Capricorn : 2022 Capricorn Group Risk Report

RISK REPORT 2022

ABOUT THIS RISK REPORT

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RISK

REPORT

Table of contents

	ABOUT THIS RISK REPORT	1
	MESSAGE FROM THE EXECUTIVE OFFICER ERM	2
	OUR RISK PHILOSOPHY AND APPROACH	5
	Our Group Risk Internal Control and Assurance Framework ("GRICAF")	5
	Embedding a Risk Culture	6
	OUR REGULATORY CONTEXT FOR RISK	7
	Basel II/III phases	7
	Regional regulatory risk matters	7
	Alignment with King IV™	7
	HOW WE GOVERN AND MANAGE RISK	8
	Overview of ERM	8
	The risk management value chain	10
	Risk management enablers	11
	Risk capacity, appetite and tolerance ("RCAT")	11
	2022 GROUP RISK PROFILE	12
	Capital risk	13
	Compliance risk	14
	Credit risk	15
	Cyber risk	17
	Finance and tax risk	18
	Financial crime risk	19
	Legal risk	20
	Liquidity risk	21
	Market risk	23
	Operations risk	24
	People risk	26
	Reputation risk	28
	Strategic risk	29
	Technology risk	30

GOVERNANCE REPORT 2022	1
ABOUT THIS RISK REPORT

About this risk report

This is our second standalone risk report ("the report") for the Capricorn Group Ltd ("the Group" or "Capricorn Group"). The report reflects our approach to risk and application of the principles contained in the King IV Report on Corporate Governance™ for South Africa, 2016 ("King IV™")1.

We focus on how risk management contributed to the Group delivering on its purpose and ensured that risk management continued to create value for the financial year from 1 July 2021 to 30 June 2022 ("the year"). The report is aimed primarily at providers of financial capital.

The entities that constitute the Group are set out on page 10 of the integrated annual report.

The risk report forms part of a suite of reports that are referenced throughout this report:

• Integrated annual report with summarised annual financial statements
• Annual financial statements
• Risk report
• Governance report
• King IV™ index

This report was compiled with input from the Group principal risk officers ("PROs") and executive leadership team, reviewed by the board of directors ("board") and its committees and finally approved by the board on 13 September 2022. The board acknowledges its responsibility to ensure the integrity of the report.

Additional information is available online at www.capricorn.com.na/ Pages/Reporting-Centre.aspx. For more information or feedback on this report or any other elements listed above, contact Marlize Horn, tel: [phone], or [e-mail].

1 Copyright and trademarks are owned by the Institute of Directors in South Africa NPC and all of its rights are reserved.

2	RISK REPORT 2022
	MESSAGE FROM THE EXECUTIVE OFFICER ERM

Message from the executive officer enterprise risk management

At Capricorn Group, we rely on sound risk management to protect our ability to create and preserve value while preventing value erosion. This means that we consider risk systematically and holistically. We focus on "what must go right" to achieve desired outcomes. We have a strong Group-wide Risk Culture with formal accountability for risk at every level to clarify roles and responsibilities.

RISK REPORT 2022	3
MESSAGE FROM THE EXECUTIVE OFFICER ERM

Our year in review

While COVID-19 dominated our operating environment in the year's first half, we experienced an economic recovery in the second half. In Namibia, the gross domestic product ("GDP") grew by a better-than- expected 2.4% in 2021, with a growth rate of 3% anticipated for 2022. In Botswana, the GDP rebounded by 12.1% in 2021 but is expected to settle back to its normal growth range of 4% to 5% in 2022. This economic recovery, albeit from a lower base than pre-pandemic levels, boosted our performance in both countries.

Despite this recovery, certain client segments, including tourism and hospitality, remain under pressure. While our impairments have reduced year-on-year, these are still worse than in 2019. In addition, the demand for credit remains subdued due to uncertainty and, more recently, a rising interest rate environment.

While the global economy bounced back quickly after the COVID-19 crisis, global growth for the next two years is predicted to slow. This slowing growth is related to higher-than-expected inflation, especially in the United States and major European economies, and China's economic slowdown due to the COVID-19 lockdowns. The International Monetary Fund ("IMF") predicts that global growth will slow from 6.1% in 2021 to 3.2% in 2022 and 2.9% in 2023.

In addition, the Russia-Ukraine conflict has already significantly increased high levels of uncertainty and will continue to impact global markets and the economic outlook. In Namibia and Botswana, the impact of the conflict can already be seen in rising fuel and food costs, contributing to a high inflationary environment. This places both consumers and businesses under financial pressure. Here, the Group's focus remains on proactive risk and capital management to positively position itself in the face of global uncertainty.

Credit risk

Protecting our asset quality is an area of strength for Bank Windhoek and a rapidly developing strength at Bank Gaborone. Namibia and Botswana's economic recovery has resulted in fewer deferments and non-performing loans ("NPLs"). Our NPL ratio (excluding interest in suspense) decreased to 4.66% (2021: 5.22%) and the NPL ratio (including interest in suspense) decreased to 5.39%(2021: 5.92%). This figure is well below the industry average in Namibia, reflecting the Group's prudent approach to credit risk management. We monitor this closely as the outlook and performance of credit risk are highly sensitive to changes in the external environment, including rising interest rates.

Despite an improving NPL ratio, our efforts will need to be amplified to ensure that credit risk remains effectively managed. Today, our credit risk remains elevated compared to pre-pandemic levels. A formal business rescue process and pre-legal functions are new developments in Namibia. This allows us to manage our at-risk customers proactively. We are always investigating new tools and reports to proactivity manage our credit risk.

Liquidity risk

The high cost of funding and low liquidity levels in Namibia and Botswana remain a challenge. For much of 2022, the liquidity in the market remained similar to the 2021 levels, however increased borrowing from Government, consumer price index ("CPI") pressures and increasing interest rates resulted in high funding costs constraining private sector growth. Constrained with highly attractive government yields our net interest margin is placed under pressure. Botswana market liquidity continues to be on a downward trend, from P1.70 billion during July 2020 to June 2021 to P1.21 billion during July 2021 to June 2022. Bank Gaborone's cost of funding deteriorated to 4.91% at end June 2022 compared to 3.72% at end June 2021. Bank Windhoek's cost of funding deteriorated to 4.25% June 2022 compared to 3.51% at June 2021.

Despite persistent low market liquidity throughout the year, Bank Windhoek protected its liquidity buffers and procured stable funding at acceptable interest rates. Bank Gaborone continues to benefit from an improved loan-to-funding ratio with a mix of stable and cheaper funding sources. Bank Gaborone grew their funding from N$5.72 billion at end June 2021 to N$6.51 billion at end June 2022. Bank Windhoek grew funding from N$38.06 billion ending June 2021 to N$40.39 billion at end June 2022. The Group maintained its respectable liquidity levels and buffers, with a loan-to-funding ratio of 88.4% as at 30 June 2022. (2021:88.6%)

Risk appetite

We reviewed and updated the Capricorn Group board risk appetite statement to ensure the quantitative measures and thresholds are aligned with our strategy and budget plans.

Key changes to our risk appetite included:

Conduct of business / Ethics

The Group has no appetite for unethical conduct of business and expects the Board of Directors, all employees, and contractors to subscribe and adhere to the Group Code of Ethics and Conduct. New investments and partnering entities should exhibit a compatible culture and focus on customer centric values and principles of sound corporate governance.

Investments and partnerships

The Group has a medium appetite for pursuing and investing in strategic initiatives that are mutually beneficial and add value to both the Group and the target/partnering entity. The key objective is to cooperate with other organisations to achieve a result which the Group cannot achieve alone.