SBN HOLDINGS LIMITED Annual Report 2022

50 REPORT OF THE INDEPENDENT AUDITOR continued SBN HOLDINGS LIMITED Annual report 2022 Overall group materiality How we determined it Rationale for the materiality benchmark applied N$42 943 150 5% of consolidated profit before direct taxation. We chose profit before tax as the benchmark because, in our view, it is the benchmark against which the performance of the Group is most commonly measured by users, and is a generally accepted benchmark. We chose 5% which is consistent with quantitative materiality thresholds used for profit-oriented companies in this sector. How we tailored our group audit scope We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the consolidated financial statements as a whole, taking into account the structure of the Group, the accounting processes and controls, and the industry in which the Group operates. The consolidated financial statements are a consolidation of the Company and its five subsidiaries (each a "component") for purposes of our group audit scope. Full-scope audits were performed on the Company and a subsidiary, Standard Bank Namibia Limited, based on their financial significance to the Group, in relation to its contribution to the Group's consolidated profit before direct taxation. Specified procedures were performed on the Properties in possession which arose from the acquisition of Spearmint Investments (Pty) Ltd, due to their associated risk to the Group. Analytical review procedures were performed on the remaining subsidiaries being financially inconsequential components. In establishing the overall approach to the Group audit, we determined the type of work that needed to be performed by us, as the group audit team. All testing was performed centrally by the group audit team. By performing the procedures outlined above, we obtained sufficient and appropriate audit evidence regarding the financial information of the Group to provide a basis for our opinion on the consolidated financial statements as a whole. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated and separate financial statements of the current period. These matters were addressed in the context of our audit of the consolidated and separate financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. We have determined that there are no key audit matters to communicate in our report in respect of the separate financial statements. Key audit matter Expected credit losses on Corporate and Investment Banking (CIB) loans and advances Refer to the following notes to the consolidated financial statements for the related disclosures and detail: ■Key management assumptions, Expected Credit Loss (ECL) Note 5, Loans and advances; Note 30, Credit impairment charges; ■Annexure B-Risk and Capital Management, Credit Risk; and ■Annexure D, Detailed accounting policies, Impairment. The ECL for CIB loans and advances was considered to be a matter of most significance to our current year audit due to the level of subjective judgement applied by management, the effect that the ECL has on the Group's credit risk management processes and operations, and the magnitude of the ECL recognised in the consolidated financial statements. In their calculation of the ECL on CIB loans and advances management applied International Financial Reporting Standard ("IFRS") 9-Financial Instruments ("IFRS 9"), as described in the notes to the consolidated financial statements. ECL on CIB exposures is calculated separately based on rating models per customer. In calculating the ECL on CIB loans and advances, the key areas of significant management judgement and estimation included: Evaluation of Significant Increase in Credit Risk ("SICR"); ■Incorporation of macro-economic inputs and forward looking information; and ■Input assumptions applied to estimate the probability of default ("PD"), exposure at default ("EAD") and loss given default ("LGD") within the ECL calculation. How our audit addressed the key audit matter We assessed the accounting policies applied to the CIB loans and advances with reference to the requirements of IFRS 9. Making use of our actuarial expertise, our audit procedures addressed the key areas of significant judgement and estimation in determining the ECL on CIB loans and advances, as follows: We assessed the Group's ECL methodology applied in determining the ECL recognised on CIB loans and advances with reference to the requirements of IFRS 9. We recalculated the ECL using management's models, inputs and assumptions, for mathematical accuracy. We evaluated the appropriateness of the credit ratings allocated specifically to the CIB clients. In this evaluation, quantitative information was evaluated such as: Financial ratios; ■Asset quality; ■Operations and profitability ratios; and Liquidity and funding ratios. We also evaluated quantitative factors to evaluate the CIB ratings such as: ■Client specific outlooks; and Operating environment status. We tested the inputs into the CIB ECL calculation. This included the inputs which determine the credit risk score of each client. We inspected the collateral which drives the LGD. We inspected loan origination documentation and approvals for existence. Key audit matter Evaluation of SICR For CIB exposures, SICR is largely driven by the movement in credit ratings assigned to counterparties on origination and then at reporting date, based on the Group's 25-point master rating scale to quantify credit risk for each exposure. Macro-economic inputs and forward-looking information Macroeconomic expectations are incorporated in CIB's client ratings to reflect the Group's expectation of future economic and business conditions. In the determination of the forward-looking impact, the Group applied judgement in assessing the impact of the Group's macroeconomic outlook expectations on forward- looking information. Input assumptions applied to estimate the PD, EAD and LGD within the ECL measurement The input assumptions applied to estimate the PD, EAD and LGD within the ECL measurement are subject to management judgement and are determined at an exposure level. Expected credit losses on Business and Commercial Banking (BCB) Consumer and High Net Worth clients (CHNW) loans and advances Refer to the following notes to the consolidated financial statements for the related disclosures and detail: Key management assumptions, Expected Credit Loss (ECL); Note 5, Loans and advances; Note 30, Credit impairment charges; ■ Annexure B-Risk and Capital Management, Credit Risk; and Annexure D, Detailed accounting policies, Impairment. The ECL for BCB and CHNW loans and advances was considered to be a matter of most significance to our current year audit due to the level of subjective judgement applied by management, the effect that the ECL has on the Group's credit risk management processes and operations, and the magnitude of the ECL recognised in the consolidated financial statements. ECLS on BCB and CHNW loans and advances are based on the product categories or subsets of the product categories, with tailored ECL models per portfolio. The key areas of significant management judgement applied within the ECL calculation include: Evaluation of SICR; ■Incorporation of macro-economic inputs and forward looking information; Application of out-of-model adjustments into the ECL calculation; ■Assessment of ECL raised for individual exposures; and ■Input assumptions applied to estimate the PD, EAD and LGD within the ECL measurement. Evaluation of SICR The Group determines the SICR threshold by utilising an appropriate transfer rate of exposures that are less than 30 days past due (DPD) to stage 2. The SICR thresholds are reviewed regularly to ensure that they are appropriately calibrated to identify SICR by portfolio vintage and to consequently facilitate appropriate impairment coverage. How our audit addressed the key audit matter Evaluation of SICR Through inquiry of management and inspection of underlying documentation we obtained an understanding of and tested relevant controls relating to the approval of credit facilities, subsequent monitoring and remediation of exposures, manual transfer of exposures between the various stages, key system reconciliations and collateral management. We selected a sample of counterparties and assessed the appropriateness of their assigned credit rating by: ■ Agreeing the inputs into the credit rating system, to the financial information relating to the exposure of the relevant customer, as well as to management's 25-point rating scale; and ■Assessing the reasonableness of management's assumptions made during the credit risk rating process, by obtaining an understanding of the process for assigning credit ratings based on the exposure type and industry factors; and performing a review of the counterparty and comparing the results to those used by management. Macro-economic inputs and forward-looking information We selected a sample of counterparties and assessed the incorporation of macro-economic inputs and forward-looking information into their assigned credit risk rating by obtaining an understanding of the forward-looking information including the impact of Covid-19, which was considered for the counterparty. Input assumptions applied to estimate the PD, EAD and LGD within the ECL measurement Utilising our actuarial expertise, we assessed the reasonableness of the input assumptions applied within the PD, EAD and LGD models with reference to the requirements of IFRS 9 by performing an independent recalculation of PD, EAD and LGD. We assessed the accounting policies applied to the BCB and CHNW loans and advances with reference to the requirements of IFRS 9. Making use of our actuarial expertise, our audit procedures addressed the key areas of significant judgement and estimation in determining the ECL on BCB and CHNW loans and advances, as follows: We assessed the Company and Group's ECL methodology applied in determining the ECL recognised on BCB and CHNW loans and advances with reference to the requirements of IFRS 9. We recalculated the ECL using management's models, inputs and assumptions, for mathematical accuracy. We also assessed the reasonability of the inputs and assumptions applied by management in their ECL calculation. PricewaterhouseCoopers, Registered Auditors 344 Independence Avenue, Windhoek, Khomas Region, Republic of Namibia PO Box 1571, Windhoek, Khomas Region, Republic of Namibia T: +264 (61) 284 1000, F: +264 (61) 284 1001, www.pwc.com/na Country Senior Partner: Chantell N Husselmann The Firm's principal place of business is at 344 Independence Avenue, Windhoek, Republic of Namibia, Khomas Region, Republic of Namibia Partners: Louis van der Riet, Anna EJ Rossouw (Partner in charge: Coast), Gerrit Esterhuyse, Samuel N Ndahangwapo, Hans F Hashagen, Johannes P Nel, Hannes van den Berg, Willem A Burger Practice Number 9406, VAT reg no. 00203281-015 PricewaterhouseCoopers, Registered Auditors 344 Independence Avenue, Windhoek, Khomas Region, Republic of Namibia PO Box 1571, Windhoek, Khomas Region, Republic of Namibia T: +264 (61) 284 1000, F: +264 (61) 284 1001, www.pwc.com/na Country Senior Partner: Chantell N Husselmann The Firm's principal place of business is at 344 Independence Avenue, Windhoek, Republic of Namibia, Khomas Region, Republic of Namibia Partners: Louis van der Riet, Anna EJ Rossouw (Partner in charge: Coast), Gerrit Esterhuyse, Samuel N Ndahangwapo, Hans F Hashagen, Johannes P Nel, Hannes van den Berg, Willem A Burger Practice Number 9406, VAT reg no. 00203281-015 51