LEADERSHIP REPORTS

GROUP CHIEF EXECUTIVE OFFICER’S REPORT

Reflecting on the 2019 financial year Our platform approach Our previous chairman, Koos Brandt, said a bank should be there for Capricorn Group identified eight platforms to implement customers in the good and bad times. Building on this philosophy, strategic choices through operational excellence: we have supported our customers in the past financial year during 5sometimes very difficult circumstances, and we can now see the 1. Digital platform positive impact it had. We anticipate the tough conditions to persist, 2. Core banking platform amplified by economic challenges and the widespread impact of 3. Process automation platform the drought, resulting in consumers, including our customers, remaining under pressure and in need of innovative solutions that 4. Information and analytics platform will address their unique challenges. This calls for finding ways to 5. Legal compliance and risk platform mitigate risk for all. 6. Human resources platform Despite challenging conditions, the group saw solid performance 7. Finance platform from Bank Windhoek and Bank Gaborone, an encouraging albeit 8. Infrastructure platform slow turnaround at and a stellar performance from newly acquired Entrepo. Capricorn Asset Management (CAM) The platform approach delivered the following benefits: continued growing market share and returned good results • Increased execution traction due to better focus on realistic notwithstanding lower rates of fee income. As a result, group outputs within properly planned timeframes operating profit increased by 13.5% compared to the previous year. • Higher levels of alignment between business and platforms with This can be ascribed to a few specific value drivers: improved communication

• Significant progress has been made with the implementation • Changed behaviours: higher energy levels, higher engagement of the Agile methodology in technology change since the levels beginning of the 2019 financial year. We can now build a • Increased transparency about execution progress solution for one bank and roll it out quickly to others. • Satisfactory levels of adoption of the Agile methodology We are creating a culture of experimentation, quick decisions and fewer rollover projects. Concerns that are being addressed in terms of this approach relate to capacity, measuring the impact and retaining momentum. • Our ability to detect increased credit risk early and our efforts to proactively engage with customers showing signs of financial The platforms further contribute by improving the quality, distress helped us to manage non-performing (NPLs) – a predictability and visibility of project delivery, by increasing product pervasive and growing challenge across the region. By capabilities and enabling us to discover business opportunities. preventing loans from defaulting, we can improve the chances of recovery. Where accounts became non-performing despite our preventative measures, good collateral security ensured that we could contain impairment provisions. • Our leadership teams have managed their respective businesses well. Key appointments were made: a new chief information officer (CIO) joined the group executive leadership team, a new managing director was appointed for Cavmont Bank, and several other skilled and experienced employees joined the group.

“Despite challenging conditions, the group saw solid performance from Bank Windhoek and Bank Gaborone, an encouraging albeit slow turnaround at Cavmont Bank and a stellar performance from newly acquired Entrepo.”

24 2019 Integrated Annual Report 2019 performance summary Bank Windhoek Bank Windhoek, our largest contributor to group profit after tax, returned a very solid performance with an increase of 1% to N$797.7 million (2018: N$796.8 million). As the largest lender in Namibia with a 32.4% market share, Bank Windhoek is exposed to local industry and economic conditions, but delivered better interest margins, improved liquidity and better cost management. Operating profit (excluding exceptional items of 2018) improved by 10.6% to N$1,124.5 million (2018: N$1,017.0 million).

Through the acquisitions of new transactional accounts, especially in our corporate and Private Wealth segments, new solar plants, renewable energy initiatives and companies with resilient business models, Bank Windhoek achieved moderate growth despite the challenging economic environment.

Bank Windhoek competes by providing outstanding client service at affordable levels, and by empowering branch managers to use their local knowledge and client relationships to enhance the client experience. Through our easy-to-use, convenient and highly reliable digital channels, clients are provided with 24/7/365 transactional banking services.

Capricorn Private Wealth performed exceptionally well over the past year. The success of Capricorn Private Wealth, albeit growing off a small base, can be attributed to an offering that is flexible, THINUS PRINSLOO personalised and offers the highest service levels.

Given the prolonged drought in Namibia, the agricultural sector Group chief executive officer remains under immense pressure. Bank Windhoek has joined efforts with clients and the agricultural sector to provide much- needed support. The bank contributed N$500,000 to the Dare to Care Fund in support of farmers and has also proactively established a focus group to assist and manage the bank’s clients operating in this sector.

Following the revision of the customer value proposition in Bank Windhoek’s target segments and in response to the voice of the customer, a number of features, enhancements and new products have been introduced. Additional features on the Women in Business offering, the introduction of the HeyJude App, credit SMS notifications, an integrated point-of-sale solution and free life and legal cover on most personal transactional accounts are a few of the notable offerings introduced.

LEADERSHIP REPORTS 25 GROUP CHIEF EXECUTIVE OFFICER’S REPORT continued

The HeyJude App was successfully launched to market in May 2019. Our biggest challenge in Botswana remains continued downward This is a first-of-its-kind offering in the Namibian banking pressure on interest margins with the continuing to environment where a unique, value-added digital service is being reduce the bank rate and cost of funding increasing. The upward coupled with our banking offering to try to cement our brand pressure on cost of funding was partly due to the uncertainty and promise of “Connectors of Positive Change”. The app is a volatility of liquidity levels in the market, as investors explored other digital personal assistant that sources products and services, investment opportunities yielding higher returns both inside and negotiates discounts and arranges payment and delivery on the outside Botswana. The bank also has relatively high exposure to customer’s behalf. price-sensitive treasury funding, limited retail depositor funding and is reliant on term deposits. To address this, term deposits have been repriced and our digital offering – including POS and bulk payment “Bank Windhoek shares the responsibility capabilities – has been used to grow current account deposits. to protect our country for future In the short term, Bank Gaborone’s focus remains on growing its generations by actively contributing to book, containing its cost of funding, optimising liquidity and and facilitating the transition to a stemming the rising trend in NPLs. We further explain our mitigation low-carbon and climate-resilient efforts in the risk report from page 86. economy.” – Baronice Hans, Bank Cavmont Bank Windhoek’s managing director Notwithstanding an increasingly difficult operating environment in , Cavmont Bank significantly reduced losses during the year. Bank Gaborone The business recorded a loss after tax of N$19.8 million (2018: loss after tax of N$46.6 million). Bank Gaborone delivered good results, with 15.7% growth in revenue (2018: 6.7%) and a 11.4% improvement in operating profit Group support and oversight for the turnaround plan continues, (2018: 17.3%). This follows significant growth in customer sales, with remediating actions driven by the executive management partly owing to the launch of a new unsecured lending product. team. Focus areas in the past year were: The new product requires customers to deposit their salaries into a • sourcing of cheaper deposits to reduce the funding gap and Bank Gaborone transactional account. improve cost of funds We also launched bulk payment services, which enabled us to start • increasing interest income through investment in government offering payroll services and capturing more employee accounts. securities or loans and advances depending on availability of Several enhancements to digital banking functionality and network liquidity stability increased Bank Gaborone’s online uptake. This is driving • continued cost management efforts transactional income growth and included: • increasing foreign exchange trading volumes and margins

• the launch of point-of-sale (POS) devices Branch rationalisation and the streamlining of head office support • the fast-branch-of-the-future concept was built and launched at functions are key initiatives to reduce an unsustainable cost base. the new head office After engagements, the Bank of Zambia approved the restructure, • a state-of-the-art data centre was established and is being run which includes the closure or downsizing of a number of branches at the bank’s new head office and support functions. • infrastructure, including lines, servers, switches, routers and The restructure follows a strategic shift away from predominantly firewalls, was upgraded retail customers to business banking, repositioning Cavmont Bank • a complete national overhaul of the PABX system was to focus particularly on SMEs – a targeted fit with our service and completed relationship strengths. • three new retail and five new lending products were launched Products and solutions for customers have been rationalised to • three new branches and six new ATMs were rolled out ensure that only profitable options are made part of the product offering. Instant cards are now being issued at the point of account • the front and back ends of the core banking and digital opening, and improved uptime of Cavmont Bank’s ATMs made the channels systems and interfaces were upgraded Cavmont Bank Visa Classic more attractive to customers.

26 2019 Integrated Annual Report Liquidity risk currently poses the greatest challenge to the bank “Capricorn Group is proud to have a team attaining its turnaround objectives. Issues related to connectivity, payment platform functioning and network downtime are being of willing, extraordinary individuals who addressed. Mitigating actions include the migration to a new data are living The Capricorn Way behaviours centre. This also resulted in improvements in the quality of data, and displaying the attributes of being which means improved performance tracking and significantly better focus on short-term business performance owing to clear key Connectors of Positive Change. This is performance indicators and regular reporting. facilitating a shift in mindset within all Capricorn Asset Management Capricorn Group employees to a more Capricorn Asset Management (CAM) launched its digital platform, future-focused, open, collaborative way Capricorn Online, in September 2018. This allows investors to of thinking about strategy.” manage their investment portfolios and provides access to a wide – Thinus Prinsloo, Group CEO range of investment options, including the Capricorn Unit Trusts. With a 0% fee, which is unique in Namibia, the platform pricing is Capricorn Capital highly competitive. Capricorn Capital launched its brand and service offering in Despite a fiercely competitive market, CAM increased its market September 2018. The 2019 financial year was a formative period share in unit trusts from 29% to 31%. Most of the growth originated where key relationships were forged with new clients and from investment short-term interest-bearing funds. The Capricorn collaborative partners. We continued to build the team that is Investment Fund passed the N$9 billion mark while the Capricorn required to implement a pipeline of transactions and opportunities Corporate Fund grew to over N$5 billion. A further highlight was successfully. Our strategy was refined to include the following the significant growth in the Capricorn High Yield Fund and initiatives: Enhanced Cash Fund, which grew by more than 175% and 40% to N$1.8 billion and N$1.3 billion respectively. The Capricorn Private • The current economic climate in southern Africa resulted in Wealth client base grew to over 500 during the year. numerous entities requiring restructuring or business rescue. As this trend is likely to continue, we are establishing a reputation Unfortunately, equity and listed property markets underperformed. with key banks and other lenders as an effective restructuring This resulted in market value reductions, disinvestments and clients team. seeking the safer haven of cash and bonds. Consequently, the • We have identified large family businesses across the region Capricorn Equity Fund decreased by 38% and the Capricorn with limited succession planning, where we can assist in Property Fund by 37%. This had a significant fee impact on CAM providing corporatisation support and sell-side advisory services. due to money shifting from higher-fee-earning funds to lower-fee- With the commodity cycle expected to turn in the near to earning money and capital market funds. medium term, we are positioning ourselves to advise During the year, CAM employees created their own impact fund to international mining houses looking to invest in or acquire local which they contribute in their personal capacity to support their productive assets as well as assets for exploration. nominated projects, acting as true Connectors of Positive Change. • We are assisting businesses that have limited access to liquidity in the current market to access capital by divesting their non-core assets. This includes assisting businesses in varying stages of restructuring and turnaround to raise equity. • We are well positioned as an advisory partner to inward investors such as offshore impact funds, development finance institutions and small to mid-size private equity with a southern Africa mandate. This includes providing transaction support, such as due diligence and valuation services.

LEADERSHIP REPORTS 27 GROUP CHIEF EXECUTIVE OFFICER’S REPORT continued

Namib Bou Entrepo The symptoms of a severely depressed economy were visible in the Entrepo operates in the Namibian lending and long-term insurance drastic slowdown in property developments and sales. This included markets, with a specific focus on the government employee the development of houses at Ondangwa Extension 20 (Phase 3) segment as a deduction code holder. It exceeded expectations in its and downward pressure on property valuations in most price first year as part of the group. At the time of making the 55.5% categories on a national level. acquisition, we envisaged a 17% contribution to group profit after tax, with the actual contribution being 15%. Entrepo’s excellent As a result, we focused on more affordable designs while performance is attributable to: attempting to address the needs of home buyers better. • Good new business inflows resulting from a distinct competitive The valuation business improved its financial contribution following edge in the speed and effectiveness whereby new loans are the conclusion of service level agreements, streamlined operations approved and disbursed, high levels of customer satisfaction, and the gathering of critical market information in a vulnerable two new branches opened in Oshakati and Katima Mulilo and a time for the property sector. shift in emphasis towards loan consolidations and client Following the retirement of Johan Nienaber, who was executive retention director at Namib Bou for 13 years, we appointed Bernard Minnaar • Increasing net interest margins at Entrepo Finance and as managing director, effective 1 January 2019. underwriting profits at Entrepo Life Associates and other subsidiaries • Low loan write-offs at Entrepo Finance Santam and Sanlam • Low cost-to-income ratios Income from associates Santam and Sanlam decreased by 18.9% • Reducing debt-to-equity ratios (2018: 6.6% increase). • Good investment income at Entrepo Life

Santam maintained its leading market position with strong Net premium income at Entrepo Life increased by 5.7% to underwriting performance under difficult economic conditions. This N$103.5, with new business largely derived from the sales at resulted from diversified income streams such as bancassurance, Entrepo Finance. The claims experience remained within the digital solutions and a new core underwriting platform. Growth actuarial assumptions and guidance. The capital adequacy ratio challenges included negative GDP growth that resulted in policy improved further and is well above the statutory requirements. cancellation and clients adjusting policy scope to reduce premiums. Good investment income was gained from the growing shareholder Claims resulted mainly from the drought and large commercial and policyholder reserves, which are invested in terms of regulatory property fires. Unfortunately, Santam received a N$15 million fine in requirements. July 2019 from the Namibian Competition Commission due to anti-competitive behaviour. Nimbus Although Nimbus did not meet our performance expectations and The key highlights for Sanlam Namibia were the exceptional did not declare any dividends, we remain committed to this 30% performance in the entry-level market business unit and effective investment. It supports our intent to diversify through partnerships cost management. Challenges included the effective turnaround of and facilitates operational growth through expanded access to the affluent business unit which has been struggling for the past infrastructure. Through Nimbus, we contribute positively to SADC few years, negative risk experience on the group business side and development as the region benefits from higher internet speed and increased lapses due to larger new business volumes taken on in the improved connectivity. entry-level market business. The Trans-Kalahari Fibre (TKF) line running between Swakopmund Both Santam and Sanlam continue to focus on synergies with key and Buitepos (on the Botswana border) was completed during stakeholders, optimised efficiencies and stringent cost September 2018. The TKF network extends 4,160 kilometres from management. the West Africa Cable System (WACS) cable landing station in Swakopmund to the EASSY cable landing station in Dar es Salaam, connecting the east and the west coast. This enables the export of bandwidth to other African countries.

Nimbus was admitted to the NSX Main Board in June 2018 and subsequently increased its interest in Paratus Namibia to 51.4%. It also concluded a rights issue, raising N$103,444,792.

28 2019 Integrated Annual Report Connections for Positive Change Capricorn Group employees, business units, teams and board members all acted individually and collectively as Connectors of Positive Change. Some examples of the outcomes include:

We appointed a The NeXtGen board was established in March 2019 to promote a culture of collaboration within the group, to millennial board help leaders recognise outdated conventions and to provide input into new or existing projects. This brings a fresh perspective that speaks to the millennials and Generation Zs who make up more than 60% of the workforce and a large portion of our clients. The NeXtGen board is chaired by Bank Windhoek’s chief financial officer and comprises a group of 12 young employees, mandated to contribute to the Capricorn Group strategy.

Bank Windhoek issued Bank Windhoek is the first to issue a green bond in the southern African region. The green Namibia’s first green bond is listed on the Namibian Stock Exchange and complies with the Sustainable Stock Exchanges (SSE) bond Initiative, a UN Partnership Programme of the UN Conference on Trade and Development (UNCTAD) and the UN Global Compact. Bank Windhoek aims to become the green financier of choice for sustainability projects in Namibia and in other countries in which the group operates. Proceeds from the bond will be used to finance eligible green projects and assets, which include renewable energy, energy and resource efficiency, green buildings, sustainable waste management, clean transportation and sustainable water management.

Since issuing the bond, Bank Windhoek was awarded a Green Bonds Pioneer Award from Climate Bonds.

Bank Windhoek Bank Windhoek, in partnership with four financial institutions, financed a new diamond recovery vessel for co-financed a new Debmarine Namibia – one of our largest commercial transactions to date. The state-of-the-art semi-submersible Debmarine vessel multirole vessel will be the world’s largest diamond recovery vessel and will enhance Debmarine Namibia’s ability to recover diamonds off Namibia’s Atlantic coastline. The N$5.6 billion asset financing facility constitutes 80% of the vessel cost and will be financed by Bank Windhoek and four other banks.

We provided finance to To support the Namibian government’s efforts to alleviate the shortage and backlog in housing, Bank Windhoek alleviate housing offered financing to potential buyers of PolyCare houses. These houses are aimed at medium- to low-income shortages earners who are unable to afford conventional housing at current market prices and interest rates. PolyCare houses are constructed without having to use water and can be built within ten working days.

Improving well-being, Bank Gaborone launched the Diabetes Apple Project to raise funds to help support and care for people with health and diabetes in Botswana. The partnership with the Diabetes Association of Botswana follows the success of productivity Bank Windhoek’s flagship Cancer Apple Project.

Sharing investor Capricorn Group co-hosted a workshop to share investor reporting best practice with peers listed on the expertise Namibian Stock Exchange. The workshop provided input on starting a reporting journey, integrating governance reporting and understanding what investors look for.

Cavmont Bank gives Cavmont Bank supports and participates in the Smart Money show, a half-hour weekly magazine programme practical money advice that gives viewers in Zambia an in-depth look at current money and business topics. It allows Cavmont Bank to offer practical and inspirational financial advice on topics such as renting vs buying a house, monetary policy and scams to avoid.

CAM employees Capricorn Asset Management’s staff launched the CAM Impact Fund to which they contribute weekly through making an impact fundraisers in the office and, in turn, donate the funds collected or essential goods to different social responsibility projects. The staff nominated and selected their top six social responsibility projects which they support over the calendar year, enabling them to be Connectors of Positive Change.

Caliber Capital Trust Caliber Capital Trust, managed by Capricorn Asset Management, has extended debt to Namibian companies supporting Harambee that support 1,129 families. In support of the Harambee objectives, the debt financing has assisted in objectives modernising healthcare, improving food security as well as increasing the country’s energy capacity, which in turn reduces its reliance on imported energy.

LEADERSHIP REPORTS 29 GROUP CHIEF EXECUTIVE OFFICER’S REPORT continued

Outlook We are positive that the group will maintain its resilience and continue to deliver positive results. By delivering on our strategy, The operating environment is expected to remain challenging. diversifying investment and keeping our focus on operational Interest rate cuts in Namibia are almost certain, which will excellence, we will be able to continue creating value and negatively impact the interest margin of Bank Windhoek. contributing to positive change. As stated by our chairman, the Consumers are expected to remain under pressure, with very little recent Economic Growth Summit in Namibia was a very positive economic growth anticipated. sign and hopefully the beginning of even more collaborative This calls for enhanced engagement with our clients on all aspects initiatives and discussions to address our national challenges. of their financial needs and finding ways to mitigate risk for all – really putting the customer at the centre of everything we do. Building on the speed of execution and adaptability that we ingrained in the business this year, we will exploit opportunities and Thinus Prinsloo further improve our offerings. Group chief executive officer

30 2019 Integrated Annual Report “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 fi nancial year during sometimes very diffi cult circumstances, and we can now see the positive impact it had. We anticipate the tough conditions to persist, amplifi ed 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 fi nding ways to mitigate risk for all.” – Thinus Prinsloo, Group chief executive offi cer.

Chobe National Park

LEADERSHIP REPORTS 31 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, JACO ESTERHUYSE Financial director • 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 on page 9 and the five-year financial overview on page 5 set out the salient features of the group’s financial performance for the year under review and the past five years.

32 2019 Integrated Annual Report Good improvement in In the 2017 financial year, the increase in net interest income was largely as a result of the acquisition of net interest margin 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%).

Net interest income

2,500,000 5.0%

2,000,000 4.7%

1,500,000 4.4% N$’000

1,000,000 4.2%

500,000 3.9%

0 3.6%

2015 2016 2017 2018 2019

Net interest income (N$’000) Net interest margin (N$’000)

LEADERSHIP REPORTS 33 FINANCIAL DIRECTOR’S REVIEW continued

Strong growth in Group non-interest income consists of the following categories: non-interest income • Transaction-based fee income (45% (2018: 53%)) with continued improved in • Card and digital channels (20% (2018: 21%)) diversification of • Commission and other insurance (12% (2018: 5%)) revenue streams • 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.

34 2019 Integrated Annual Report IFRS 9 significant Impairment charges were for the first time, calculated in terms of the new IFRS 9 standard that was adopted on impacting impairment 1 July 2018. Under the new standard, impairments are determined based on an expected credit loss model provisions 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.

Bank Windhoek N$’000

IAS 39 opening balance – 1 July 2018 230,314 IFRS 9 implementation adjustment 218,932

Adjusted opening balance – 1 July 2018 449,246 Impairments and bad debts written off 51,282 Closing balance – 30 June 2019 500,528

Bank Gaborone P’000

IAS 39 opening balance – 1 July 2018 92,150 IFRS 9 implementation adjustment 17,871

Adjusted opening balance – 1 July 2018 110,021 Impairments 10,144 Closing balance – 30 June 2019 120,165

Cavmont Bank ZK’000

IAS 39 opening balance -–1 July 2018 10,083 IFRS 9 implementation adjustment 97,280

Adjusted opening balance – 1 July 2018 107,363 Impairments and bad debts written off (19,389) Closing balance – 30 June 2019 87,974

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 on page 37.

LEADERSHIP REPORTS 35 FINANCIAL DIRECTOR’S REVIEW continued

Operating expenses Operating expenses increased 14.3% year-on-year from N$1.8 billion to N$2.1 billion as a result of three are well controlled 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. Group operating expenses

2,500,000

30,855 36,521 2,052,038 2,000,000 149,107 1,795,108 40,447

1,500,000 N$’000

1,000,000

500,000

0

2018 Entrepo Staff Operational Other 2019 costs banking expenses

36 2019 Integrated Annual Report Satisfactory growth in Gross loans and advances increased slightly below with private sector credit extension by 6.5% (N$2.3 billion) to loans and advances 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.

Gross loans and advances to customers

5% 50,000

40,000 4%

30,000 3% N$’million

20,000 2%

10,000 1%

0 0%

2015 2016 2017 2018 2019 Bank Windhoek Bank Gaborone Cavmont Bank Entrepo NPLs as % of gross loans and advances (N$’000)

LEADERSHIP REPORTS 37 FINANCIAL DIRECTOR’S REVIEW continued

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

1,200 7,000 150

6,000 1,000 120 5,000 800 4,000 90 600 P’million ZK’million N$’million 3,000 60 400 2,000 30 200 1,000 0 0 0 June 2017 June 2018 June 2019 June 2017 June 2018 June 2019 June 2017 June 2018 June 2019 Regulatory requirement Actual liquid assets

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

38 2019 Integrated Annual Report Capital remains well The group remains well capitalised with its total risk-based capital adequacy ratio of 14.9% (June 2018: 15.3%). above minimum This is well above the minimum regulatory capital requirement of 10.0%. requirements 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.

Financial outcomes Return on equity Headline earnings Profi t after tax per share 16.3% +8.7% (2018: 17.3%) +14.9% to N$1,015 million to 181.5 cents (2018: N$934 million) (2018: 157.9 cents)

LEADERSHIP REPORTS 39 FINANCIAL DIRECTOR’S REVIEW continued

Strategic choices to invest aggressive growth strategy to further expand its infrastructure footprint across the continent. It is the only information and The Capricorn Group has made a number of investments in recent communication technology company that can provide redundancy years, which included the expansion of the group beyond the on both the West Africa Cable System (WACS) and the Eastern borders of Namibia to Botswana and Zambia, an acquisition of a African Submarine Cable System (EASSY) under one single 55% interest in Entrepo, an exceptionally well-run finance business autonomous system number that does not run through South in Namibia, and an investment in Nimbus, which has a 51.4% Africa. shareholding in Paratus Namibia.

The investment in Nimbus was the start of the expansion outside Dividend declaration with a specific focus on the telecommunications A final dividend of 36 cents per ordinary share was declared on sector given the convergence between financial services and 20 August 2019 for the year ended 30 June 2019 (2018: 30 cents). telecommunications and the exponential growth in the demand Considering the interim dividend of 30 cents per share, this for data. represents a total dividend of 66 cents per ordinary share (2018: 60 cents per share). The group’s dividend policy remains On 1 July 2019, the group concluded a 30% acquisition in Paratus unchanged with a cover ratio of three times. 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 Jaco Esterhuyse Financial director

40 2019 Integrated Annual Report