psg banking review - 2016 - banking... · 2016-12-12 · annual inflation rate was estimated at...

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PSG BANKING REVIEW

- 2016

DECEMBER 2016

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PSG Wealth Management (Namibia) (Pty) Ltd

Table of contents

Introduction ................................................................................................................................................................. 3

Executive Summary ...................................................................................................................................................... 4

PSG - Ranking the Local Banks ....................................................................................................................................... 5

Nature of business ....................................................................................................................................................... 7

Local Banks ............................................................................................................................................................................ 7

SA Banks ................................................................................................................................................................................. 8

Botswana Banks ..................................................................................................................................................................... 9

Zambian Banks ....................................................................................................................................................................... 9

Economic Review and Outlook .................................................................................................................................... 10

Real Economic Growth ........................................................................................................................................................ 10

Namibian Inflation ............................................................................................................................................................... 10

Private Sector Credit Extension (PSCE) ................................................................................................................................ 11

Monetary Policy ................................................................................................................................................................... 11

Local Banks - Financial Results Review ........................................................................................................................ 12

CGP ...................................................................................................................................................................................... 12

FNB ....................................................................................................................................................................................... 12

NED ...................................................................................................................................................................................... 13

SBNH .................................................................................................................................................................................... 13

Balance Sheet ............................................................................................................................................................ 14

Bank Assets .......................................................................................................................................................................... 14

Gross Advances .................................................................................................................................................................... 15

Growth by Loan Category – Local Banks .............................................................................................................................. 16

Mortgage Loans ................................................................................................................................................................... 17

Term Loans and Overdrafts ................................................................................................................................................. 20

Instalment Sales and Leases ................................................................................................................................................ 21

Deposits ..................................................................................................................................................................... 22

Total Revenue ............................................................................................................................................................ 23

Net Interest Income (NI) ...................................................................................................................................................... 23

Non-Interest Revenue (NIR)................................................................................................................................................. 24

Non-Interest Revenue as % of Operating Cost .................................................................................................................... 26

Fee and Commission (F&C) Income ..................................................................................................................................... 26

Cost Measures ........................................................................................................................................................... 27

Operating Expenditure (Opex) ............................................................................................................................................. 27

Opex vs. Asset Growth ............................................................................................................................................... 28

Local Banks .......................................................................................................................................................................... 28

SA Banks ............................................................................................................................................................................... 29

Cost-to-Income .......................................................................................................................................................... 31

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Staff Cost ................................................................................................................................................................... 33

Staff Cost per Employee ...................................................................................................................................................... 34

Staff Cost as % of Total Revenue – Compensation Ratio ..................................................................................................... 35

Staff Cost as % of Net Interest Income ................................................................................................................................ 36

Profitability ................................................................................................................................................................ 37

Net Profit per Employee ...................................................................................................................................................... 37

Earnings Growth .................................................................................................................................................................. 37

Earnings per Share (EPS) ...................................................................................................................................................... 39

Dividend Payout ................................................................................................................................................................... 40

Return on Average Assets (ROA) ................................................................................................................................. 42

ROA – 2 Factor Du Pont Analysis ......................................................................................................................................... 43

Return on Average Equity (ROE) .................................................................................................................................. 45

ROE Du Pont Analysis ........................................................................................................................................................... 47

Lending Rates ............................................................................................................................................................. 51

Deposit Rates ............................................................................................................................................................. 52

Interest Rate Spread ................................................................................................................................................... 53

Net Interest Margins (NIM) ......................................................................................................................................... 54

Loan-to-Deposit (LTD) Ratio ................................................................................................................................................ 57

Liquid Assets to Deposit (LADST) ......................................................................................................................................... 60

Credit Risk .................................................................................................................................................................. 61

Credit Loss Ratio .................................................................................................................................................................. 61

Non-Performing Loans (NPL’s) ............................................................................................................................................. 62

Provision for Bad Debts ....................................................................................................................................................... 63

Gross Coverage (Provision % of NPL) ................................................................................................................................... 65

Valuation ................................................................................................................................................................... 67

Annexure 1: Definitions .............................................................................................................................................. 69

Annexure 2: Rating and Ratio Definitions .................................................................................................................... 70

Annexure 3: Financial Data ......................................................................................................................................... 71

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Introduction

The PSG Banking Review provides a detailed time series and

financial ratio analysis between the Namibian and listed South

African, Botswana and Zambian banks. However, the focus will

remain on local banks. The SA banks included in the analysis are

Standard Bank, Nedbank, FirstRand, Capitec and Barclays Group

Africa (previously Absa) while the listed Botswana banks are

Barclays, FNB Botswana and Standard Chartered. The Zambian

banks are Zanaco and Standard Chartered.

Note that the name of Bank Windhoek Holdings changed to

Capricorn Investment Group in 2016. We refer to Capricorn

Investment Group (CGP) throughout this report.

In our 2015 Banking Review, we supplemented the current

analysis by including Capitec. We have also decided to include

the most recently published financial information where it was

available. This means that the report does not refer throughout

to FY15 as in previous versions, but will speak about “as at latest

year-end”. It should be noted that the comparative analysis

amongst the local banks are based on the financial year-end

results with different year-ends (June vs. December). Also note

that Standard Bank Holdings Namibia Ltd (SBNH) data was

consolidated back for comparison purposes from FY07-FY10.

Pre-FY07 remains Standard Bank Limited (the bank) data.

The report starts by studying the dynamics and trends in market

share and Compounded Annualised Growth Rates (CAGR) over

different time periods in terms of total assets, advances,

mortgage loans, term loans, non-interest income and deposits.

Financial ratios include profitability ratios such as Return on

Equity (ROE) and Return on Assets (ROA) broken down by a two

factor Du Pont Analysis. Other ratios include net interest

margins, interest rate spreads, cost efficiency ratios and

liquidity and credit risk ratios. All the formulae and definitions

used in the report are detailed in the annexure.

We conclude the analysis with a fair value estimation of all the

local, Botswana and Zambia banks using the price-to-book

valuation model based on conservative sustainable ROE

assumptions. The fair value estimates allowed us to estimate

the market cap and dividend yield for each of the unlisted banks

for comparison purposes.

Table 1: Year-ends

February June December

Capricorn Investment Group x

FNB Namibia Holdings x

NedNamibia Holdings x

Standard Bank Namibia

Holdings

x

Barclays Group Africa x

FirstRand x

NedBank SA x

Standard Bank SA x

Capitec SA x

Barclays Botswana x

FNB Botswana x

Std. Chartered Botswana x

Std. Chartered Zambia x

Zanaco Zambia x

Source: PSG, Annual Reports

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Executive Summary

While profitability remains one of the most important goals of

banks, the efficient provision of financial services through banks

is also critical, especially for a country’s economic growth and

development. A stable and efficient banking system is vital to

provide financial services while having the capability of

absorbing unforeseen shocks through effective risk, credit and

liquidity management. While this study addresses profitability,

more importantly, it enables us to measure the bank’s overall

performance and soundness by identifying their strengths and

weaknesses in terms of other metrics such as liquidity and credit

risk policies. However, it is worthy to note that ratio analysis has

it shortcomings in that it is backward looking, instead of forward

looking.

Economic growth slowed sharply in 2016. The NSA estimates

real GDP growth at -1.2% y-o-y in Q2, down from 3.4% y-o-y in

Q1 2016. The negative growth is mainly attributable to sharp

contractions in real value added recorded by the construction (-

19.9% y-o-y), mining & quarrying (-13.2% y-o-y) and hotels &

restaurants (-15.5% y-o-y) sectors.

Private sector credit extension (PSCE) growth declined in

October, mainly as a result of a decline in demand for credit

from the corporate sector. PSCE growth decreased from 11.1%

y-o-y in September to 10.2% y-o-y in October, therefore,

remaining on a broadly downward trend since March 2015. The

annual inflation rate was estimated at 7.3% y-o-y in October,

higher than the 6.9% y-o-y increase recorded in September and

the highest annual inflation rate since November 2012. The

Namibia prime lending rate increased from 9.75% in January

2015 to 10.75% in December 2016.

In our ranking of the Namibian banks, FNB retains its first place

and all of the other rankings remain the same as well. This is

despite SBNH making up a lot of ground with improvements in

credit risk and cost efficiency. What also emerge from the

analysis is that the two listed banks stand out in terms of ROA.

While the unlisted banks are slightly lagging in terms of this

metric, SBNH have increased ROE significantly over the last

year. In terms of profitability, CGP slid during the last year due

to SBNH and NED outperforming them in 3-year EPS CAGR. NED,

however deteriorated significantly in terms of credit risk due to

worsening credit loss ratios.

Local bank assets made up 69.3% of GDP as at December 2015,

re-iterating the big role it plays it the Namibian economy.

Advances growth remained strong for the local banks at

between 11.6% and 18.3%.

Our finding, based from a range of performance ratios is that

the local banks remain sound in terms of profitability and capital

adequacy with high-quality liquid assets. On the credit risk side,

credit loss ratios remain low. As mentioned last year, we are

concerned about the increasing ratio of the mortgage loan

books that are in early arrears. This is a trend at all the local

banks and it has begun to filter through to impairments.

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. Credit risk did deteriorate slightly, but credit

losses are still well below industry accepted levels. All the local

banks reported double digit annualised compounded growth in

earnings over the last three years, but we could see this taper

as advances growth slows in the challenging economic

environment.

The SA banks experienced mixed results in their EPS growth

numbers over the last year but NPL ratios continue to gradually

improve. Operational expenses growth outpacing asset growth

for most of the SA banks over 5 years creates challenges.

Besides Capitec, SBK SA and BGA are the only banks which grew

assets ahead of opex marginally over 5 years. Credit quality for

the SA banks has remained good. Drawing a comparison

between local banks and SA banks, the analysis reflects the

superior net interest margins, ROE, ROA and credit quality of

local banks for the last year, but the trend is that SA banks’

credit quality is improving, while the Namibian banks are seeing

headwinds.

The two listed Zambian banks have suffered severely over the

last year with earnings declining at double digit rates attributed

to high operating cost and low revenue growth. Cost-to-income

ratios for both banks have increased, but Standard Chartered

Zambia did grow assets ahead of the operating costs. ROE

declined for both banks despite the increase in interest rates in

Zambia. The Zambian banking system is under severe pressure,

and Zanaco specifically have experienced a spike in NPLs. From

the performance metrics broadly, it looks like Standard

Chartered is more resilient in these tough times.

The Botswana banks saw earnings decline by more than 20%

over the last year. Standard Chartered Botswana performed the

worst with earnings declining by 85%. Botswana banks

generally have higher NIM than local and SA banks. These

margins have come under severe pressure with the declining

interest rates in Botswana. Net interest income took a huge hit

for all the Botswana banks. These banks reported NIMs of

between 6.7% and 8.0% in FY13, but this has reduced to 4.0%

to 7.0%.

The outlook for local banks remain positive, although there will

be a period of slower growth and increased credit losses over

the next 18 to 24 months. They remain profitable, well

capitalised with acceptable credit quality.

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PSG - Ranking the Local Banks

To evaluate and compare the local banks we developed a

ranking system based on several of the ratios and data

contained in this report whereby we rank the four local banks

from “1” to “4”, with 1 being the best and 4 the worst. The

ranking system consist of 5 categories namely profitability, cost

efficiency, credit risk, advances growth & market share and

capital adequacy. In this report, financial ratios were based on

the most recent financial statement data and all compounded

growth numbers on three years to represent the category. Each

category and sub-category is assigned a weighting based on our

opinion of the relative importance of each in order to determine

the ranking for each bank.

Under the ranking system, a greater emphasis is placed on

profitability and credit risk, these two categories account for

50% of the total weighting. We allocated a weight of 20% each

to advances and cost efficiency categories whilst the capital

adequacy category represents 10% of the total weighting. The

categories and sub-categories and the respective weights are

shown in the table 2 below.

Table 2: Category and sub-category weights

Category Category

weight

Sub-category

Weight

Profitability 25%

EPS (CAGR) 30%

NIM 15%

NIR (CAGR) 15%

ROA 10%

ROE 30%

Advances 20%

Market share 40%

Advances Growth (CAGR) 60%

Cost efficiency 20%

Cost-to-income ratio 50%

Opex (CAGR) 20%

Asset vs. Opex (CAGR) 30%

Credit Risk 25%

Credit loss Ratio 60%

NPL/Gross Advances 40%

Capital adequacy 10% 100%

Source: PSG

Within the profitability category EPS growth and ROE were

assigned more weight relative to the other profitability metrics

mainly due to the importance attached to it in the valuation

process and since they represent how successful a bank’s

strategies are implemented. Similarly, the cost-to-income ratio

carries the biggest weight in its category. The credit loss ratio

has been assigned 60% of the weight in the credit risk category

because we regard actual impairment of advances more

important than NPLs that can still become performing loans.

This is the ratio of bad debt to average gross advances.

The ranking system does not consider liquidity ratios since the

optimal liquidity ratio will differ between banks depending on

the risk profile and is open for interpretation. Moreover, there

is a fine line between too much liquidity and too little making

ranking banks according to this metric problematic. While

service delivery could play a significant role in the rankings it

was not included in the ranking system given the subjective

nature of assigning a rating. We opt to include market share and

advances growth which to some extent is an indication of

service delivery since a bank with poor service will find it

difficult to grow or maintain market share.

We rank FNB the best bank in Namibia as it performed best

overall in the weighted score assigned to 13 sub-categories.

Table 3: Weighted ranking by category

FNB NED SBNH CGP

Profitability 1.3 3.7 2.1 2.9

Advances 1.4 2.8 3.6 2.2

Cost efficiency 1.8 2.0 3.8 2.4

Credit risk 1.0 3.2 3.4 2.4

Capital adequacy 1.0 4.0 3.0 2.0

Overall rating 1.3 3.1 3.2 2.4

Overall ranking 1.0 3.0 4.0 2.0

Source: PSG

Table 4 shows the detail of the performance metrics for each

bank by category and sub-category.

Table 4: Performance metrics

Category Weighted Score

FNB NED SBNH CGP

Profitability

EPS (CAGR) 26.8% 19.6% 20.2% 18.6%

NIM 5.4% 4.8% 5.9% 5.1%

NIR (CAGR) 20.2% 12.5% 19.0% 22.2%

ROA 3.7% 2.1% 2.3% 3.0%

ROE 32.7% 15.4% 23.4% 22.9%

Total score 1.3 3.7 2.1 2.9

Advances

Market share 32.2% 12.7% 22.1% 33.0%

Growth (CAGR) 17.9% 17.4% 11.8% 15.8%

Total score 1.4 2.8 3.6 2.2

Cost efficiency

Cost-to-income ratio 43.6% 59.6% 60.9% 50.2%

Opex (CAGR) 14.5% 11.7% 14.8% 15.7%

Asset vs. Opex (CAGR) 1.8% 4.4% -0.3% 2.2%

Total score 1.8 2.0 3.8 2.4

Credit Risk

Credit loss Ratio 0.23% 0.58% 0.52% 0.24%

NPL/Gross Advances 1.0% 1.0% 2.9% 1.4%

Total score 1.0 3.2 3.4 2.4

Capital adequacy 17.8% 14.3% 15.6% 15.8%

Overall Score 1.3 3.1 3.2 2.4

Source: PSG

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Table 5: Ranking by Category

Ranking

Category FNB NED SBNH CGP

Profitability

EPS (CAGR) 1 3 2 4

NIM 2 4 1 3

NIR (CAGR) 2 4 3 1

ROA 1 4 3 2

ROE 1 4 2 3

Advances

Market share 2 4 3 1

Advances Growth (CAGR) 1 2 4 3

Cost efficiency

Cost-to-income ratio 1 3 4 2

Opex (CAGR) 2 1 3 4

Asset vs. Opex (CAGR) 3 1 4 2

Credit Risk

Credit loss Ratio 1 4 3 2

NPL/Gross Advances 1 2 4 3

Capital adequacy 1 4 3 2

Source: PSG

Looking at the rankings in terms of profitability, it shows that

FNB was ranked first with Standard Bank in second place. Both

these banks performed better than the rest in terms of three-

year earnings growth, ROE and Net Interest Margins.

In the advances category, FNB and CGP is ranked 1 and 2. FNB

has grown advances at a faster pace than other banks over a

three-year period and these two banks have the largest

advances market share at 32.2% and 33.0% as at December

2015.

In terms of cost efficiency, FNB ranked first again followed very

closely by CGP, which performed very well in the asset vs

operating expense growth category.

The credit risk category contains the credit loss ratio and

NPL/advances ratios with a weighting of 60% and 40% each. In

this category, FNB and CGP have credit loss ratios of half that of

the other two banks.

FNB is also ranked first in the capital adequacy category with its

higher capital adequacy ratio.

The rankings are based on the financial statement data which

could differ between banks in the way certain items are

reported. The ranking system is based on backward looking

financial statement data and should not be used for investment

decisions which should be based on various factors.

Chart 1: Ratings history

Source: PSG

The above chart shows the banks’ rankings from the one year

to the next. The rankings remained the same as the last two

year, but it is notable that Standard Bank has come much closer

to Nedbank. The main reasons for Nedbank’s decline are their

low Non-interest revenue growth, high credit loss ratio and

lower ROE.

Table 6: Rankings comparison to previous year

FNB NED SBNH CGP

2015 2016 2015 2016 2015 2016 2015 2016

Profitability 1.3 1.3 3.3 3.7 3.1 2.1 2.3 2.9

EPS 1.0 1.0 2.0 3.0 4.0 2.0 3.0 4.0

NIM 1.0 2.0 4.0 4.0 2.0 1.0 3.0 3.0

NIR 3.0 2.0 4.0 4.0 2.0 3.0 1.0 1.0

ROA 1.0 1.0 3.0 4.0 4.0 3.0 2.0 2.0

ROE 1.0 1.0 4.0 4.0 3.0 2.0 2.0 3.0

Advances 1.4 1.4 3.4 2.8 3.6 3.6 1.6 2.2

Market share 2.0 2.0 4.0 4.0 3.0 3.0 1.0 1.0

Growth 1.0 1.0 3.0 2.0 4.0 4.0 2.0 3.0

Cost efficiency 1.5 1.8 2.0 2.0 4.0 3.8 2.5 2.4

Cost-to-income 1.0 1.0 3.0 3.0 4.0 4.0 2.0 2.0

Opex 2.0 2.0 1.0 1.0 4.0 3.0 3.0 4.0

Asset vs. Opex 2.0 3.0 1.0 1.0 4.0 4.0 3.0 2.0

Credit Risk 1.6 1.0 1.4 3.2 4.0 3.4 3.0 2.4

Credit loss 2.0 1.0 1.0 4.0 4.0 3.0 3.0 2.0

NPL ratio 1.0 1.0 2.0 2.0 4.0 4.0 3.0 3.0

Capital adequacy 1.0 1.0 3.0 4.0 4.0 3.0 2.0 2.0

Overall rating 1.4 1.3 2.6 3.1 3.7 3.2 2.3 2.4

Overall ranking 1.0 1.0 3.0 3.0 4.0 4.0 2.0 2.0

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

201420152016201420152016201420152016201420152016

FNB NED SBNH CGP

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Nature of business

Local Banks

Capricorn Group Holdings (CGP)

CGP is an investment holding company with a 100%

shareholding in Bank Windhoek Ltd, Namib Bou (Pty) Limited,

Capricorn Unit Trust Management Company Limited (CUTM)

and Capricorn Asset Management (Pty) Ltd (CAM). Bank

Windhoek Ltd is one of the largest commercial banks in

Namibia. CGP also has strategic interests in Santam Namibia

(28%) and Sanlam Namibia (29.5%). Capricorn Investment

Holdings (CIH) has a 56.81% shareholding in CGP. The group

offers a complete range of retail, business, corporate and

investment banking, insurance and wealth management. CGP

announced in December 2016 that they will acquire 65% of the

issued share capital of Capricorn Investment Holdings

(Botswana) Limited, which owns 100% of the share capital of

Bank Gaborone, and 97.9% of Cavmont Capital Holdings Zambia

Plc, which owns 100% of the share capital of Cavmont Bank.

FNB Namibia Holdings (FNB)

FNB Namibia Holdings has a 100% shareholding in First National Bank

of Namibia Limited. South African group, FirstRand EMA Holdings is

the majority shareholder of FNB, with a 58.4% shareholding. GIPF holds

14.8% with the remainder of the shareholding held by the general

public. Five percent of FirstRand’s has been allocated to a black

empowerment group, with 1% allocated to black employees and 4% to

a BEE Consortium. The BEE consortium consists of two groups, namely

Sovereign Capital and Chappa’Ai Investments. FNB also have a 51%

holding in OUTsurance Insurance Company Namibia (Pty) Limited. The

group also has a 100% holding in RMB Namibia (Pty) Ltd and FNB

Namibia Unit Trusts Limited. FNB recently concluded a transaction to

purchase 100% of the shares in Pointbreak.

NedNamibia Holdings (NED)

Nedbank Group Limited is the South African controlling shareholder

(100%) of NedNamibia Holdings Limited. NedNamiba Holdings Ltd has

a 100% interest in Nedbank Namibia Limited and also in the following

subsidiaries: NedProperties (Pty) Limited, NedCapital Namibia (Pty)

Limited, NedPlan Insurance Brokers Namibia (Pty) Limited and

Coversure Limited. Nedbank Namibia Ltd holds a 100% shareholding in

CBN Nominees (Pty) Limited, 25% in Namclear (Pty) Limited, 80% in

Nedloans (Pty) Limited, 50% in Ten Kaiser Wilhelm Strasse (Pty) Limited

and 50% in Walvis Bay Land Syndicate (Pty) Limited.

Standard Bank Namibia Holdings Limited (SBNH)

The Standard Bank Group Limited, registered and listed in South

Africa and dual listed on the NSX, transferred its ownership to

Standard Bank Holdings Limited effective 01 January 2011.

Standard Bank Holdings Limited acts as an investment holding

company with 100% shareholding in Standard Insurance

Brokers (Namibia) (Proprietary) Limited, (a short term insurance

broker), Stanfin (Namibia) (Proprietary) Limited, (a long term

insurance broker) and Standard Bank Namibia Limited.

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SA Banks

Barclays Group Africa (BGA) Barclays Group Africa, one of the big four banks in South Africa,

was established in 1999. Barclays acquired a controlling stake in

2006, and raised its shareholding further to 62.3% in July 2013.

BGA offers a complete range of retail, business, corporate and

investment banking, plus insurance and wealth management.

FirstRand (FSR)

FirstRand was created in 1998 through the merger of the

financial services interests of Anglo American and RMB

Holdings. Subsidiaries include FNB (retail & corporate),

WesBank (asset finance & unsecured lending), RMB (corporate

& investment banking).

NedBank SA (NED SA)

Nedbank, a subsidiary of Old Mutual, has been listed on the JSE

since 1969. It focuses on southern Africa, offering corporate

banking, business banking, investment banking, retail banking,

wealth management and bancassurance. Having made a big

loss in 2003, it was recapitalised through a rights issue. Nedbank

generates most of its earnings from corporate and investment

banking, but is also rebuilding its retail franchise, which has

been lagging the other big banks.

Standard Bank SA (SBK SA)

Standard Bank was listed on the JSE in 1970. The group offers

corporate & investment banking and retail banking. It has a

controlling stake in Liberty Holdings, a listed insurer. SBK is

operating in 17 African countries. Having embarked on

expansion into emerging markets before the global financial

crisis, it is now refocusing its strategy on Africa.

Capitec (CPI)

Capitec Bank Holdings Limited has been listed on the JSE since

2002. The Company's subsidiaries conduct retail banking. The

Company owns 100% of its principal subsidiary, Capitec Bank

Limited (Capitec Bank). Capitec Bank is a retail bank, which

focuses on banking services and provides savings, transacting

and unsecured lending products to individuals. Capitec does not

at this stage provide any services to businesses Home loan

origination is provided but it is outsourced to SA Home Loans

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Botswana Banks

Barclays Bank Botswana (BBB) The Bank is controlled by Barclays Africa Group Limited which

owns 67.82% of the ordinary shares, which is a subsidiary of

Barclays PLC (incorporated in the United Kingdom). The

remaining 32.18% of the shares are widely held. The bank

employs 1 247 people and has 43 branches and 115 ATMs

throughout the country. Their consumer business serves

customers across a network of 43 branches, which is the largest

branch network in Botswana, and 115 ATMs.

First National Bank of Botswana (FNBB)

FNBB was registered in 1991, as a wholly owned subsidiary of

First National Bank Holdings (Botswana). The Bank became a

listed entity on the Botswana Stock Exchange in 1993. The

Company’s stated capital consists of 2 563 700 000 ordinary

shares, of which First National Bank Holdings (Botswana)

Limited holds 1 780 590 000 shares (69.45%), and the balance is

traded on the Botswana Stock Exchange (BSE).

Standard Chartered Botswana (SCB)

SCB first opened for business in 1897, making it the country's

oldest bank. The Bank was locally incorporated in 1975 with a

full board. The bank operates with 19 branches and 25% of its

shares are listed on the Botswana Stock Exchange.

Zambian Banks

Standard Chartered Bank of Zambia (SCZ)

The bank was established in 1906 and has a total of 25 branches

spread across the country, 47 automated teller machines

(ATMs) and 719 employees. The Bank, which is a registered

commercial bank under the Zambian Banking and Financial

Services Act 1994, is owned 90% by Standard Chartered

Holdings (Africa) BV, a company incorporated in the

Netherlands, which in turn is wholly owned by Standard

Chartered Plc, a company incorporated in the England and

Wales.

Zambia National Commercial Bank Plc (Zanaco)

Zanaco was established in 1969. The bank remains majority-

owned by Zambians. In 2007, the Government of Zambia sold a

49% stake in the bank to Rabo Financial Institutions

Development (RFID) a subsidiary of Rabobank of the

Netherlands. Following the Banks Initial public offer in 2008

RFID sold 3.41% stake to Lizara Investments Limited (a nominee

of the Zambia National Farmers Union (ZNFU). Current

shareholding 25% GRZ, 45.59% RFID, 3.41% ZNFU and 25.6%

free float.

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Economic Review and Outlook

Real Economic Growth According to the Namibia Statistics Agency (NSA), real GDP

contracted in the second quarter of this year. The NSA

estimates real GDP growth at -1.2% y-o-y in Q2, down from 3.4%

y-o-y in Q1 2016. The NSA notes that the negative growth is

mainly attributable to sharp contractions in real value added

recorded by the construction (-19.9% y-o-y), mining & quarrying

(-13.2% y-o-y) and hotels & restaurants (-15.5% y-o-y) sectors.

The poor performance of construction reflects decreased

spending in mining construction as major mining projects are

completed or nearing completion and reduced government

construction expenditure as it embarks on a fiscal consolidation

path – the government suspended its mass housing programme

in July.

The mining sector’s poor performance is ascribed to a

significant decline in real value added by the diamond sub-

sector. Diamond production dropped by 31.5% y-o-y in Q2

2016, ascribed to lower-grade diamonds being mined and the

maintenance of a De Beers marine mining vessel taking longer

than anticipated. The contraction in the hotels and restaurants

sector reflects declines in the number of bed nights (-14% y-o-

y) and room nights sold (-14.4% y-o-y) in Q2 2016.

These declines have occurred despite a weaker Namibian dollar

that should theoretically support overseas tourist arrivals.

Instead, the declines could be explained by the fact that the vast

majority of tourist arrivals in Namibia are from South African

Development Community (SADC) countries, in particular Angola

and South Africa, both of which are facing strong GDP growth

headwinds.

Agriculture (including forestry and fishing) continues to perform

poorly, with the sector contracting by 1.4% y-o-y in Q2.

However, this is an improvement compared to the contraction

of 7.9% y-o-y recorded in the previous quarter. Low and erratic

rainfall over the past two seasons is expected to lead to a

second consecutive year of contraction in both livestock

farming and crop production, according to the central bank.

The industrial sector recorded a sharply weaker performance,

contracting by 11.3% y-o-y in Q2 compared to a 3.5% y-o-y

expansion in the previous quarter, dragged by weak activity in

the construction, mining and manufacturing industries. A

significant increase in the value added by the electricity & water

sector (25.7% y-o-y) in Q2, ascribed to the refurbishment of the

Van Eck power station, served to offset the contraction in total

industrial activity to some extent.

Growth in the services sector continued to slow to 2.3% y-o-y in

Q2, from 4.4% y-o-y in Q1. Wholesale & retail trade (9.6% y-o-

y) remains buoyant despite relatively high inflation, while the

hotels & restaurants industry represented the major drag on

the sector in Q2.

Namibian Inflation The annual inflation rate was estimated at 7.3% y-o-y in

October, higher than the 6.9% y-o-y increase recorded in

September and the highest annual inflation rate since

November 2012. Looking at the four largest sub-indices

comprising the overall CPI, the food & non-alcoholic beverages

sub-index increased by 11.7% y-o-y in October, which was

slower than the 12.0% y-o-y increase recorded in September.

Bread & cereals, which has the largest weighting in the overall

food sub-index of 31% continued to push food inflation higher.

The currency remains a significant upside risk to the inflation

outlook.

Chart 2: Real GDP Growth (%)

Source: PSG, NSA

Chart 3: NCPI % (y/y)

Source: PSG, NSA

-10%

-6%

-2%

2%

6%

10%

14%

18%

20

13Q

1

20

13Q

2

20

13Q

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Y-o-y Q-o-q

-6.0

-4.0

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0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16CPI

Food & Non-alcoholic Beverages

Transport

Housing, Utilities, Gas & Other Fuels

P a g e | 11


Private Sector Credit Extension (PSCE)

Private sector credit extension (PSCE) growth declined in

October, mainly as a result of a decline in demand for credit

from the corporate sector, according to the Bank of Namibia’s

(BoN, the central bank) recently released Money and Banking

Statistics report. PSCE growth decreased from 11.1% y-o-y in

September to 10.2% y-o-y in October, therefore, remaining on

a broadly downward trend since March 2015.

Growth in credit extended to businesses dropped by 90.2 bps

to 10.2% y-o-y in October, while credit growth to households

remained unchanged at 9.7% y-o-y. The growth in mortgage

credit, which accounts for more than 50% of total PSCE, slowed

to 9.4% y-o-y in October, compared to 10.1% y-o-y in the

preceding month.

Elsewhere in the report, the central bank said that the stock of

international reserves dropped to N$25.1bn at the end of

October, from N$26.5bn in the prior month. “The decrease

emanated mainly from net government payments and net

foreign currency purchases by commercial banks during the

reviewed period,” the BoN said.

Chart 4: PSCE (% y/y)

Source: BoN

Monetary Policy

The Monetary Policy Committee (MPC) of the Bank of Namibia

(BoN, the central bank) decided to keep the repo rate

unchanged following its most recent meeting. The policy rate

therefore remains stable at 7%. According to the MPC, a repo

rate at this level “is appropriate to support growth and maintain

the one-to-one link of the Namibian dollar to the South African

rand”. The central bank states that since the previous MPC

meeting in October 2016, monetary policy stances in both key

advanced economies and emerging market economies have

remained accommodative.

No doubt the South African Reserve Bank’s (SARB) decision to

keep its policy rate unchanged in November contributed to the

decision to hold Namibian rates steady. Furthermore, the BoN’s

decision was supported by the downward trend in private

sector credit extension (PSCE) growth and a sharp drop in

overall economic growth during the first 10 months of 2016.

PSCE growth slowed to an average of 11.8% y-o-y over the first

10 months of 2016, compared to 15.5% y-o-y for the same

period in 2015.

According to the central bank, weaker economic growth is

ascribed to declines in the production of diamonds and zinc as

well as slower growth in the construction, agriculture and

transport sectors. However, wholesale & retail trade as well as

communications continue to perform well. The BoN still

projects real GDP growth of 2.5% in 2016, sharply lower than

the 5.3% recorded in 2015.

Chart 5: Namibian vs. South African Interest Rates

Source: PSG

Nevertheless, the outlook for monetary policy remains very

uncertain and the exchange rate continues to be a significant

upside risk to the inflation outlook. In recent months, the

inflation rate kept close to 7% y-o-y and we still expect price

pressures to remain elevated in 2017.

A source of depreciatory pressure on the rand is the substantial

risk that South Africa will lose its investment-grade status

during the course of 2017. Despite the recent decisions by credit

rating agencies not to downgrade South Africa’s foreign

currency credit rating, both S&P Global Ratings and Fitch

Ratings now have the country on “BBB-” with a negative

outlook.

Looking ahead, our baseline expectation is for the BoN to raise

the repo rate by 25 bps during 2017. This is on the back of our

projected 50 bps hike in the US federal funds rate next year,

which will put pressure on the Namibian dollar, as well as our

expectation of elevated food and administrated prices well into

2017.

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

Oct

-15

No

v-15

Dec

-15

Jan

-16

Feb

-16

Mar

-16

Ap

r-16

May

-16

Jun

-16

Jul-

16

Au

g-16

Sep

-16

Oct

-16

%ch

g, y

-o-y

PSCE Corporates Households

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

Jan

-14

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-14

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14

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-14

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v-1

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-15

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v-1

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-16

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-16

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-16

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16

Sep

-16

No

v-1

6

Nam Prime SA Prime

Nam repo SA Repo rate

Nam Real Interest

P a g e | 12


Local Banks - Financial Results Review

At time of writing this report, the two local listed banks, FNB and CGP have

already published annual results for the year ended June 2016.

CGP

After reporting strong interim results, advances growth slowed

in the second half of FY16. Headline earnings increased by

20.5% from 151 cps in FY15 to 182cps in FY16. The net interest

margin (IEA) after impairment charges remained resilient at

4.9% on the back of 15.1% growth in net interest income despite

lower advances growth of 12.6%.

In FY16 there was an increase of 65 bps in interest income on

average IEA and an increase of 82 bps in the interest expense

on average interest paying assets.

After peaking at 62.9% in 2010, the cost-to-income ratio has

consistently come down and has improved to 50.2% in the 2016

financial year. This has been because of increased income but

also a substantial curbing of operating cost growth in the last

two years.

The loan to deposit ratio increased further to 111%. This ratio

remaining above 100% shows the bank is not only relying on

deposits to fund loan growth but also on borrowed funds.

ROE increased further over the last year from 22.4% to 22.9%.

While gearing has continued to come down over the three-year

period, it was offset by strong improvement in asset utilisation

from 2.8% in FY15 to 3.0% in FY16 keeping ROE above 22%.

Despite this, the liquid assets to deposits and short term

borrowing figure improved further to 19.5% from 18.3% in

FY15. CGP is well capitalised with a total capital adequacy ratio

of 15.8%.

The group declared a total dividend of 66 cps up 10.6% from last

year (53cps).

Table 7: CGP - Key Financial Data at Year-end

FY14 FY15 FY16

Growth net interest income 15.6% 19.9% 15.1%

Growth non-interest income 29.9% 19.4% 17.5%

ROA 2.6% 2.6% 2.8%

ROE 21.9% 22.4% 22.9%

Interest margin (Avg. IEA) 4.8% 4.8% 4.9%

Cost- to-income 53.6% 51.6% 50.2%

Gross advances growth (%) 14.7% 16.7% 12.6%

NPL/Avg. Advances 0.7% 0.7% 1.4%

Credit loss Ratio (%) 0.15% 0.26% 0.24%

Compensation ratio (%) 28.3% 27.5% 27.9%

DPS (cps) 44 53 66

Capital Adequacy (%) 15.8% 15.8% 15.8%

Growth operating Cost (%) 19.9% 13.9% 13.2%


FNB

FNB reported an excellent set of financial results for the 12

months ended 30 June 2016. The group increased headline

earnings by 22.0% for the year. Non-interest income growth at

19.6% was higher than our forecasted 14.9%, but net interest

income was lower which meant that Profit before tax growth of

17.8% is in line with our expectations.

FY16 has been more challenging, there was an increase of 40

bps in interest income on average IEA and an increase of 48 bps

in the interest expense on average interest paying assets.

Non-performing loans were also higher at 0.97% but is

influenced by a large commercial transaction write-off which is

expected to be recovered.

The size of the growth in digital channels is significant and the

continued strong growth in non-interest income despite the

removal of cash deposit fees for individuals and SMEs. Also, the

strong growth in deposits bodes very well for the future funding

requirements of the bank.

Credit losses, however, have remained at very low levels of

below 1% and even during the current economic slowdown it

has not increased in FY16. We are seeing that NPLs are

increasing as expected from 0.7% to 1.0%.

The group declared a total dividend of 213 cps up 16.4% from

last year (183cps). ROE improved further from 32.2% in FY15 to

32.7% in FY16 driven by a significant increase in ROA from 3.5%

to 3.7%.

Table 8: FNB - Key Financial Data at Year-end

FY14 FY15 FY16



ROA 3.2% 3.5% 3.7%

ROE 30.9% 32.2% 32.7%


Cost- to-income 47.3% 43.9% 43.6%





DPS (cps) 122 183 213




P a g e | 13


NED

NED reported an average set of financial results for the 12

months ending 30 December 2015. EPS increased by 10.8%. Net

interest income growth accelerated strongly to 31.2% but

interest expenditure growth was even higher at 40.0%.

There was a strong increase in net interest margins (IEA) to 4.8%

from 4.6% and high advances growth of 18.3%. This came at a

cost, however with bad debt charges soaring to N$53 million

from N$4.3 million. NPL as % of gross advances reduced further

to 1.0%.

The gains made in cost efficiency in FY14 was reversed in FY15,

with the cost-to-income ratio returning to 59.6% from 56.6%

The group has not paid a dividend since 2005. ROE declined

from 16.5% in FY14 to 15.4% in FY15, and still remains below

the other local banks.

Table 9: NED - Key Financial Data at Year-end

FY13 FY14 FY15



ROA 2.1% 2.3% 2.1%

ROE 16.1% 16.5% 15.4%


Cost- to-income 59.9% 56.6% 59.6%





DPS (cps) ND ND ND



Source: PSG, Annual Reports, ND = No Dividend

SBNH

SBNH reported results as at 31 December 2015 which were

significantly better than expected with earnings growth at

44.7%, amid continued declining advances growth.

Significant improvement in ROA from 1.7% to 2.3% driving ROE

up to 23.4% from a previous 18.8%. Deposit growth was very

low at 4.2%

The credit loss ratio amounted to 0.44% of total advances, a

significant improvement from the 0.65% for FY14. Net interest

income rose by 29.6% while non-interest revenue grew by 8.6%.

Operating cost was 12.5% higher than the previous year,

resulting in the cost-to-income (after impairment) ratio

declining from 66.5% in FY14 to 60.9% in FY15, the highest

among local banks. SBNH reported a NPL/Advances ratio of

2.9%, the same as in FY14.

The NPL ratio remains the highest among local banks,

nevertheless still favourable below the 3% acceptable level. Net

advances grew by 11.6% in FY15, below the average PSCE

growth rate. ROE increased from 18.8% in FY14 to 23.4% in

FY15. The group declared a total dividend of 260 cps in FY14,

but did not declare any dividends in FY15.

Table 10: SBNH - Key Financial Data at Year-end

FY13 FY14 FY15



ROA 1.7% 1.7% 2.6%

ROE 18.0% 18.8% 23.4%


Cost- to-income 68.1% 66.5% 60.9%





DPS (cps) 120 260 -




On balance, local banks remain profitable while the overall

credit quality remains intact. The NPL/Average advances ratio

remains significantly below the accepted 3% for all the local

banks. All the banks, except for NED improved their cost-to-

income ratios, partly attributable to rising interest rates. The

pressure the economy is under will influence the housing

market which could push up credit losses and NPLs in the next

year.

P a g e | 14


Balance Sheet

This section measures assets and gross advances as at 31

December to compare all the banks at the exact same point

in time. Interim results from CGP and FNB are used.

Bank Assets

The banking system plays an important role in the economic

development of any country. The importance of the banking

sector in the Namibian economy, in particular for the

contribution to economic growth cannot be underestimated.

Total bank assets between the four local banks as a % of

nominal GDP increased from 60.3% in 2008 to 69.3% in 2015

indicating the importance of the banking sector in Namibia.

Chart 6: Total Local Bank Assets as % of Current GDP

Source: PSG, NSA

Total assets between the four local banks amounted to

N$101.6 billion measured at 31 December 2015, up from

N$88 billion the previous year. FNB and CGP remain the two

largest banks in Namibia with total assets amounting to

N$32.5 and N$31.3bn, respectively, followed by SBNH with

N$23.9bn and NED at N$13.8bn.

Chart 7: Local Banks - Total Assets (N$billion)


Table 11 shows the asset market share at December 2015.

FNB remains the market leader with 32.0% of total assets,

followed closely by CGP at 30.8%. NED, the smallest in terms

of assets, increased its market share from 11.9% to 13.6%

over the 5-year period. SBNH has lost significant market share

from ten years ago from 36% to 23.6% in FY15, and is now the

third biggest bank in terms of assets at December 2015.

Table 11: Total Assets at 31 December (N$000)

N$000 2012 2013 2014 2015

FNB 20 226 000 24 793 727 28 101 816 32 479 750

NED 8 786 263 9 999 919 11 871 305 13 828 598

SBNH 18 190 783 20 108 898 21 822 523 23 991 803

CGP 20 167 542 22 761 093 26 323 929 31 346 136

Total 67 370 588 77 663 637 88 119 573 101 646 287


Table 12: Total Assets Market Share (%)

2011 2012 2013 2014 2015

FNB 32.5% 30.0% 31.9% 31.9% 32.0%

NED 11.9% 13.0% 12.9% 13.5% 13.6%

SBNH 25.6% 27.0% 25.9% 24.8% 23.6%

CGP 29.9% 29.9% 29.3% 29.9% 30.8%


Table 13 shows the Compounded Annualised Growth Rate

(CAGR) in assets over different time periods. All the banks

grew their assets at double digit growth over the last 5 years.

Table 13: Total Assets Market Share (%)

1 year 3 years 5 years

FNB 15.6% 17.1% 13.5%

NED 16.5% 16.3% 14.1%

SBNH 9.9% 9.7% 10.7%

CGP 19.1% 15.8% 14.4%


63.5%

60.3%

66.2%67.6%

69.0%

62.8%63.3%63.2%

69.3%

54.0%56.0%58.0%60.0%62.0%64.0%66.0%68.0%70.0%72.0%

2007 2008 2009 2010 2011 2012 2013 2014 2015

20.6

7.5

16.218.9

32.5

13.8

24.0

31.3

-

5

10

15

20

25

30

35

FNB NED SBNH CGP

N$

Bn

2011 2012 2013 2014 2015

Chart 8: Local Banks - Total Assets Market Share (%)


32.5%

11.9%

25.6%

29.9%32.0%

13.6%

23.6%

30.8%

0%

5%

10%

15%

20%

25%

30%

35%

FNB NED SBNH CGP

2011 2012 2013 2014 2015

P a g e | 15


CGP has grown its assets fastest over the last year and over 5

years. FNB is the frontrunner over 3 years. SBNH has lagged in

assets growth over all periods.

Gross Advances

Total loans and advances continued to grow in 2015, at an

average rate of 15.0%, slower than the 16.9% rate in 2014.

Advances grew from N$67.8bn to N$77.9bn.

Table 14: Total Gross Advances at 31 December (N$000)

2012 2013 2014 2015

FNB 15 303 999 18 988 162 21 803 113 25 096 180

NED 6 124 565 7 008 385 8 374 544 9 907 360

SBNH 12 336 081 13 250 316 15 432 811 17 216 332

CGP 16 578 549 18 796 458 22 217 161 25 757 009

Total 50 343 194 58 043 321 67 827 629 77 976 881


Among the local banks, CGP have taken the lead in market

share with 33.0% of total advances or N$25.7bn, followed

closely by FNB with N$25.0 or 32.2%. SBNH and NED are

positioned at 3rd and 4th with N$17.2bn and N$9.9bn,

respectively.

Chart 9 shows CGP has retained its market share over the last

5 years at around 33.0%.

In contrast, SBNH lost some market share over the five year

period. SBNH’s market share shrunk from 23.4% to 22.1%.

NED’s market share is the same as it was 5 years ago at 12.7%.

FNB and CGP have retained their market share over 30% over

the last 5 years trading places 1 and 2 over the last few years.

All the local banks reported double digit advances growth in

2015. NED recorded by far the fastest growth of 18.3% for the

year ended December 2015, followed by FNB (15.1%) and

SBNH at 11.6%.

Table 15: CAGR for gross advances at 31 December 2015

CAGR (%) 1 year 3 years 5 years 7 years

FNB 15.1% 17.9% 15.3% 13.9%

NED 18.3% 17.4% 13.5% 12.5%

SBNH 11.6% 11.8% 14.2% 10.6%

CGP 15.9% 15.8% 15.7% 14.5%

Total 15.0% 15.7% 15.0% 13.1%


Chart 9: Total Gross Advances Market Share (%)


31.0%

12.7%

23.4%

32.9%32.2%

12.7%

22.1%

33.0%

0%

5%

10%

15%

20%

25%

30%

35%

FNB NED SBNH CGP

2011 2012 2013 2014 2015

P a g e | 16


The data shown from here onwards, refers to the latest

financial year ends of the different banks. There is a timing

difference of 6 months or less.

Chart 10 shows the CAGR in gross advances for all the banks

over a 5 year period. Among the local banks CGP and FNB

posted the fastest annualised growth in gross advances over

the last 5 years, growing at a CAGR of 15.4%. SBNH and NED

are not far behind in terms of advances growth, growing by

14.2% and 13.5%. The slower growth explains the drop or

stagnation in market share for these two banks.

Chart 10: Gross Advances – 5 years (% CAGR)

Source: PSG, Annual Reports, UBS

Advances growth for the SA banks has varied significantly. SBK

and CPI grew at double digit rates of 14.7% and 16.7%

respectively while the other banks grew advances at less than

10%. The fastest advances growth reported among the SA

banks over the last 3, 5 and 7 years, besides CPI, was FSR. SBK

SA and BGA have grown at an annualised rate of 5.0% and

4.7% over the last 5 years.

Table 16: CAGR (%) for gross advances as at financial year end

1 year 3 years 5 years 7 years

FNB 12.9% 14.9% 15.4% 13.4%

NED 18.3% 17.4% 13.5% 12.5%

SBNH 11.6% 11.8% 14.2% 10.6%

CGP 12.6% 14.7% 15.4% 15.7%

NED SA 7.8% 7.7% 6.7% 6.2%

SBK SA 14.7% 4.7% 5.5% 2.5%

BGA 7.3% 9.0% 6.0% 3.8%

FSR 9.3% 12.2% 12.9% 10.5%

CPI 16.7% 18.0% 34.2% 43.7%

FNBB 12.6% 12.0% 15.2% 17.8%

BBB 20.6% 15.5% 11.3% 9.6%

SCB -10.5% 12.9% 15.6% 12.6%

SCZ 12.6% 16.6% 24.5% 19.0%

Zanaco 11.6% 10.6% 14.3% 18.7%


Growth by Loan Category – Local Banks

Advances growth has slowed significantly since January

2016. SBNH and NED numbers only reflect what happened

up to 31 December 2015.

CGP has grown all its loan categories at double digits, with

mortgage loans significantly faster at 17.2%, over the last 5

years. Over the last year, however, term loans and overdrafts

showed the highest growth as mortgage loan growth slowed.

Table 17: CGP - CAGR (%) as at as at 30 June 2016

Loan category 1 year 3 years 5 years 10 years

Mortgage loans 13.2% 16.4% 17.2% 18.7%

Term loans and overdrafts 17.4% 14.7% 14.9% 12.6%

Installment sales and leases 12.2% 13.1% 12.5% 14.2%


Out of all the loan categories, FNB has grown term loans and

overdrafts the fastest over the last 5 years, at a CAGR of

24.4%.

Table 18: FNB - CAGR (%) as at 30 June 2016


Mortgage loans 10.5% 11.9% 12.5% 10.8%

Term loans and overdrafts 18.6% 22.0% 24.4% 16.7%



NED showed significant growth in the instalment sales and

leases category and mortgage loans over the last year at the

expense of term loans and overdrafts. Over the last 5 years,

instalment sales grew in excess of 20% per year.

Table 19: NED - CAGR (%) as at 31 December 2015


Mortgage loans 32.4% 18.2% 15.7% 16.5%

Term loans and over drafts -10.3% 4.9% 4.5% 2.1%



SBNH expanded all categories in double digits over the last 5

years. Mortgage loan growth, however slowed sharply to

6.8% last year. Over 5 years, term loans grew fastest at 19.7%

Table 20: SBNH - CAGR (%) as at 31 December 2015


Mortgage loans 6.8% 9.0% 10.5% 12.0%

Term loans and over drafts 18.0% 13.7% 19.7% 10.6%



15.4%

13.5%14.2% 15.4%

6.7%5.5% 6.0%

12.9%

34.2%

15.2%11.3%

15.6%

24.5%

14.3%

0%

5%

10%

15%

20%

25%

30%

35%

40%

FNB

NED

SBN

H

CG

P

NED

SA

SBK

SA

BG

A

FSR

CP

I

FNB

B

BB

B

SCB

SCZ

Zanaco

P a g e | 17


Mortgage Loans

As mentioned, mortgage loans has gained in significance over

the last decade and remain a major earnings driver for local

commercial banks. As we have done last year, we include a

section on the early arrears of the mortgage loan books. The

total mortgage loans consisting of commercial and residential

loans between the four commercial banks amounted to about

N$36.9bn and account on average for about 46.2% of total

average gross advances at the latest year-ends.

Chart 11: Total Mortgage Loans at Year-end (N$ billion)


Table 21: Mortgage loans - CAGR (%)


FNB 10.5% 11.9% 12.5% 10.8%

NED 32.4% 18.2% 15.7% 16.5%

SBNH 6.8% 9.0% 10.5% 12.0%

CGP 13.2% 16.4% 17.2% 18.7%


Table 22: Mortgage Loans (N$000)

FY13 FY14 FY15 FY16

FNB 8 442 123 9 667 352 10 694 799 11 815 279

NED 3 065 491 3 476 328 4 601 266

SBNH 6 042 297 6 616 835 7 063 798

CGP 8 499 995 9 919 583 11 850 416 13 412 655


CGP’s mortgage loan book amounted to N$13.4bn at June

2016 followed by FNB with N$11.8bn. Residential loans

account for about 56% of CGP’s mortgage loan book and

28.4% of total advances at FY16.

CGP has grown its mortgage loans at the fastest annualised

rate of 18.7% over the last 10 years. SBNH reported the

slowest CAGR growth of 12.0% over the last 10 years.

Chart 12: CAGR (%) – 5 years


Chart 12 shows CGP superior growth in mortgage loans over

the last 5 years growing by a CAGR of 17.8%. Although NED

has the smallest mortgage loan book amongst the local banks,

it has grown its book at the 2nd fastest pace over the last 5

years at a CAGR of 15.7% while SBNH reported the slowest

growth of 10.5% over the same period.



Chart 14: CAGR (%) – 1 year


4.6

7.1

11.8

13.7

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

FNB NED SBNH CGP

N$

bn

FY11 FY12 FY13 FY14 FY15 FY16

12.5%

15.7%

10.5%

17.8%

0%

5%

10%

15%

20%

FNB NED SBNH CGP

11.9%

18.2%

9.0%

17.4%

0%

5%

10%

15%

20%

FNB NED SBNH CGP

10.5%

32.4%

6.8%

15.9%

0%

5%

10%

15%

20%

25%

30%

35%

FNB NED SBNH CGP

P a g e | 18


NED’s fast growth in mortgages over the last year of 32.4%,

also boosted them to record the fastest growth (18.2%) over

the last 3 years.

Mortgage loans accounted for 45.5% of FNB’s total gross

advances in FY16 while mortgage loans accounted for 46.4%

and 41.0% of total advances for NED and SBNH, respectively.

CGP and NED have increased the share that mortgages make

up of their total advances book, while FNB and SBNH have

decreased their exposure to mortgages.

Chart 15: Mortgage Loans as % of Total Gross Advances


Chart 16 shows how mortgage loans continue to account for

a larger part of total loans over the last 10 years. Mortgage

loans as percentage of advances have gradually increased

from between 20% - 40% of total advances a decade ago to

between 40% and 55% at latest year end. Over the last 3

years, though one can see how SBNH and FNB have tapered

their exposure to home loans as % of their total advances.

Interestingly, even though CGP increased its mortgage loan

book as % of total gross advances from 36.5% in FY06 to 51.2%

in FY15. NED’s mortgage loans as a percentage of its total

gross advances increased at a faster pace over the last 10

years from 21% to 46.4% in FY15.

Chart 16: Mortgage Loans as % of total gross advances


Mortgage book age analysis

An analysis of the credit quality of the mortgage loan books,

have yielded thought-provoking results. Even though

impairment figures in the mortgage home loan books have

increased slightly since 2011, there is evidence of pressure on

the consumer in the ratio of the books which are 1 or 2

instalments behind.

For FNB, the ratio of the book in good standing has declined

from 98.1% in FY11 to 92.7% in FY16. The ratio of the

mortgage loan book which has missed one or two installments

has increased every year, from 0.7% in FY11 to 6.0% in FY15.

Chart 17: Age analysis of FNB mortgage loans


The situation looks markedly different for CGP. Information is

only available since its listing in 2012, but the overall % of the

loan book in good standing has remained above 98.0% since

then.

The model that CGP applies where each branch manager is

responsible for managing his/her own book could be the

reason for their superior early arrear numbers. Despite this,

there is also a trend of the % of early arrears, which are not

accounted for in non-performing loans, increasing every year.

51.7%

45.6%47.6% 46.2%46.4%

41.0%45.5%

51.2%

0%

10%

20%

30%

40%

50%

60%

FNB NED SBNH CGP


20%

30%

40%

50%

60%

FY0

3

FY0

4

FY0

5

FY0

6

FY0

7

FY0

8

FY0

9

FY1

0

FY1

1

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6

FNB NED SBNH CGP

98.1% 97.2% 96.9%95.5%

94.0%92.7%

0.7%1.5% 2.0%

3.5%5.0%

6.0%

1.2% 1.3% 1.1% 1.0% 1.0% 1.3%

80.0%

82.0%

84.0%

86.0%

88.0%

90.0%

92.0%

94.0%

96.0%

98.0%

100.0%

2011 2012 2013 2014 2015 2016

Good standing Early arrears Impaired

P a g e | 19


Chart 18: Age analysis of CGP mortgage loans


NED improved their loans in good standing from 93.1% of

the portfolio in FY11 to 96.0% in FY14, but this deteriorated

significantly in FY15 to 89.4%. This can be as a result of their

very aggressive mortgage advances growth of 32.4%.

Chart 19: Age analysis of NED mortgage loans


SBHN has a much lower ratio for loans in good standing than

the other Namibian banks. This could be due to timing

differences in their system. We do, still see the trend of an

increase over the last few years in early arrears even though

FY14 showed some improvement where 86.3% of their home

loans were in good standing. The impairments figure did

increase significantly in FY15 to 2.5% to 3.6%

Chart 20: Age analysis of SBNH mortgage loans


This prevailing trend of the early arrears number increasing

for the past 4 years is an indication of the continued pressure

on the Namibian consumer. It is likely that these mortgage

loan arrears do not relate to primary residences, but more to

investment properties where tenants might be struggling to

make rent payments. We are starting to see these early

arrears feeding through to larger impairment and credit loss

numbers, which are discussed in the Credit Risk section.

98.64% 98.60% 98.62% 98.16%

0.61% 0.80% 0.73% 0.97%0.75% 0.60% 0.65% 0.87%

80.0%

82.0%

84.0%

86.0%

88.0%

90.0%

92.0%

94.0%

96.0%

98.0%

100.0%

FY13 FY14 FY15 FY16


92.6%94.2% 95.0% 96.1%

94.5% 94.5%

89.4%

1.5%

1.4%2.1%

1.2%2.8% 3.2%

8.5%

5.8%4.4%

2.9% 2.7% 2.7% 2.3% 2.1%

80.0%

82.0%

84.0%

86.0%

88.0%

90.0%

92.0%

94.0%

96.0%

98.0%

100.0%

2009 2010 2011 2012 2013 2014 2015


89.0%86.5%

84.2%86.3% 85.6%

8.7%11.1%

13.5%11.2%

10.8%

2.3% 2.4% 2.3% 2.5% 3.6%

80.0%

82.0%

84.0%

86.0%

88.0%

90.0%

92.0%

94.0%

96.0%

98.0%

100.0%

2011 2012 2013 2014 2015


P a g e | 20


Term Loans and Overdrafts

Term loans accounted for 35.3% of total gross advances at the

latest year ends. Chart 21 shows FNB with the biggest market

share followed by CGP and SBNH.

Chart 21: Term Loans and Overdrafts at Year-end (N$ billion)


At the 2015 year-end FNB’s term loans and overdrafts

amounted to N$10.1bn followed by CGP with N$9.1bn.

SBNH’s term loan and overdrafts increased from N$5.6 to

N$6.7bn while NED book declined to N$2.3bn from N$2.5bn.

FNB has recorded the fastest growth in this loan category over

the last 10 years, growing at a CAGR of 16.7%, followed by

CGP at 12.0%. Last year we reported that over the same

period, NED and SBNH reported strong growth, and they

entered double digits. However, with NED’s decline over the

last year and a high base in 2005, they have slipped even

further now and have only grew by 2.1% per year over 10

years.

Table 23: Term Loans and Overdrafts - CAGR (%)


FNB 18.6% 22.0% 24.4% 16.7%

NED -10.3% 4.9% 4.5% 2.1%

SBNH 18.0% 13.7% 19.7% 10.6%

CGP 11.1% 12.6% 13.6% 12.0%


Table 24: Term Loans and Overdrafts (N$000)

FY13 FY14 FY15 FY16

FNB 5 571 007 6 879 917 8 533 575 10 123 449

NED 2 160 988 2 514 330 2 254 581 SBNH 4 392 912 5 682 512 6 707 003 CGP 6 392 838 7 180 425 8 222 379 9 133 462


FNB has grown term loans and advances the fastest over all

time periods.

Chart 22 shows that CGP’s term loans and overdrafts account

for 34% of total gross advances in FY16, steadily decreasing

over the last 5 years. FNB has increased the ratio from 27% to

39%. SBNH also showed an increase in this ratio from 31%, 5

years ago, to 39% in FY15, their last year end.

Despite growing at 13.6% over the last 5 years CGP’s term

loans and overdrafts as % of gross advances has declined,

reflecting the faster growth in other loan categories such as

mortgage loans.

Chart 22: Term Loans and Overdrafts as % of Total Advances


2.3

6.7

10.19.1

0.0

2.0

4.0

6.0

8.0

10.0

12.0

FNB NED SBNH CGP

N$

bn


26.8%

31.4% 31.5%

36.8%

22.8%

39.0%39.0%

34.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

FNB NED SBNH CGP


P a g e | 21


Instalment Sales and Leases

Total instalment sales and leases between the four local

commercial banks amounted to about N$12.9bn at the latest

year-ends. This is one area where the timing difference in the

banks’ year end make a big difference. The biggest pressure

on instalment sales occurred from January 2016, which is not

captured in the NED and SBNH figures.

Chart 23: Instalment Sales and Leases (N$billion)


Table 25: Instalment Sales and Leases (N$000)

FY13 FY14 FY15 FY16

FNB 2 638 282 3 036 975 3 357 535 3 570 858

NED 1 428 865 2 015 889 2 697 824

SBNH 2 443 019 2 901 551 3 216 421

CGP 2 597 434 2 863 806 3 348 452 3 435 162


Table 26: Instalment sales and leases – CAGR (%)


FNB 6.4% 10.6% 13.2% 9.8%

NED 33.8% 35.7% 22.5% 13.6%

SBNH 10.9% 15.0% 15.5% 10.8%

CGP 2.6% 9.8% 10.6% 13.2%


Chart 24 shows the compounded growth over 5 years. NED

reported the fastest growth over the last 5 years, growing by

a CAGR of 22.5%, followed by SBNH at 15.5%. CGP reported

the lowest growth in this category, growing by 10.6%.

As stated in our report last year, CGP’s growth in this category

has slowed over the last few years and the result is that their

5-year growth is now the slowest of all banks.



The other local banks have outperformed over the last 3 years

with NED reporting the fastest growth in this category,

growing by 35.7% followed by SBNH at 15.0%.



The instalment sales and leases accounted for 27.2% of NED’s

total gross advances, the highest among local banks.

Instalment sales account for 18.7%, 13.8% and 12.8% of total

gross advances for SBNH, FNB and CGP, respectively.

Chart 26: Instalment Sales and Leases as % of Total Gross Advances


2.7

3.23.6 3.4

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

FNB NED SBNH CGP

N$

bn


13.2%

22.5%

15.5%

10.6%

0%

5%

10%

15%

20%

25%

FNB NED SBNH CGP

10.6%

35.7%

15.0%

9.8%

0%

5%

10%

15%

20%

25%

30%

35%

40%

FNB NED SBNH CGP

15.2%18.0% 19.2%

15.9%

27.2%

18.7%

13.8% 12.8%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

FNB NED SBNH CGP


P a g e | 22


Deposits

Total deposits consist of current/transactional accounts and

investment accounts such as call deposits, fixed deposits,

money market investments, NCDs and investment funds.

Deposit growth is critical to a bank’s success, higher deposit

rates in combination with service delivery generally translates

into deposit growth. High inflation could negatively impact

deposit growth when deposits are not able to provide any real

rate of return. In a later section the loan-to-deposit ratio

analysis provides a better picture on how effectively deposits

are utilised for writing loans.

Deposit growth slowed to below 10% in the last year for SBNH

and CGP. NED showed the fastest deposit growth over the last

3 years growing at 16.5%. FNB is the current market leader

with N$28.5 deposits followed by CGP at N$24.1bn.

Table 27: Deposits - CAGR (%)


FNB 14.5% 14.3% 16.5% 13.9%

NED 17.4% 16.5% 13.9% 11.6%

SBNH 4.2% 8.7% 8.4% 10.0%

CGP 9.3% 12.3% 12.5% 14.2%


Table 28: Deposits (N$000)

FY13 FY14 FY15 FY16

FNB 19 154 760 22 335 341 24 971 829 28 594 771

NED 8 335 554 9 818 234 11 531 141

SBNH 15 850 883 17 460 602 18 185 518

CGP 17 082 611 19 065 075 22 124 149 24 171 257




Chart 27 shows that NED posted the fastest annualised

growth in deposits over the last 3 years growing at a CAGR of

16.5% followed by FNB (14.3%). SBNH growth has slowed

down and all the banks except for them grew deposits at

double digit rates over the last three years.

Chart 28: CAGR (%) – Rolling 5 year deposit growth


As can be seen from the above chart, the rolling 5 year deposit

growth has shown a downward trend from 2007. In 2007 the

5 year deposit growth CAGR for all the banks was 18% - 21%

per year. FNB and NED have improved since 2011 and SBNH

has kept this medium term growth consistent. CGP’s rolling 5

year growth has continued declining. As at the latest year

ends, all the banks have 5 year deposit rate growth of below

17%.

14.3%16.5%

8.7%

12.3%

0%

5%

10%

15%

20%

FNB NED SBNH CGP

16.5%

13.9%

8.4%

12.5%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

FNB NED SBNH CGP

P a g e | 23


Total Revenue

In this section total revenue is defined as net interest income

(NI) plus non-interest revenue (NIR) before impairment of

advances. Chart 29 shows the annualised compounded

growth in revenue over 5 years for the listed banks by

country. Among the local banks CGP reported the fastest

annualised revenue growth of 17.6% over 5 years, followed

closely by FNB at 17.0% and SBNH at 15.0%. NED reported the

lowest growth of 10.9% over the same period.

Among the SA banks, besides the growth of CPI, which comes

off a low base, FSR has shown the fastest revenue growth

(12.2%) over the last 5 years.

Chart 29: Growth in Revenue CAGR (%) – 5 years


Over a three-year period CPI recorded the fastest growth

among the SA banks, followed by BGA at 12.7%.

Table 29: Revenue - CAGR (%)


FNB 16.5% 19.5% 17.0% 15.2%

NED 17.7% 14.4% 10.9% 11.9%

SBNH 19.7% 22.0% 15.0% 10.8%

CGP 16.0% 18.8% 17.6% 16.3%

NED SA 5.2% 7.2% 8.8% 7.8%

SBK SA 2.9% 8.1% 9.2% 5.0%

BGA 6.5% 12.7% 9.4% 6.6%

FSR 8.1% 12.4% 12.2% 11.2%

CPI 16.3% 19.6% 29.5% 32.6%

FNBB 7.9% 4.5% 9.9% 11.2%

BBB 0.7% -0.6% -1.0% 1.5%

SCB -18.0% -0.9% 4.1% 2.5%

SCZ 2.4% 10.2% 13.0% 14.7%

Zanaco 9.8% 14.3% 13.4% 15.1%


Banks in Botswana have had a tough time of it over the last 3

years with declining interest rates. SCB specifically saw a drop

in revenue of 18.0%. FNBB outperformed the other listed

banks over the last 5 years growing revenue by an annualised

rate of 9.9%. Listed banks in Zambia have shown steady

revenue growth in double digits over the last 3 years.

Net Interest Income (NI)

Net interest income continued to be the major source of

income for local and other SADC banks accounting for

between 50% and 70% of total revenue at the latest year

ends. The contribution of net interest income to total income

for FNB has declined over the last 5 years from 58% to 52.3%

respectively while it increased for SBNH from 53% to 57.2% at

the latest year ends.

Chart 30: Net Interest Income as % of Total Revenue


Chart 31: Local Banks – Net Interest Income as % of Total Revenue


17.0%

10.9%

15.0%17.6%

8.8%9.2%

9.4%12.2%

29.5%

9.9%

-1.0%

4.1%

13.0%13.4%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

FNB

NED

SBN

H

CG

P

NED

SA

SBK

SA

BG

A

FSR

CP

I

FNB

B

BB

B

SCB

SCZ

Zanaco

52.3%

63.1%

57.2%60.5%

52.4%

56.9%57.2%

55.6%

62.0%

50.5%

70.7%

53.6%

64.1%59.8%

0%

20%

40%

60%

80%

FNB

NED

SBN

H

CG

P

NED

SA

SBK

SA

BG

A

FSR

CP

I

FNB

B

BB

B

SCB

SCZ

Zanaco

52.3%

63.1%

57.2%

60.5%

40.0%

45.0%

50.0%

55.0%

60.0%

65.0%

70.0%

75.0%

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

FNB NED SBNH CGP

P a g e | 24


Among the local banks CGP recorded the fastest annualised

growth in NI income over 10 years. NED reported the

slowest annualised growth over the last 5 years at 10.7%. All

the local banks managed double digit growth over 5 and 10

years. The Zambian banks continue to record strong growth

over the last 5 years, even though Zanaco struggled over the

last year.

Table 30: Net Interest Income - CAGR (%)


FNB 13.8% 18.9% 14.5% 13.1%

NED 23.9% 15.6% 10.7% 11.8%

SBNH 29.6% 24.5% 17.9% 13.1%

CGP 15.1% 16.8% 16.8% 16.6%

NED SA 4.0% 6.7% 7.5% 10.8%

SBK SA 9.0% 12.9% 12.8% 14.0%

BGA 7.9% 17.0% 10.5% 12.5%

FSR 13.3% 15.9% 16.4% 14.9%

CPI 14.8% 20.9% 36.0% 29.1%

FNBB 8.2% 1.7% 7.4% 12.6%

BBB 2.1% -1.8% -1.9% 9.2%

SCB -20.8% -6.5% -0.5% 4.9%

SCZ 14.6% 18.3% 22.2%

Zanaco -1.2% 11.4% 14.5%


Chart 32 shows the CAGR in net interest over the last 7

years. Besides CPI at 39.3%, FSR reported the fastest growth

among the SA banks at CAGR of 13.9%. Among the

Botswana banks, FNBB grew net NI at the fastest CAGR of

8.8% over the last 7 years. The banks in Botswana have had

a particularly tough time of it, with NI declining for SCB at

20.8% over the last year. Interest rates in Botswana have

decreased by 4% over the last 5 years.

Chart 32: Net Interest Income CAGR (%) – 7 years


Chart 33: Net Interest Income CAGR (%) – 5 years


Non-Interest Revenue (NIR)

In developing markets income has always been skewed

towards interest income due to higher interest rates and

spreads where in developed markets non-interest income has

generally accounted for the bulk of total revenue. For some

local banks, such as FNB and NED the reliance on non-interest

revenue is starting to grow in importance, especially during

the low/declining interest environment.

FNB increased its non–interest revenue as % of total income

over the last 5 years from 41.9% to 47.7% in FY16 while CGP

has reduced its ratio of NIR to total revenue and it has

stabilised at 39% over the last 3 years. In CGP’s case the

decline could be attributed to net interest income

outstripping non-interest income growth as a result of strong

advances growth.

Chart 34: NIR as % of Total Revenue


Table 31 shows that over the last 5 years, FNB has driven

earnings growth primarily through superior growth in non-

interest income. This is tied closely to their drive of digital

channels in transacting. In contrast, SBNH’s earnings were

driven primarily by net-interest income over the last 5 years,

while CGP and NED has grown the two streams at an equal

pace.

12.1%9.9%

13.0%16.6%

5.7%6.3%8.2%13.9%

39.3%

8.8%

2.1%

-2.1%

15.6%13.6%

-10%

0%

10%

20%

30%

40%

50%

FNB

NED

SBN

H

CG

P

NED

SA

SBK

SA

BG

A

FSR

CP

I

FNB

B

BB

B

SCB

SCZ

Zanaco

14.5%10.7%

17.9%16.8%

7.5%12.8%

10.5%

16.4%

36.0%

7.4%

-1.9%-0.5%

22.2%

14.5%

-5%0%5%

10%15%20%25%30%35%40%

FNB

NED

SBN

H

CG

P

NED

SA

SBK

SA

BG

A

FSR

CP

I

FNB

B

BB

B

SCB

SCZ

Zanaco

47.7%

36.9%

42.8%39.5%

20%

25%

30%

35%

40%

45%

50%

55%


FNB NED SBNH CGP

P a g e | 25


Table 31: Local Banks – NI vs. NIR – CAGR (%)

FNB 1 year 3 years 5 years 10 years

Net interest 13.8% 18.9% 14.5% 13.1%

Non-interest 19.6% 20.2% 20.0% 15.9%

NED 1 year 3 years 5 years 10 years

Net interest 23.9% 15.6% 10.7% 11.8%

Non-interest 8.4% 12.5% 11.2% 15.0%

SBNH 1 year 3 years 5 years 10 years

Net interest 29.6% 24.5% 17.9% 13.1%

Non-interest 8.6% 19.0% 11.7% 13.0%

CGP 1 year 3 years 5 years 10 years

Net interest 15.1% 16.8% 16.8% 16.6%

Non-interest 17.5% 22.2% 18.8% 16.0%


FNB has grown its NIR at an annualised rate of 20.0% over

the last 5 years, compared to NI growth of 14.5% over the

same period. CGP reported a CAGR of 18.8% in NIR against

a 16.8% annualised growth in NI.

Chart 35: Local banks : NI vs. NIR – CAGR (%) – 5 years


For the SA banks, the growth numbers in CPI’s income

streams dwarfs that of the four longer established banks. All

of the banks, except NED SA reports higher NI growth than

NIR growth over 5 years. This is due to the recent rising

interest rate environment. FSR has shown compounded

annual growth of 16.4% in NI and NIR growth of 8.0%.

Chart 36: Local banks : NI vs. NIR – CAGR (%) – 5 years


As interest rates in Botswana kept falling over the last 5

years, annualised growth in total revenue diverged between

NI and NIR. For all of the banks NIR outpaced NI significantly,

and only FNB Botswana had positive growth in NI.

Chart 37: Botswana Banks : NI vs. NIR – CAGR (%) – 5 years


Chart 38: Zambian banks : NI vs. NIR – CAGR (%) – 5 years


14.5%

10.7%

17.9%16.8%

20.0%

11.2% 11.7%

18.8%

-5%

5%

15%

25%

FNB

NED

SBN

H

CG

P

NI NIR

7.5%

12.8%10.5%

16.4%

36.0%

10.5%7.8% 8.1% 8.0%

18.1%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

NED

SA

SBK

SA

BG

A

FSR

CP

I

NI NIR

7.4%

-1.9%-0.5%

12.9%

1.3%

11.7%

-5%

0%

5%

10%

15%

20%

FNB

B

BB

B

SCB

NI NIR

22.2%

14.5%

3.1%

12.0%

0%

5%

10%

15%

20%

25%

SCZ

ZanacoNI NIR

P a g e | 26


Non-Interest Revenue as % of Operating Cost

Chart 39 shows non-interest revenue as a % of operating cost

for the banks under review. Most banks would ideally prefer

to cover operating cost with non-interest income. Local and

SA banks, except for FNB Namibia, have not been able to

achieve this over the period under review. FSR covers

operating cost with continuous diversification into new non-

interest revenue streams (premium income).

Chart 39: Non-Interest Revenue as % of operating cost


FNB showed a steep increasing trend from 72.7% to 106.3%

over the last 10 years while SBNH is showing a diminishing

trend since FY08.

Chart 40: Local Banks – NIR as % of Operating Cost


The trend for the SA banks have mostly been downward since

FY08, even though NED SA increased the NIR as % of operating

costs to 83.4% from 79% in FY08.

Chart 41: SA Banks – NIR as % of Operating Cost


Fee and Commission (F&C) Income

All the local banks have shown a slight decline in F&C income as a %

of non-interest over the last 5 years. A similar trend, although more

benign has been witnessed for SA and other SADC banks. F&C

income accounted for between 64% and 85% of non-interest income

at latest year end for the local banks and SA banks.

CPI is the exception since they derive all their NIR from fees.

Generally, dividends, revenue from exchange and securities trading

make up the remainder of NIR.

Chart 42: F&C Income as % of NIR


106.3%

65.5%73.3%

80.8%83.4%

81.3%76.4%

85.5%84.4%

96.5%

53.0%57.9%

58.7%

54.7%

0%

20%

40%

60%

80%

100%

120%

FNB

NED

SBN

H

CG

P

NED

SA

SBK

SA

BG

A

FSR

CP

I

FNB

B

BB

B

SCB

SCZ

Zanaco

106.3%

80.8%

73.3%65.5%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

110.0%

120.0%


FNB NED SBNH CGP

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%


NED SA SBK SA BGA

FSR CPI

85.1%

73.7%74.5%

69.5%71.9%

64.4%70.0%

78.3%

100.0%

67.2%71.8%

61.7%62.8%

71.5%

0%

20%

40%

60%

80%

100%

120%

FNB

NED

SBN

H

CG

P

NED

SA

SBK

SA

BG

A

FSR

CP

I

FNB

B

BB

B

SCB

SCZ

Zanaco

P a g e | 27


Chart 43: Local Banks – F&C Income % NIR


F&C income for local banks have grown at a faster rate than SA banks

over the last 5 years and is now at a similar or higher level of % of

NIR as the SA banks. Among the local banks, FNB reported the fastest

growth in F&C income over the last 5 years with a CAGR of 18.2%

followed by CGP at 17.9% and NED at 15.3%. SBNH reported the

lowest growth in fee and commission income of 11.2% over the same

period.

Table 32: Fee and Commission Income – CAGR (%)


FNB 13.5% 17.7% 18.2% 18.5%

NED -2.7% 20.9% 11.2% 18.0%

SBNH 12.4% 13.9% 15.3% 12.7%

CGP 21.7% 18.2% 17.9% 15.5%

NED SA 7.3% 7.6% 9.9% 10.5%

SBK SA 3.2% 8.1% 8.5% 9.9%

BGA 8.0% 9.6% 7.0% 7.7%

FSR 8.1% 8.4% 9.6% 11.2%

CPI 20.1% 15.7% 18.1% 74.3%

FNBB 14.8% 11.1% 11.3% 18.3%

BBB -11.5% -0.6% -1.4% 7.6%

SCB -6.9% 13.4% 11.9% 11.2%

SCZ -6.2% 6.4% 13.9%

Zanaco 5.4% 11.4% 10.5%

Source: PSG, Annual Reports, No Data (ND)

Generally, fee and commission income is highly correlated to higher

economic activity, which fuels greater volumes of transactions.

Namibian banks have continued to grow F&C income strongly on the

back of strong volume growth and digital channels, rather than

through increased pricing.

Chart 44: F&C Income – 5 years (CAGR %)


Cost Measures

Operating Expenditure (Opex)

Operating expense is the non-interest expense of a bank which

includes staff cost, depreciation, IT cost, directors fees and other

overhead costs. Table 33 below presents the annualised growth in

operating cost. Looking at the local banks over the last 7 years, CGP

reported the highest growth in operating growing by a CAGR of

12.7% followed by SBNH at 11.0%, above the local inflation rate and

the average growth for SA banks. Only NED kept its 5 year CAGR at

single digit levels by containing staff cost.

Table 33: Operating Cost - CAGR (%)

1 year 3 years 5 years 7 years 10 years

FNB 16.0% 14.5% 13.0% 10.7% 12.0%

NED 17.6% 11.7% 9.7% 9.4% 13.0%

SBNH 12.5% 14.8% 11.0% 11.0% 13.3%

CGP 13.2% 15.7% 12.9% 12.7% 15.0%

NED SA 6.5% 8.4% 9.7% 9.8% 9.6%

SBK SA 10.4% 8.7% 8.3% 7.8% 12.1%

BGA 5.1% 13.3% 9.4% 8.6% 11.4%

FSR 11.4% 12.4% 11.4% 8.8% 10.5%

CPI 13.9% 15.0% 20.1% 23.0% 24.7%

FNBB 38.7% 16.6% 15.7% 17.2% 19.1%

BBB 1.1% 5.1% 5.8% 3.7% 8.4%

SCB 6.1% 8.6% 11.5% 11.8% 14.4%

SCZ 21.5% 22.3% 17.2% 11.6% ND

Zanaco 29.6% 18.1% 16.8% 15.8% ND


Growth in opex cannot be viewed in isolation and must be

interpreted in relation to asset growth (next section).

85.1%73.7%74.5%

69.5%

40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

90%


FNB NED SBNH CGP

18.2%

11.2%

15.3%

17.9%

9.9%8.5%

7.0%

9.6%

18.1%

11.3%

-1.4%

11.9%13.9%

10.5%

-5%

0%

5%

10%

15%

20%

FNB

NED

SBN

H

CG

P

NED

SA

SBK

SA

BG

A

FSR

CP

I

FNB

B

BB

B

SCB

SCZ

Zanaco

P a g e | 28


Chart 45: Opex – 5 years (CAGR %)


Opex vs. Asset Growth

As mentioned in the previous section growth in opex cannot be

interpreted in isolation without considering other variables such as

asset growth and advances growth. In order to maintain a

sustainable ROE it is important that the growth in opex must not

be faster than the growth in assets in the long-term (>10 years). The

chart below shows the CAGR (%) in opex over the last 10 years in

relation to asset growth. Among the local banks, NED and SBNH did

not grow assets faster than operating costs.

Chart 46: Opex vs. Total Asset Growth – CAGR (%) - 10 years

Source: PSG, Annual Reports, UBS, Bloomberg

Local Banks

FNB and CGP posted faster asset growth compared to growth in

operating cost over the last 10 years. While the difference is not that

significant, it could to some extent explain the decline in SBNH’s ROE

over the past 10 years. This seems to have worsened over the past 3

years.

Chart 47: CGP – Opex vs. Asset growth (CAGR %)


Chart 48: FNB – Opex vs. Asset Growth (CAGR %)


Chart 49: NED – Opex vs. Asset growth (CAGR %)


13.0%

9.7%11.0%

12.9%

9.7%8.3%9.4%

11.4%

20.1%

15.7%

5.8%

11.5%

17.2%16.8%

0%

5%

10%

15%

20%

25%

FNB

NED

SBN

H

CG

P

NED

SA

SBK

SA

BG

A

FSR

CP

I

FNB

B

BB

B

SCB

SCZ

Zanaco

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

FNB

NED

SBN

H

CG

P

NED

SA

SBK

SA

BG

A

FSR

CP

I

FNB

B

BB

B

SCB

OPEX 10 years Asset 10 years

13.2% 13.6%

15.7%

12.9% 12.7%15.0%

13.0%

15.3% 15.6% 15.1% 14.4%15.8%

0%2%4%6%8%

10%12%14%16%18%20%

1 year 2 years 3 years 5 years 7 years 10 years

Operating cost Asset growth

16.0%15.1% 14.5%

13.0%

10.7%12.0%

14.8% 14.1%

15.0%14.8%

13.5% 13.5%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%



17.6%

13.1%11.7%

9.7%9.4%

13.0%

16.5%17.6%

16.3%

14.1%13.3%

12.5%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%



P a g e | 29


Chart 50: SBNH – Opex vs. Asset growth (CAGR %)


SA Banks

Except for FSR and SBK, all the SA banks grew assets at a faster

annualised rate than opex over the last 10 years.

Chart 51: BGA – Opex vs. Asset Growth (CAGR %)

Source: PSG, UBS

Chart 52: FSR – Opex vs. Asset growth (CAGR %)

Source: PSG, UBS, Bloomberg, Annual reports

Chart 53: NED SA – Opex vs. Asset Growth (CAGR %)

Source: PSG, UBS, Bloomberg, Annual Reports

SBK SA has grown its assets grew at a CAGR of 8.2% over the last 5

years and this asset growth has lagged behind operating cost

growth over all periods.

12.5%13.5%

14.8%

11.0% 11.0%

13.3%

9.9%9.2% 9.7% 10.7% 10.5% 11.0%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%



5.1%6.2%

13.3%

9.4% 8.6%

11.4%

15.5%

9.0%

12.1%9.5%

5.7%

12.7%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%



11.4% 10.9%12.4%

11.4%

8.8%

10.5%

8.5%10.2% 9.9% 10.4%

5.1%6.7%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%



6.5%8.0% 8.4%

9.7% 9.8% 9.6%

14.4%

11.1% 10.7%

8.7%7.3%

10.1%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%



P a g e | 30


Chart 54: SBK SA – Opex vs. Asset Growth (CAGR %)

Source: PSG, UBS

Chart 55: CPI – Opex vs. Asset Growth (CAGR %)


The shining star in the Opex vs Asset growth ratio, CPI have, in the

last financial year, returned to asset growth outpacing operating

cost.

Botswana and Zambian Banks

BBB reported consistent faster growth in assets relative to costs

over the last 3 years, which is contributing to improving the 10 year

difference in asset and opex growth.

Chart 56: BBB – Opex vs. Asset Growth (CAGR %)


FNBB’s very high growth in opex over the last year of 38.7% has

caused all of the reporting periods to indicate opex growth being

higher than asset growth. This is due to intensive focus now being

placed on the regulatory environment in Botswana, requiring the

Bank to invest substantially in the risk, compliance and regulatory

functions. The cost to the Bank of maintaining and upskilling

adequate risk and compliance capacity and of responding to new

requirements is reflected by the increased human resource costs.

Chart 57: FNBB – Opex vs. Asset Growth (CAGR %)


10.4% 10.6%8.7% 8.3%

7.8%

12.1%

3.9%

8.2% 8.2% 8.2%

4.0%

9.8%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%



13.9%

19.0%

15.0%

20.1% 23.0%24.7%

16.7%16.7% 18.0%

34.2%

43.7%48.0%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%



1.1%2.9%

5.1%5.8%

3.7%

8.4%

19.6%

11.8%

8.1%

4.7%

0.8%

8.8%

0%2%4%6%8%

10%12%14%16%18%20%



38.7%

17.7% 16.6% 15.7%17.2%

19.1%

4.4%

11.4% 11.5% 10.7%8.4%

11.7%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%



P a g e | 31


Chart 58: SCB – Opex vs. Asset Growth (CAGR %)


Over the last 7 years, SCZ has been growing its assets (19.7%) at a

faster pace than opex while SCB has seen 7 year opex growth far

exceed asset growth.

Chart 59: SCZ – Opex vs. Asset Growth (CAGR %)


Chart 60: Zanaco– Opex vs. Asset Growth (CAGR %)


Cost-to-Income

The cost-to-income ratio is a measure of cost efficiency relative to

total operating income after the impairment of advances. When

total income is growing faster than operating cost, a bank can

achieve improved cost efficiency resulting in a gradually declining

cost-to-income ratio over time. Improved cost efficiency has a

positive impact on profits, meaning there exists an inverse

relationship between the cost-to-income ratio and the bank's

profitability.

A generally accepted rule of thumb is that a ratio under 60% is

favourable. Chart 61 shows that most of the local and SA banks are

operating at or below this level. Among the local banks FNB and CGP

are the most cost efficient banks at 43.6% and 50.2% at FY16 while

NED is at 59.6%

Chart 61: Cost-to-Income

Source: PSG, Annual Reports, Bloomberg, Annual reports

Chart 62: Local Banks – Cost-to-Income (%)


6.1%

10.5%

8.6%

11.5% 11.8%

14.4%

2.6%

14.4%

12.0%

4.4%5.4%

10.7%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%



21.5%

24.5%22.3%

17.2%

11.6%

30.7%

25.5%

18.6%

13.5%

19.7%

0%

5%

10%

15%

20%

25%

30%

35%



29.6%

20.3%18.1%

16.8% 15.8%19.2%

6.8%

11.0%

17.7%

15.4%

0%

5%

10%

15%

20%

25%

30%

35%



43.6%

59.6%60.9%

50.2%59.2%

61.1%58.2%

53.2%

34.1%

58.4%

68.1%

91.1%

64.2%

80.9%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

FNB

NED

SBN

H

CG

P

NED

SA

SBK

SA

BG

A

FSR

CP

I

FNB

B

BB

B

SCB

SCZ

Zanaco

43.6%

59.6%

60.9%

50.2%

40%

50%

60%

70%

80%


FNB NED SBNH CGP

P a g e | 32


Local banks have generally improved cost efficiencies over the last 5

years. SBNH have also improved their ratio over the last two years,

after deteriorating from FY08. The SA banks have consistently kept

their cost-to-income ratios between 50% and 60% over the last 5

years. SBK SA has seen its ratio increase to 61.1% over the last year.

CPI is the outlier which reduced its cost-to-income ratio to below

35%

Chart 63: SA Banks – Cost-to-Income (%)


In contrast, the Botswana banks have showed some deterioration in

cost efficiency over the last 5 years, especially BBB where the cost-

to income ratio increased significantly from 44.9% in FY10 to 68.1%

in FY15. SCB’s ratio has increased to over 90% in the last year with

the decrease in NI and NIR coupled with the increase in opex. FNBB

is the most cost efficient bank at 58.4% of total income.

Chart 64: Botswana Banks – Cost-to-Income (%)


After reporting significant improvement in cost efficiencies from

FY08 to FY12, the Zambian banks have seen their cost-to-income

ratios increase over the last 3 years.

Chart 65: Zambian Banks – Cost-to-Income (%)


20%

30%

40%

50%

60%

70%


NED SA SBK SA BGA FSR CPI

58.4%68.1%

91.1%

0%10%

20%

30%

40%

50%60%

70%80%

90%

100%


FNBB BBB SCB

30%

40%

50%

60%

70%

80%

90%


SCZ Zanaco

P a g e | 33


Staff Cost

Staff cost accounted for between 48.6% (NED) and 55.5%

(CGP) of operating expenses at the latest year end. SBNH’s

staff cost to operating expenses declined from 55.2% in FY12

to 49.6% in FY15, whilst CGP’s staff cost as % of operating

expenses increased from 45.3% in FY08 to 55.5% in FY16, the

highest among the local banks.

The rise in the CGP’s staff cost contribution to opex was

primarily as a result of a strong CAGR of 15.3% in staff cost

over the last 10 years, the highest among the banks, even

though FNB’s staff numbers increased by more than CGP’s.

SBNH contribution of staff cost to operating expenditure

decreased from 54.1% to 50.1% over the last 5 years.

Table 34: Staff Cost as % of Operating Expenses

FY12 FY13 FY14 FY15 FY16

FNB 52.9% 52.0% 51.7% 52.7% 52.5%

NED 43.2% 44.3% 47.9% 48.6%

SBNH 55.2% 53.1% 50.1% 49.6%

CGP 57.4% 55.0% 51.5% 54.7% 55.5%

NED SA 55.8% 56.5% 56.5% 54.8%

SBK SA 55.6% 58.9% 53.6% 54.4%

BGA 50.8% 52.6% 53.9% 55.5%

FSR 57.5% 58.6% 58.7% 59.4% 59.4%

CPI 52.8% 50.9% 47.9% 53.8% 53.6%

FNBB 50.6% 49.7% 50.5% 42.6% 45.8%

BBB 56.3% 48.6% 53.4% 45.7%

SCB 36.7% 38.6% 37.4% 31.2%

SCZ 61.0% 58.6% 59.3% 54.7%

Zanaco 49.5% 48.8% 50.6% 45.9%


Chart 66 shows that staff cost as % of operating cost diverged

over the last financial year for local banks. It ranges from

48.6% for NED to 55.5% for CGP.

Chart 66: Staff Cost as % of Operating Expenses


FNB showed significant growth in the number of employees

over the last 10 years, the total number of permanent

employees increased by 68.2%. Among the local banks, FNB is

the largest employer with 2 411 permanent employees at

FY16, followed by SBNH at 1 549 and CGP at 1 520.

Table 35: Growth in Employees (%)

5 years 10 years

Number employees

– latest year end

FNB 33.4% 68.2% 2 411

NED 36.1% 43.0% 732

SBNH 24.5% 40.3% 1 549

CGP 8.2% 53.2% 1 520

NED SA 13.8% 41.1% 31 312

SBK SA 13.0% 50.5% 54 361

BGA 11.6% 22.3% 41 018

FSR 32.9% 45.2% 46 009

CPI 114.6% 501.8% 11 440

FNBB 11.4% 65.4% 1 201

BBB -10.3% 28.4% 1 239

SCB ND ND 779

SCZ 13.2% ND 736

Zanaco 20.4% ND 1 392

Source: PSG, Annual Reports, ND = Not Disclosed

Table 36 shows the annualised growth in staff cost

stretching over different time periods. CGP overtook FNB to

report the highest growth in staff cost over 10 years of

15.3%. Previously, some of FNB’s growth could be explained

by the merger cost inherit with the Swabou merger in

2003/4 and their expanding insurance business, but this is

not included in the 10 year figure currently.

Table 36: Staff Cost – CAGR (%)


FNB 15.4% 14.8% 12.8% 12.3%

NED 19.4% 16.1% 11.5% 13.2%

SBNH 11.3% 10.7% 12.1% 12.9%

CGP 15.0% 16.0% 13.4% 15.3%

NED SA 3.3% 7.8% 10.2% 10.4%

SBK SA 12.0% 7.9% 8.7% 11.6%

BGA 8.1% 16.7% 10.8% 10.8%

FSR 11.3% 12.9% 11.8% 11.6%

CPI 13.6% 17.0% 20.4%

FNBB 49.0% 13.5% 14.2%

BBB -13.5% -1.9% 5.1% 10.6%

SCB -11.7% 2.8% 7.7% 9.3%

SCZ 12.1% 18.0% 15.7%

Zanaco 17.7% 15.2% 16.2%


52.5%48.6%

49.6%55.5%

54.8%54.4%

55.5%59.4%

53.6%

45.8%45.7%

31.2%

54.7%

45.9%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

FNB

NED

SBN

H

CG

P

NED

SA

SBK

SA

BG

A

FSR

CP

I

FNB

B

BB

B

SCB

SCZ

Zanaco

P a g e | 34


For the Botswana banks, it is interesting to note that

Barclays and SCB laid off workers and their staff cost

declined over the last year while FNB employed more staff

for risk and compliance, increasing their staff cost by 49.0%.

Table 36 shows the growth in other operating expenses

(Operating expenses less staff cost). It is only NED that has

grown other operating expenses at single digits over the last

3, 5 and 7 years. All the other banks show double digit

growth in this number over all measured periods.

Table 37: Other Operating Expense – CAGR (%)


FNB 16.7% 14.2% 13.3% 9.1% 11.8%

NED 16.0% 8.1% 8.1% 9.7% 12.7%

SBNH 13.8% 19.4% 10.0% 10.6% 13.8%

CGP 11.1% 15.2% 12.3% 10.5% 14.6%

NED SA 10.6% 9.2% 9.0% 8.9% 8.6%

SBK SA 8.5% 9.6% 7.8% 8.3% 12.7%

BGA 1.5% 9.6% 7.8% 8.4% 12.2%

FSR 11.6% 11.7% 10.8% 5.5% 9.2%

CPI 14.3% 12.9% 19.8% 20.2% 15.5%

FNBB 31.1% 19.6% 17.0% 18.1% 20.0%

BBB 17.9% 13.0% 6.4% 2.0% 6.8%

SCB 16.7% 11.7% 13.4% 16.5% 17.9%

SCZ 35.1% 28.5% 19.3% 12.5%

Zanaco 41.8% 20.9% 17.2% 6.1%


Staff Cost per Employee

Chart 67 shows the staff cost per employee (converted to N$)

for the local and SA banks under review at the latest year-end.

Staff cost includes salaries, pension and other benefits.

Among the local banks, CGP and SBNH reported the highest

cost per employee at the latest year end, however this must

be seen in relation to the growth in profit per employee and

growth over time.

Chart 67: Staff Cost per Employee (N$000)


In order to better illustrate each bank’s growth in staff cost

per employee over the last 13 years, we constructed an index

with 2003 as base year (base year = 100). Chart 68 shows the

growth in staff cost per employee for the local banks relative

to the Namibia Consumer Price Index (NCPI). SBNH recorded

the highest cost per employee growth over the last 10 years,

significantly above the local inflation rate and SA peers.

CGP reported the lowest growth in staff cost per employee

over the last 10 years, in line with the local inflation rate which

contributed to the bank’s superior earnings growth over the

period.

Chart 68: Local Banks – Staff Cost per Employee Index (2003 =100)


298 320 336375

454507

464517

211

298 289 284

481

360

0

100

200

300

400

500

600

FNB

NED

SBN

H

CG

P

NED

SA

SBK

SA

BG

A

FSR

CP

I

FNB

B

BB

B

SCB

SCZ

Zanaco

371

450

248 285

193

50

100

150

200

250

300

350

400

450

500

FY0

3

FY0

4

FY0

5

FY0

6

FY0

7

FY0

8

FY0

9

FY1

0

FY1

1

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6

FNB NED SBNH

CGP NCPI Index

P a g e | 35


Chart 69: SA Banks – Staff Cost per Employee Index (2003 =100)

Source: PSG, Bloomberg, Annual reports

Staff Cost as % of Total Revenue – Compensation Ratio

Chart 70 shows the staff cost as a % of total net revenue

(compensation ratio). A lower ratio is perceived as more

favourable. Among the local banks SBNH has the highest

compensation ratio at 28.9%. SA banks’ compensation ratios

have all increased to above 30%, except for CPI, which also

saw its ratio increasing from 17% in FY15 to 23.5% in FY16. As

always, the ratio has to be seen in context of other variables

and measured over time (long-term trend).

Chart 70: Staff Cost as % of Total Revenue

Source: PSG, Annual Reports, Bloomberg

Chart 71 and 72 show the compensation ratio for the local and

SA banks over the last 5 years. Historically, banks set aside on

average about 30% of net revenues to pay staff. CGP and FNB

both showed a drop in this ratio over the last 3 years due to

significant revenue growth.

SBNH has made great strides during the past three years and

reported decrease in its compensation ratio from 38.2% to

31.1%.

Chart 71: Local Banks – Compensation Ratio (%)


SA banks have kept this ratio steady over the last 5 years and

there is not much difference between the banks. The

exception, again, is CPI which has maintained a low ratio

historically but has seen a spike in the last year.

Chart 72: SA Banks – Compensation Ratio (%)


224 238

283

254 260

190

50

100

150

200

250

300

FY0

3

FY0

4

FY0

5

FY0

6

FY0

7

FY0

8

FY0

9

FY1

0

FY1

1

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6

NED SA SBK SA BGA

FSR CPI SA CPI

23.5%27.4%

28.9%27.2%

31.4%

32.3%

31.1%30.9%

23.5%23.5%

25.2%25.0%

33.5%33.7%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

FNB

NED

SBN

H

CG

P

NED

SA

SBK

SA

BG

A

FSR

CP

I

FNB

B

BB

B

SCB

SCZ

Zanaco

20%

23%

26%

29%

32%

35%

38%

41%

44%

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

FNB NED SBNH CGP

15%

18%

21%

24%

27%

30%

33%

36%


NED SA SBK SA BGA

FSR CPI

P a g e | 36


Staff Cost as % of Net Interest Income

The relationship between staff cost and net interest revenue

is not that obvious. However, a declining ratio over time is

favourable and would suggest either more efficient net

interest growth or a slowdown in staff cost.

Chart 73: Staff Cost as % of Net Interest Income


Chart 74 shows that SBNH’s staff cost to net interest income

ratio improved from FY12 to FY15. This could be attributed to

slower growth in staff cost (10.7%) combined with net interest

income CAGR of 24.5% over the last 3 years. It is still the

highest among the local and other banks under review.

Local banks have on average lower staff cost ratios relative to

SA peers. It is our view that lower local staff cost ratios do not

necessarily point to better cost efficiency but rather to

superior local net interest income growth. Historically, the

Botswana banks had even lower ratios than local banks

attributed to their wider interest rate spreads, but the recent

decrease in interest income has increased the ratios there as

well.

Chart 74: Local Banks – Staff cost-to-NI (%)


Chart 75: SA Banks – Staff cost- to-NI (%)


45.0%43.4%

50.5%44.9%

59.9%56.7%

54.4%55.6%

25.7%

46.6%

35.6%

46.7%52.2%

56.5%

0%

10%

20%

30%

40%

50%

60%

70%

FNB

NED

SBN

H

CG

P

NED

SA

SBK

SA

BG

A

FSR

CP

I

FNB

B

BB

B

SCB

SCZ

Zanaco

30%

36%

41%

47%

52%

58%

63%

69%

74%

80%


FNB NED SBNH CGP

15%

18%

21%

24%

27%

30%

33%

36%



P a g e | 37


Profitability Net Profit per Employee

Profit per employee is another measure of financial

performance and is a good proxy for the return on intangibles

unlike ROIC which is a measure of the return on tangible

investments. Chart 76 shows the net profit per employee for

the local and SA banks SBNH reported the lowest net profit

per employee of N$234k among the local banks at the latest

year end. FSR is the most efficient among the SA banks at

N$411k per employee.

Chart 76: Earnings per Employee (N$000)


Chart 77 shows, except for SBNH, local banks seemed to have

improved income efficiency over the last 5 years, especially NED

which has significantly improved its ratio from N$58k to N$336k

by streamlining its staff compliment in 2010.

Chart 77: Local Banks – Net Profit per Employee (N$000)


The SA banks also improved significantly over the last 3 years

and appear to be slightly more income efficient than local

banks even though the difference is becoming smaller.

Chart 78: SA Banks – Net profit per Employee (N$000)


Earnings Growth

The chart below shows the earnings converted to N$ at the

average annual exchange rate between local, Botswana and

Zambia banks for their latest financial year ends. FNB

reported the highest net profit locally of N$1 198m, followed

by CGP at N$905m. FNBB earned N$675m in FY16. Among SA

banks, SBK SA produced the highest earnings number of

R23.7bn in FY15 followed by FSR at R22.8bn for FY16.

Chart 79: Local, Botswana and Zambian Banks – Earnings Attributable (N$ millions)


Chart 80: SA Banks – Earnings Attributable (N$ millions)


357336

234

411

316 329 322

442

197

0

50

100

150

200

250

300

350

400

450

500

FNB

NED

SBN

H

CG

P

NED

SA

SBK

SA

BG

A

FSR

CP

I

050

100150200250300350400450500550


FNB NED SBNH CGP

0

50

100

150

200

250

300

350

400

450

500



1 198

273

524

905

675

328

60

274180

0

200

400

600

800

1 000

1 200

1 400

FNB NED SBNH CGP FNBB BBB SCB SCZ Zanaco

10 831

23 754

14 331

22 855

3 213

0

5 000

10 000

15 000

20 000

25 000


P a g e | 38


The two listed local banks, FNB and CGP, have outperformed

the two unlisted banks in terms of earnings CAGR over 3, 5, 7

and 10 years. This was influenced by NED underperforming

over the last financial year. The Botswana and Zambian banks

have had a tough time of it over the last year with earnings

plunging for all these banks. In the case of Barclays Botswana

and Standard Chartered Botswana, this has all but wiped out

earnings growth for the last 10 years.

Table 38: Earnings Attributable – CAGR (%)


FNB 22.0% 26.2% 20.9% 19.0% 16.7%

NED 10.8% 19.6% 14.0% 18.1% 12.0%

SBNH 44.7% 20.2% 7.0% 2.5% 12.0%

CGP 20.2% 22.4% 22.6% 21.8% 21.5%

NED SA 9.6% 12.7% 16.5% 8.9% 12.2%

SBK SA 32.7% 13.2% 16.5% 7.8% 10.2%

BGA 8.4% 19.9% 12.0% 4.3% 11.9%

FSR 7.4% 14.0% 15.8% 19.7% 10.0%

CPI 26.2% 26.6% 38.1% 40.3% 47.2%

FNBB -28.7% -10.4% -2.6% 3.1% 7.2%

BBB -22.4% -16.7% -14.6% -6.6% 1.0%

SCB -85.2% -44.6% -26.7% -22.9% -13.4%

SCZ -26.6% -6.8% 6.1% 32.1%

Zanaco -17.8% -9.0% 0.9% 12.4%


SBNH had a bumper year for earnings in FY15 after it struggled

to gain momentum over the previous 5 years. All the SA

banks, except SBNH and CPI, reported single digit growth over

the corresponding period.

Chart 81: Earnings Attributable – 7 years CAGR (%)


Over the last 5 years FNB and CGP grew earnings in excess of

20%. SBNH has lagged significantly over 5 and 7 years.

NED grew earnings at CAGR of 14% over the 5-year period

while CGP reported a CAGR of 22.6%. SCZ grew earnings by

CAGR of 6.1% over the last 5 years.

Chart 82: Earnings attributable – 5 years CAGR (%)


19.0%18.1%

2.5%

21.8%

8.9%7.8%

4.3%

19.7%

40.3%

3.1%

-6.6%

-22.9%

32.1%

12.4%

-25.0%

-15.0%

-5.0%

5.0%

15.0%

25.0%

35.0%

45.0%FN

B

NED

SBN

H

CG

P

NED

SA

SBK

SA

BG

A

FSR

CP

I

FNB

B

BB

B

SCB

SCZ

Zanaco

20.9%14.0%

7.0%

22.6%

16.5%16.5%

12.0%15.8%

38.1%

-2.6%

-14.6%

-26.7%

6.1%0.9%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

FNB

NED

SBN

H

CG

P

NED

SA

SBK

SA

BG

A

FSR

CP

I

FNB

B

BB

B

SCB

SCZ

Zanaco

P a g e | 39


Earnings per Share (EPS)

Chart 83 shows the EPS (converted to N$) for FY14, FY15 and

FY16 at various year-ends. All the local banks improved EPS in

the latest financial year.

Chart 83: EPS (N$cps) – FY14, FY15 and FY16


Chart 84 shows the y/y growth for the last 5 years. SBNH’s

strong growth for FY15 is attributable to a big reduction of

24.2% in impairments and interest income growth exceeding

interest expenditure growth by 3.0%. Trading income growth

for SBNH was also very high at 31.5%. The other banks

reported double digit growth every year for the last 5 years.

Chart 84: Local Banks – EPS Growth (y/y %)


On balance the SA banks performed well over the last five

years, NED SA and FSR being slightly more consistent than the

other banks, but with declining EPS growth. BGA EPS declined

by 9.3% in FY12 on the back of a significant rise in bad debts.

CPI has also seen growth in the last two years which is more

in line with that of the mature banks.

Chart 85: SA Banks – EPS Growth (y/y %)


Table 39 shows the annualised compounded growth over

different time periods. Please note that the EPS for CGP was

adjusted backward for the 4:1 share split for comparison

purposes and EPS for Zambia banks could be difficult to

interpret due to bonus shares issued and a change in Zambian

Kwacha 1000 (ZMK) to 1 ZMW.

What stands out is the poor performance of SBNH with single

digit EPS growth over the last 5 years. All the other local banks

have grown EPS with more than 10% on the back of strong

non-interest income growth and effective cost management.

Among the Botswana banks, only FNBB has posted positive

annualised growth over the last 10 years. CPI, NED SA and FSR

outshine the other SA banks with double digit growth over 10

years.

Table 39: EPS – CAGR (%)


FNB 22.9% 26.8% 21.5% 17.1%

NED 10.8% 19.6% 14.0% 11.4%

SBNH 44.7% 20.2% 7.0% 12.0%

CGP 20.6% 18.6% 19.6% 19.8%

NED SA 6.7% 11.1% 14.8% 10.1%

SBK SA 28.8% 14.2% 14.2% 7.7%

BGA 10.3% 11.7% 8.6% 7.5%

FSR 7.5% 14.2% 16.3% 10.3%

CPI 26.2% 23.0% 30.6% 40.2%

FNBB -28.7% -10.4% -2.6% 7.2%

BBB -37.9% -20.8% -15.2% -15.5%

SCB -85.2% -44.6% -27.2% -13.7%

SCZ -26.6% -6.8% 6.1%

Zanaco -17.8% -9.0% -32.6%


Zanaco Zambia EPS declined due to a 13 to 2 bonus share

issue in FY12 which diluted EPS as well as recent poor

performance.

388 524

2269

1392

1697

32 20 0.160.02

469

181407

2787

27 0

500

1 000

1 500

2 000

2 500

3 000

FNB

NED

SBN

H

CG

P

NED

SA

SBK

SA

BG

A

FSR

CP

I

FNB

B

BB

B

SCB

SCZ

Zanaco

FY14 FY15 FY16

15.5% 17.4%

0.0%

19.9%

10.8%

44.7%

20.2%22.9%

0%

10%

20%

30%

40%

50%

FNB NED SBNH CGP


17.7%

9.1%

-10.2%

17.8%

48.6%

6.7%

28.8%

10.3% 7.5%

26.2%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%



P a g e | 40


Below we present EPS for the 4 local banks over the last 6

years. CGP, FNB and NED showed a very good consistent

growth trend in EPS.

Chart 86: CGP – EPS (N$ cps)


Chart 87: FNB – EPS (N$ cps)


Chart 88: NED – EPS (N$ cps)


Chart 89: SBNH – EPS (N$ cps)


Dividend Payout

FNB has a good track record for paying special dividends,

declaring a special dividend 4 times over the last 10 years with

the most recently being in FY12. This was part of its capital

management program to reduce its excess capital and

improve ROE. FNB currently has the highest ROE among local

banks at 32.7% in FY16.

Table 40: Dividend per Share


FNB (N$ cps) 262 100 122 183 213

NED (N$ cps) ND ND ND ND

SBNH (N$ cps) 200 120 260 ND

CGP (N$ cps) 25 33 44 53 66

NED (R cps) 752 895 1 028 1 107

SBK SA (R cps) 455 533 598 674

BGA (R cps) 684 1 528 925 1 000

FSR (R cps) 102 136 174 210 226

CPI (R cps) 412 574 663 836 1 055

FNBB (thebe) 13 15 16 16 11

BBB (thebe) 25 12 23 23

SCB (thebe) 30 67 71 57

SCZ (Kwacha) - 0.14 0.14 0.10

Zanaco (Kwacha) 0.004 0.005 0.005 0.005


CGP paid a special dividend of 18 cps in FY10. CGP declared a

dividend of 66 cps in FY16 and has steadily increased its

payout ratio over the last 5 years. Although CGP is still

adequately capitalised we believe the bank had to reduce its

payout from close to 50% in FY08 and FY10 to current levels

in order to fund growth and keep the capital adequacy ratio

above the 10% required by BoN. SBNH declared a dividend of

260 cps (120 cps FY13) in FY14 but nothing in FY15. NED has

no dividend track record.

89

108125

150

181

0

20

40

60

80

100

120

140

160

180

200


205 230

299

381

469

0

50

100

150

200

250

300

350

400

450

500


193 227

285

350

388

0

50

100

150

200

250

300

350

400

450


301 302 319362

524

0

100

200

300

400

500

600


P a g e | 41


Table 41: Dividend Payout Ratio (%)


FNB 128.1% 43.4% 40.8% 48.0% 45.4%

NED 0.0% 0.0% 0.0% 0.0%

SBNH 66.3% 37.6% 71.8% 0.0%

CGP 28.2% 30.3% 35.3% 35.4% 36.5%

NED 46.6% 47.2% 48.3% 48.8%

SBK SA 48.8% 50.1% 55.3% 48.4%

BGA 55.9% 109.3% 60.1% 58.9%

FSR 45.3% 49.7% 52.6% 55.5% 55.5%

CPI 37.8% 38.3% 37.8% 37.8% 37.9%

FNBB 58.2% 54.5% 55.9% 57.6% 55.5%

BBB 48.5% 36.5% 56.6% 91.2%

SCB 32.3% 62.2% 66.8% 356.9%

SCZ 0.0% 35.2% 95.7% 93.2%

Zanaco 20.7% 22.5% 30.3% 36.9%


P a g e | 42


Return on Average Assets (ROA)

ROA is an important tool for assessing a bank’s profitability.

ROA measures the ability of the bank management to

generate income by utilizing the bank’s assets at their

disposal. It shows how efficiently the resources of the banks

are used to generate the income. In advanced economies, a

bank is regarded as adequately profitable if its ROA is greater

than 1%. This could be attributed to keen competition among

banks in developed countries which are highly leveraged, low

margin, high volume businesses. Banks in Sub-Saharan Africa

appear more profitable with the average ROA around 2%,

however this could be a case of riskier assets demanding

higher returns.

From the charts below, we see that local banks posted higher

average returns than SA banks over the last 10 years. Except

for SBNH, local banks on average reported ROA between 2% -

3.7% at their most recent year ends, while SA banks average

ROA was below 2%. Subsequent to the financial crisis ROA

from SA banks deteriorated to below 1%. The decline was

attributed to slowing PSCE and stricter credit policies, interest

margin pressure and deteriorating bad debt levels.

Historically, the Botswana and Zambian banks reported even

higher average ROA than local banks, but this in our view

could be attributed to these banks being skewed to riskier

unsecured assets. In the last financial year ROA for these

banks also dropped.

Looking at local banks, FNB has steadily increased its ROA over

the last 7 years from 2.6% to 3.7% in FY16, the highest among

the local banks. Over the same period, CGP also increased

ROA from 2.0% in FY09 to 3.0% while SBNH’s ROA declined

from 3.8% in FY08 to 1.7% in FY14, but has picked up in FY15

to be higher than that of NED. NED has also improved its ROA

over the same period from 1.9% to 2.3%.

Chart 90: Local Banks – ROA (%)


The SA banks all improved ROA from FY09 and FSR had a

significantly more pronounced improvement than the other

banks. SBK SA saw their ROA increasing again to 1.3% after

declining slightly from 1.2% to 1.1% in FY14. CPI achieves very

high ROA ratios, even though it has been declining as the bank

acquires more assets. It is currently at 5.5%, considerably

higher than any local or other SA bank.

Chart 91: SA Banks – ROA (%)


All the Botswana and Zambian banks saw their ROA plunge

over the last year. The reason for this will be explained in the

next section, in the breakdown Du Pont analysis. ROA in

Zambian banks generally improved over the last 6 years, but

dropped off over the last year.

Chart 92: Botswana Banks – ROA (%)


Chart 93: Zambian Banks – ROA (%)


0.0%

1.0%

2.0%

3.0%

4.0%


FNB NED SBNH CGP

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%

10.0%


NED SA SBK SA BGA FSR CPI (rhs)

2.4%1.9%

0.4%0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%


FNBB BBB SCB

2.4%

1.6%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%


SCZ Zanaco

P a g e | 43


ROA – 2 Factor Du Pont Analysis

To understand the trends in ROA, it is necessary to look at the

Du Pont analysis where ROA is stripped down into a revenue

management and a cost management factor. It follows that

ROA = Asset utilisation – Expense ratio, where Asset

utilisation is total income as % of average assets and the

expense ratio is calculated as all interest and non-interest

expenses as % of average assets.

Chart 94 and 95 show the increase in CGP and FNB’s ROA over

the last five years could be attributed mainly to improved

asset utilisation while managing to keep the expense ratio

steady at about 5.3% and 6.7%, respectively.

Chart 94: CGP – ROA, Expense Ratio and Asset Utilisation


Chart 95: FNB – ROA, Expense Ratio and Asset Utilisation


SBNH’s ROA has seen significant improvement over the last 2

years to the current 2.3%. This is mainly due to the asset

utilisation ratio increasing from 6.9% in FY11 to 9.1% in FY15.

There is still risk in SBNH’s expense ratio which has increased

from 4.9% in FY11 to 6.5% in FY15.

After improving from 1.9% in FY09 to 2.3% in 2014, NED saw

a decline in ROA in FY15 to 2.1% on the back of a deterioration

in the expense ratio.

3.0%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

FY10 FY11 FY12 FY13 FY14 FY15 FY16

Asset utilisation (LHS) Expense ratio (LHS)

ROA (RHS)

3.7%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

0%

2%

4%

6%

8%

10%

12%



ROA (RHS)

Chart 96: SBNH – ROA, Expense Ratio and Asset Utilisation


Chart 97: NED – ROA, Expense Ratio and Asset Utilisation


2.3%

-0.6%

-0.1%

0.4%

0.9%

1.4%

1.9%

2.4%

2.9%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%



ROA (RHS)

2.1%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%



ROA (RHS)

P a g e | 44


Among the Botswana banks, which have all seen their ROAs

decrease, the reason is mainly linked to the lower asset

utilisation numbers for all of them. SCB and FNBB saw the dual

effect of increase in expense ratio and decline in asset

utilisation.

FNBB had the smallest decrease in asset utilisation, from 9.1%

to 8.7%, but its expense ratio increased the most.

Chart 98: FNBB – ROA, Expense ratio and Asset Utilisation


SCB had the biggest decline in asset utilisation from 11.6% to

9.8% and an increase in expense ratio from 8.8% to 9.4%.

Chart 99: SCB – ROA, Expense ratio and Asset Utilisation


Chart 100: BBB – ROA, Expense ratio & Asset Utilisation


The Zambian banks have also seen declining ROAs over the

last year. For SCZ it was due to a declining asset utilisation

ratio, but Zanaco’s increased asset utilisation could not

compensate for the increase in expense ratio from 12.6% to

16.1%.

Chart 101: SCZ – ROA, Expense ratio & Asset Utilisation


Chart 102: Zanaco – ROA, Expense ratio & Asset Utilisation


2.4%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

0%

2%

4%

6%

8%

10%

12%



ROA (RHS)

0.4%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%



ROA (RHS)

1.9%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

0%

2%

4%

6%

8%

10%

12%



ROA (RHS)

2.4%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%


Asset utilisation (LHS) Expense ratio (LHS)ROA (RHS)

1.6%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

FY8 FY9 FY10 FY11 FY12 FY13 FY14 FY15Asset utilisation (LHS) Expense ratio (LHS)

ROA (RHS)

P a g e | 45


Return on Average Equity (ROE)

The main drivers of bank profitability remain efficiency,

earnings, risk exposure and leverage. ROE is a measure of

profitability commonly used by banks. Banks around the

world consider ROE as their main metric to measure overall

financial profitability and efficiency. ROE measures the

efficiency of banks in re-investing earnings to generate profit;

the ratio is defined as net profit after tax to average equity

capital. To create wealth for its shareholders, the bank’s

return on equity (ROE) needs to be greater than its cost of

equity in order to create shareholder value.

In general, banks with high equity capital (low leverage) have

higher profit ratios, gross margins and ROA, ceteris paribus.

The simple reason is that a bank with higher equity capital

needs to borrow less, as a result its interest expense are lower

resulting in slightly better interest margins.

When a bank is highly capitalised the expansion in the ROE is

inhibited if excess capital is held on the balance sheet without

being invested to generate returns in excess of earnings

growth but is also not distributed to shareholders. Banks that

pursue active capital management activities will improve

ROEs. This may be obtained through special dividend

payments, share buyback programmes as well as mergers and

acquisitions. However, boosting ROE by keeping capital super

thin by utilising debt instead could absorb thin equity very

quickly when lending risk increases.

ROE is not perfect and does have limitations. ROE does not

adequately reflect the banks risk profile, cost of risk, asset

quality, liquidity and solvency. What is an acceptable level of

return on equity (ROE) for a bank? A good level of ROE may

either reflect a good level of profitability or a thin level of

equity capital. Moreover, a high ROE doesn't tell you if a bank

has excessive debt and is raising more of its funds through

borrowing rather than issuing shares.

A high ROE bank could perform poorly dragged down by

leverage adjustment. It must be noted that banks operate in

different economic and regulatory environment with

different capital structures, accounting practises, business

mix (retail vs. wholesale) and inflation (real returns). The

difference in equity capital of banks could be significant and

needs to be borne in mind when making cross border

comparisons.

During the credit crisis in 2009 it was shown how ROE failed

to discriminate between the best performing banks and the

others in terms of being able to generate sustainable profits.

In some cases, the banks with the highest ROE were those

worst hit by the crisis. Thus, ROE did not make it possible to

identify the best performing banks in terms of sustainability

of their results. ROE is a short-term measure and must be

interpreted as a snapshot of the current financial

performance of a bank. It does not take into account either

the banks’ long-term strategy or risk profile.

Capital adequacy is the level of capital relative to risk

weighted assets (RWA) required by the banks to enable them

to withstand the credit, market and operational risks. Capital

regulation is in the interest of depositors. Chart 103 shows all

the banks under review are well capitalised with capital

adequacy ratios in excess of the required rate

Currently, BoN sets the capital adequacy at 10% of RWA. The

Bank of Botswana has set the individual minimum ratio

requirements for banks in Botswana at 15% which is above

the Basel Committee minimum guideline of 8%. The Botswana

and Zambian banks are also well capitalised in excess of 10%.

Chart 103: Capital Adequacy Ratio – (%)


Local banks have generally reported lower ROE’s compared to

10 years ago. The decline in local ROE’s over the last decade

could be attributed to narrowing net interest margins (NIM)

and in most cases a decline in gearing.

The last financial year has been tough on Zambian and

Botswana banks which were historically operating on higher

ROEs compared to SA banks.

Chart 104: ROE – (%)


17.8%

14.3%15.6%

15.8%

14.1%15.7%

14.5%16.9%

34.9%

16.4%19.5%

19.8%

12.7%

21.1%

0%

5%

10%

15%

20%

25%

30%

35%

40%

FNB

NED

SBN

H

CG

P

NED

SA

SBK

SA

BG

A

FSR

CP

I

FNB

B

BB

B

SCB

SCZ

Zanaco

32.7%

15.4%

23.4%22.9%

15.7%14.9%

17.0%

24.0%27.0%

20.2%17.0%

4.2%

26.8%

11.5%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

FNB

NED

SBN

H

CG

P

NED

SA

SBK

SA

BG

A

FSR

CP

I

FNB

B

BB

B

SCB

SCZ

Zan

aco

P a g e | 46


Table 42: ROE (%)


FNB 25.4% 25.8% 30.9% 32.2% 32.7%

NED 15.1% 16.1% 16.5% 15.4%

SBNH 18.6% 18.0% 18.8% 23.4%

CGP 23.1% 21.9% 21.9% 22.4% 22.9%

NED 14.8% 15.6% 15.8% 15.7%

SBK SA 13.2% 13.2% 12.3% 14.9%

BGA 13.5% 15.5% 16.7% 17.0%

FSR 20.7% 22.7% 24.2% 24.7% 24.0%

CPI 29.0% 27.0% 23.0% 25.0% 27.0%

FNBB 42.4% 40.5% 34.7% 30.0% 20.2%

BBB 32.4% 21.6% 23.0% 17.0%

SCB 32.1% 31.2% 27.7% 4.2%

SCZ 45.7% 35.6% 34.2% 26.8%

Zanaco 24.1% 23.6% 15.3% 11.5%

Source: PSG, UBS, Annual Reports

Although ROE is generally lower than historical levels, FNB

and CGP have steadily increased ROE over the last four years

on the back of higher ROA.

FNB reported the highest ROE at 32.7% in FY16, up from

32.2% in FY15.

SA banks’ ROE’s have showed a decline since September 2007

against the backdrop of the ongoing turmoil in the global

financial markets whilst local ROE’s remained fairly resilient

over the same period.

Slowing PSCE, stricter credit policies, interest margin

pressure, and deteriorating bad debt levels all contributed to

SA banks’ lower ROE’s. The last year has had mixed results for

the various banks with SBK, BGA and CPI increasing while NED

and FSR’s ROE decreased.

Chart 105: Local Banks – ROE (%)


Chart 106: SA Banks – ROE (%)

Source: UBS, Bloomberg, Annual reports

The Botswana banks showed a significant decline in ROE since

2009, on the back of a gradual decline in gearing while

Zambian banks have improved ROE over the same period

mainly due to higher ROA (next section).

Chart 107: Botswana Banks – ROE (%)


Chart 108: Zambian Banks – ROE (%)


32.7%

15.4%

23.4%22.9%

0%5%

10%15%20%25%30%35%40%45%50%


FNB NED SBNH CGP

15.7%14.9%

17.0%

24.0%27.0%

0%

5%

10%

15%

20%

25%

30%

35%

40%



20.2%17.0%

4.2%0%10%20%30%40%50%60%70%80%90%

100%


FNBB BBB SCB

26.8%

11.5%

0%

10%

20%

30%

40%

50%

60%


SCZ Zanaco

P a g e | 47


ROE Du Pont Analysis

In this 2 factor Du Pont analysis ROE is defined as the product

between the ROA and gearing. Gearing is a measure of

financial leverage and shows the extent to which operations

are funded by lenders (depositors & borrowed funds) versus

owners’ capital (reserves & retained earnings). Gearing has a

substantial impact on ROE and is of particular importance to

banks, because of the uniqueness of their capital structure. As

mentioned, ROE has its shortcomings, so we should not look

at ROE in isolation, but together with ROA, they provide a

clear picture of profitability and efficiency.

The gearing for SBNH and FNB has remained fairly steady over

the last 6 years while NED and CGP showed a steady decline.

SA banks, except for CPI, still remain slightly more geared than

local banks. Among the local banks, FNB’s gearing has

improved significantly over the last 10 years on the back of its

capital management program to reduce its excess capital.

Special dividend pay-outs in FY11 and FY12 helped increase

gearing while ROE increased from about 22% to 32.7% in

FY16. FNB’s gearing is currently in line with other local banks.

Chart 109: Local Banks – Gearing


Chart 110: SA Banks – Gearing

Source: PSG, Annual reports

Botswana banks experienced a significant decline in gearing

over the last 5 years and have now reached similar levels than

Namibian banks. This explain the normalisation in the ROE

from between 50%-70%, six years ago, to between 4%-20% as

at latest year end. The Zambian banks’ gearing is now also in

line with the local banks.

Chart 111: Botswana Banks – Gearing


Chart 112: Gearing – Zambian Banks


The charts below illustrate the breakdown in ROE in its two

distinctive parts for each bank.

CGP maintained its ROE above 20% over the last 5 years on

the back of strong ROA despite gearing falling from above 10

to below 8 in FY16.

CGP’s lower gearing over the last three years is a result of

average equity (the denominator) growing at a much faster

pace than assets. The significant improvement in ROA could

be attributed to resilient net interest margins, improved cost

efficiency and credit quality.

8.7

7.2

10.2

7.7

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0


FNB NED SBNH CGP

12.211.611.2

11.2

4.9

-3.0

2.0

7.0

12.0

17.0

22.0



8.68.8

11.6

0

5

10

15

20

25

30


FNBB BBB SCB

11.4

7.2

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0


SCZ Zanaco

P a g e | 48


Chart 113: CGP – ROA, ROE and Gearing


Chart 114 shows the increase in FNB’s ROE from 22.7% in

FY09 to 25.8% in FY13 and 32.7% in FY16. The higher ROE

over the last 5 years could be attributed to improved ROA.

Chart 114: FNB – ROA, ROE and Gearing


Although NED’s ROE has come off levels from 5 years ago, ROE

has improved over the last four years from 15% to 16.5%

because of an improvement in ROA from 1.9% to 2.3% in

FY14. This has declined again in FY15 after gearing and ROA

decreased.

Chart 115: NED – ROA, ROE and Gearing


In contrast, SBNH’s ROE increased from 18.8% in FY14 to

23.4% in FY15 on the back of improving asset utilisation

(ROA Du Pont analysis). These ROE levels have last been

seen around FY11, after which ROE and ROA declined for 4

years. SBNH’s higher asset utilisation is a direct result of the

banks’ higher income growth.

Chart 116: SBNH – ROA, ROE and Gearing


BGA has on average kept its ROE above 15% over the last 5

years while gearing declined. There was a further increase

in FY15 coinciding with an increase in the ROA from 1.4% to

1.5% while gearing decreased.

Chart 117: BGA – ROA, ROE and Gearing

Source: UBS, Bloomberg, Annual Reports

FSR’s ROE improved significantly from 12.5% in FY09 to 24.7%

in FY15 on the back of ROA increasing from 0.9% to 2.2%, the

highest among SA banks. During the most recent financial

year, though, FSR’s ROA and ROE declined to 2.1% and 24.0%

respectively.

2.0% 2.1% 2.2% 2.3% 2.5% 2.8% 2.8% 3.0%

20.8%22.1% 22.5% 23.1%

21.9% 21.9%22.4% 22.9%

3.5

4.5

5.5

6.5

7.5

8.5

9.5

10.5

11.5

0%

5%

10%

15%

20%

25%


ROA ROE Gearing (RHS)

2.6% 2.7% 2.8% 2.9% 2.8% 3.2% 3.5% 3.7%

22.7%22.2% 24.3% 25.4% 25.8%

30.9%32.2% 32.7%

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

0%

5%

10%

15%

20%

25%

30%

35%



1.9% 2.1% 1.9% 2.0% 2.1% 2.3% 2.1%

18.7% 18.7%

15.0% 15.1%16.1% 16.5%

15.4%

0.01.02.03.04.05.06.07.08.09.010.011.0

0%

5%

10%

15%

20%



3.0% 2.7% 2.0% 1.8% 1.7% 1.7% 2.3%

32.5%29.6%

20.5%18.6% 18.0% 18.8%

23.4%

3.5

4.5

5.5

6.5

7.5

8.5

9.5

10.5

11.5

0%

5%

10%

15%

20%

25%

30%

35%



1.1% 1.2% 1.4% 1.2% 1.4% 1.4% 1.5%

15.5%15.1%

16.9%

13.5%

15.5% 16.7%

17.0%

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

14.0

15.0

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%



P a g e | 49


Chart 118: FSR – ROA, ROE and Gearing


Chart 119 shows NED SA improved its ROE over the last 6

years from 11.8% in FY09 to 15.7% in FY15 mainly through

higher ROA while gearing gradually declined.

Chart 119: NED SA – ROA, ROE and Gearing


SBK SA has seen its ROE steadily declining over the last 4

years from 11.8% in FY10 to 12.3% in FY14, but has

recovered to 14.9% in FY15. ROA is the highest it’s been in 7

years.

Chart 120: SBK SA – ROA, ROE and Gearing


CPI returned the highest ROE of all banks over the last 8

years, with only FSR coming close. This is due to their

superior ROA which averages more than 5.0%.

Chart 121: CPI SA – ROA, ROE and Gearing


The higher ROEs relative to local and SA banks reported by

the Botswana banks could primarily be attributed to higher

ROA. As mentioned, higher levels of ROA is a result of higher

interest rate spreads, however this comes with higher credit

risk and lower efficiency. Gearing has come off for Botswana

banks since 2008 resulting in more normalised ROE levels,

and is showing to converge with the averages of the local

and SA banks.

Chart 122: BBB – ROA, ROE and Gearing


Chart 123: FNBB – ROA, ROE and Gearing


0.9% 1.4% 1.6% 1.8% 2.0% 2.2% 2.2% 2.1%

12.5%

17.3%

18.7%20.7%

22.7% 24.2% 24.7% 24.0%

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

14.0

15.0

0%

3%

6%

9%

12%

15%

18%

21%

24%

27%



0.8% 0.9% 1.0% 1.2% 1.2% 1.3% 1.3%

11.8%12.1% 13.6%

14.8%15.6% 15.8% 15.7%

10.0

11.0

12.0

13.0

14.0

15.0

16.0

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%



1.2% 1.0% 1.2% 1.1% 1.2% 1.1% 1.3%

14.5%

11.8%13.8% 13.2% 13.2%

12.3%

14.9%

5.0

7.0

9.0

11.0

13.0

15.0

17.0

0%

2%

4%

6%

8%

10%

12%

14%

16%



7.6% 6.0% 5.4% 5.7% 5.1% 4.8% 5.1% 5.5%

26.1%30.9%

34.0%

29.0%27.0%

23.0%25.0%

27.0%

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

0%

5%

10%

15%

20%

25%

30%

35%

40%

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16ROA ROE Gearing (RHS)

6.9% 6.7% 7.0% 7.5% 8.4% 7.9% 7.6%

53.4% 52.0%

39.9%

32.4%

21.6% 23.0%17.0%

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

0%

10%

20%

30%

40%

50%

60%



4.1% 4.2% 4.7% 6.0% 6.3% 6.1% 5.3% 6.4%

49.4% 41.9% 49.8%42.4% 40.5%

34.7% 30.0%

20.2%

0.02.04.06.08.010.012.014.016.0

0%

10%

20%

30%

40%

50%

60%



P a g e | 50


SCB’s ROE declined over the last 5 years as the group reduced

its excessive liquid assets-to-deposit ratio from about 70% to

40%, but in the last year it plummeted to 4.2% as the ROA

reduced to 0.4%.

Chart 124: SCB – ROA, ROE and Gearing


Chart 125: SCZ – ROA, ROE and Gearing


Zanaco bank experienced a substantial improvement in ROE

over the last 5 years, but experienced a large drop off from

23.6% in FY13 to 11.5% in FY15. The improvement came off

a low base and because gearing doubled from a very low 4x

in FY09 to 8x in FY13. In FY15, gearing and ROA declined.

Chart 126: Zanaco – ROA, ROE and Gearing


2.7% 2.4% 2.8% 2.9% 3.3% 2.8% 0.4%

66.5%

44.2%

39.8%

32.1% 31.2%27.7%

4.2%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

0%

10%

20%

30%

40%

50%

60%

70%



2.5% 3.5% 2.9% 4.5% 4.5% 4.0% 2.4%

34.8%

48.6%

37.9%

45.7%

35.6%34.2%

26.8%

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

0%

10%

20%

30%

40%

50%

60%



2.7% 3.4% 2.9% 3.0% 2.9% 2.1% 1.6%

11.1%

17.9%

23.0% 24.1% 23.6%

15.3%

11.5%

0.0

2.0

4.0

6.0

8.0

10.0

12.0

0%

5%

10%

15%

20%

25%

30%



P a g e | 51


Lending Rates

The average lending rate for a bank is estimated as the

interest received as % of average interest earning assets (IEA).

Chart 127 and 128 show how the lending rates move in line

with the average prime rate. The charts below also show that

during the rising interest rate environment local and SA banks

initially seem to lag the cycle.

Looking at the local banks, CGP and SBNH have consistently

demanded higher lending rates than the other local banks

over the last 5-year period. Among the SA banks, FSR on

average charge higher lending rates than other SA banks. This

could be for various reasons. FSR’s asset yield is slightly higher

given its loan mix, skewed towards retail and within retail

unsecured lending and vehicle finance, less home loans. Also,

average IEA (the denominator) is not always similarly defined

between banks.

Chart 127: Local Banks – Interest Received to Avg. IEA


Chart 128: SA Banks – Interest Received to Avg. IEA


Among the Botswana banks, BBB charged interest higher than

the prime rate over the last 4 years. The higher interest

received by BBB also explains its superior interest rate

spreads. The Zambian lending rates have just recently (last

two years) moved in line with the prime rate.

Chart 129: Botswana Banks – Interest Received to Avg. IEA


Chart 130: Zambian Banks – Interest Received to Avg. IEA


8%

10%

12%

14%

16%

FY0

3

FY0

4

FY0

5

FY0

6

FY0

7

FY0

8

FY0

9

FY1

0

FY1

1

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6

FNB NEDSBNH CGPAvg. Namibian Prime

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

160.0%

7%

9%

11%

13%

15%

17%

FY0

3

FY0

4

FY0

5

FY0

6

FY0

7

FY0

8

FY0

9

FY1

0

FY1

1

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6

NED SA SBK SA

BGA FSR

6%

8%

10%

12%

14%

16%

FY0

5

FY0

6

FY0

7

FY0

8

FY0

9

FY1

0

FY1

1

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6

FNBB BBB

SCB Avg Botswana Prime

6%8%

10%12%14%16%18%20%22%


SCZ Zanaco Avg Zambia Prime

P a g e | 52


Deposit Rates

Deposit rates are estimated as interest paid to average

interest paying liabilities (IPL). As expected local and SA

deposit rates have come down since 2008 in line with the

declining bank repo rate. In an attempt to attract more

deposits to fund their rapid growing advances, CGP has since

2008 consistently offered higher deposit rates than the other

local banks. Similarly, NED SA offered on average higher

deposit rates than other SA banks.

Since Namibia share a common monetary area with SA and

the N$ is pegged to the SA Rand, local deposit rates offered

by local banks has showed a similar trend compared to SA

peers. Deposit rates have to be kept on par with SA banks to

avoid margin pressure and capital outflows.

Chart 131: Local Banks – Deposit Rates


Chart 132: SA Banks – Deposit Rates


Botswana deposit rates also went down with the local repo

rate from FY07 and are now at a very low level just above 2%.

The Zambian bank’s deposit rates are on par with Botswana

banks in FY15.

Chart 133: Botswana Banks – Deposit Rates


Chart 134: Zambian Banks – Deposit rates


3%

4%

5%

6%

7%

8%

9%


FNB NED SBNH CGP

2.5%

4.5%

6.5%

8.5%

10.5%



0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%


FNBB BBB SCB

0.0%

1.0%

2.0%

3.0%

4.0%


Std. Chartered Zambia Zanaco Zambia

P a g e | 53


Interest Rate Spread

In developing countries where economies are primarily bank-

based where a few banks dominate the market, high interest

rate spreads are commonly associated with inefficiencies, lack

of competition and high operating cost. On the other hand,

high spreads can also be associated with well-capitalised

banks in economies where there is low credit availability.

When the spread is too high, it not only discourages potential

savers but also curb credit growth because of the higher loan

rates. And as mentioned previously, spread analysis is not

always effective given that interest earning assets (the

denominator) are not always consistently defined between

banks.

NED has seen its interest rate spread decline from 4.6% in

FY12 to 4.2% in FY15. SBNH reported the highest interest rate

spread of 6.0% in FY15 while NED had the lowest interest rate

spread at 4.2%. Nevertheless, spreads for these two banks

remain on average 100 basis points higher than their SA

parent companies. Table 43: Interest rate spread (%)


FNB 4.7% 4.4% 4.4% 4.9% 4.9%

NED 4.6% 4.3% 4.2% 4.2%

SBNH 4.8% 4.7% 5.4% 6.0%

CGP 4.6% 4.6% 4.6% 4.6% 4.5%

NED SA 3.2% 3.2% 3.0% 2.6%

SBK SA 3.6% 4.0% 4.1% 3.9%

BGA 3.4% 5.0% 5.2% 5.5%

FSR 5.5% 5.6% 5.5% 5.4% 4.9%

CPI 16.4% 16.2% 16.6% 17.4% 17.8%

FNBB 6.0% 6.7% 6.4% 4.9% 4.8%

BBB 8.0% 8.3% 8.2% 7.6% SCB 6.8% 7.1% 5.8% 4.0%

SCZ 7.8% 9.2% 9.6% 9.4%

Zanaco 10.5% 10.5% 12.4% 12.4%


Chart 135: Country average prime rates (%)


Botswana and Zambian banks have significantly higher

spreads than local and SA banks, this could be partly

attributed to higher reserve requirements and lending being

skewed to riskier unsecured lending. Other important factors

that can also explain wider spreads are: discount rate, real

interest rates, money supply, level of economic development

and population size.

Chart 136: Local Banks – Interest Rate Spread (%)


Chart 137: SA Banks – Interest Rate Spread (%)


Chart 138: Botswana Banks – Interest Rate Spread (%)


7%9%

11%13%15%17%19%21%23%


Avg. Namibian Prime Avg. SA Prime

Avg Botswana Prime Avg Zambia Prime

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%


FNB NED SBNH CGP

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2.5%

3.5%

4.5%

5.5%

6.5%

7.5%



0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%


FNBB BBB


P a g e | 54


Chart 139: Zambian Banks – Interest Rate Spread (%)


Net Interest Margins (NIM)

The net interest margin is calculated as net interest income

before impairment as % of average interest earning assets

(IEA). It is not a measure of a bank’s total profitability since

most banks also earn fee income and other non-interest

income. The higher the percentage the more effectively a

bank is managing its assets and interest requirements. The

widest net interest margins are found at banks for which loans

make up the bulk of their interest-earning assets and where

those assets are funded with deposits rather than higher-cost

borrowed funds.

Chart 140 shows that, except for CPI, local interest margins

have always been a couple of basis points higher than SA

banks. This could be attributed to the wider interest rate

spreads than SA peers. The spread between local prime and

the repo rate is still 25 basis points higher than SA despite the

spread reduction required by BoN in 2009.

Although interest margins did narrow slightly from 2009, we

believe it was also a direct consequence of the repo rate

declining from 7.0% in 2009 to 5.5% in 2013. Since June 2014,

the repo rate has increased again to 7.0% in December 2016.

NIM levels are now generally higher or at their 2009 levels,

except in the case of NED.

Net interest margins are now generally lower than 12 years

ago. For example, FNB’s interest rate margin has come down

significantly from 7.4% in FY03 to 5.4% in FY16. SBNH have

increased NIM from 4.6% in FY08 to 6.0% in FY15, the highest

among the local banks. Despite lower rates, CGP have steadily

improved net interest margins (before impairment) over the

last 5 years.

Chart 140: Net Interest Margin (%)


1.0%

3.0%

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

17.0%


SCZ Zanaco

5.4%4.8%

5.9%5.1%

3.3%4.7%

4.8%5.3%

16.6%

4.9%

7.0%

4.0%

9.0%

11.9%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

FNB

NED

SBN

H

CG

P

NED

SA

SBK

SA

BG

A

FSR

CP

I

FNB

B

BB

B

SCB

SCZ

Zanaco

P a g e | 55


Chart 141: Local Banks – Net Interest Margin (%)


SBNH has previously reported the lowest net interest

margin among the four local banks over the last 5 years, but

has made gains in FY14 and is now tied in second place with

CGP. This is reflected by their CAGR in net interest income

over the same period now outperforming that of NED. NED

experienced some margin pressure over the last 5 years.

FNB’s margins narrowed from 5.8% in FY09 to 4.8% in FY14

and recovered to 5.4% in FY16 while NED’s margins

narrowed from 5.7% to 4.8% in FY15. From the sideways

trajectory of FNB and CGP’s NIM margins, who reported in

FY16, one can expect the same for NED and SBNH for their

end of FY16 results.

Chart 142: SA Banks - Net Interest Margin (%)

Source: PSG, UBS

On balance, the BoN spread reduction requirement put local

banks under pressure to maintain interest rate margins.

Some local banks experienced downward pressure on

interest margins while others, against expectations, were

very resilient and maintained net interest margins.

Among the Botswana banks, SCB and FNBB have

consistently increased interest margins from FY08 to FY13

but there has been margin compression over the last three

years. BBB’s NIM remains the highest among the Botswana

banks mainly because it is heavily skewed toward higher risk

unsecured lending. It is also interesting to note that BBB’s

net interest margin is much higher than local banks,

however, this comes at the expense of higher risk (higher

NPL ratios).

The continued declining trend for the most recent year end

(FY16) for FNBB could prove an indication of what will

happen with SCB and BBB for their next earnings results.

Chart 143: Botswana Banks – Net Interest Margin (%)


Rates in Botswana have decreased from 11.5% in FY10 to

8.1% in FY15, while Zambia has seen rates increase from

10.4% in FY13 to 13.0% in FY15. Despite this increase, NIM

in Zambian has decreased over the last two years.

Chart 144: Zambian Banks - Net Interest Margin (%)

Source: PSG, UBS

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%


FNB NED SBNH CGP

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%



0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%


FNBB BBB


0%

10%

20%

30%

40%

50%

60%


SCZ Zanaco Avg Zambia Prime

P a g e | 56


Table 44: Net interest margins (%)


FNB 5.2% 4.8% 4.8% 5.4% 5.4%

NED 5.0% 4.7% 4.6% 4.8%

SBNH 4.3% 4.4% 5.1% 5.9%

CGP 4.8% 4.9% 5.0% 5.1% 5.1%

NED SA 3.5% 3.6% 3.5% 3.3%

SBK SA 4.3% 4.3% 4.4% 4.7%

BGA 3.9% 4.5% 4.7% 4.8%

FSR 4.9% 5.0% 5.1% 5.3% 5.3%

CPI 18.1% 17.8% 18.0% 15.8% 16.6%

FNBB 6.2% 6.7% 6.5% 5.1% 4.9%

BBB 8.7% 8.0% 7.7% 7.0%

SCB 6.8% 7.1% 5.8% 4.0%

SCZ 7.8% 9.2% 9.5% 9.0%

Zanaco 10.5% 10.5% 12.2% 11.9%

Source: PSG, Annual

Liquidity

Liquidity risk indicates the ability of the bank to meet its

financial obligations in a timely and effective manner.

Liquidity is required for deposit withdrawals and loan

demand. A bank's least expensive means of funding loan

growth is through deposit accounts. When this is not

available, banks must rely on more expensive funding sources

such as borrowing funds at wholesale rates, liquidating

investment securities portfolios or issue bonds.

Since liquid assets such as cash and government securities

generally have a relatively low return relative to other assets,

holding them imposes an opportunity cost on a bank. In the

absence of regulation, it is reasonable to expect banks will

hold liquid assets to the extent they help to maximize the

firm’s profitability.

All else equal, if a bank is more reliant on short-term funding,

it may need to hold more liquid assets to maximise profits.

Similarly, if a bank is more traditional/conservative (funding

its loans with deposits without debt) it can get away with

lower levels of liquidity. On balance, the optimal level of

liquidity will differ between banks depending on a myriad of

factors.

In the next section we will discuss two measures of liquidity,

the gross loan-to-deposit ratio (LTD) which is an indicator of

the banks’ ability to fund loan growth through deposits. The

LTD ratio helps assess a bank's liquidity, and at the same time

the aggressiveness of the bank's management.

The second measure is the liquid asset-to-deposit and short-

term borrowing ratio which indicates the percentage of short-

term obligations that could be met with the bank’s liquid

assets in the case of sudden withdrawals. Liquid assets mainly

consist of current accounts and reserves with the Bank of

Namibia and other banks, money at call and investment in

TB’s and Bonds.

http://www.investopedia.com/terms/l/loan-to-deposit-ratio.asp#axzz1ZISod4Tn

P a g e | 57


Loan-to-Deposit (LTD) Ratio

A LTD below 100% is preferable indicating that the bank still

has significant capacity to write new loans from existing

deposits. A LTD ratio above 100% is not necessarily

detrimental it just shows the bank is not only relying on

deposits but also on borrowed funds to fund its loans.

However, if the ratio is too high, the bank could be vulnerable

to any sudden adverse changes in its deposit base.

Conversely, if the ratio is too low, the bank is holding on to

unproductive capital and not generating sufficient returns.

Chart 145: LTD – (%)


CGP’s LTD ratio steadily increased from 92.2% to 111.0% in

FY16 on the back of significant advances growth (7 year CAGR

15.7%), while total deposits increased by (7 year CAGR

12.4%). This suggests that CGP is currently not only relying on

deposits but also on borrowed funds to fund loan growth.

CGP’s debt in issue doubled from N$943m in FY13 to

N$1.84bn in FY14 and increased further to N$2.2bn at FY16

year-end despite a reduction of N$ 200 million over the last

financial year.

Chart 146: CGP – Gross loan-to- deposit


Chart 147 shows that FNB has improved its LTD ratio from

levels above 100% in FY09 to 90.8% in FY16. The improvement

can be ascribed to deposits growing at a faster pace than

advances over the period under review.

Chart 147: FNB – Gross LTD (%)


NED consistently operated on a LTD ratio between 84% and

90% over the period.

Chart 148: NED – Gross LTD (%)


After SBNH’s LTD ratio fluctuated just under 90% levels over

the last 5 years, in the most recent financial year it increased

to 94.7% with very low deposit growth of 4.2%.

As mentioned, this ratio should ideally be below 100%,

however, it must also be noted that LTD is just a snapshot of

total loans to total deposits at one point in time and should

be monitored regularly. The ratio does not give any idea about

the prevailing money multiplier; it also depends on several

deposit-to-loan cycles and LTD ratio of each of them.

90.8%85.9%

94.7%

111.0%

95.5%91.6%

81.9%

93.1%85.3%85.4%

89.3%

65.8%

47.0%

60.3%

0%

20%

40%

60%

80%

100%

120%

FNB

NED

SBN

H

CG

P

NED

SA

SBK

SA

BG

A

FSR

CP

I

FNB

B

BB

B

SCB

SCZ

Zanaco

92.2%98.0% 98.1%

104.1% 107.0% 107.7% 111.0%

0%

20%

40%

60%

80%

100%

120%


101.1%94.8% 95.0%

87.4% 89.3% 90.2% 92.1% 90.8%

0%

20%

40%

60%

80%

100%

120%


88.8% 87.5% 89.5%84.0% 84.1% 85.3% 85.9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


P a g e | 58


Chart 149: SBNH – Gross LTD (%)


Table 45 shows how much long-term debt the local banks

have as a ratio of their deposits. The increase in CGP’s

debt-to-deposit ratio from 4.83% in FY12 to 9.17% is the

exception among the local banks.

Table 45: LT Debt-to-deposit ratio local banks


FNB 2.41% 2.05% 1.76% 1.57% 1.37%

NED 0.04% 0.04% 0.04% 0.04%

SBNH 4.63% 4.14% 4.20% 4.12%

CGP 4.83% 5.52% 9.66% 11.12% 9.17%


The SA banks have been fairly successful in keeping their

LTD ratio at acceptable levels below 100%.

Chart 150: BGA – LTD (%)

Source: PSG, UBS

Chart 151: FSR – LTD (%)


Chart 152: NED SA – LTD (%)

Source: PSG, UBS

Chart 153: SBK SA – LTD (%)

Source: PSG, UBS

Chart 154: CPI – LTD (%)


87.9%

72.9% 75.9%

87.1% 83.6%88.4% 94.7%

0%

20%

40%

60%

80%

100%


92.0% 92.1% 84.8% 87.2% 82.3% 83.2% 81.9%

0%

20%

40%

60%

80%

100%


88.1%86.6%

85.5% 88.4% 88.1% 92.3% 91.7% 93.1%

0%

20%

40%

60%

80%

100%


98.0% 99.2% 97.4% 97.7% 98.0% 95.5% 95.5%

0%

20%

40%

60%

80%

100%

120%


96.6%92.1% 92.1% 89.9% 91.9% 89.1% 91.6%

0%

20%

40%

60%

80%

100%

120%


97.6%

76.2%

104.5%104.0%

105.7%

95.0%88.2% 85.3%

0%

20%

40%

60%

80%

100%

120%


P a g e | 59


Chart 155: BBB – LTD (%)


FNBB LTD ratio has increased significantly from FY09 to

FY16, after briefly receding in FY15 to 75.5%. This is

attributed to a CAGR 6.5% in gross advances in FY15 while

recording a staggering 21.6% growth in deposits. In FY16,

advances growth came in at 12.6% while deposits declined

by 0.4%.

Chart 156: FNBB – LTD (%)


Chart 157: SCB – LTD (%)


SCZ also increased its LTD from FY10 to FY13. In the last 2

years it declined again with deposit growth at 32.2% vastly

outpacing advances growth of 12.8%.

Chart 158: SCZ – LTD (%)


Chart 159: Zanaco – LTD (%)


64.7% 64.2%71.3% 70.6%

83.1%88.1% 89.3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


44.7%

57.5%

67.6%74.1%

81.4%86.2%

75.5%

85.4%

0%

20%

40%

60%

80%

100%


47.9%

38.0%

50.3%

65.1%

76.0% 74.3%

65.8%

0%

10%

20%

30%

40%

50%

60%

70%

80%


39.0%

32.7%

46.2%

53.3%

62.1%56.7%

47.0%

0%

10%

20%

30%

40%

50%

60%

70%


55.1%

71.2%

58.0%61.9%

55.4%

64.5%60.3%

0%

10%

20%

30%

40%

50%

60%

70%

80%


P a g e | 60


Liquid Assets to Deposit (LADST)

This ratio represents the percentage of short-term obligations

that could be met with the bank’s liquid assets in the case of

sudden withdrawals. It captures the bank’s vulnerability

related to funding sources such as customer and business

deposits from other banks and other financial institutions.

The higher the value of the ratio, the higher is the capacity to

absorb liquidity shock. Nevertheless, a high value of this ratio

could also be interpreted as inefficiency since liquid assets

yield a lower return than other assets and imposes high

opportunity costs for the bank, thereby having a negative

impact on profitability.

The optimal level of liquidity will vary from bank to bank,

however, if the banks are more reliant on short-term funding

it may need to hold more liquid assets to maximise

profitability and investor confidence.

Chart 160: LADST


Chart 160 shows that local banks are on average more liquid

than SA banks. The Botswana and Zambian banks on the other

hand seem excessively liquid bordering on inefficiency, which

we have mentioned is having a negative impact on their

profitability.

Chart 161: CGP – LADST (%)

Source: PSG, Company data

Chart 162 shows FNB’s liquidity remains favourable over the

last 6 years. While CGP’s LADST ratio might be the lowest

among local banks, it remains at acceptable levels.

Chart 162: FNB – LADST (%)

Source: PSG, Annual Report

NED’s liquidity has gradually increased from 18.9% in FY07

to 31.5% in FY15. As mentioned, if this ratio becomes too

high, it could be interpreted as inefficiency of funds with a

potential negative impact on profitability.

Chart 163: NED – LADST (%)

Source: PSG, Annual Report

Chart 164: SBNH – LADST (%)


24.9%

31.5%26.3%

19.5%21.3%

19.4%18.9%

27.2%

52.1%

25.6%

33.8%

50.9%

61.6%65.1%

0%

10%

20%

30%

40%

50%

60%

70%

FNB

NED

SBN

H

CG

P

NED

SA

SBK

SA

BG

A

FSR

CP

I

FNB

B

BB

B

SCB

SCZ

Zanaco

19.4%20.8%

18.5% 18.7%15.9%

17.6% 18.3%19.5%

0%

5%

10%

15%

20%

25%


25.7%

33.9%

21.2%

31.1%

25.3% 24.5% 23.0%24.9%

0%

5%

10%

15%

20%

25%

30%

35%

40%


18.9%20.5%

22.1%

26.4% 27.1%

32.7% 32.1% 32.2% 31.5%

0%

5%

10%

15%

20%

25%

30%

35%


26.1%28.7% 28.0%

26.4% 27.2%

22.6%

26.3%

0%

5%

10%

15%

20%

25%

30%

35%


P a g e | 61


Credit Risk Credit Loss Ratio

The Namibian and SA interest rates are currently in an

upward cycle. Keeping bad debts in check is an important

earnings driver for most banks during periods of rising

interest rates and expanding net interest margins. In a rising

interest rate environment, customers may not be able to

meet interest payments because of the increase in the size

of the payment resulting in higher NPL and loan impairment

charges for banks.

The Namibian credit loss ratios are currently at very

favourable levels but are at risk if one considers the increase

in the early arrears percentages of the loan books and the

expected continued interest rate increases.

Chart 165: Credit loss ratio – (%)


FNB and CGP’s bad debt ratios showed a definite

improvement from 2008, in line with the lower interest

rates. Local banks reported bad debt ratios significantly

below the 1% acceptable norm, but as at the latest year end

NED reported a significant increase while SBNH’s decreased

and FNB and CGP’s remained stable. SA banks are, on

average just below or at this 1% level at the last year end.

The outlier is CPI with a credit loss ratio of 11.4%. The reason

for this is that Capitec does unsecured lending. The

provisions are also made accordingly.

FNB reported an impairment release in FY11/12. For FNB

this ratio has bottomed in FY12, the bank has reported an

impairment charge of N$47m or 0.2% in FY16. BGA, after

experiencing a significant jump in bad debts in FY12 (mostly

unsecured loans), has done well to bring the ratio back

down to 1.1% in FY15.

Chart 166: Local Banks – Bad Debts to Average Advances (%)


Chart 167: SA Banks – Bad Debts to Average Advances (%)

Source: PSG, UBS

Table 46: Credit Loss ratio (%)


FNB -0.3% 0.1% 0.1% 0.2% 0.2%

NED 0.2% 0.2% 0.1% 0.6%

SBNH 0.3% 0.5% 0.8% 0.5%

CGP 0.2% 0.2% 0.2% 0.3% 0.2%

NED SA 1.0% 1.1% 0.8% 0.8%

SBK SA 1.1% 1.0% 1.0% 0.9%

BGA 1.6% 1.2% 1.0% 1.1%

FSR 0.9% 1.0% 0.8% 0.8% 0.9%

CPI 10.9% 10.8% 12.4% 11.5% 11.4%

FNBB 1.7% 1.3% 1.1% 1.6% 1.6%

BBB 1.9% 2.8% 1.9% 2.6%

SCB 0.8% 0.4% 0.0% 1.4%

SCZ 0.2% 0.6% 0.4% 1.2%

Zanaco 0.0% 1.1% 1.5% 2.8%

Source: PSG, Annual

0.2%0.6%

0.52%0.2%

0.8%0.9%1.1%

0.9%

11.4%

1.6%2.6%

1.4%1.2%

2.8%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

FNB

NED

SBN

H

CG

P

NED

SA

SBK

SA

BG

A

FSR

CP

I

FNB

B

BB

B

SCB

SCZ

Zanaco

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%


FNB NED SBNH CGP

10.0%

10.5%

11.0%

11.5%

12.0%

12.5%

13.0%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%



P a g e | 62


Non-Performing Loans (NPL’s)

NPL’s are loans on which the borrower is not making interest

payments or repaying any principal debt for three months, at

which point the loan is classified as non-performing by the

bank.

For our analysis, it is not the absolute amount, but the ratio

of NPL’s to total gross advances that represent the relevant

indicator of the quality of assets. A gradual increase in the

ratio over time reflects a deterioration in the quality of the

loans.

Table 47: NPLs as % of gross advances


FNB 1.1% 1.0% 0.8% 0.7% 1.0%

NED 1.3% 1.3% 1.1% 1.0%

SBNH 1.8% 2.1% 2.3% 2.9%

CGP 1.0% 0.9% 0.7% 1.2% 1.4%

NED SA 3.6% 3.0% 2.5% 2.6%

SBK SA 3.7% 3.2% 3.2% 3.8%

BGA 5.8% 4.7% 4.2% 3.9%

FSR 3.5% 2.8% 2.3% 2.2% 2.5%

CPI 5.1% 5.8% 6.5% 5.4% 5.6%

FNBB 3.1% 3.5% 3.9% 4.5% 5.7%

BBB 6.4% 5.5% 5.2% 5.0%

SCB 10.2% 7.7% 0.8% 1.9%

SCZ 1.7% 2.2% 1.5% 1.1%

Zanaco 3.0% 4.7% 6.6% 8.6%


In a rising interest rate environment, banks report increasing

NPL’s to gross advances due to the unaffordability of interest

payments on loans. Generally, banks consider a ratio NPL’s to

gross advances below 3% as favourable. The chart below

shows SBK and BGA with NPL ratios higher than the

acceptable 3% in FY15 indicating deteriorating credit quality.

CPI is the highest at 5.6% but this ratio is acceptable given that

all lending done is unsecured.

Chart 168: NPL as % of Average Gross Advances


Chart 169 shows that local banks’ NPL ratios have moved with

the interest rate cycle, with the ratios improving as interest

rates decreased from FY08 to FY13 and in the last 2 years

deteriorating. Except for SBNH at 2.9%, the NPL ratios are

currently at levels significantly below 3%, reflecting the

current quality of local loan books.

Chart 169: Local Banks – NPL as % of Gross Advances


The SA banks improved NPL ratios over the last 5 years from

levels above 5% to about 3% in line with declining interest

rates. BGA and CPI are the only SA banks with a NPL ratio

significantly above 3.0% at 4.2% for BGA and 5.4% for CPI.

Chart 170: SA Banks – NPL as % of Gross Advances


1.0%1.0%

2.9%

1.4%

2.6%3.8%

3.9%

2.5%

5.6%5.7%

5.0%

1.9%1.1%

8.6%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

FNB

NED

SBN

H

CG

P

NED

SA

SBK

SA

BG

A

FSR

CP

I

FNB

B

BB

B

SCB

SCZ

Zanaco

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%


FNB NED SBNH CGP

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%



P a g e | 63


FNBB’s NPL ratio deteriorated from below 3.0% to 5.7% in

FY16 over the last five years.

Chart 171: Botswana Banks – NPL as % of Gross Advances


BBB’s NPL ratio improved over the last 4 years, nevertheless

its NPL ratio remains high at 5.0%. SCB improved its ratio

drastically over the last 2 years, from having the highest ratio

of 7.7% to 1.9% in FY15.

The Zambian banks improved their NPL ratios substantially

over the last 5 years from levels above 10% but the tough

economic environment has taken its toll over the last 2

financial years.

SCZ have kept the NPL ratio at an acceptable level of 1.1% at

FY15, but Zanaco’s ratio spiked to 8.6%. The declining NPL

ratios came on the back of strong growth in advances over the

period, but this has reversed as interest rates increased.

Chart 172: Zambian Banks – NPL as % of Gross Advances


Provision for Bad Debts

In terms of Namibian legislation local banks must maintain a

general and specific provision for bad and doubtful debts. This

provision or allowance for credit losses can be seen as capital

specifically set aside to absorb estimated loan losses. This

provision should be maintained at a level that is adequate to

soak up the estimated amount of probable losses in the

bank’s loan book. The actual write off should ideally not be

greater than the amount set aside for the provision.

Determining the level of provision involves a great deal of

management judgement. Chart 173 shows the lower

provisions of local banks compared to SA and the other banks,

reflecting the superior quality of the loan books.

Chart 173: Provision as % of Gross Advances


Chart 174 shows that local banks have reduced provision for

bad debts over the last 5 years on the back of declining

interest rates. FNB has reduced its provision as % of gross

advances more significantly than the other local banks over

the last 5 years and is currently in line with the other local

banks. FNB’s reduction in provisioning has helped the bank’s

earnings growth momentum through lower bad debt charges

via the income statement.

Local banks are on average providing for about 1% of gross

advances while SA banks, except for CPI are providing 2% of

gross advances at latest year end.

NED has consistently reduced its provision over the last

decade from 6.8% of average advances to 1.2% in FY15. NED

has been the most conservative of all the local banks in

providing for loan losses and is now in line with the other local

banks.

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%

10.0%11.0%


FNBB BBB SCB

0%

2%

4%

6%

8%

10%

12%

14%


SCZ Zanaco

0.8%1.1%

1.2%

0.9%

1.8%2.5%2.5%

2.0%

11.4%

3.2%

5.0%

1.9%1.6%

5.6%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

FNB

NED

SBN

H

CG

P

NED

SA

SBK

SA

BG

A

FSR

CP

I (rhs)

FNB

B

BB

B

SCB

SCZ

Zanaco

P a g e | 64


Chart 174: Local Banks – Provision as % of Gross Advances


CGP has also been reducing its provision over the last 5 years

from 1.2% to 0.9% in FY16, the lowest among the local

banks, making it the most aggressive in providing for bad

debts. Given a credit loss ratio of only 20 basis points in

FY16, a provision of 90 basis points is adequate.

Chart 175: SA Banks – Provision as % of Gross Advances

Source: UBS

Among the Botswana banks, BBB stands out with a provision

of 5.0% of gross advances in FY15. Given a NPL ratio of 5.0%

and a credit loss ratio of 2.6%, provisioning is at the right level.

Chart 176: Botswana Banks – Provision as % of Gross Advances


Chart 177: Zambian Banks – Provision as % of Gross Advances

Source: PSG Annual Reports

In line with the credit loss experience, Zambian banks have

reduced their provision since 2009, but have increased it

again, especially in the case of Zanaco over the last 2 years.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%


FNB NED SBNH CGP

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%



0.0%

2.0%

4.0%

6.0%

8.0%


FNBB BBB SCB

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%

10.0%


SCZ Zanaco

P a g e | 65


Gross Coverage (Provision % of NPL)

Gross coverage is the total provision (specific and portfolio) as

% of NPL outstanding. Chart 178 shows FNB has

conservatively set aside reserves (made provision) for an

amount greater than the NPL’s outstanding over the last 6

years, but has reduced it significantly to 76.8% in FY16.

In contrast, SBNH has been the most aggressive, providing for

only 41.1% of NPL’s in FY15.

CGP has become more aggressive over the last 5 years,

coverage decreased from 85.2% in FY12 to 64.0% in FY16.

NED’s higher coverage of 110.1% in FY15 could be interpreted

as an estimation of the group’s expectations for NPLs and bad

debt levels.

Table 48: Gross Coverage (Provision as % NPL)


FNB 111.0% 93.1% 104.1% 117.1% 76.8%

NED 91.2% 88.4% 79.4% 110.1%

SBNH 49.7% 45.5% 51.8% 41.1%

CGP 85.2% 88.6% 106.0% 75.1% 64.0%

NED SA 56.4% 65.6% 65.0% 65.0%

SBK SA 58.1% 66.2% 0.0% 64.5%

BGA 45.0% 54.8% 58.9% 61.1%

FSR 60.0% 73.6% 85.4% 84.3% 77.9%

CPI 165.8% 153.2% 167.3% 196.4% 223.4%

FNBB 76.6% 59.8% 53.2% 57.3% 57.1%

BBB 93.9% 93.0% 100.8% 93.4% SCB 16.3% 18.6% 110.2% 99.0%

SCZ 88.6% 66.9% 107.6% 135.1%

Zanaco 65.7% 53.5% 57.6% 64.8%

Source: PSG, Annual report

The SA banks gross coverage was at very low levels in FY09 of

between 36% and 40% and have since gradually increased to

between 59% and 86% at the last year ends. The growth in the

coverage ratio could be attributed to a slowdown in NPLs (the

denominator).

The SA banks NPL ratios have increased over the last 5 years.

CPI is the outlier with very high coverage ratios, again due to

the unsecured nature of its lending.

Chart 178: Local Banks – Gross Coverage


Chart 179: SA Banks – Gross Coverage

Source: UBS

Chart 180 - 183 breaks down the specific and portfolio

provision as a % of NPL outstanding. FNB’s overall provision

has come down in line with the level of NPL to average

advances over the last 5 years. This contributed positively to

the impairment line in the income statement.

Specific and portfolio provisioning for all local banks except

NED, has decreased over the last financial year and is less than

levels 5 years ago.

CGP’s gross coverage increased from 60% in FY10 to 106% in

FY14 and reduced back to 64.0% in FY16.

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%


FNB NED SBNH CGP

0.0%

50.0%

100.0%

150.0%

200.0%

250.0%

300.0%

350.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%


NED SA SBK SA BGA

FSR CPI (rhs)

P a g e | 66


Chart 180: CGP – Specific and portfolio coverage


Chart 181: FNB – Specific and portfolio coverage


NED has increased its gross coverage from 82.5% to 110.1%

over the last 5 years with a slight reduction to 79.4% in FY14.

Specific coverage increased to very high levels. SBNH’s

portfolio provision amounted to 34 bps, lower than the 52 bps

credit loss ratio reported in the income statement.

Chart 182: NED – Specific and portfolio coverage


Chart 183: SBNH – Specific and portfolio coverage


47

.7%

41

.6%

48

.1%

50

.4%

52

.4%

62

.4%

49

.2%

41

.6%

25

.2%

27

.8%

30

.8%

34

.8%

36

.2% 4

3.6

%

26

.0%

22

.4%

0

50 000

100 000

150 000

200 000

250 000

0%

20%

40%

60%

80%

100%

120%


Portfolio coverage

Specific Coverage

Total provision (N$000) (RHS)

42

.8%

44

.3%

38

.9%

39

.1%

32

.4%

30

.6%

33

.8%

26

.7%

64

.3%

65

.4%

88

.5%

71

.8%

60

.7%

73

.5%

83

.3%

50

.1%

0

50 000

100 000

150 000

200 000

250 000

300 000

0%

20%

40%

60%

80%

100%

120%

140%


Portfolio coverage

Specific Coverage


50

.1%

54

.8%

52

.4%

46

.7%

50

.4%

44

.0%

63

.3%

21

.1%

20

.7%

30

.1%

44

.5%

37

.9%

35

.4%

46

.8%

0

20 000

40 000

60 000

80 000

100 000

120 000

0%

20%

40%

60%

80%

100%

120%


Portfolio coverage

Specific Coverage


28

.7%

33

.8%

30

.2%

33

.2%

40

.3%

33

.6%

17

.1%

15

.6%

19

.5%

12

.3% 11

.5%

7.5

%

0

50 000

100 000

150 000

200 000

250 000

0%

10%

20%

30%

40%

50%

60%

FY10 FY11 FY12 FY13 FY14 FY15Portfolio coverage

Specific Coverage


P a g e | 67


Valuation

In this section, we estimate a fair value for the local, Botswana

and Zambian banks.

The listed Namibian banks, FNB and CGP are valued using a

three-stage discounted cash flow model with the terminal

value determined by the justified price-to-book multiple.

All the other banks are valued on a justified price-to-book

value method. The justified PB value is represented by ROE-

g/COE–g, where COE is the cost of equity and g is the

sustainable growth rate.

Other valuation inputs include risk free rate, sustainable and

a risk premium.

We have used the latest data available for FNB and CGP and

FY15 data for the other banks. Chart 184 shows the market

cap for the SA banks at 7 December 2016. FSR has the highest

market cap at R 290bn.

Chart 184: SA Banks – Market Cap (Rbn) at 7 December 2016

Source: PSG, Bloomberg

Chart 185 shows the market cap for local, Botswana and

Zambian banks (converted to N$) based on share price and

exchange rates at 7 December 2016. Estimated prices were

used for the two unlisted banks (NED and SBNH). At N$12.8bn

FNB has the highest market cap among local banks, but

remains small compared to SA banks.

Chart 185: Market Cap (N$billion) at December 2016

Source: PSG, Bloomberg

The chart below shows the fair value of the banks based on

our P/B valuation. We value FNB at N$14.46bn, the highest

among the banks. CGP is valued at N$10.38bn. NED is

currently valued at N$1.82bn at a sustainable ROE of 15%

while SBNH is valued at N$3.95bn at a sustainable ROE of 18%.

Chart 186: Fair value (N$billion)

Source: PSG

FNBB, BBB and SCB are valued at N$10.5bn, N$3.8bn and

N$3.4bn based on sustainable ROE of 30%, 20% and 25%,

respectively. All the Botswana banks have historically

operated on very high ROEs (above 50%), however, ROE has

started to come off over the last couple of years.

Chart 187: Justified Price-to-Book and Sustainable ROE

Source: PSG

NED has not paid a dividend in the last 7 years. SBNH did not

pay a dividend in FY15 so there is no dividend yield applicable.

114.6

241.5

137.2

290.6

74.5

0

50

100

150

200

250

300

350

NedBank SA StandardBank SA

BarclaysAfrica

FirstRand Capitec

12.81

1.82 3.95

8.84 9.9

5.5 3.0 4.0

0.6

-

5.00

10.00

15.00

FNB

NED

(es

t)

SBN

H (

est)

CG

P

FNB

B

BB

B

SCB

SCZ

Zan

aco

14.46

1.82

3.95

10.38 10.5

3.8 3.4

1.1 0.6

-

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

FNB

NED

(es

t)

SBN

H (

est)

CG

P

FNB

B

BB

B

SCB

SCZ

Zan

aco

23%

15%

19% 18%

30%

20%

25%

32%

15%2.9

0.9

2.0

1.6

4.1

2.5

3.3

1.7

0.60.1

0.6

1.1

1.6

2.1

2.6

3.1

3.6

4.1

4.6

0%

5%

10%

15%

20%

25%

30%

35%

FNB

NED

CG

P

SNB

H

FNB

B

BB

B

SCB

SCZ

Zan

aco

ROE (LHS) PB (RHS)

P a g e | 68


Table 49: Local Banks – Fair Value per Share

CGP FNB NED SBNH

BVPSo (N$ cps) 856 1 536 2 733 2 499

Sustainable ROE 19.0% 23.0% 15.0% 8.0%

Justified P/B 2.0 2.9 0.9 1.6

Fair value (cps) 2 078 5 403 2 589 3 945

Total value N$ 000 N$ 000 N$ 000 N$ 000

Book value 2 624 058 3 348 673 1 923 539 2 498 652

# shares ('000) 499 534 267 593 70 382 100 000

Fair book value 10 378 083 14 458 847 1 822 300 3 945 240

Source: PSG, Annual report.

Table 50: Botswana Banks – Fair Value per Share

BBB FNBBB SCB

BVPS (thebe) 181 100 349

Sustainable ROE 20% 30% 25%

Justified P/B 2.5 4.1 3.3

Fair value per Share (t) 446 408 1 144

Total value BWP 000 BWP 000 BWP 000

Book value 1 545 047 2 534 353 1 041 281

# shares ('000) 852 161 2 563 700 298 353

Fair value Bank 3 799 296 10 468 359 3 414 036


Table 51: Zambian Banks – Fair Value per Share

Zanaco SCZ

BVPS (kwacha) 0.12 0.41

Sustainable ROE 15.0% 32.0%

Justified P/B 0.6 1.7

Fair value per share (K) 0.07 0.72

Total value ZMW 000 ZMW 000

Book value 1 001 106 689 352

# shares ('000) 8 662 500 1 666 980

Fair value Bank 600 664 1 194 877


Chart 188: Price-to-Book and ROE for listed banks

Source: PSG

FNB

FSR

BGA

CPI

NED

SBK

ZANACO

BCBB

SCBB

SCBL

FNBB

CGP

-5

0

5

10

15

20

25

30

35

0 1 2 3 4 5 6

RO

E

P/B

P a g e | 69


Annexure 1: Definitions

Cost-to-Income Operating expenditure divided by total income (net interest before impairment + non-interest income)

Earnings Per Share (EPS) Net Income after tax, extraordinary items, outside shareholders and income associates but before dividends

and reserve transfers divided by the weighted average number of ordinary shares.

Endowment effect

The endowment effect refers to a change in interest margin which occurs when market interest rates change

and the assets and liabilities reprice at different ways. In both the up and down interest rate cycles, assets

reprice more than liabilities, therefore margins compress in a downward cycle and widen in an upward cycle

Return on Assets (ROA) Net income after tax for the financial year divided by average total assets, expressed as a percentage.

Return on Equity (ROE) Net income after tax for the financial year divided by the average shareholders’ funds, expressed as a

percentage or ROA * gearing (assets/equity)

Interest Earning Assets (IEA) Total interest earning loans and advances, including investments that generate interest income, but before any

specific provisions

Interest Bearing Liabilities Total liabilities excluding acceptances, trade creditors and tax liabilities, as well as capital and reserves

Interest Income Total interest income earned on loans, advances and other interest bearing investments.

Net Interest Margin (NIM) The current year’s net interest income before impairment divided by average interest earning assets (IEA).

Interest Spread

The difference between the rate earned on average interest earning assets (interest income/average interest

earning assets) and the rate paid on average interest bearing liabilities (interest expenditure/average interest

bearing liabilities)

Non-Performing Loans A loan on which the recovery of the contractual interest and capital is doubtful. Many loans become non-

performing after being in default for three months, but this can depend on the contract terms.

NAV per share Shareholders’ funds (share capital plus distributable and non-distributable reserves) excluding debentures and

preference shares divided by the number of ordinary shares in issue at the year end

Gross Advances Gross Advances include debtors and acceptances before general provisions and specific provisions

Total risk-based capital ratio The Bank of Namibia (BON) sets the total regulatory to risk weighted assets at a minimum of 10% capital

adequacy ratio at 10% of risk- weighted assets.

Risk Weighted Assets

Different weights are applied to different assets based on the perceived risk. For example - cash and cash

equivalents and all government-backed debt (TB’s and Bonds) are assigned a zero weighting (risk free).

Mortgage loans, with residential property as collateral, are assigned a 50% weighting. More risky assets such as

overdrafts (no collateral) are assigned a 100% weighting.

Tier 1 Capital

This is the core measure of a bank's financial strength from a regulator's point of view. It consists of the types

of financial capital considered the most reliable and liquid, primarily Shareholders' equity less goodwill and

treasury shares

Tier 2 Capital Tier II capital is secondary bank capital that includes items such as undisclosed reserves, collective impairment

allowances, subordinated term debt.

Tier 3 Capital Includes short-term subordinate debt that may be used only to cover a portion of banking institution’s capital

charges for market risk

Gross-loan-to deposit ratio

The gross loan-to-deposit ratio is an indicator of the banks’ ability to fund loan growth through deposits. The

LTD ratio helps assess a bank's liquidity, and at the same time the aggressiveness of the bank's management.

Ideally the ratio should be below 100% indicating that the bank still has significant capacity to write new loans.

Liquid assets-to-deposit & ST borrowing

This ratio indicates the percentage of short-term obligations that could be met with the bank’s liquid assets in

case of sudden withdrawals. Liquid assets mainly consist of current accounts and reserves with the Bank of

Namibia and other banks, money at call and investment in TB’s and Bonds.

Gross Coverage Provision as % of NPL outstanding. .

Bad debt ratio/Credit loss ratio Impairment charge (income statement) divided by average gross advances.

Basis point 1 basis point = 0.01%, 100 basis points =1%

http://www.answers.com/topic/bank

http://www.answers.com/topic/regulator-automatic-control

http://www.answers.com/topic/financial-capital

http://www.answers.com/topic/shareholders-equity

http://www.investopedia.com/terms/l/loan-to-deposit-ratio.asp#axzz1ZISod4Tn

P a g e | 70


Annexure 2: Rating and Ratio Definitions

12 month Rating Definition

Buy Forecasted Stock Return is >6% above the Market Return Assumption

Hold Forecasted Stock Return is between -6% and 6% of the Market Return Assumption

Reduce Forecasted Stock Return is >6% below the Market Return Assumption

Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12months.

Market Return Assumption (MRA) is defined as the one-year local market interest rate plus an implied the equity risk premium.

Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change in the near

term, usually in response to an event that may affect the investment case or valuation.

Equity Price Targets have an investment horizon of 12 months.

P a g e | 71


Annexure 3: Financial Data Table 52: Bank Windhoek Holdings Limited for the year ended 30 June

Income statement (N000) FY11 FY12 FY13 FY14 FY15 FY16

Net Interest Income (NII) 671 316 783 058 914 454 1 056 898 1 266 961 1 458 142

Impairment advances (27 129) (25 243) (26 803) (29 115) (58 305) (60 779)

Non-interest Income 402 914 463 332 523 191 679 732 811 891 953 804

Fee & Commission Income 301 215 355 155 416 361 493 301 568 324 686 739

Trading Income 44 444 42 009 46 209 47 263 97 427 143 071

Other non-interest 57 255 66 168 60 621 139 168 146 140 123 995

Operating cost (643 275) (706 511) (762 759) (914 641) (1 042 231) (1 180 153)

Pre-tax profits 462 555 569 981 709 719 878 289 1 067 142 1 269 542

Net Income attributable 327 374 399 803 493 271 624 915 753 002 905 048

Per share data FY11 FY12 FY13 FY14 FY15E FY16

HEPS 73.90 87.00 108.70 121.00 150.9 181.8

DPS 23.00 25.00 32.80 44.00 53.0 66.0

BVPS cents 349.30 417.00 532.10 617.50 728 856

DY (%) 0.0% 2.9% 3.2% 3.6% 3.3% 3.8%

Payout ratio 31.8% 28.2% 30.3% 35.3% 35.4% 36.5%

Profitability FY11 FY12 FY13 FY14 FY15E FY16

NIM (Avg. IEA) 4.40% 4.50% 4.60% 4.70% 4.8% 4.8%

ROA (%) 2.00% 2.10% 2.40% 2.60% 2.6% 2.8%

ROE (%) 22.50% 23.10% 21.90% 21.9% 22.4% 22.9%

Productivity FY11 FY12 FY13 FY14 FY15E FY16

Cost-to-income ratio 61.4% 54.4% 50.9% 50.2% 48.1% 50.2%

Cost/average assets 4.2% 4.0% 3.8% 4.0% 3.9% 3.9%

Compensation expense ratio 32.6% 32.5% 29.2% 28.3% 27.5% 27.9%

Balance sheet (N$000) FY11 FY12 FY13 FY14 FY15E FY16

Total assets 15 984 823 18 921 050 20 938 608 24 318 268 28 700 631 32 333 653

Total deposits 13 387 519 15 911 343 17 082 611 19 065 075 22 251 161 24 171 257

Gross loans 13 115 389 15 604 620 17 786 928 20 393 082 23 621 871 26 825 310

Specific impairment 67 719 70 779 79 864 86 887 95 576 147 829

Portfolio impairment 43 265 48 909 55 102 60 800 66 880 79 458

Net advances 13 004 405 15 484 932 17 651 962 20 245 395 23 621 871 26 598 023

Book value 1 572 853 1 887 059 2 624 058 3 094 158 3 643 373 4 274 039

Capital Adequacy FY11 FY12 FY13 FY14 FY15E FY16

Tier 1 Capital 1 300 722 1 543 094 2 316 138 2 752 941 3 236 196 3 830 115

Total Capital 1 744 181 2 116 897 2 919 832 3 221 507 3 732 256 4 202 488

RWA year-end 13 198 935 15 754 130 17 589 161 20 395 703 23 621 871 26 598 023

Tier 1 ratio % 9.90% 9.80% 13.20% 13.50% 13.70% 14.40%

Total capital ratio 13.20% 13.40% 16.60% 15.80% 15.80% 15.80%

Equity multiplier (x) 10.40 10.10 8.80 7.90 7.90 7.70

Asset Quality FY11 FY12 FY13 FY14 FY15E FY16

Bad debt ratio (%) 0.22% 0.18% 0.16% 0.15% 0.26% 0.24%

NPL 140 673 140 444 152 397 139 290 160 184 355 216

NPL/Gross Advances 1.1% 1.0% 0.9% 0.7% 0.7% 1.4%

Gross coverage 78.9% 85.2% 88.6% 106.0% 101.4% 64.0%

Liquidity FY11 FY12 FY13 FY14 FY15E FY16

Gross loan-to-total funding 93.3% 93.6% 98.7% 97.5% 96.1% 97.4%

Liquid assets to deposit 18.4% 18.7% 15.9% 17.6% 18.3% 19.5%

Value (x) FY11 FY12 FY13 FY14 FY15E FY16

Market cap/revenues 3.5 3.5 3.9 3.6

Market cap/deposits 0.3 0.3 0.4 0.4

P/E 9.4 10.0 10.6 9.6

P/B 1.9 2.0 2.2 2.0

DY (%) 3.2% 3.6% 3.3% 3.8%


P a g e | 72


Table 53: FNB Namibia Holdings Limited for the year ended 30 June

Income Statement (N$000) FY11 FY12 FY13 FY14 FY15 FY16

Net Interest Income (NII) 839 440 889 879 984 964 1 138 002 1 452 867 1 653 631

Impairment advances 12 398 41 913 (23 366) (18 433) (49 882) (47 852)

Non-interest Income 604 861 739 585 868 549 1 087 351 1 260 061 1 506 656

Fee & Commission Income 528 080 640 707 747 083 928 558 1 072 685 1 217 512

Trading Income 65 589 80 163 102 163 131 100 155 755 173 233


Net insurance premium income 71 935 84 468 99 725 125 795 153 944 189 253

Net Claims and benefits paid (41 437) (40 968) (50 915) (71 079) (82 310) (102 777)

Operating cost (768 918) (884 105) (944 265) (1 069 398) (1 221 986) (1 417 647)

Pre-tax profits 722 514 838 208 936 663 1 192 795 1 513 252 1 782 592

Net Income attributable 464 253 538 579 607 621 784 608 998 662 1 217 633

Per share data FY11 FY12 FY13 FY14 FY15 FY16

HEPS 192 203 229 295 378 461

DPS 242 262 100 122 183 213

BVPS 704 912 872 1 057 1 289 1 536

DY (%) 16.6% 13.9% 4.3% 4.9% 4.5% 4.4%

Payout Ratio 136.6% 128.1% 43.4% 40.8% 48.0% 45.4%

Profitability FY11 FY12 FY13 FY14 FY15 FY16

NIM (Avg. IEA) 5.5% 5.2% 4.8% 4.8% 5.4% 5.4%

ROA (%) 2.8% 2.9% 2.8% 3.2% 3.5% 3.7%

ROE (%) 24.3% 25.4% 25.8% 30.9% 32.2% 32.7%

Productivity FY11 FY12 FY13 FY14 FY15 FY16




Balance sheet (N$000) FY11 FY12 FY13 FY14 FY15 FY16

Total assets 17 163 930 19 697 552 22 499 441 26 255 827 29 784 315 34 185 503

Total deposits 13 349 517 16 286 901 19 154 760 22 335 341 24 971 829 28 594 771

Gross loans 12 675 970 14 234 294 17 112 228 20 137 640 23 006 071 25 969 201



Net advances 12 464 342 14 076 753 16 964 679 19 990 782 22 833 693 25 776 087

Book value 1 820 122 2 362 036 2 262 045 2 745 911 3 348 673 3 989 699


Capital Adequacy FY11 FY12 FY13 FY14 FY15 FY16

Tier 1 Capital 1 413 000 1 855 000 2 023 000 2 484 000 3 092 000 3 659 000

Total Capital 1 864 000 2 389 000 2 584 000 3 075 000 3 714 000 4 309 000

RWA year-end 11 230 000 13 521 000 15 909 000 18 036 000 21 350 000 24 259 000

Tier 1 ratio % 12.6% 13.7% 12.7% 13.8% 14.5% 15.1%



Asset quality FY11 FY12 FY13 FY14 FY15 FY16

Bad debt ratio (%) -0.1% -0.3% 0.1% 0.1% 0.2% 0.2%

NPL 166 000 141 943 158 427 141 051 147 230 251 366


Gross coverage 127.5% 111.0% 93.1% 104.1% 117.1% 76.8%

Liquidity FY11 FY12 FY13 FY14 FY15 FY16

Gross Loan/deposit ratio 95.0% 87.4% 89.3% 90.2% 92.1% 90.8%


Value (x) FY11 FY12 FY13 FY14 FY15 FY16

Market cap/revenues 2.70 3.10 3.34 3.02 4.04 4.07

Market cap/deposits 29.3% 31.1% 32.9% 31.2% 45.8% 46.2%

P/E 8.22 9.24 10.06 8.40 10.75 10.24

P/B 2.07 2.07 2.66 2.38 3.18 3.13

DY (%) 16.6% 13.9% 4.3% 4.9% 4.5% 4.4%


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Table 54: NedNamibia for the year ended 31 December


Net Interest Income (NII) 354 489 342 745 380 922 411 483 475 085 588 781




Trading Income 5 241 5 264 5 381 7 481 6 195 764


Operating cost (331 289) (331 185) (377 244) (410 769) (446 620) (525 404)

Pre-tax profits 194 733 193 519 218 108 259 625 325 210 343 820



EPS 201 193 227 285 350 388

DPS ND ND ND ND ND ND

BVPS cents 1 185 1 389 1 633 1 923 2 345 2 733

DY (%) ND ND ND ND ND ND

Payout Ratio ND ND ND ND ND ND


NIM (Avg. IEA) 5.6% 5.0% 5.0% 4.7% 4.6% 4.8%

ROA (%) 2.1% 1.9% 2.0% 2.1% 2.3% 2.1%

ROE (%) 18.7% 15.0% 15.1% 16.1% 16.5% 15.4%






Total assets 7 159 494 7 515 911 8 786 263 9 999 919 11 871 305 13 828 598

Total deposits 6 020 944 6 185 252 7 292 729 8 335 554 9 818 234 11 531 141

Gross loans 5 267 951 5 535 214 6 124 565 7 008 385 8 374 544 9 907 360



Net advances 5 197 409 5 476 323 6 056 454 6 935 109 8 309 843 9 802 400

Book value 833 942 972 197 1 143 957 1 348 331 1 637 668 1 910 200


Tier 1 Capital 769 702 916 859 1 070 428 1 227 533 1 403 156

Total Capital 848 118 999 388 1 162 507 1 360 160 1 525 441

RWA year-end 5 592 443 5 425 128 6 934 049 8 363 680 9 677 562

Tier 1 ratio % 13.8% 16.9% 15.4% 14.7% 14.5%



Asset Quality FY10 FY11 FY12 FY13 FY14 FY15

Bad debt ratio (%) 0.31% 0.14% 0.16% 0.14% 0.04% 0.44%

NPL 93 403 71 390 74 691 82 928 81 490 95 343


Gross coverage 75.5% 82.5% 91.2% 88.4% 79.4% 110.1%





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Table 55: Standard Bank Namibia Holdings for the year ended 31 December


Net Interest Income (NII) 502 710 516 910 594 772 688 793 885 585 1 147 549




Trading Income 76 698 68 614 76 440 98 345 104 229 137 046


Operating cost (693 775) (602 921) (773 748) (908 388) (1 039 307) (1 169 725)

Pre-tax profits 449 150 422 526 421 219 424 255 523 490 751 207



EPS 374 301 302 319 362 524

DPS ND ND 200 120 260 0

BVPS cents 1 379 1 564 1 675 1 879 1 977 2 499

DY (%) 0% 0% 0% 0% 0% 0%

Payout Ratio ND ND 66% 38% 72% 0%


NIM (Avg. IEA) 4.3% 4.2% 4.3% 4.4% 5.1% 5.9%

ROA (%) 2.7% 2.0% 1.8% 1.7% 1.7% 2.3%

ROE (%) 29.6% 20.5% 18.6% 18.0% 18.8% 23.4%






Total assets 14 403 717 16 210 298 18 190 783 20 108 898 21 822 523 23 991 803

Total deposits 12 135 724 13 465 491 14 165 566 15 850 883 17 460 602 18 185 518

Gross loans 8 849 491 10 224 698 12 336 081 13 250 316 15 432 811 17 216 332



Net advances 8 768 787 10 137 895 12 261 893 13 120 881 15 645 096 17 392 119

Book value 1 379 496 1 563 739 1 674 866 1 878 504 1 976 746 2 498 652


Tier 1 Capital 1 114 308 1 373 275 1 569 460 1 702 693 2 300 449

Total Capital 1 357 713 1 587 489 1 749 278 2 012 146 2 674 086

RWA year-end 11 182 802 13 447 268 14 418 469 15 282 496 17 140 740

Tier 1 ratio % 10.0% 10.2% 10.9% 11.1% 13.4%

Total capital ratio 12.1% 11.8% 12.1% 13.2% 15.6%


Asset Quality FY10 FY11 FY12 FY13 FY14 FY15

Bad debt ratio (%) 0.08% 0.30% 0.29% 0.51% 0.79% 0.52%

NPL 176 459 175 663 208 229 267 986 325 815 479 941


Gross coverage 45.7% 49.4% 49.7% 45.5% 51.8% 41.1%





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Copyright PSG

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the information of clients only. It shall not be reproduced in whole or in part without our permission. The information contained herein has been obtained

from sources which and persons whom we believe to be reliable but is not guaranteed for accuracy, completeness or otherwise. Opinions and estimates

constitute our judgement as of the date of this material and are subject to change without notice.

Past performance is not indicative of future results. This report is provided for informational purposes only. No information contained herein, no opinion

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subject security and issuer and that no part of his compensation was, is or will be directly or indirectly related to specific recommendations or views contained

in this report.

Member of the Namibian Stock Exchange

Registration number: (98/528)

Directors: Hanli Jacobs, Dan Hugo*, Isaac Kaulinge, Milka Mungunda, Willem Theron*, Brian van Rensburg

* South African

5 Conradie Street, Windhoek, NAMIBIA

PO Box 196, Windhoek, NAMIBIA

Telephone +264 61 378 900 Fax +264 61 378901, E-Mail [email protected]

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