Category Archives: Private Sector Credit Extension

Overall

Total credit extended to the private sector increased by N$180.6 million or 0.2% m/m in June, bringing the cumulative credit outstanding to N$88.13 billion. On a year on year basis, credit extended grew by 7.96% in June, compared to 8.24% recorded in May. Growth in private sector credit extension has been slowing since 2015, on a rolling 12-month basis N$6.49 billion worth of credit was extended. N$2.51 billion worth of credit has been extended to corporates and N$4.01 billion to individuals on a 12-month cumulative basis, while the non-resident private sector has decreased their borrowings by N$36.03 million.

Credit extension to households

Growth in credit extension to individuals moderated to 8.47% y/y and 0.7% m/m, compared to 8.55% y/y growth recorded in May. Installment credit contracted by 0.6% m/m bringing year on year growth to 1.5%. New vehicle sales, which make up a large portion of installment credit, have been under pressure since mid-2015. Amendments to the Credit Agreement Act which now obligate shorter repayment periods, abolishment of balloon payment options and zero deposit financing have further added to the slowdown in vehicle sales. Growth in mortgage loans showed some improvement in June, recording growth of 0.9% m/m and 8.7% y/y. Overdraft facilities remains the fastest growing form of credit extended to individuals, growing by 15.5% y/y and 0.20% m/m. Other loans and advances recorded growth of 1.00% m/m, with an increase of 18.9% y/y.

Credit extension to corporates

Credit extended to corporates contracted by 0.2% m/m in June after ticking up 0.7% m/m in May. Annual growth fell from 8.4% y/y recorded in May to 7.5% in June. Instalment credit extended to corporates contracted by 0.1% m/m, continuing into its ninth consecutive month of contraction. Year on year installment credit extended to corporates has contracted by 3.8%. Mortgage loans extended to corporates in June remained relatively flat compared to loans extended in May, contracting by 0.4% m/m and growing only by 4.5% y/y. Mortgage loans extended to corporates have recorded single digit growth for the past nine months Overdrafts extended to corporates recorded growth of 2.0% on a m/m basis and 17.5% y/y.

Banking Sector Liquidity

The average monthly liquidity position of commercial banks has remained well over N$3 billion in June, closing at a monthly average of N$3.17 billion. A significant improvement from the N$1.83 billion seen just two months before. This position was to a large extend boosted by funding secured through the African Development Bank (AfDB), with the Ministry of Finance affirming that these funds were received in June. How the proceeds of this loan will be utilized remains to be seen. The liquidity position of the commercial banks has been ticking up following a sustained period of pressure, suggesting that commercial banks now have more loanable funds at their disposal for extension to consumers. However, banks behavior towards extending credit may take a new turn with impending IFRS 9 regulations, with preliminary analysis indicating that banks will be required to change their provisioning models from a loss incurred basis to future potential loss basis. This means that banks will be required to provide for loans extended as potentially irrecoverable, and this may have a significant bearing on bank profits and credit extension as a result.

Reserves and money supply

Foreign reserves rose by N$3.096 billion to N$28.5 billion at the end of June from N$25.4 billion in May. According to the Bank of Namibia the increase in the level of reserves emanated mainly due to an inflow of international loans received from the African Development Bank (AfDB).

Outlook

Our expectation is for private sector credit extension to remain under pressure. As the South African Reserve Bank (SARB) has cut rates for the first time in five years, all eyes are on the Bank of Namibia (BoN), poised to make its decision on policy rates next week. All signs point to BoN starting a cycle of monetary easing given that economic growth has been sluggish and inflation moderating. Easing monetary rates will be followed by banks applying symmetric cuts to lending rates, this will provide some relief to an already ailing consumer. However, a projected rate cut of only 25 basis point will do little to alleviate the current slowdown, especially in the short-term. Further rate cuts are projected towards the end of the year. However, changes to banks reporting regulation pose immediate risks as to how banks will react towards these new developments. One reaction may be that banks become more reluctant towards extending more credit into an economy currently in a recession, or it may react by making credit more expensive.

Overall

Total credit extended to the private sector increased by N$586.1 million or 0.7% m/m in May, bringing the cumulative credit outstanding to N$87.95 billion. On a year on year basis, credit extended grew by 8.2%, though slightly higher that the8.1% recorded in April, it remains of the slowest growth seen in PSCE for the last 5 years. On a rolling 12-month basis, N$6.69 billion worth of credit was extended, down significantly from the N$10.3 billion high of 2015. This consisted of N$2.82 billion worth of credit extended to corporates and N$4.02 billion to individuals, while the non-resident private sector on the other hand decreased their borrowings by N$150.8 million.

Credit extension to households

Credit extension to individuals picked up slightly in May, expanding by 8.6% y/y and 0.4% m/m. Installment credit contracted further by 0.7% m/m bringing the year on year growth to 3.0%. Vehicle sales, which make up a large portion of installment credit, has taken a nosedive since the end of 2015 and has since been struggling to recover. Similarly, the growth in mortgage loans remains sluggish at 1.2% m/m and 8.8% y/y. There has been however, a noticeable shift in overdrafts facilities extended to individuals, up 17.34% y/y with a m/m change of 0.30%.

The large year-on-year increase  in overdraft advances is a sign that the Namibian consumer is still under pressure, while other loans and advances recorded a m/m contraction of 0.9%, with a y/y increase of 20.0%. The general slowdown in mortgage and installment credit extended to individuals is attributable to tighter lending conditions as well as a deterioration in the creditworthiness of the average borrower as household debt has increased substantially for the average consumer.

Credit extension to corporates

Credit extended to corporates grew by 0.7% m/m in May after contracting 0.4% m/m in April.  Annual growth is up from 7.4% y/y recorded in April to 8.4% in May. Instalment credit extended to corporates contracted by 0.7% m/m, the eighth consecutive monthly contraction, which also further contributed to a contraction of 1.0% y/y. Mortgage loans extended to corporates during May grew by 1.2% m/m and grew only by 4.8% y/y. Mortgage loans extended to corporates have recorded single digit growth figures for the past nine months, far from the highs of 20.4% seen February of 2016. Overdrafts extended to corporates recorded increases of 0.3% on a m/m basis and 18.6% y/y.

Banking Sector Liquidity

The overall liquidity position of commercial banks has shown healthy improvement, closing at a monthly average of N$3.29 billion during May, up from the average N$1.83 billion seen during April. We expect this to remain relatively stable in the very near term, boosted by the loan from the African Development Bank seems to have alleviated some of the pressure  on government to fund their deficit though debt issuance. This should serve as a sign that banks have  increased supply of loanable funds This sentiment being supported by the increased levels overdrafts extended to both corporates and to individuals.

Reserves and money supply

Foreign reserves decreased by N$262 million to N$25.4 billion at the end of May from N$25.7 billion in April. According to the Bank of Namibia the decline in the level of reserves emanated mainly from government payouts and the appreciation of the local currency.

Outlook

The outlook for private sector credit extension continues to improve albeit slightly. Small signs of positivity are showing in the form of the improved overall liquidity position of commercial banks. We believe that with the banking sector now having increased levels of loanable funds and relatively lower short term funding costs, it should incentivize the commercial banks to lend more. However, sluggish demand for mortgage and vehicle loans will in all likelihood persist over the short to medium term. Also bearing in mind the latest Q1 GDP release from the NSA that now affirms that Namibia is in a recession makes for a relatively dim outlook. Furthermore, there has been some relief, with inflation being on the decline since the start of the year, currently at 6.3%., Furthermore, the South African Reserve Bank is expected to cut interest rates this year and Bank of Namibia is likely to follow, which may give the already stretched consumer more room to breathe.

Overall

Total credit extended to the private sector increased by N$113.7 million or 0.13% m/m in April, bringing the cumulative credit outstanding to N$87.36 billion. On a year on year basis, credit extended grew by 8.1%, the slowest growth recorded since mid-2010. On a rolling 12-month basis, N$6.51 billion worth of credit was extended, down significantly from the highs of 2015. This consisted of N$2.49 billion worth of credit extended to corporates and N$4.06 billion to individuals, while the non-resident private sector decreased their borrowings by N$33.7 million.

Credit extension to households

Credit extension to individuals continued to slow in April, expanding by 8.7% y/y and 0.5% m/m. Installment credit contracted by 0.5% m/m bringing the year on year growth to 2.2%. Vehicle sales, which make up a large portion of installment credit, has been in negative territory since the end of 2015 which has decreased the demand for these loans considerably. Similarly, the growth in mortgage loans has been slowing from an average of 12.3% y/y over the previous five years to the current level of 8.9% y/y.

The general slowdown in credit extended to individuals is attributable to tighter lending conditions and banking sector liquidity, as well as a deterioration in the creditworthiness of the average borrower due to an increase in debt to incomes over the last two years. Additionally, overdraft loans to individuals has picked up strongly in 2017, increased by 1.2% m/m and 12.3% y/y in April, which is an indication of the financial stress felt by the consumer.

Credit extension to corporates

Credit extended to corporates contracted by 0.4% m/m in April after contracting 0.3% m/m in March. This has slowed annual growth to 7.4% y/y, the lowest growth rate since December 2011. Instalment credit extended to corporates contracted by 0.8% m/m, the seventh consecutive monthly contraction, which brings the annual growth figure to 0.2% y/y. Mortgage loans extended to corporates also contracted by 0.4% m/m and grew by 6.1% y/y. Mortgage loans extended to corporates have recorded single digit growth figures for the last eight months, a significant slowdown from the 20% plus growth rates seen pre-March 2016. Overdrafts have increased quite strongly, growing by 1.3% m/m and 12.6% y/y.

Banking Sector Liquidity

Although still relatively low, the overall liquidity position of commercial banks improved to an average of N$1.84 billion during April, a N$467.4 million improvement from the preceding month. We expect liquidity to continue improving as the loan from the African Development Bank has relieved some of the pressure on government to fund their deficit though debt issuance. This will allow some of these funds to find its way back to the banking sector, decreasing the cost of funding and opening margins for the banks. An increase in funding would increase the supply of loanable funds and would likely be supportive of credit extension going forward.

Reserves and money supply

Foreign reserves increased by N$3.1 billion to N$25.7 billion at the end of April from N$22.6 billion in March. According to the Bank of Namibia the rise in the level of reserves emanated mainly from SACU inflows. The increase in foreign reserves is estimated to increase our import coverage ratio to 3.1x, up from the 2.7x reported in March and above the best practice of a minimum of three months import cover.

Outlook

The outlook for private sector credit extension has improved slightly. As mentioned, we expect short term money market investments to find their way to the banking sector, increasing the supply of loanable funds and drive down funding costs. Which should incentivize the commercial banks to lend more. However, the demand for credit may remain slightly muted as the economic environment has not yet improved to such an extent as to increase the demand for capital goods such as houses and vehicles. Furthermore, South Africa’s local currency debt rating is still under review by both S&P and Moody’s. A downgrade of this rating may trigger capital outflows resulting in currency depreciation and higher inflation expectations. As the South African Reserve Bank is an inflation targeting bank, an unexpected increase in inflation due to currency weakness could trigger interest rate hikes which will have to be matched by Bank of Namibia, putting pressure on credit extension.