SBN HOLDINGS LIMITED Annual Report 2022
KEY MANAGEMENT ASSUMPTIONS continued
70
SBN HOLDINGS LIMITED
Annual report 2022
The group's forward-looking economic
expectations were applied in the
determination of the ECL at the reporting
date.
A range of base, bullish and bearish forward-looking economic
expectations were determined, as at 31 December 2022, for
inclusion in the group's forward-looking process and ECL
calculation.
Namibia economic expectation
Base scenario
Although the global economic outlook and risks have worsened,
we still forecast a stable recovery in the Namibian domestic
economy over the forecast period. The recovery is expected
to stem from a robust performance in the mining industry,
particularly diamonds. Continued water supply and high input
cost constraints will place pressure on uranium mining prospects
until alleviated. Most of the sectors under the secondary and
tertiary industries are similarly expected to register positive but
low growth. Higher inflation and interest rates are likely to reduce
discretionary consumer expenditure in the short term. A marginal
recovery is expected once inflationary pressure stabilises over
the midterm. We expect economic growth over the midterm to
be higher than the pre-pandemic growth trend supported by
structural and fiscal Government reforms and elevated terms of
trade.
Risks to the forecast are skewed to the downside with geopolitical
tensions, climatic challenges, global supply chain disruptions
and higher food and oil prices weighing on the forecast. Further
tightening of financial conditions has led to depreciating real
incomes for households which exerts pressure on consumption
and remains a risk for growth.
Bear scenario
The risks of a bearish scenario materialising are predicated on
the more long lasting negative global shocks are based primarily
Main macroeconomic factors
on higher oil prices and slower growth in China. This scenario also
assumes that commodity prices fall under the weight of slowing
demand, with longer lasting supply chain disruptions and a period
of persistently higher inflationary pressure. Domestically, failure
to successfully implement structural and fiscal reforms occurs.
Economic recovery would be more protracted, leading to
persistent structural growth constraints. In this scenario,
worsening public finances may trigger a ratings downgrade and
result in significant capital outflows. Electricity supply, rail and
port infrastructure inefficiencies and stalling reform momentum
in South Africa weigh on potential growth and suppresses
economic activity in the region. The effects of the economic
downturn in South Africa would carry over into the Namibian
economy and likely weigh negatively on growth. Failure to contain
inflationary pressure accompanied by a weaker Rand (and by
extension the Namibian dollar) would force BoN to raise policy
rates, further hindering recovery efforts. In this scenario, growth
is persistently lower and as domestic demand remains subdued,
partly owing to the larger permanent destruction of businesses
and jobs in key sectors of the economy.
Bull scenario
Generally, there is a low probability of a bullish scenario in which
the implementation of fiscal and structural reforms, which
had started but continues at a slow pace in the baseline, gains
momentum.
This supports the growth rebound, including fixed investment and
employment growth, as well as capital inflows. The scenario also
assumes elevated terms of trade due to higher commodity prices.
In this scenario, a recovery in growth over the medium term would
boost government revenues and speed up the fiscal adjustment
process leading to an improved fiscal outlook.
Domestic GDP growth would pick up significantly, averaging at
almost 3.3% over the remaining forecast period. The turnaround
would be supported by a recovery in consumer demand and
commodity prices.
The following table shows the main macroeconomic factors used to estimate the forward-looking impact on the ECL provision on financial
assets. For each scenario the average values of the factors over the next 12 months, and over the remaining forecast period, are presented.
Base scenario
Remaining
forecast
period¹
Bull scenario
Bear scenario
Remaining
forecast
period¹
12 months
Next
12 months
Next
Remaining
forecast
period¹
Next
12 months
Macroeconomic factors
2022
Namibia²
Inflation (%)
5.60
4.61
5.99
5.16
4.84
3.96
Real GDP³ (%)
3.10
2.56
1.54
1.67
3.93
3.31
Exchange rate (USD/NAD)
16.60
15.99
17.58
17.25
15.86
15.01
Prime (%)
11.00
10.54
12.00
11.40
10.75
10.25
2021
Namibia²
Inflation (%)
Real GDP³ (%)
Exchange rate (USD/NAD)
Prime (%)
4.20
4.25
4.60
4.99
3.53
3.90
3.40
2.98
1.65
1.49
4.15
3.67
15.03
15.15
15.58
16.19
14.43
14.41
8.06
9.29
8.25
9.48
7.75
1 The remaining forecast period is 2024 to 2026.
2 The scenario weighing is: Base at 55%, Bear at 30% and Bull at 15%.
3 Gross domestic product.
8.71
Sensitivity analysis of home services, vehicle and asset finance, card, personal, business and other
lending products forward-looking impact on ECL provision
The following table shows a comparison of the FLI on the provision as at 31 December 2022, based on the probability weightings of the
above three scenarios resulting from recalculating each of the scenarios using a 100% weighting of the above factors.
Forward-looking impact
Scenarios
Base
Bear
Bull
2021
2022
Total ECL I/S (release)/
provision
N$'000
charge
N$'000
Total ECL
provision
N$'000
I/S (release)/
charge
N$'000
68 252
(5 636)
73 888
(11 091)
60 214
(8 038)
66 515
157 872
327
89 620
(67 925)
170 728
221
(7373)
96 840
(73 667)
The income statement impact of N$5.6 million for 2022 was assessed by applying the same sensitivity analysis principles mentioned
above. The impact on the total ECL provision for each scenario is N$60 million (decrease of N$8 million) for the base scenario,
N$158 million (increase of N$90 million) for the bear scenario and N$0.3 million (decrease of N$68 million) for the bull scenario.
Post-model adjustments
The company's forward-looking scenarios remain aligned to base
case (55%), bull (15%) and bear (30%). The current period ECL
charge decreased from N$74 million to N$68 million in support of
the positive sentiment expected.
Fair value
Financial instruments
In terms of IFRS, the group is either required to or elects
to measure a number of its financial assets and financial
liabilities at fair value, being the price that would, respectively,
be received to sell an asset or paid to transfer a liability in an
orderly transaction in the principal (or most advantageous)
market between market participants at the measurement date.
Regardless of the measurement basis, the fair value is required
to be disclosed, with some exceptions, for all financial assets and
financial liabilities. Fair value is a market-based measurement
and uses the assumptions that market participants would
use when pricing an asset or liability under current market
conditions. When determining fair value it is presumed that the
entity is a going concern and is not an amount that represents a
forced transaction, involuntary liquidation or a distressed sale.
Information obtained from the valuation of financial instruments
is used to assess the performance of the group and, in particular,
provides assurance that the risk and return measures that the
group has taken are accurate and complete.
Valuation process
The group's valuation control framework governs internal control
standards, methodologies and procedures over its valuation
processes, which include:
Prices quoted in an active market: The existence of quoted
prices in an active market represents the best evidence of fair
value. Where such prices exist, they are used in determining the
fair value of financial assets and financial liabilities.
Valuation techniques: Where quoted market prices are
unavailable, the group establishes fair value using valuation
techniques that incorporate observable inputs, either directly,
such as quoted prices, or indirectly, such as those derived
from quoted prices, for such assets and liabilities. Parameter
inputs are obtained directly from the market, consensus pricing
services or recent transactions in active markets, whenever
possible. Where such inputs are not available, the group makes
use of theoretical inputs in establishing fair value (unobservable
inputs). Such inputs are based on other relevant input sources
of information and incorporate assumptions that include prices
for similar transactions, historic data, economic fundamentals,
and research information, with appropriate adjustments to
reflect the terms of the actual instrument being valued and
current market conditions. Changes in these assumptions would
affect the reported fair values of these financial instruments.
Valuation techniques used for financial instruments include
the use of financial models that are populated using market
parameters that are corroborated by reference to independent
market data, where possible, or alternative sources, such as,
third-party quotes, recent transaction prices or suitable proxies.
The fair value of certain financial instruments is determined
using industry standard models such as, discounted cash flow
analysis and standard option pricing models. These models are
generally used to estimate future cash flows and discount these
back to the valuation date. For complex or unique instruments,
more sophisticated modelling techniques may be required,
which require assumptions or more complex parameters such as
correlations, prepayment spreads, default rates and loss severity.
Valuation adjustments: Valuation adjustments are an integral
part of the valuation process. Adjustments include, but are not
limited to:
■credit spreads on illiquid issuers,
■implied volatilities on thinly traded instruments,
■correlation between risk factors,
■prepayment rates and
other illiquid risk drivers.
In making appropriate valuation adjustments, the group applies
methodologies that consider factors such as bid-offer spreads,
liquidity, counterparty and own credit risk. Exposure to such
illiquid risk drivers is typically managed by:
■using bid-offer spreads that are due to the relatively low
liquidity of the underlying risk driver
■raising day one profit or loss provisions in accordance with
IFRS
■quantifying and reporting the sensitivity to each risk driver
■prepayment rates
limiting exposure to such risk drivers and analysing exposure
on a regular basis.
Validation and control: All financial instruments carried at
fair value, regardless of classification, and for which there are
no quoted market prices for that instrument, are fair valued
using models that conform to international best practice
and established financial theory. These models are validated
independently by the group's model validation unit and formally
reviewed and approved by the market risk methodologies
committee. This control applies to both off-the-shelf models,
as well as those developed internally by the group. Further, all
inputs into the valuation models are subject to independent price
validation procedures carried out by the group's market risk unit.
Such price validation is performed on at least a monthly basis,
but daily where possible given the availability of the underlying
price inputs. Independent valuation comparisons are also
performed, and any significant variances noted are appropriately
investigated. Less liquid risk drivers, which are typically used to
mark level 3 assets and liabilities to model, are carefully validated
and tabled at the monthly price validation forum to ensure that
these are reasonable and used consistently across all entities in
the group. Sensitivities arising from exposures to such drivers
are similarly scrutinised, together with movements in level 3 fair
values. They are also disclosed on a monthly basis at the market
risk and asset and liability committees.
Refer to note 18 for assets and liabilities
at fair value disclosures.
71View entire presentation