financial director’s review

2019 overview

Despite the economies in the region where we operate being under severe pressure, the Capricorn Group delivered very good results,
with group profit after tax for the year ended 30 June 2019 of N$1,015 million (2018: N$934 million), surpassing the N$1 billion mark for the first time.

Bank Windhoek, Capricorn Asset Management and Entrepo Holdings’ performances exceeded expectations, while Bank Gaborone performed in line with its targets for growth and profitability. Cavmont Bank showed improvement compared to the prior year with a significantly reduced operating loss.

Sharp declines in investment income and challenging market conditions for underwriters, resulted in income from associates reducing by 12.7%.

The following events might affect the comparability of financial information since the previous financial year:

  • The contribution from Entrepo was included for the first time in our full-year results.
  • Exceptional items relating to a gain-on-bargain purchase of Entrepo of N$38.8 million and profit on the sale of Visa shares of N$77.3 million which were included in the prior period were not repeated in the current period.

Excluding exceptional items mentioned above in the prior year,

  • group operating profits increased by 26.0% to N$1.36 billion;
  • headline earnings per share increased by 14.9% to 181.5 cents (2018: 157.9 cents) per share; and
  • earnings attributable to shareholders increased by 15.3%.

Financial performance summary

The graphics and the five-year financial overview set out the salient features of the group’s financial performance for the year under review and the past five years.

“Our previous chairman, Koos Brandt, said a bank should be there for customers in the good and bad times. Building on this philosophy, we have supported our customers in the past financial year during sometimes very difficult circumstances, and we can now see the positive impact it had. We anticipate the tough conditions to persist, amplified by economic challenges and the widespread impact of the drought, resulting in consumers, including our customers, remaining under pressure and in need of innovative solutions that will address their unique challenges. This calls for finding ways to mitigate risk for all.”
– Thinus Prinsloo, Group chief executive officer.

Good improvement in net interest margin

In the 2017 financial year, the increase in net interest income was largely as a result of the acquisition of Capricorn Investment Holdings (Botswana) Limited (CIHB) and Cavmont Capital Holdings Zambia Plc (CCHZ).

Net interest income increased with 17.3%. Bank Windhoek contributed 8.3% of this growth mainly through good margin improvement resulting from lower cost of funding and effective liquidity management. The margin improvement has been achieved notwithstanding the bank increasing lower-yielding liquid assets significantly (growth of 15.3%), whilst higher-yielding loans and advances showed growth of 6.3% over the year. This resulted in a considerable improvement in the average loan to funding (LFR) ratio of Bank Windhoek from 93.1% to 92.1% compared to the prior year. The inclusion of Entrepo contributed 5.0% of the growth in net interest income.

Bank Windhoek’s improvement in the net interest margin is even more remarkable given the significant increase in non-performing loans from N$829.4 million to N$1,222.9 million and the negative effect suspended interest had on the bank’s margin.

Bank Gaborone’s net interest margin decreased from 3.8% to 3.5%, mainly due to increased cost of funding, resulting from more prudent liquidity management through an increased maturity profile. Cavmont Bank also experienced a shrinking interest margin due to low market liquidity giving rise to increased pricing of deposits in Zambia. As depicted in the graph below, the group experienced an improvement in the net interest margin to 4.3% (2018: 4.0%).

Strong growth in non-interest income with continued improved in diversification of revenue streams

Group non-interest income consists of the following categories:

  • Transaction-based fee income (45% (2018: 53%))
  • Card and digital channels (20% (2018: 21%))
  • Commission and other insurance (12% (2018: 5%))
  • Asset management fees (9% (2018: 10%))
  • Net trading income (14% (2018: 9%))

Non-interest income (excluding the effect of exceptional items) grew by 22.6% to N$1.36 billion for the year ended 30 June 2019.

The growth is mainly attributable to:

  • strong forex trading income across the three banks (contributing 9.0% to the growth);
  • strong, consistent income from electronic channels within Bank Windhoek increasing by 25.4%;
  • good growth in transaction fee income in Bank Gaborone of 45.4%, mainly as a result of a transaction volume increase; and
  • the income from underwriting activities contributed by Entrepo for the first time (13.6% of the growth).

Cards and digital channels showed consistent growth over the past few years as customers switch to online and mobile solutions. Not surprisingly, it is in this capability and functionality that the group invests most significantly.

Asset management income increased by 11.3% to N$118.2 million (2018: N$105.8 million).

By increasing the ratio of non-interest income to total income, we continue to decrease the dependency on net interest income and therefore lessening the impact of shrinking margins due to reduction in interest rates by central banks and increased cost of funding attributed to factors beyond our control.

IFRS 9 significant impacting impairment provisions

Impairment charges were for the first time, calculated in terms of the new IFRS 9 standard that was adopted on 1 July 2018. Under the new standard, impairments are determined based on an expected credit loss model rather than the incurred loss model (IAS 39) used for the previous year. The level of provisions under IFRS 9 are more in line with the provisions required by determination BID-2 of Bank of Namibia on Asset Classification, Provisioning and Suspension of Interest (BID-2) compared to IAS 39. It emphasises a more proactive impairment provisioning approach.

Impairment charges for the group increased by 41.7% to N$114.5 million (2018: N$80.8 million). The impact of the first time adoption per bank is illustrated below as well as the movement for the year.

Impairment charges for Bank Windhoek increased by 63.1% whilst both Bank Gaborone and Cavmont Bank decreased by 45.1% and more than 100%, respectively.

The impairment coverage ratios for the three banks as at 30 June 2019:

  • Bank Windhoek: 42.8%
  • Bank Gaborone: 47.6%
  • Cavmont Bank: 110.5%

Cavmont Bank has been significantly impacted by the downgrade of the Zambian sovereign rate on 26 June 2019 to CCC-, the last grade before default. In accordance with IFRS 9, impairment provisions had to be recognised on its holding of government securities, e.g. treasury bills and government bonds, using probability of defaults (PDs) and loss given defaults (LGDs) prescribed by one of the three main rating agencies. This resulted in an additional impairment provision of ZMW13.9 million to be raised on Cavmont Bank’s government securities holdings at year end.

More information regarding Capricorn Group’s loan book is discussed under loans and advances.

Operating expenses are well controlled

Operating expenses increased 14.3% year-on-year from N$1.8 billion to N$2.1 billion as a result of three main factors:

  • the inclusion of Entrepo, which contributed 2.3% of the growth;
  • staff cost, which increased by 15.6% and contributed 8.3% of the growth, was mainly attributed to the inclusion of Entrepo, building capacity in Capricorn Private Wealth and the group’s IT function, and increase in performance remuneration linked to the group’s improved financial performance; and
  • operational banking expenses increased with N$30.9m (18.6%) from the prior year, mainly due to increased transaction volumes, property valuation fees and a once off loan settlement fee within Bank Windhoek.

The increase in staff cost should be viewed in conjunction with the savings on projects and flexible resources as there was a drive to replace IT consultants with permanent employees in Namibia.

Excluding the items mentioned above, remaining cost only increased by 2.0%, well below inflation.

Satisfactory growth in loans and advances

Gross loans and advances increased slightly below with private sector credit extension by 6.5% (N$2.3 billion) to N$39.0 billion. N$2.0 billion of this increase is accounted for by commercial loans in Bank Windhoek and Bank Gaborone increasing by 31.2% and 28.6% respectively.

Current adverse economic conditions have seen a substantial increase in non-performing loans (NPLs) across the industry. Our group was no exception, with NPLs increasing from N$1.2 billion as at 30 June 2018 to N$1.6 billion as at 30 June 2019. The increase is mainly as a result of:

  • some large well-secured loans within Bank Windhoek, classified as NPLs in this financial year, contributing 70% of the total growth of the group;
  • Bank Gaborone’s NPLs increasing by 34.4% from BWP188.0 million to BWP252.6 million; impairment of mortgage loans and, to a lesser extent, in overdrafts and finance; and
  • Cavmont Bank seeing a reduction in NPLs as a result of improved credit processes and active management of the non-performing book through collections and rehabilitation.

Bank Windhoek experienced a fairly large shift in its asset mix with overdrafts and mortgage loans remaining relatively flat and vehicle finance declining, while commercial loans grew.

The group’s loans and advances book remains healthy, notwithstanding the current economic environment. This is testimony to the group’s success in prudent credit management and the benefits of a decentralised credit model.

Significant liquidity buffers

Liquid assets increased by 14.6% compared to the prior year. This is largely due to a key focus by Bank Windhoek to grow liquid assets which increased by 15.3%, resulting in a significant improvement to the bank’s LFR ratio.

All three banks exceed the minimum regulatory requirements as at 30 June 2019 with healthy excess above minimum liquidity requirement as indicated below:

  • Bank Windhoek: N$2.7bn (176.4%)
  • Bank Gaborone: P392.5m (80.2%)
  • Cavmont Bank: K199.0m (151.9%)
Strong growth in funding

Total funding increased by N$3.6 billion (9.0%) to N$43.9 billion as at 30 June 2019.

Growth in funding is attributable mainly to growth in NCDs in Bank Windhoek and term deposits in
Bank Gaborone. This was largely driven by market appetite.

Funding growth would have been higher had it not been for the repayment of the DEG loan by Bank Windhoek, while Zambia saw liquidity pressures in a low liquidity market.

Although Bank Windhoek grew their funding in line with general money supply it has actively managed the cost of funding. This resulted in a decrease in the average cost of funding from 6.7% in the prior year to 6.6%, improving the interest margin of the bank.

Capricorn Group issued a medium-term note programme on both the Namibian and the Botswana Stock Exchange. Capricorn Group issued notes for BWP128.5 million (N$171 million) under the Botswana listed programme to create a natural currency hedge against existing pula assets. No notes have been issued yet under the programme approved by the Namibian Stock Exchange.

The group also obtained a N$650 million five-year preference share facility from a Namibian financial institution. This was mainly to fund the Entrepo acquisition and related funding. Read more in note 26 of the annual financial statements.

Capital remains well above minimum requirements

The group remains well capitalised with its total risk-based capital adequacy ratio of 14.9% (June 2018: 15.3%). This is well above the minimum regulatory capital requirement of 10.0%.

The implementation roadmap of Basel III in Namibia has been communicated and is a key priority of Bank Windhoek. Bank Windhoek expects to be well above the required ratios for Basel III when it becomes effective in 2023.

The Global Credit Ratings Company affirmed the group’s and Bank Windhoek Limited’s credit ratings of AA(NA) with a stable outlook during November 2018. The rating was based on adequate capitalisation, growing earnings, adequate funding and liquidity of the group. The rating also recognised the group’s strong and diverse competitive position, supported by a large market share in Namibia.

Strategic choices to invest

The Capricorn Group has made a number of investments in recent years, which included the expansion of the group beyond the borders of Namibia to Botswana and Zambia, an acquisition of a 55% interest in Entrepo, an exceptionally well-run finance business in Namibia, and an investment in Nimbus, which has a 51.4% shareholding in Paratus Namibia.

The investment in Nimbus was the start of the expansion outside financial services with a specific focus on the telecommunications sector given the convergence between financial services and telecommunications and the exponential growth in the demand
for data.

On 1 July 2019, the group concluded a 30% acquisition in Paratus Group Holdings Limited. Paratus Group Holdings and its subsidiaries and associates operate in 24 African countries, the most significant of which are Angola, Namibia, Zambia and Botswana. In line with the Capricorn Group’s strategy to be a regional competitor, Paratus has demonstrated a successful regional expansion and has an aggressive growth strategy to further expand its infrastructure footprint across the continent. It is the only information and communication technology company that can provide redundancy on both the West Africa Cable System (WACS) and the Eastern African Submarine Cable System (EASSY) under one single autonomous system number that does not run through South Africa.

Dividend declaration

A final dividend of 36 cents per ordinary share was declared on 20 August 2019 for the year ended 30 June 2019 (2018: 30 cents). Considering the interim dividend of 30 cents per share, this represents a total dividend of 66 cents per ordinary share (2018: 60 cents per share). The group’s dividend policy remains unchanged with a cover ratio of three times.

Jaco Esterhuyse
Financial director