Annual Financial Statements 2020

32 22 ANNUAL FINANCIAL STATEMENTS KEY MANAGEMENT ASSUMPTIONS CONTINUED STANDARD BANK NAMIBIA LIMITED Annual financial statements 2020 33 Group master rating scale band SICR trigger (from origination) Low credit risk 3 rating or more 1 rating or more SB 1 12 SB 13 20 SB 21 - 25 From a Namibian perspective, for Covid-19 related qualifying exposures the SICR methodology remains unchanged (comparing the credit risk grading) to determine whether these exposures are classified within stage 1 or stage 2. The credit risk grade is assessed at the time of the relief, and subsequently monthly reviews of the status of the request and client's performance are conducted. Incorporation of forward-looking information (FLI) in ECL measurement The company determines the macroeconomic outlook, over a planning horizon of at least three years. For PBB these forward-looking economic expectations are included in the ECL where adjustments are made based on the company's macroeconomic outlook, using models that correlate these parameters with macroeconomic variables. Where modelled correlations are not viable or predictive, adjustments are based on expert judgement to predict the outcomes based on the company's macroeconomic outlook expectations. In addition to forward-looking macroeconomic information, other types of FLI, such as specific event risks and industry data, have been taken into account in ECL estimates when required, through the application of out-of-model adjustments. These out-of-model adjustments are subject to credit governance committee oversight. The company's macroeconomic outlooks are incorporated in CIB's client rating and include specific forward-looking economic considerations for the individual client. The client rating thus reflects the expected client risk for the company's expectation of future economic and business conditions. Further adjustments, based on point-in-time market data, are made to the PDS assigned to each risk grade to produce PDs and ECL representative of existing market conditions. Default The definition of default, which triggers the credit impaired classification (stage 3), is based on the company's internal credit risk management approach and definitions. While the specific determination of default varies according to the nature of the product, it is compliant to the Basel definition of default, and generally determined as occurring at the earlier of: ⚫ where, in the company's view, the counterparty is considered to be unlikely to pay amounts due on the due date or shortly thereafter without recourse to actions such as the realisation of security; or ⚫ when the counterparty is past due for more than 90 days (or, in the case of overdraft facilities, in excess of the current limit). The company has not rebutted the 90 days past due rebuttable presumption. Write off policy An impaired loan is written off once all reasonable attempts at collection have been made and there is no material economic benefit expected from attempting to recover the balance outstanding (i.e. no reasonable expectation of recovery). This assessment considers both qualitative and quantitative information, such as past performance, behaviour and recoveries. The company assesses whether there is a reasonable expectation of recovery at an exposure level. As such once the below criteria are met at an exposure level, the exposure is written off. The following criteria must be met before a financial asset can be written off: ⚫ the financial asset has been in default for the period defined for the specific product (i.e. vehicle and asset finance, mortgage loans, etc.) which is deemed sufficient to determine whether the company is able to receive any further economic benefit from the impaired loan. The period defined for unsecured PBB products are determined with reference to post-default payment behaviour such as cumulative delinquency, as well as an analysis of post write off recoveries which includes an assessment of the factors resulting in post write off recoveries. Factors that are within the company's control are assessed and considered in the determination of the period defined for each product. The post-default payment period is generally once the rehabilitation probability (repayment of arrear instalments) is considered low to zero, and a period of 180 days in arrears; and ⚫ at the point of write off, the financial asset is fully impaired (i.e. 100% ECL allowance) with no reasonable expectation of recovery of the asset, or a portion thereof. As an exception to the above requirements: ⚫ where the exposure is secured (or for collateralised structures), the impaired exposure can only be written off once the collateral has been realised. Post-realisation of the collateral, the shortfall amount can be written off if it meets the second requirement listed above. ⚫ CIB products, write off are assessed on a case-by-case basis, and approved by CIB credit governance committee based on the individual facts and circumstances. For unsecured exposures, post write off collection and enforcement activities include outsourcing to external debt collection agents as well as, collection/settlement arrangements to assist clients to settle their outstanding debt. The company continuously monitors and reviews when exposures are written off, the levels post write of recoveries as well as the key factors causing post write off recoveries. This ensures that the company's point of write off remains appropriate and that post write off recoveries are within acceptable levels after time. Curing Continuous assessment is required to determine whether the conditions that led to a financial asset being considered to be credit impaired (i.e. stage 3) still exist. Distressed restructured financial assets that no longer qualify as credit impaired remain within stage 3 for a minimum period of six months (i.e. six full consecutive monthly payments per the terms and conditions). In the case of financial assets with quarterly or longer dated repayment terms, the classification of a financial asset out of stage 3 may be made subsequent to an evaluation by the company's CIB or PBB credit governance committee (as appropriate), such evaluation will take into account qualitative factors in addition to compliance with payment terms and conditions of the agreement. Qualitative factors include compliance with covenants and with existing financial asset terms and conditions. Where it has been determined that a financial asset no longer meets the criteria for SICR, the financial asset will be moved from stage 2 (lifetime ECL model) back to stage 1 (12-month ECL model) prospectively. The company'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 30 November 2020, for inclusion in the company's forward-looking process and ECL calculation. Namibia economic expectation Base scenario ⚫ Due to the negative impact of the Covid-19 outbreak both globally and domestically in 2020, Namibia's economic prospects have weakened substantially. • In this scenario, real gross domestic product (GDP) is expected to contract by around 8.0% in 2020. Local lockdowns for six months and border closures, resulted in most tourist accommodation establishments closing down, which significantly hampered the tourism sector. Additionally, under the lockdown there was limited activity in the mining, transport and storage, manufacturing and wholesale and retail trade sectors, which ultimately negatively impacted growth prospects. • Continued investments in the health and ICT sectors, coupled with recoveries in agriculture (as a result of above average rainfall), manufacturing and mining and quarrying, should lead to a slight economic recovery in 2021, with a growth estimated at 2.1%. Growth is expected to average above 2% by the end 2024. Bear scenario • Material risks of a more bearish scenario do exist and a largely predicated on failure to contain the outbreak of the Covid-19 pandemic, reform failure in South Africa and depressed Main macroeconomic factors commodity prices. In this scenario, worsening public finances in South Africa would trigger a ratings downgrade by Moody's and result in significant capital outflows. Additionally, Eskom's delayed turnaround would deepen electricity shortfalls and ultimately constrain economic output. ⚫ The effects of the economic downturn in South Africa would carry over into the Namibian economy and likely weigh negatively on growth. ⚫ Downside risks to the domestic economic outlook are dominated by the persistence of the pandemic, a potential slow vaccine rollout as well as pre-existing structural constraints. Furthermore, debt sustainability concerns, which may require fiscal consolidation, which, if prematurely implemented will likely further dampen economic recovery and growth efforts. ⚫ In this scenario, the recession would continue and deepen as domestic demand remains subdued, partly owing to 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 - however, if it were to occur it would hinge on better-than- expected traction with broader economic reform implementation in South Africa, this in turn would attract portfolio inflows, leading to the exchange rate strengthening as global growth and commodity prices pick up. In addition, Namibia would also fast track implementation of the envisaged structural reforms and some key identified projects. In this scenario, domestic GDP growth would pick up significantly (easily around 3.5% in 2021). The turnaround would be supported by a recovery in commodity prices, coupled with improved rainfall supporting growth in the agriculture sector. 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 scenario¹ Next Macroeconomic factors 12 months 2020 Namibia Inflation (%) 2019 Remaining forecast period² Bearish scenario¹ Next 12 months Bullish scenario¹ Remaining forecast period² Next 12 months Remaining forecast period² 2.20 3.80 2.90 3.84 3.50 4.20 Real GDP (%) (8.00) 2.10 (12.00) 2.60 0.30 (3.50) Exchange rate (USD/NAD) 17.02 15.82 17.36 17.85 16.22 15.04 Prime (%) 8.20 8.15 8.25 9.48 8.20 7.72 Inflation (%) Real GDP (%) Exchange rate (USD/NAD) Prime (%) 4.30 4.80 4.80 5.50 4.10 4.20 0.40 2.10 (0.20) 0.70 1.70 3.10 14.83 14.43 16.44 15.40 13.70 13.58 10.00 10.25 10.75 11.00 9.75 9.75 1 In 2020, the scenario weighing is: Base at 55%, Bull at 15% and Bear at 30%. In 2019, the scenario weighting is: Base at 60%, Bull at 20% and The scenario weighting has been revised from 2019 to 2020 due to the changes in the macroeconomic factors including the impact of Covid-19. 2 The remaining forecast period is 2021 to 2024.