Banks will help with Covid band-aid

Jo-Maré Duddy – Local commercial banks have taken the partnership with government “very seriously” to help distressed consumers and businesses impacted by the lockdown and the Covid-19 pandemic, the new chair of the Bankers Association of Namibia (BAN), Ester Kali, has said.

Kali, also the chief executive officer of locally-listed Letshego Namibia Holdings, earlier this month took over from former BAN chair Sarel van Zyl. Van Zyl, the CEO of FirstRand Namibia, will retire from the locally-listed giant at the end of September this year.

Asked whether BAN can give an indication of how much money in total commercial banks have granted in debt relief so far, Kali answered: “Individual banks will best be placed to speak to their own support processes over this time, but the partnership with government has been taken very seriously and debt holidays have indeed been offered to qualifying individuals according to each banks’ process.”

“The banking sector have heeded the request from BoN to provide payment relief to selected customers and the reduction of interest rates will stimulate growth,” she said.

The deputy governor of the Bank of Namibia (BoN), Ebson Uanguta, last week said the central bank said commercial banks were asked to provide data of the extent of relief granted.

The BoN needs at least three months of “tangible data” before it can decide whether it is satisfied with commercial banks’ effort, Uanguta said. Feedback on local commercial banks' willingness to grant debt repayment holidays has been “a mix bag of responses so far”, he said.

Kali pointed out that banks have already announced “a number of other initiatives to reduce the financial stress for customers in good standing who find themselves in difficulties because of the Covid-19 pandemic and the national lockdown”.

Joining the fight

Kali said the banking industry has been preaching financial literacy for many years.

“We have become accustomed to living by the day and not saving for rainy days as such. Namibians have a culture of being over-indebted and using pension funds, savings and investments for non-essentials,” she said.

The banking sector “once more needs to stress the importance of financial planning, budgeting and living within their means”, Kali said.

“We are aware that the lower income citizens struggle to earn the basics. Therefore, it’s critical for all banks and financial institutions to lend a helping hand when government reaches out with proposals,” she added.

Another lesson from the Covid-19 pandemic is that Namibia has to start funding and investing in local manufacturing companies, Kali said.

“The dependency on other countries has crippled us in such times and investments should be done locally to stimulate our very own economy.”

Under pressure

According to Kali, the coronavirus pandemic poses significant downside risks to the banking environment.

“The banks’ asset quality and earnings will be pressured in 2020 by the deep economic recession, and by widespread disruption to industries from social containment measures,” she said.

In its Financial Stability Report in April, the BoN said banks are “facing severe financial headwinds in 2020 on account of the coronavirus outbreak”.

The pandemic will compound existing threats to the banks’ stemming from a prolonged period of poor economic growth and weak business confidence, Kali added.

The BoN forecasts the economy will grow by a record -6.9% in 2020.

Kali says it is important to take note that local banks are integral to the free movement of goods, business growth and security and cashflow of almost every business in Namibia.

“Any slowdown in the economy affects banks because of the strong interconnectedness of industries,” she said.

“Because the movement of people has been restricted most industries have been impacted and their subsequent reliance on government and the banks in partnership have become for many businesses their only form of support as consumption has dropped significantly over the past few months. Most banks have reduced fees, offered payment holidays and dropped interest rates, which in turn has significant impact on their own bottom lines,” Kali added.

“The banking sector is effectively required to prop up working capital in businesses to allow them to pay suppliers and employees,” said IJG Securities’ research analyst, Dylan van Wyk, in his recent review of the impact of Covid-19 on the local banking sector.

“IJG is particularly concerned about the liquidity outlook over the next two years,” he said. This will be a “key determinant of the cost of funding going forward”.

Asked whether local banks experience liquidity constraints currently or whether it is anticipated, Kali said: “Due to reduced spending in the market, liquidity should not necessarily be an issue at this point. But again each bank manages their own liquidity ratios in line with BoN parameters for bank thresholds.”

Interest rates

The BoN has already decreased its repo rate four times this year. It lowered the repo by 25 basis points in February, followed by 100 basis points in March and another 100 basis points in April – the significant latter two drops were in response to Covid-19 and the lockdown ravaging the Namibian economy. Last week, the repo was decreased by another 25 basis points to 4.0% - the lowest rate in the history of Namibia.

As a result, the prime lending rate of local commercial banks currently is 7.75%.

Kali said lowering interest rates is one of the BoN’s tools to stimulate economic growth. “However, when rates are too low, they can spur excessive growth and perhaps inflation,” she cautioned.

The latest interest rate cuts by the BoN will give Namibian homeowners, consumers and businesses additional cash flow during these harsh times for the economy and the country. This monetary policy transmission mechanism allows banks to further lower the cost of credit for their customers.

“This will give consumers more money to save, reduce debt or spend on essential goods and services – all of which is good for the economy. Unfortunately for depositors and savers, it also means lower deposit rates,” Kali said.

The repo rate informs the prime reference rate, which banks, use as a benchmark to determine some client interest rates. Client rates can be above or below prime, after considering their credit risk profiles and general market conditions, she explained.

“The effects of the sharp, unexpected, downwards move in the South African and Namibian repo rates pose quite a significant headwind to the banking industry’s net interest margin,” Van Wyk said in his report.

Asset quality

Due to the prevailing economic difficulties, the BAN expects asset quality to deteriorate, as households and corporates become cash strapped.

“Namibian companies are exposed to falling commodity prices, lower mining output and even lower manufacturing activity as well as a decline in the tourism sector.

“Relief measures announced by the commercial banks, including postponement of principal and interest payments to selected customers, will take some initial pressure off customers but a prolonged lockdown may lead to an increase in non-performing loans and bad debts,” Kali said.

According to the BoN’s latest Financial Stability Report, non-performing lonas (NPLs) at local commercial banks totalled more than N$4.99 billion at the end of last year, nearly N$3.8 billion or 312% more than in 2016, Namibia’s first recession year in the current cycle.

With NPLs representing 4.8% of total loans and advances, banks last year breached the BoN’s threshold of 4%. Anticipating borrowers’ inability to service their loans in a Covid economy, the BoN increased its NPL trigger to 6%.

“There is no question that the Namibian banks are bracing for a wave of defaults,” Van Wyk said in his report.

Hot seat

Asked what she wishes to accomplish during her term as BAN chair, Kali said: “Note this is not a personal accomplishment as chair, but as the body and as the team. We, in collaboration with the governor of the Bank of Namibia, the minister of finance, all banks, members of the public and the finance industry at large, have much on our plate.”

An organisation such as BAN has a lot of expectations from various role players and we should collaboratively work together, she said.

“As much as this organisation has been established, we also call on the public to engage with us. Have conversations around the policies and frameworks that we structure in the best interest for them.”

Kali concluded: “We look forward to this new chapter, which will most probably be the most difficult. However, we remain focused and positive.”