Non-performing loans hamper Capricorn profits

By Hilary Mare

THE challenging economic environment, exacerbated by the impact of the pandemic, has had a negative impact on the Capricorn Group’s total non-performing loans (NPLs), which increased by 12,7 percent to N$2.2 billion during the current period.

This is revealed in the group’s interim financial results for the six months ended 31 December 2020 which also highlight that the group’s NPL ratio increased from 4.7 percent to 5.2 percent.

“Due to the significant increase in provision for expected credit losses the NPL coverage ratio increased to 53.2 percent (Dec 2019: 44.8 percent),” the statements further reveal.

The Group’s profit from continuing operations decreased by N$118.8 million, or 20.2 percent, relative to the pre-Covid-19 comparable period.

“This year-on-year decrease is mainly due to interest margin compression and increased impairment provisions. Lower interest margins are a result of unprecedented interest rate decreases enacted by central banks to counter the slowdown in the economy. Increased impairment provisions resulted from the extremely challenging economic and market conditions in the wake of imposed lockdowns and other responses to the pandemic,” said Thinus Prinsloo, Group CEO.

The group also said that net interest income and interest margins were negatively impacted during 2020 following significant interest rate cuts of 275 basis points by Bank of Namibia and 100 basis points by Bank of Botswana. Despite the interest rate cuts, net interest margin reductions of Bank Windhoek and Bank Gaborone were well contained at only 0.53 percent and 0.38 percent year-on-year respectively with the group saying that this was achieved mainly through effective management of cost of funding.

On a consolidated level, net interest income before impairment charges decreased by 6.8 percent year-on-year mainly as a result of reduced margins.

“Impairment charges increased to N$155.6 million. This is a direct result of the economic impact related to the Covid-19 pandemic, compared to the period before the pandemic. Given the current uncertainty the group applied a prudent forward-looking approach, consistent with the requirements of IFRS 9, in determining expected credit losses given the current economic conditions,” the bank said.

On a positive note, non-interest income increased by 3.2 percent year-on-year despite the difficult operating environment and the material impact of the Covid-19.

“Growth was mainly attributable to a 5.6 percent increase in income from electronic channels and asset management fee income increasing by 13.0 percent to N$77.4 million. This achievement highlights the positive impact of the group’s diversification strategy in cushioning the impact of the steep interest rate cuts experienced. Growth in income from electronic channels and asset management fees were offset by a decline of 22.7 percent in trading revenue,” further stated the group in the statements.

The group further said that roughly 80 percent of the group’s operating expenses are fixed and could not be adjusted in line with lower expected income since the onset of the pandemic.

“In addition, a significant part of the group’s technology costs, which increased by 21.5 percent year-on-year, are denominated in US Dollar and was severely impacted by a weakening of the Namibian Dollar against the US Dollar. Despite these shocks, the group contained the increase in operating expenses to 2.4 percent. This bears testimony to the group’s ability to contain costs during adverse economic conditions such as the Covid-19 pandemic,” the group said.