Annual Financial Statements 2020

18 ANNUAL FINANCIAL STATEMENTS REPORT OF THE INDEPENDENT AUDITOR CONTINUED STANDARD BANK NAMIBIA LIMITED Annual financial statements 2020 19 Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key audit matter Expected credit losses on Corporate and Investment Banking (CIB) loans and advances Refer to Expected Credit Loss (ECL) on financial assets - IFRS 9 drivers, included within the Key management assumptions note, note 6 (loans and advances), note 31 (credit impairment charges), the credit risk section of annexure C- Risk and Capital Management, and the impairment section in the detailed accounting policies in the financial statements, for the related disclosures. The ECL assessment for CIB loans and advances is material to the financial statements in terms of their magnitude, the level of subjective judgement applied by management and the effect that the ECL has on the Company's credit risk management processes and operations. This resulted in this matter being considered a matter of most significance to the audit of the financial statements. The ECL on CIB loans and advances was calculated by applying International Financial Reporting Standard (IFRS) 9 - Financial Instruments (IFRS 9), as described in the notes to the financial statements. ECLS on CIB exposures are calculated separately based on rating models for 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") taking into account the estimated impact of COVID-19; ⚫ Incorporation of macro-economic inputs and forward looking information into SICR assessment and ECL measurement; • • Input assumptions applied to estimate the probability of default ("PD"), exposure at default ("EAD") and loss given default ("LGD") within the ECL measurement; and Incorporation of the estimated impact of COVID-19 on the key inputs into the ECL pertaining to forward-looking information. Evaluation of SICR taking into account the impact of COVID-19 For CIB exposures, SICR is largely driven through the movement in credit ratings assigned to counterparties on origination and reporting date, based on the Company's 25-point master rating scale to quantify credit risk for each exposure. With regard to COVID-19 related qualifying exposures the credit risk grade is assessed at the time of relief and subsequent monthly reviews are performed. Incorporation of macro-economic inputs and forward-looking information into SICR assessment and ECL measurement Macroeconomic expectations are incorporated in CIB's client ratings to reflect the Company's expectation of future economic and business conditions. Input assumptions applied to estimate the PD, EAD and LGD within the ECL measurement Input assumptions applied to estimate the PD, EAD and LGD as inputs into the ECL measurement are subject to management judgement and are determined at an exposure level. How our audit addressed the key audit matter 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 accounting policies applied to the CIB segment against the requirements of IFRS noting no material inconsistencies. Making use of our actuarial expertise, we assessed the Company's ECL methodology applied in determining the ECL recognised on CIB loans and advances against the requirements of IFRS 9, and noted no material inconsistencies. Making use of our actuarial expertise, we also independently recalculated the ECL on CIB loans and advances by independently calculating parameters and comparing the results against the ECL calculated by the Company and noted no material differences in this regard. Evaluation of SICR taking into account the impact of COVID-19 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, key system reconciliations and collateral management. We selected a sample of counterparties and assessed the appropriateness of their assigned credit rating by: • Testing the inputs into the credit rating system against the financial information relating to the exposure and the Company's 25-point rating scale noting no material exceptions; and Making use of our actuarial expertise, we assessed the reasonableness of management's assumptions made during the credit risk rating process, by performing the following procedures: Through inquiry of management we obtained an understanding of the process for assigning credit ratings based on the exposure type and industry factors; and Performing an independent assessment of the credit risk rating assigned to the exposure by assessing the quantitative and qualitative factors, including the impact of COVID-19 pandemic, assigned by management against our independent expectation. Based on the results of our work performed, we accepted management's assumptions. For a sample of stage 1 and stage 2 exposures we assessed whether the stage classification of these exposures was appropriate in terms of the Company's accounting policy for SICR based on the change in credit risk at reporting date since the origination date of these exposures. Our procedures included the inspection of the credit risk ratings at reporting date relative to origination date to assess whether the Company's SICR policy has been applied consistently. No material exceptions were noted. Incorporation of macro-economic inputs and forward looking information into SICR assessment and ECL measurement We selected a sample of exposures and assessed the reasonableness of the forward-looking information incorporated into their assigned credit risk ratings. Through inquiry with management, we obtained an understanding of the forward-looking information that was incorporated into the assigned credit rating for the exposure and evaluated the reasonableness of the forward-looking information against management's expectations and other industry factors for the SICR assessment and ECL measurement. Based on our work performed, we accepted the forward-looking information incorporated into the model. Input assumptions applied to estimate the PD, EAD and LGD within the ECL measurement Making use of our internal actuarial expertise, we assessed the reasonableness of the input assumptions applied within the PD, EAD and LGD models for compliance with the requirements of IFRS 9 by performing an independent recalculation of PD, EAD and LGD. In addition, our procedures included assessing the appropriateness of the statistical models by way of reperformance and validation procedures. We did not note any material variances. Key audit matter Expected credit losses Personal and Business Banking (PBB) loans and advances Refer to Expected Credit Loss (ECL) on financial assets - IFRS 9 drivers, included within the Key management assumptions note, note 6 (loans and advances), note 31 (credit impairment charges), the credit risk section of annexure C - Risk and Capital Management, and the impairment section in the detailed accounting policies in the financial statements, for the related disclosures. The ECL assessment for PBB loans and advances is material to the financial statements in terms of their magnitude, the level of subjective judgement applied by management and the effect that the ECL has on the Company's credit risk management processes and operations. This resulted in this matter being considered a matter of most significance in the audit of the financial statements. ECLS on PBB 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 within the ECL calculation include: • Evaluation of SICR taking into account the estimated impact of COVID-19; • • • Incorporation of macro-economic inputs and forward looking information into SICR assessment and ECL measurement; Application of out-of-model adjustments into the ECL measurement; Assessment of ECL raised for individual exposures; Input assumptions applied to estimate the PD, EAD and LGD within the ECL measurement; and Incorporation of the estimated impact of COVID-19 on the key inputs into the ECL pertaining to forward-looking information. Evaluation of SICR taking into account the impact of COVID-19 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 day 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. As a result of Bank of Namibia's response to the economic and financial stability challenges posed by the COVID-19 pandemic, where a restructure is considered by the counterparty as a result of COVID-19, the Company applies judgement in determining the following: • determining whether the exposure is expected to remain in 'an not overdue status' subsequent to the relief period, and assessing whether the restructure can be classified as a temporary or permanent distress. Incorporation of macro-economic inputs and forward looking information into SICR assessment and ECL measurement Forward-looking expectations are included in the ECL for PBB loans and advances based on the Company's macro-economic outlook, using models that correlate these parameters with macro-economic variables. Where modelled correlations are not viable or predictive, adjustments are based on judgement to predict the outcome based on the Company's macro-economic outlook expectations. In the determination of the forward-looking impact, the Company applied judgement in assessing the impact of the COVID-19 pandemic on forward-looking information. Application of out-of-model adjustments into the ECL measurement Management may identify that due to modelling complexity, certain aspects of the ECL may not be fully reflected by the underlying model and an out-of-model adjustment is required. Assessment of ECL raised for individual exposures A lifetime ECL is calculated on stage 3 exposures that are assessed to be credit impaired due to evidence of default, significant financial difficulty of the borrower and/or modification, probability of bankruptcy or financial reorganisation or disappearance of an active market due to financial difficulties. This assessment relates primarily to business lending accounts and incorporates judgement in determining the foreclosure value of the underlying collateral. Input assumptions applied to estimate the PD, EAD and LGD within the ECL measurement The ECL is calculated using statistical models which incorporate observable data, assumptions and estimates relating to historical default experience, timing and amount of forecasted cash flows and the value of collateral. How our audit addressed the key audit matter Our audit procedures addressed the key areas of significant judgement and estimation in determining the ECL on PBB loans and advances as follows: We assessed the accounting policies applied to the PBB segment against the requirements of IFRS 9 noting no material inconsistencies. Making use of our actuarial expertise, we assessed the Company's ECL methodology applied in determining the ECL recognised on PBB loans and advances against the requirements of IFRS 9, and noted no material inconsistencies. Making use of our actuarial expertise, we also independently recalculated the ECL on PBB loans and advances by independently calculating parameters and comparing the results against the ECL calculated by the Company and noted no material differences. Evaluation of SICR taking into account the impact of COVID-19 Making use of our actuarial expertise,we reperformed the calculation of the significant deterioration roll rates per product category and compared these rates per product category to those used by management and noted no material differences. For a sample of exposures which were manually transferred by management we assessed if these transfers were appropriate through discussions with management and inspection of underlying documentation. No material exceptions were noted. For a sample of stage 1, 2 and 3 exposures, we evaluated if the exposures are appropriately classified by recalculating the days in arrears. For exposures that were more than 30 days past due, we confirmed that these were appropriately classified. No material exceptions were noted. For a sample of exposures classified as COVID-19 related restructures we assessed the reasonableness of the staging and classification assigned to these exposures by assessing the payment history before and after the relief term. We found no material exceptions in the staging and classification of these exposures. Incorporation of macro-economic inputs and forward looking information into SICR assessment and ECL measurement Making use of our actuarial expertise, we evaluated the appropriateness of forward-looking economic expectations included in the ECL model which included the impact of COVID-19 by comparing the forward-looking expectations to independently sourced industry data and noted no material inconsistencies. Application of out-of-model adjustments into the ECL measurement For a sample of out-of-model adjustments we evaluated the reasonableness of the adjustments by assessing key assumptions, inspecting the calculation methodology and tracing a sample of out-of-model adjustments back to source data. Assessment of ECL raised for individual exposures For a sample of stage 3 exposures, we independently recalculated the impairment losses based on our assessment of the expected cash flows and the recoverability of collateral at an individual exposure level. No material differences were noted. For collateral held in respect of the sample of stage 3 exposures referred to above, we inspected legal agreements and other documentation to assess the existence and legal right to collateral. No material exceptions were noted. We assessed the collateral valuation techniques applied by management against the Company's valuation guidelines. Making use of our valuation expertise we performed an independent reasonability test on the valuation of collateral. Although our independent internal reasonability tests differed from external valuations in some instances, no material adjustments to the ECLS on PBB loans and advances were considered necessary. Input assumptions applied to estimate the PD, EAD and LGD within the ECL measurement Making use of our actuarial expertise, we assessed the assumptions relating to historical default experience, estimated timing and amount of forecasted cash flows and the value of collateral applied within the PD, EAD and LGD models for compliance with the requirements of IFRS 9. In addition, our procedures included assessing the appropriateness of the statistical models by way of reperformance and validation procedures. We did not note any material differences on the assumptions applied in the calculation of the ECL at year end.