PART C: Banking Supervision
INTRODUCTION
Despite various challenges, the banking sector remained resilient and reported good balance sheet growth, strong capital, profitability and adequate liquidity levels. During 2022, banks rebounded from the COVID-19 pandemic’s effects with strong balance sheet expansion, strong capital and sufficient liquidity. The banking sector recorded elevated growth in earnings, which was driven by steady economic recovery. To support economic recovery, the Bank maintained and further enhanced its relief measures to ensure that banking institutions could continue lending to businesses and clients affected by the COVID-19 pandemic until April 2023.
The Namibian banking sector remained with seven (7) fully fledged commercial banks, of which four (4) are Domestic Systemically Important Banks (DSIBS)1, while the remaining three (3) are classified as second tier banks.
In addition, one (1) foreign banking institution and one (1) representative office complete the list of authorised institutions.
1 DSIBs are classified on the basis of the impact that their failure may have on the domestic economy, based on an assessment of factors such as (i) size, (ii) interconnectedness, (iii) substitutability, and (iv) financial market infrastructure.
PERFORMANCE OF THE BANKING SECTOR
The banking system remained well-capitalised, with a notable improvement in asset quality and total income. Total eligible capital ratio increased to 17.0 percent, from 15.9 percent reported in 2022. Likewise, all DSIBs recorded improvements in other capital indicators, namely the Common Equity Tier 1 capital ratio and the Tier 1 leverage ratio, at 14.7 percent and 9.6 percent, respectively, exceeding the prudential requirements of 6.0 percent and 7.0 percent, respectively. Although the industry posted strong capital levels, it is expected that increasing interest rates and rising provisions may negatively impact profitability and ultimately capital levels in future. Nevertheless, asset quality as measured by the performance of non-performing loans (NPLs) has seen material improvement during 2022, due to a combination of repayments, write-offs and debt restructuring measures. Finally, earnings for the banking sector for year 2022 improved, mainly driven by an increase in net interest income and operating income.
BALANCE SHEET STRUCTURE
The banking sector remained resilient, as can be noted from the persistent balance sheet growth despite the economy still facing headwinds following the fallout of COVID-19. The balance sheet size grew by 11.0 percent to N$164.4 billion, which surpassed the 2.8 percent growth reported in 2021 (Figure C.1). The balance sheet growth was mainly driven by increases in cash and balances held with the banks, short-term negotiable securities, and loans and advances as sourced from non-bank funding.
ASSET STRUCTURE
The banking sector registered an improved financial position in 2022 as evidenced by higher bank balances held with banks and the central bank. The growth in the balance sheet was mainly attributable to increased cash and balances held with the banks, which expanded by N$9.6 billion to N$26.5 billion, on the back of increases mainly in interbank placements and other balances held with Bank of Namibia. Similarly, net loans and advances reported an increase of N$4.3 billion to N$105.8 billion, with most credit extended into residential and commercial mortgages. The short- term negotiable securities category increased by N$1.7 billion to N$20.6 billion and was largely driven by investments in negotiable certificates of deposit.
The asset structure maintained its composition from the prior year with net loans and advances accounting for more the half of total assets. Net loans and advances decreased as a proportion of total assets from 68.5 percent to 64.4 percent, whereas cash and balances with banks’ asset share increased from 11.4 percent held during the 2021 to 16.1 percent in 2022. Notably, a decrease was reported under short term negotiable securities from 12.8 percent in 2021 to 12.5 percent in 2022.
Credit extension was steered towards personal loans and residential mortgages despite the steady rise in interest rates. The year under review saw a 4.1 percent growth across the loan book which brought it to N$110.0 billion. Personal loans led the increase in the loan book by N$1.4 billion and stood at N$9.0 billion. Similarly residential mortgages as a major loan component increased by N$1.2 billion to N$44.2 billion. The top categories of the loan book were residential mortgage loans, which occupied the largest portion of the loan book at 40.2 percent, followed by other loans and advances at 19.0 percent, and commercial mortgage loans at 11.8 percent (Figure C.2).
FUNDING STRUCTURE
The banking industry was mainly funded by non-bank funding in the form of deposits and borrowing. Bank funding increased by N$7.0 billion to stand at N$10.7 billion for 2022, compared to N$3.7 billion recorded in 2021. In a similar vein, capital and reserves increased by N$1.6 billion to N$19.1 billion due to an increase in general reserves (Figure C.3).
Demand deposits accounted for the largest portion of non-bank funding, while negotiable certificates of deposit and fixed and notice deposits lagged. Demand deposits increased from N$61.2 billion to N$63.5 billion. Among the other deposit classes in 2022, negotiable certificates of deposit increased from N$20.4 billion to N$23.3 billion, whereas fixed notice deposits decreased from N$23.8 billion in 2021 to N$22.9 billion (Figure C.3).
CAPITAL ADEQUACY
The banking sector complied with the set minimum capital requirements during 2022. The banking sector is strongly capitalised with a Total eligible capital ratio of 17.0 percent, an expansion from the 15.9 percent reported in 20212. As prescribed by the Basel III Capital Accord, DSIBs are expected to hold a minimum Common Equity Tier 1 capital ratio of 7.0 percent of risk-weighted assets, to cushion banks against a financial crisis. In this regard, all DSIBs recorded improvements in Common Equity Tier 1 capital from N$14.5 billion in 2021 to N$16.0 billion in 2022. Both the total eligible capital ratio and the Common Equity Tier 1 capital ratio are above the minimum regulatory requirements for DSIBs of 10.8 percent and 7.0 percent, respectively. During 2022, the Common Equity Tier 1 capital ratio stood at 14.7 percent, while Tier 1 leverage stood at 9.6 percent, compared to 13.7 percent and 9.6 percent recorded in 2021, respectively. Lastly, the Tier 1 leverage ratio remained constant and well positioned above the regulatory minimum of 6.0 percent, which indicates a higher capital buffer to withstand financial shocks.
Total eligible capital continued an upward trajectory as a result of the further build-up of reserves through retained income. Total eligible capital recorded growth of 11.8 percent, considerably higher than the 0.6 percent increase reported a year ago, and stood at N$18.6 billion for 2022 (Figure C.4). The increase was mainly on account of an increase in Common Equity Tier 1 capital, which increased significantly by N$1.4 billion, mainly reflected in accumulation of general reserves and retained earnings. Similarly, Tier 2 capital increased by N$420.0 million, due to increases in unaudited interim profits and certain loan loss provisions. Although the industry posted strong capital levels, poor asset quality is expected to negatively impact capital levels as existing non-performing exposures indirectly affect profitability and capital levels of banks, through lower interest income and increased levels of provisions.
The continued operational losses significantly reduced the Second-Tier banks total qualifying capital. Total qualifying capital deteriorated by a further 3.5 percent and stood at N$1.2 billion, stemming from significant decreases in Tier 1 capital and Tier 2 capital. Tier 1 capital decreased by N$34.7 million as attributed to decreases in retained profits that declined by N$96.7 million on the back of continuous increases in operational losses observed among the second- tier banks.
CREDIT RISK
Analysis of non-performing loans
The stock of non-performing loans (NPLs) improved over the period under review, driven by recoveries of non- performing mortgages. The NPLs decreased from N$6.7 billion to N$6.1 billion, with major improvement being recorded for non-performing mortgages, which decreased by N$490.0 million to N$3.4 billion. Improvements in asset quality were also observed under other loans and advances, as well as overdrafts, of which the NPLs decreased by N$146.8 million to N$821.0 million, and by N$56.0 million to N$1.1 billion, respectively. The witnessed improvements in the quality of the loan book were underpinned by repayments, write-offs and debt restructuring. Consequently, the NPL ratio improved to 5.6 percent in 2022 from 6.4 percent recorded in 2021. The NPL ratio of 5.6 percent, stood below the crisis trigger benchmark ratio of 6.0 percent and indicates that the quality of assets was satisfactory during 2022 (Figure C.5).
The NPLs sectoral distribution was mainly concentrated under individual, and real estate and business services. Non-performing loans of the individual sector made up 46.5 percent of total NPLs. The real estate and business services sector recorded the second highest in NPLs at N$833.7 million, or 13.7 percent. The construction and agriculture sectors followed and were also amongst the most affected sectors in terms of NPLs, standing at N$618.1 million (10.2 percent) and N$491.7 million (8.1 percent), respectively, of the total non-performing book share. The remaining percentage share of 21.5 percent of total NPLs was distributed among manufacturing, transport, fishing, mining, electricity, gas and water, trade and accommodation, government services, and finance sectors.
Adequacy of provisions
As expected, total provisioning decreased in tandem with the contraction observed in the NPL portfolio. Total provisions decreased from N$3.6 billion to N$3.4 billion in tandem with the improvements observed in NPLs. Specific provisions3 decreased by N$500.0 million to N$1.8 billion, as NPLs decreased by N$657.4 million to N$6.1 billion due to repayments, write-offs and debt restructuring. General provisions moved in the opposite direction and increased from N$1.2 billion to N$1.5 billion as total loans and advances increased from N$105.1 billion to N$110.0 billion. The significant increase in general provisions was due to an increase in total loans and advances, including a corresponding increase in overdue loans, especially under the one-to-two month and two-to-three month buckets. These exposures were adequately provisioned in accordance with the prescribed prudential requirements of the asset classification categories in line with Determination on Asset Classification, Suspension of Interest and Provisioning (BID-2).
Loan diversification and statutory large exposures
The banking sector continued to spread the credit risk by diversifying loans across different sectors and counterparties. The spread in the loan disbursements remained well diversified across various sectors, which is necessary to mitigate the probability of default risk by one sector. Gross loans and advances grew by N$4.3 billion and stood at N$109.7 billion in 2022.
The banking industry managed concentration risk well to remain within regulatory thresholds for large exposures during 2022. The value of large exposures4 decreased by 18.3 percent to N$11.8 billion year-on-year due to a reduction observed in large exposures which are largely owed to debt servicing by corporates. The large exposures to total loans ratio declined marginally from 16.8 percent to 10.8 percent, which is within regulatory limits of 30.0 percent of the banks’ capital. On aggregate, large exposures in relation to qualifying capital declined from 106.8 percent to 63.7 percent, also meeting the aggregate limit of 800 percent of capital funds per the Determination on Limits on Exposures to Single Borrowers, Large Exposures and Concentration Risk (BID-4) (Figure C.6).
Loan moratorium during the COVID-19 pandemic
The value of loan moratoriums granted reduced, which is a result of mild levels of economic recovery. The total value of the loans decreased by N$932.0 million in 2021 and stood at N$7.4 billion during 2022. Similarly, the total number of loan applications reduced from 11 210 in 2021 to 9 438. Meanwhile, the number of approvals reduced from 11 210 to 9 409, year-on-year. Some banks mostly rolled-over existing facilities and others opted to restructure distressed loans. In addition, the uptake of loan moratoria declined due to banks applying other methods, such as debt restructuring aimed at assisting clients under distress.
PROFITABILITY AND EARNINGS
Total income for the banking sector increased due to an increase recorded in net interest income and operating income. The total income amounted to N$11.1 billion, representing a growth of 5.6 percent. Net interest income expanded by 12.8 percent to N$6.7 billion, driven by higher interest income earned on the back of rising interest rates in 2022. Furthermore, operating income increased by 10.8 percent to N$5.1 billion owing to higher transaction volumes, higher than the 4.6 percent increase recorded in 2021.
Net interest income continued to be the principal sources of income for the banking sector, standing at N$6.7 billion in 2022 and constituting 60.0 percent of total income. This was largely driven by the interest income from residential mortgages, fixed term loans, and other interest-related income.
The efficiency ratio trended upward following an escalation in operating costs in 2022. Operating expenses stood at N$6.7 billion in 2022, 7.0 percent higher than in 2021. The operating expenses expansion was a result of increases in staff costs, administration and overheads costs, and other operating expenses.5 The cost-to-income ratio increased from 59.8 percent to 60.6 percent (Figure C.7b) signalling a deterioration in efficiencies, but still stood below the Bank’s benchmark of 65.0 percent.
The banking sector continued to record profits mainly due to an increase in net interest income. Net income after tax increased by 33.5 percent year-on-year to N$3.0 billion in 2022. The prior year recorded an increase of 23.7 percent. The growth in net income after tax was primarily due to the higher interest earned on loans following the increase in the repo rate during 2022, coupled with the growth in loans advanced to customers. Consequently, the ROA (Return on Assets) improved from 1.7 percent to 1.9 percent following the improvement in earnings. Similarly, the ROE (Return on Equity) increased from 13.9 percent to 15.7 percent, as capital and reserves improved year-on-year (Table C.1).
The banks embarked on a digitisation strategy which entails reducing the bank’s points of presence. The number of branches reduced from 135 to 134 reported during the year, while the number of agencies decreased from 85 to 82 points (Table C.2).
FRAUD AND OTHER ECONOMIC CRIME
The banking sector observed an increase in the number of fraud and related economic crimes during 2022 in comparison to the previous reporting period. A total of 370 fraud cases were reported during 2022, an increase of 38.0 percent over 2686 cases reported in 2021. The categories of fraud experienced by banking institutions in 2022 included ATM fraud, EFT fraud, credit and debit card fraud, mobile application fraud, currency counterfeits, and theft of cash. Despite these increases, the total value of fraud incidents reported in 2022 decreased to N$41.6 million, from N$144.0 million in 2021 (Figure C.8). This substantial decrease in the current year is attributed to low value fraud incidents noted in comparison to the prior year. Additionally, banking institutions have maintained and enhanced control measures aimed at combating high-value fraud incidents, and thereby contributing to the decline. However, the actual amount of financial loss suffered by the industry (banks and clients) increased by 44.4 percent from N$22.6 million in 2021 to N$32.6 million in 2022. Of the amount lost, the banking sector recovered N$5.2 million during 2022, which is similar to the amount recovered in 2021.
6 The number and value of the fraud cases recorded for 2021 increased from what had previously been reported due to revised updates.
LIQUIDITY
The banking sector’s liquid asset holdings recorded an improvement during the review period. The liquid asset portfolio grew by 9.3 percent from N$23.2 billion to N$25.3 billion in 2022. The increase is ascribed to a greater increase in non-bank funding that became due and payable, when compared to the movement in lending activity. This spilled over into increases in the banks’ holdings of stocks, bills and bonds, as well as clearing account and call account balances held with the Bank.
Conventionally, treasury bills and investment securities held across the industry have served as the preferred liquid asset instruments. Treasury bills constituted the majority shareholding of 53.7 percent of liquid asset instruments, decreasing from 58.7 percent in 2021. Stocks, securities, bills and bonds held a share of 27.8 percent, followed by treasury bills with 11.9 percent and notes and coins with 5.9 percent. Net interbank placements and other securities remained insignificant at 0.5 percent and 0.2 percent, respectively.
The banking sector remained compliant with the minimum liquidity statutory requirement. The liquid asset ratio declined marginally to 15.6 percent in 2022, from 15.7 percent recorded in 2021, while the liquidity ratio declined from 18.3 percent in 2021 to 17.8 percent in 2022. The liquidity ratio was well above the regulatory minimum of 11.0 percent, with a surplus of N$11.1 billion being recorded. The average total liabilities to the public increased by 12.2 percent from N$127.3 billion in 2021 to N$142.8 billion 2021, mainly driven by an increase in total deposits.
Other liquidity measures such as the loan-to-asset ratio and the loan-to-deposit ratio performed well. The loan-to- asset ratio declined from 69.2 percent to 65.1 percent. This indicates the liquidity in terms of the asset base, which stood slightly below the international benchmark of 75.0 percent. Meanwhile the loan-to-deposit ratio decreased from 90.4 percent in 2021 to 83.7 percent in 2022. Nevertheless, the ratio remained below 100.0 percent, depicting a more stable deposit base and an adequately funded banking industry for lending activities.
ON-SITE EXAMINATIONS
During 2022, the thematic reviews on credit risk management were the key focus area for safeguarding and enhancing financial stability. The thematic reviews focused on compliance by DSIBs with the Determination on Asset Classifications, Suspension of Interest and Provisioning (BID 2) and the Determination on Policy Changes in Response to Economic and Financial Stability Challenges as a Result of the COVID-19 Pandemic (BID-33). Making use of data analytics tools and techniques, the Bank assessed the accuracy of asset classifications, suspension of interest, provisioning treatment of collateral, reclassification of loans back to accrual status, treatment of loans with payment holidays, and write-offs of NPLs classified as losses. The implementation of the recommendations by senior management of all DSIBs is underway.
The Bank also engaged in additional supervisory activities during 2022 to promote banking sector stability and bolster confidence within the banking sector. The Bank applies a risk-based approach in its supervisory practices to ensure more intensive supervision of high and moderate risk areas of deposit-taking institutions at the levels of individual banks (solo) and banking groups (consolidated). As such, risk-based examinations are conducted to determine the effectiveness of risk management practices, compliance with relevant laws and regulations, and adequacy of capital. The Bank conducted a risk-based examination at one DSIB and finalised the examination report on another DSIB which had commenced during 2021. The outcome of the DSIB examinations were communicated to the boards of directors of the respective banking institutions. The preliminary risk assessment for one non-DSIB was finalised in 2022, while the on-site examination was deferred to 2023 due to new developments that required the urgent attention of the Bank. The Bank approached the High Court of Namibia to seek liquidation of one of the non-DSIBs which had been under supervisory action since 2020. This was necessitated by the banking institution’s non-responsiveness in addressing key concerns of the Bank which were required for the said banking institution to continue as a going concern. Other than the aforementioned High Court application, all the institutions examined during the year were in sound condition, and weaknesses identified during the examinations could be addressed in the normal course of business.
Supervision of cross-border banking groups was conducted during the year under review. The Bank participated in two supervisory colleges and prudential meetings for coordination, collaboration and sharing of information for the effective supervision of components of cross-border banking groups. Supervisory colleges and prudential meetings provide a platform for interaction between the banking institutions and regulators, which allows the Bank to craft a comprehensive consolidated supervision approach.
LEGAL MATTERS
Licensing of banking institutions and building societies
During the year under review, the Bank received an application seeking authorisation to establish a building society in terms of section 4 of the Building Societies Act (Act No. 2 of 1986), as amended. The application was assessed and found to have met the minimum requirements for registration of a building society and was provisionally approved. Upon fulfilment of the conditions of provisional registration, the Registrar will grant final approval for registration to Cadence Building Society.
Illegal financial schemes
Sections 5 and section 55A of the Banking Institutions Act (Act No. 2 of 1998) as amended outlaw illegal financial schemes. During 2022, in accordance with its mandate as provided for in the Act, the Bank investigated illegal financial schemes which were suspected of conducting business in contravention of the Act. Fourteen (14) of the suspected schemes were presented to the Board and necessary approval was granted to take action as provided for in the Act. The Bank continues to conduct public awareness campaigns through public and private television and radio stations and social media platforms to create awareness about illegal financial schemes and the dangers they pose to the public.
Developments relating to banking legislation
The Bank requires a regulatory framework that is in line with international standards to ensure effective regulation and supervision of institutions under its regulatory purvue. It is therefore incumbent upon the Bank to ensure that the regulatory tools for the supervision of banking institutions and other entities under its regulatory purvue are relevant and fit for regulatory purposes.
Primary legislative changes
The revision of the Banking Institutions Act is ongoing. The revision seeks to, among others, introduce a blend of local and foreign ownership with a view to transform the banking sector. The Bill is expected to be tabled in Parliament during the first semester of 2023.
Secondary legislative changes
The Bank is empowered by section 71 of the 1988 Banking Institutions Act, as amended, to issue secondary legislation on matters which the Bank considers appropriate for the conducting of the banking business. In line with its mandate, the Bank revised and issued the following determinations to ensure that banking institutions conduct their business in a prudent manner: the Determination on Outsourcing and Cloud Computing (BID-34); the Determination on Policy Changes in Response to Economic and Financial Stability Challenges (BID-33); and the Determination on the Appointment Duties and Responsibilities of Directors, Principal Officers, and Executive Officers of Banking Institutions and Controlling Companies (BID-1).