…As non-performing loans continue to attract concern
By Hilary Mare
ACCORDING to the Namibia financial stability report released last month, banking sector assets continued to increase at a rate above that of inflation amidst recessionary economic conditions and low consumer confidence during the 2017/18 financial year.
As at 31 December 2017, the banking industry balance sheet stood at N$ 122 billion, representing a growth rate of 11.1 percent, year-on-year, slightly higher than the 10.1 percent increase at the end of 2016.
The report, a joint effort between the Bank of Namibia and the Namibia Financial Institutions Supervisory Authority (NAMFISA), further notes that the increase in assets was concentrated in liquid assets such as banks’ holdings of government securities and deposits, whereas growth in credit extension to the private sector was quite slow
“The pace and composition of this growth signify a stable banking sector, amidst challenging economic conditions,” the report notes.
However, in line with the recessionary economy during the period under review, the nonperforming loan (NPL) ratio as a measure of credit risk in the banking sector, increased significantly.
The non-performing loans as a ratio of the total loan book increased by 1.5 percentage points to 2.5 percent at the end of December 2017.
“Despite the significant increase during the period under review, this ratio nonetheless remained well within the 4.0 percent internal benchmark and also below Namibia’s historically highest NPL ratio observed to date, even amidst the recent economic downturn16. While the banking sector is adequately capitalized to offset the deterioration in asset quality, going forward, the Bank (Bank of Namibia) will continue to closely monitor this ratio and take prompt action to safeguard the stability of the banking industry should the need arise,” reads the report in part.
The increase in the overall NPLs during the review period was displayed by a general increase in NPLs across all asset classes. The general increase in NPLs in 2017 resulted from a proportional increase in NPLs across all asset classes, which implies that the relative share of NPLs of individual asset classes in total NPLs remained broadly unchanged.
Mortgage NPLs as a share of total NPLs remained the largest with a share of 58.0 percent, followed by overdrafts and other loans and advances NPLs with relative shares of 14.0 percent and 13.0 percent, respectively.
“Given that residential and commercial mortgage loans account for more than 52 percent of the total loan book, it is therefore not surprising that the increase in the non-performing mortgage loans category contributed significantly to the increase in total NPLs. The relative shares of NPLs for the remaining categories, namely instalment sale & leasing finance, personal loans and credit card advances remained very low at 10 percent, 5 percent and 1 percent, respectively,” further states the report.
In essence, growth in mortgage loans, which constitute the largest asset class of the banking sector, continued to slow during 2017. Growth in mortgage loans (i.e., residential and commercial), which account for about 52 percent of total bank loans and two-thirds of lending to households, slowed to 8.0 percent at the end of December 2017, from 8.7 percent a year earlier.
Mortgage loans which experienced double-digit year-on-year growth rates averaging about 12.7 percent over the past ten years, peaked at the end of 2015 and has since sharply slowed.
“This slowdown could be attributed to both lower credit demand due to the deceleration in the economy and in house prices, and tentatively to the Loan-to-Value (LTV) limit set for non-primary housing introduced in March 20.”
Overall, the banking sector continued to be profitable despite the recession that prevailed for the most part of 2017. The banking sector continued to record respectable profit margins, but lower in contrast to previous years, amidst a general slowdown in the economy.
The Return on Equity (ROE) as well as the Return on Assets (ROA) slowed to 21.1 percent and 2.2 percent in 2017, from 24.1 percent and 2.6 percent, respectively, in 2016.
“Although both ratios declined as a result of the recent weakening of the economy, the sustained profitability of the sector over so many years reflects that its overall mix of business is healthy for the sustainability of the banking institutions,” extends the report.
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