Annual Financial Statements 2020

30 ANNUAL FINANCIAL STATEMENTS ACCOUNTING POLICY ELECTIONS AND RESTATEMENT CONTINUED KEY MANAGEMENT ASSUMPTIONS STANDARD BANK NAMIBIA LIMITED Annual financial statements 2020 Restatements Correction of the classification of property, equipment and right-of-use assets and intangible assets During 2020, it was identified that computer software costs were incorrectly capitalised to IT equipment and included in property, equipment and right-of-use assets instead of intangible assets. The error has been corrected by restating comparatives. The restatement has no impact on total assets, profit for the year, earnings per share, headline earnings or net cash flows used in investing activities. The correction of this error resulted in a reclassification between two line items in the statement of financial position as indicated below: 1 January 2019 2019 Previously reported Restatement N$'000 N$'000 Previously Restated N$'000 reported N$'000 Restatement N$'000 Restated N$'000 Assets Property, equipment and right-of-use assets 566 470 (50 398) 516 072 Intangible assets 401 455 50 398 967 925 451 853 967 925 568 340 298 960 867 300 (73 098) 73 098 495 242 372 058 867 300 Change in presentation and correction of errors In the current year the company aligned the presentation of the statements of cash flows with that of SBG, which is considered to be more correct. In addition, the correction of the classification of property, equipment and right-of-use assets and intangibles disclosed above affected certain line items within investing activities. Non-cash adjustment errors relating to various items that were identified have been corrected. Net cash flows from operating activities Net income before capital items and equity accounted earnings Adjusted for non-cash items and other adjustments included in the income statements Decrease (increase) in income earning assets (Decrease)/increase in deposits and other liabilities Interest paid Net cash flows from other operating activities Net cash flows (used in) investing activities Capital expenditure on property and equipment Capital expenditure on intangible assets Net cash flows from other investing activities Net cash flows (used in) financing activities Principal element of lease payments Net cash flows from other financing activities Total (decrease) in cash and balances with central banks for the year Cash and balances with central banks at beginning of the year Effects of exchange rate changes on cash and cash equivalents Total cash and balances with central banks at end of the year (1 531 458) 2019 Previously reported Restatement N$'000 N$'000 Restated N$'000 178 924 62 021 240 945 816 667 (3 929) 812 738 (1 002 487) (8 896) (1 011 383) (3 639 287) 148 200 (3 491 087) 2 930 022 (69 938) 2 860 084 (1 528 042) (3416) 2 602 051 2 602 051 (99 883) (4 318) (106 040) (65 745) (165 628) (62 721) (67 039) (3 024) (109 064) 10 475 10 475 (113 022) 3 416 (109 606) (26 522) 3 416 (23 106) (86 500) (86 500) (33 981) (308) (34 289) 1 546 355 1 546 355 308 308 1 512 374 1 512 374 In preparing the annual financial statements, estimates and assumptions are made that could materially affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on factors such as historical experience and current best estimates of future events. The estimates and judgements below have remained unchanged unless otherwise stated. The following represents the most material key management assumptions applied in preparing these financial statements. Expected credit loss (ECL) on financial assets IFRS 9 drivers - Covid-19 placed considerable strain on our operations specifically retail, business and corporate clients, however the group's risk appetite remained unchanged. As such the below significant increase in credit risk (SICR) and default assumptions, thresholds and/or triggers were not amended. For the purpose of determining the ECL: ⚫ The Personal & Business Banking (PBB) portfolios are based on the product categories or subsets of the product categories, with tailored ECL models per portfolio. The impairment provision calculation excludes post-write off recoveries (PWOR) from the loss given default (LGD) in calculating the ECL. These LGD parameters are aligned to market practice. Corporate & Investment Banking (CIB) exposures are calculated separately based on rating models for each of the asset classes. ECL measurement period ⚫ The ECL measurement period for stage 1 exposures is 12-months (or the remaining tenor of the financial asset for CIB exposures if the remaining lifetime is less than 12-months). • A loss allowance over the full lifetime of the financial asset is required if the credit risk of that financial instrument has increased significantly since initial recognition (stage 2). ⚫ A lifetime measurement period is applied to all credit impaired (stage 3) exposures. • The measurement periods for unutilised loan commitments utilise the same approach as on-balance sheet exposures. Significant increase in credit risk and low credit risk PBB All exposures are assessed to determine whether there has been significant increase in credit risk (SICR) at the reporting date, in which case an impairment provision equivalent to the lifetime expected loss is recognised. SICR thresholds, which are behaviour score based, are derived for each portfolio vintage of exposures with similar credit risk and are calibrated over time to determine which exposures reflect deterioration relative to the originated population and consequently reflect an increase in credit risk. Behaviour scorecards are based on a combination of factors which include the information relating to customers, transactions and delinquency behaviour (including the backstop when contractual payments are more than 30 days past due) to provide a quantitative assessment (score), and more specifically, a ranking of customer creditworthiness. The creditworthiness of a customer is summarised by a score, with high scores corresponding to low-risk customers, and conversely, low scores corresponding to high-risk customers. These scores are often taken into account in determining the probability of default (PD) including relative changes in PD. Credit risk has increased since initial recognition when these criterion are met. The company determines the SICR threshold by utilising an appropriate transfer rate of exposures that are less than 30 days. past due (DPD) to stage 2. This transfer rate is such that the proportion of the 0 - 29 DPD book transferred into stage 2 is no less than the observed 12-month roll rate of 0 - 29 days accounts into 30 or more days in arrears. 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. Where behaviour scores are not available, historical levels of delinquency are applied in determining whether there has been SICR. For all exposures, the rebuttable presumption of 30 days past due as well as exposures classified as either debt review or as 'watch-list' are used to classify exposures within stage 2. In accordance with BoN's policy directives in response to economic and financial stability challenges, following the fallout of the Covid-19 pandemic where a restructure is considered due to Covid-19 related factors, the company determines whether the exposure is expected to remain in a not overdue status subsequent to the relief period. These restructured exposures are classified as Covid-19 related restructures and the determination of temporary or permanent distress is assessed on a regular basis. Temporary distressed accounts are classified as stage 1 or stage 2 based on the risk profile and permanently distressed accounts are classified as stage 3. The determination of temporary or permanently distressed is made by assessing various customer, transactional and delinquency variables (included but not limited to customers that were up to date at 29 February 2020 were deemed to be temporary in nature if it was expected that the customer would remain up to date post the relief period and customers experiencing financial distress and in arrears prior to 29 February 2020 were deemed to be permanent in nature) to estimate a probability of default (PD). Risk profile Stage 1 and 2 - temporary Stage 3 permanent Total N'000 1 646 647 40 414 1 687 061 CIB (including certain PBB business banking exposures) The company uses a 25-point master rating scale to quantify the credit risk for each exposure. On origination, each client is assigned a credit risk grade within the company's 25-point master rating scale. Ratings are mapped to PDs by means of calibration formulae that use historical default rates and other data for the applicable portfolio. These credit ratings are evaluated at least annually or more frequently as appropriate. CIB exposures are evaluated for SICR by comparing the credit risk grade at the reporting date to the origination credit risk grade. Where the relative change in the credit risk grade exceeds certain pre-defined ratings' migration thresholds or, when a contractual payment becomes more than 30 days overdue (IFRS 9's rebuttable presumption), the exposure is classified within stage 2. These pre-defined ratings' migration thresholds have been determined based on historic default experience which indicate that higher rated risk exposures are more sensitive to SICR than lower risk exposures. Based on an analysis of historic default experience, exposures that are classified by the group's master rating scale as investment grade (within credit risk grade 1 - 12 of the company's 25-point master rating scale) are assessed for SICR at each reporting date but are considered to be of a low credit risk customer. To determine whether a client's credit risk has increased significantly since origination, the company would need to determine the extent of the change in credit risk using the table on the next page. 31