Banks look solid though credit risk rising

Namibian banks are in good shape in terms of profitability and capital adequacy and have high-quality liquid assets. At the same time, on the credit risk side, credit loss ratios remain low, according to the PSG 2015 Banking Review which was released last week.
The annual Review compares Namibian and listed South African, Botswana and Zambian banks.
“Banks play a critical role in our economic growth and development, as they enable the provision of financial services to businesses and consumers,” says Brian van Rensburg, director of PSG in Namibia. Total Namibian banking assets accounted for 59% of GDP at the end of December 2014.
These assets are mainly in the form of loans and advances. The Report found that gross advances represent approximately 77% of the total assets at December 2014 while mortgages constitute 32% of total assets or 48% of total advances. On the liabilities side, deposits account for about 90% of total banking liabilities.
Local banks continue to rely greatly on interest as the major source of their income. Net interest income accounts for between 53% and 60% of total income at the most recent year ends that PSG analysed.
“We are continuing on in a rising interest rate cycle which will be characterised by higher interest rate margins, but also by slower credit growth and rising credit losses,” van Rensburg says. “The extent of the slowdown in advances and rising credit losses will very much depend on the strength of the cycle.” Although credit risk did deteriorate slightly, credit losses are still well below industry accepted levels.
Going forward PSG doesn’t see a strong interest rate cycle given the pressure on the consumer, a lack of business confidence and sluggish economic growth.
On balance, the company believes that local banks are well positioned to benefit from the current cycle through higher margins. However, van Rensburg says that the quality of loan books will be tested. “We are concerned about the increasing ratio of mortgage loan books that are in early arrears, a trend at all of the local banks.”
Drawing a comparison between local banks and SA banks, the PSG Report reflects superior results for local banks over SA banks in terms of net interest margins, ROE (Return on Equity) ROA (Return on Assets), and credit quality. However, the trend is that SA banks’ credit quality is improving, while Namibian banks are seeing headwinds in that regard.
Although some of the banks experienced margin pressure over the last 5 years, net interest margins (NIM) have been resilient, and local banks have benefitted from the rising interest rate environment.
What also emerged from the analysis is that Namibia’s two listed banks – FNB and Bank Windhoek- stand out in terms of ROA and ROE. While the unlisted banks are slightly lagging in terms of these metrics, these ratios remain at very acceptable levels.
Despite having the smallest market share in terms of assets NedNamibia has managed to retain market share and outperformed in terms of EPS (Earnings per Share) growth over the last 7 years on the back of strong non-interest growth. They have also shown good performance in cost efficiency and credit quality.
Standard Bank Namibia gained heavily in the net interest income department over the last year and has managed to make up on some of the longer term growth numbers for revenue. They have however lagged with cost efficiency and have breached the acceptable 60% cost-to-income ratio since FY12. As a result, ROE has gradually declined over the last 5 years to below 20% in FY14. Nevertheless, most of SBN’s key ratios compare well with SA banks, but there is clearly room for improvement in its cost efficiencies.
“The outlook for local banks remains positive. Although the unlisted banks are slightly lagging in some performance metrics, they remain profitable, well capitalised with good credit quality. Going forward, we believe technological advancements will be key for local banks to maintain market shares and remain competitive,” van Rensburg concludes.