General Findings

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General Findings

• 26 March 2009

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- National Development Bank- Development Bank of
Namibia- Development Bank of Mauritius
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How were the ratings assigned?

• Based on Support
• Standalone ratings

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Support

• gt Long-term IDR assigned based on Long-term IDR
  of the sovereign
• High levels of support from sovereign factored
  into Long-term IDR
• Higher rated sovereigns supported higher IDRs
• Highest IDR rating assigned did not imply
  strongest bank
• Factors impacting the assessment of support
• Ownership structures
• Support letters
• Access to capital/callable capital
• Ability to call capital promptly
• Role the bank plays key developmental
  role/government initiative
• Legislation/Act of Parliament
• Past history of support/assumption of previous
  DFI assets
• Government funding and government guaranteed
  funding
• Size relative to commercial banking sector re
  bailout

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Standalone ratings

• Modus operandi to provide development finance
• Banks assumed to be taking on higher risk
• Profit maximisation is not key/rather sustainable
  financial performance
• Pre-provision profits sufficient to cover risk
  costs and support growth
• Corporate Governance/Risk Management assessment
• Corporate Governance
• Improvements required to ensure a strong and
  independent board
• Board experience
• Key executive appointments to the board
• Balance between executive/non-executive directors
• Not formally regulated
• Related party lending

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Financial performance

• Weak levels of financial performance
• Profit maximisation not an objective
• Given the development focus would expect low
  levels of profitability
• Sustainable profitability
• Suspended interest included in revenues
• Loans provided at concessionary/subsidised rates
• Interest margins low
• Given narrow margins overall levels of
  profitability sensitive
• to funding changes
• Inadequate provisioning for NPLs
• Impairment provisioning insufficient to cover
  suspended interest
• High cost to income ratios
• Benign economic environment

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Risk ManagementgtRisk management requires
attention - key committees do not exist - key
risk management absent from committees -
segregation of duties in certain institutions
unclear - additional committees recommended
(large exposures) - concentrations in credit
risk by sector, obligor - enhancement of
further policiesgtCredit risk perceived be
significant
Source Fitch survey
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Credit Risk

• High levels of inherent credit risk
• High levels of loans in arrears
• Limited monitoring of loans
• Inconsistent reporting of NPLs
• Coverage ratios for NPLs considered to be low
• Given the operational risks, coverage ratios
  could be even lower
• Unseasoned loan book
• Long-tenured facilities

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Market Risk

• gt Unsophisticated risk systems
• gt Unable to measure interest rate risk
• gt Foreign exchange risk considered low
• gt Market risk arising from equity and property
  investments high

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Other Assets

• Significant property investments
• Material revaluation reserves supporting
  shareholder funds
• Valuation issues
• Market risk implications
• Extent of Free Capital
• Equity investments
• Valuation issues
• Market risk implications
• Extent of Free Capital

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Operational Risk

• Operational systems considered to be weak
• Difficulty in determining ownership of key
  functions and responsibilities
• Operational risk considered to be high as a
  result of basic procedures and controls for loan
  monitoring

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Funding

• Absence of a ALCO Committee and or treasury
  department
• Certain institutions benefit from
  government/government guaranteed funding
• Funding franchises perceived to be underdeveloped
  and in some instances untested
• Most institutions are not deposit taking or an
  unregulated deposit taker
• Funding is largely wholesale based

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Liquidity

• Low levels of liquidity
• Refinancing risk
• No evidence of stress testing
• No evidence of back-up lines
• Funding franchise
• Ability to access Central Bank funding

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Capitalisation

• Contrasting levels of capitalisation
• Degree of free capital
• High level of unreserved NPLs
• Quality of earnings and sustainability
• Dividend payments

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Global trends
How Far through the Crisis are we?
The Greatest Challenges Facing Banks
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Diagnosis Business Models in the Spotlight
Pressure on domestic profitability
Refocus on domestic markets and traditional
business model
Financial innovation and international expansion
Overheating in credit markets
Strong credit growth in domestic and emerging
markets
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Symptoms The Greatest Challenges Facing Banks

• C Capital raising required
• A Asset quality deterioration, exposures to
  Emerging Markets
• M Management
• E Earnings weakness
• L Liquidity and funding pressures

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Asset Quality Peak to Trough Impaired Loans
Source National authorities, Fitch estimates
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Funding Availability

• Four stages
• Bank systemic crisis
• Mistrust/counterparty risk
• Hoarding liquidity for fear of own position
• Hoarding with some lending to supported banks
• Usage of the central bank liquidity facilities
  continues (ECB, SLS)
• Government guaranteed debt programmes continue to
  emerge
• The most unpredictable part of the financial
  crisis is behind us.

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Profitability Takes a Turn for the Worst

• Profitability, the first buffer and pressures are
  mounting
• Reduced appetite for lending
• Pressure on net interest margins
• Fee and commission income highly correlated to
  economic cycle
• Rising impairment charges

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Capital Raised, More Required?
Total capital raised by European banks in 08
09
Top 10 European capital raisers
Source Bloomberg, as at 9 March 2009
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Deleveraging Limited Alternatives

• Banks Preferred Option Change Mix of
  Assets/Risk Weighted Assets
• but takes time since quick fixes such as
  financial engineering no longer acceptable
• Banks Less Desirable Option Raise Capital...
• even though shareholders have conceded some
  dilution, earnings prospects are worse and some
  have been burnt by bail outs
• Banks Least Desirable Option Selling Assets
• non-core asset sales and not renewing maturing
  lending is unlikely to be sufficient

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Outlook for Banks

• Real economy impact growing
• Recession in many developed economies and impact
  on emerging markets
• Fear of deflation (and even depression)
• Higher credit risk costs for most banks
• Earnings for most banks are likely to be under
  pressure, until 2010 or beyond!
• Capital is under pressure, the bar is heightened,
  capital is being raised
• Central banks are still providing much of the
  market liquidity
• Shrinkage of off-balance sheet business (ABCP
  conduits, SIVs)
• Deleveraging slow and painful

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The Changed World Global Rating Stock
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Enhancements to credit quality

• Sovereign ratings
• Perceptions of support
• Government guaranteed funding
• Sustainable financial performance
• Corporate governance and risk management
  improvements
• Asset quality
• Adequate provisioning
• Levels of capitalisation
• Funding franchises
• Liquidity

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Enhancements to credit quality

• Multilateral banks
• Preferred creditor status, example African
  Development Bank
• SADC banks do not benefit from this and therefore
  in weaker position given their target market
• ADB has significant callable capital
• Shareholding of sovereigns with AA and AAA
  ratings
• significant driver of rating uplift for ADB
• In the absence of a regulatory environment has a
  negative impact on ratings
• Generally credit concentrations higher than
  commercial banks which leads to lower ratings

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Conclusion

• Questions

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Your contact at Fitch