to affect lending. Return on equity (ROE) slipped to 18.5% at the end of 2018, from 24.5% at the end of 2015 before the recession, according to Bank of Namibia data. Return on assets (ROA) fell from 2.5% to 2% over the same period.
“The economy did very well between 2010 and the start of 2016,” says Baronice Hans, managing director at Bank Windhoek. “However, Namibia has witnessed a significant slowdown since the second half of 2016 and, of course, the banking sector is very dependent on how clients are faring.”
Namibian banks’ overall NPLs ratio deteriorated to 3.6% at the end of 2018, compared with 2.5% a year before. This figure is just below the central bank’s benchmark of 4%.
“The rise in NPLs across the banks set off early warning triggers,” says Sarel van Zyl, chief executive officer at FirstRand Namibia, the country’s largest bank. “We are restructuring the lending facilities available to customers under stress. Maybe they only have to service their debt at the moment and do not have to pay back the capital. We have certainly become more cautious in providing financing.”
The banking sector’s total assets grew by 6.9% last year compared with 12.4% growth in 2017, according to Bank of Namibia. Net loans and advances increased to N$95.4bn last year from N$90.3bn in 2017, while short-term negotiable instruments increased sharply to N$15.4bn in 2018 from N$11.8bn in 2017. The commercial banks’ total balance sheet was valued at N$132bn on December 31, 2018, compared with N$124bn on the same date the year before.
“Despite the economic slowdown, the financial sector remains sound,” says Geremia Palomba, IMF mission chief for Namibia. “The authorities are taking steps to curb possible risks arising from structural vulnerabilities in the sector and advance key reforms, such as strengthening banks’ asset classification, tightening concentration risk regulations, and improving the macroprudential policy framework.”
Efficiency drive
FirstRand Namibia, the parent company of FNB, Namibia’s biggest commercial bank, saw its profits in the country for the six months to the end of December 2018 rise by 4.1% to N$812.3m, compared with N$780m the year before. Its ROE and ROA stood at 22.4% and 2.7%, respectively, at the end of 2018, down from 23.3% and 2.8%, respectively, in 2017. The bank had a cost-to-income ratio of 51.7% for the six-month period, down from 52.1% in the same period a year earlier.
“FNB is a well-established bank and very resilient,” says Mr van Zyl. “It accounts for about 40% of the profits of the [banking] system.”
The bank has 57 branches and about 350 ATMs and deposit terminals throughout the country. As of May 2019, it had 600,000 clients with current and savings accounts.
Mr van Zyl says the bank does not have a high-growth strategy for the country but it is trying to become more efficient – mainly through increased digitalisation – to bring down its cost base.
In May, FNB had a total of 1.45 million e-wallets registered to users, and 1 million of these are currently active (that is, used during the past six months). These enable customers to make mobile money payments and to withdraw money from ATMs and retailers’ tills.
Performance comparison
Profits before tax at Bank Windhoek, the country’s second largest lender, rose to N$596m for the six months to the end of December 2018, compared with N$566m for the same period in the previous year, representing an increase of 5%. Profits before tax for the year ending June 30, 2018, stood at N$1.09bn, a year-on-year decline of 1%.
Bank Windhoek has 52 branches and about 130 ATMs throughout Namibia. In 2018, its ROE and ROA stood at 17% and 2.2%, respectively, compared with 20.9% and 2.4% in 2016. In December 2018, the bank had an NPL ratio of 3.8%, compared with 2.3% the year before. It had a total risk-based capital adequacy ratio of 15.7% at the end of 2018, well above the minimum regulatory capital requirement of 10%, while its Tier 1 risk-based capital ratio stood at 13.6%.
Like FNB, Bank Windhoek is also trying to improve operational efficiencies by embracing digitalisation. The bank says the number of users of its smartphone app jumped by 60% between April 2018 and April 2019, while the number of people using mobile banking via basic Unstructured Supplementary Service Data technology increased by 10% during the same period.
Standard Bank Namibia’s net income for the year ending December 31, 2018, was N$475m compared with N$467m the year before. Meanwhile, despite lower-than-expected growth in loans and advances of 3.9%, Nedbank Namibia’s net interest income improved by 8.16% to N$809m in 2018.
New regulations
In March 2017, Namibia’s banking industry was left reeling after the central bank had to step in and take charge of SME Bank, a joint venture between the Namibian government, the Metropolitan Bank of Zimbabwe and a Zimbabwean businessman, Enoch Kamushinda. The bank was closed down later that year after it failed to account for about N$200m invested in South Africa under questionable circumstances.
Many clients who had deposited money in the bank, mostly small businesses, were left hanging, and some have still not received their money back. Namibian law currently guarantees depositors only N$25,000 of their money deposited in case of liquidation.
The scandal prompted the government to announce plans for a new deposit guarantee scheme in the country in October 2018. It would support financial stability by guaranteeing the repayment of smaller deposits held with banks in the event of a bank failure. The scheme is expected to become operational later in 2019, and would be administered by the Bank of Namibia.
Under current proposals, the scheme would be funded by deposit guarantee premiums collected from all the banks. Although the plan would only cover a small portion of total deposits by value, the Bank of Namibia hopes it will give smaller depositors greater peace of mind.
Mortgage moves
Faced with a surge in housing prices, Bank of Namibia introduced curbs on mortgage lending in March 2017, which capped the loan-to-value ratio at 80% of the purchase price for a second residential property and at 70% for a third. It also stated that homeowners would no longer be allowed to use the equity in a first home to finance a second one, arguing that it exacerbated the debt cycle.
The new rules helped to dampen Namibia's housing market, and in 2018 overall mortgage growth slowed to 6.5%, compared with 8% in 2017.
“Residential development offered banks some of the biggest opportunities before the Bank of Namibia introduced new regulations about deposit requirements in 2017,” says Ms Hans at Bank Windhoek. “That market has now fallen into a complete slump.”
Going forward, the government also wants to introduce a banking institutions law in 2019 that would limit the foreign ownership of new banking entrants in the country to 75%; the remaining 25% of equity would have to be held by Namibians. The reform would not apply to existing banking institutions.
Non-bank finance growth
Namibia's non-bank financial institutions sector grew by 0.9% to total assets under management of N$290.3bn last year, according to the Namibia Financial Institutions Supervisory Authority (Namfisa), the sector’s regulator. The country had a total of 365 microlenders at the end of 2018, compared with 317 in 2017. Their combined loan book stood at N$6.4bn at the end of 2018 from N$5.5bn in 2017. At the end of 2018, there were also 138 active pension funds and 27 investment managers in the country.
In October 2018, the Microlending Act came into force, more effectively regulating the microlending industry. The authorities felt that malpractice had become prevalent in the sector and that the legislation provides for a better enforcement framework.
“Namfisa has observed the increasing importance of the financial sector – including that of microlending – for the attainment of specific national objectives,” says Namfisa chief executive officer Kenneth Matomola. “In particular, this industry has contributed immensely to financial inclusion by serving those members of society that otherwise have very limited or no access to finance.”
During 2016, the Bank of Namibia and the ministry of finance became concerned about the possible emergence of bubbles in the home loan and vehicle financing markets. In August that year, a new law was implemented that required clients who purchase vehicles through banks and other financial institutions to produce a deposit of at least 10%. The maximum period of repayment on financed motor vehicles was also limited to 54 months, down from 60 months.
Pensions potential
Old Mutual, the South African financial services group, is a major player in many sectors in Namibia. It enjoys a 22% market share of the country’s asset management industry and 39% of the life assurance market, according to its own estimates. It is the country’s third biggest short-term insurer and third largest micro-lender.
“The economic recession has certainly affected our business, especially our short-term insurance business,” says Kosmas Egumbo, group chief executive officer at Old Mutual Namibia. “There has been a downturn in construction and mortgage lending, which has negatively affected our property insurance business. The drop in vehicle sales had an adverse effect on our vehicle insurance business, too. People have decided to self-insure, in other words they are only taking out insurance on some of their assets and are carefully managing their cashflows.
“Our pensions business has also been affected because many employers have had to lay off staff. However, we think that the economic crisis has started to bottom out and we see opportunities. Only 42% of employed staff are active pension fund contributors, for example. We believe that pensions are a big growth market.”
