GCR maintains the Namibian financial institutions sector risk score of ‘6.0’

GCR Ratings has maintained the Namibian Financial Institutions’ sector risk score of ‘6.0’.

The Financial Institutions sector risk score (ranging from 0 to 15) is a key factor in the operating environment component score. The core of the GCR Ratings Framework is based on GCR’s opinion that an entity’s operating environment largely frames its creditworthiness.

As a result, the operating environment analysis anchors the underlying risk score for the GCR rating methodology. GCR combines elements of the country risk and sectoral risk analysis, blended across countries for entities operating across multiple jurisdictions, to anchor a financial institution to its current operating conditions.

GCR periodically publishes updated “Financial Institutions Sector Risk Scores”, which supersede previous publications. The publication titled “GCR Financial Institutions Sector Risk Scores, 14 September 2021”, available at https://gcrratings.com/risk-scores/, supersedes the article published on 23 June 2021.

The Namibian banking sector risk score of ‘6.0’ balances reasonable capital and liquidity buffers and structural stability, against challenging operating conditions, posing medium term risks to asset quality. Furthermore, the largely wholesale deposit funding structure increases deposit sensitivities to market sentiment.

Namibian banks have been operating under highly subdued economic conditions for the past few years, and despite a downward trend in profit margins, the sector’s balance sheet has been maintained at sound levels, reflected in good liquidity and capital ratios.

The onset of the COVID-19 pandemic in 2020 caused a sharp downward spike in earnings, with return on assets dropping to a 5-year low of 1.3%, from 2% in 2019, primarily due to higher credit losses and reduced net interest income (as a result of large interest rate cuts). We expect earnings to gradually recover as credit losses normalise from the peak of mid-2020, net interest income stabilises and transactional activity gains momentum, but we think return on assets may remain low, between 1.5%-1.8%, compared to historical levels of above 2%.

This, in conjunction with loan growth extension expectations of between 3%-5% should support an industry average Common Equity Tier 1 capital ratio of around 13% going forward. Additionally, this muted loan growth may also allow existing liquidity buffers to be sustained, at least over the short term, with the banking sector holding high liquid assets relative to regulatory minimums.

On the negative side, asset quality may remain pressured (non-performing loans deteriorated to 6.4% in 2020, from 4.8% in 2019) given the unfavourable sector dynamics underpinning borrower credit quality. This includes high household indebtedness, negative property valuation trends (with the sector representing over 50% of total industry loans) and comparably high corporate debt as a percentage of GDP (of around 70% at 2020 versus South Africa’s c.40%).

However, the low interest rate environment may support debt serviceability as economic conditions gradually improve, but downside risk will prevail if employment and income growth do not improve. The sector continues to exhibit a high reliance on wholesale funding, however, to date, this has been fairly well managed.