U.S. markets closed

Edited Transcript of ACCESS.LA earnings conference call or presentation 10-Mar-20 1:00pm GMT

Q4 2019 Access Bank Plc Earnings Call

Mar 23, 2020 (Thomson StreetEvents) -- Edited Transcript of Access Bank Plc earnings conference call or presentation Tuesday, March 10, 2020 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Gregory Ovie Jobome

Access Bank Plc - Chief Risk Officer & Executive Director

* Herbert Onyewumbu Wigwe

Access Bank Plc - Group MD, CEO & Executive Director

* Oluseyi Kolawole Kumapayi

Access Bank Plc - CFO & GM

* Roosevelt Michael Ogbonna

Access Bank Plc - Group Deputy MD & Executive Director

================================================================================

Conference Call Participants

================================================================================

* Jerry Nnebue

CardinalStone Partners Limited, Research Division - Analyst

* Oyinkan Ogungbemile

* Rudo Maisiri

* Timothy Wambu

Absa Capital Securities Proprietary Limited, Research Division - Research Analyst

* Tolu Alamutu

Tellimer Research - Director & Credit Analyst of Banks

* Wale Okunrinboye

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon, ladies and gentlemen. Welcome to the Access Bank Plc 2019 Full Year Results Presentation. (Operator Instructions) Please note that this call is being recorded.

I would now like to turn the conference over to Herbert Wigwe. Please go ahead, sir.

--------------------------------------------------------------------------------

Herbert Onyewumbu Wigwe, Access Bank Plc - Group MD, CEO & Executive Director [2]

--------------------------------------------------------------------------------

Thank you very much, Chris, and a very good afternoon, ladies and gentlemen. You are all welcome to Access Bank's Full Year 2019 Earnings Call. We prepared a very detailed presentation highlighting all aspects of our business, which we're going to be sharing with you right now.

On the call with me today are Mr. Roosevelt Ogbonna, who is our Group Deputy Managing Director; Greg Jobome, who is our Executive Director in charge of risk management; Adeolu Bajomo, in charge of IT and operations; Mr. Victor Etuokwu, who is our Executive Director on Personal Banking; Chizoma Okoli, our Executive Director of Business Banking; Hadiza Ambursa, Executive Director of Commercial Banking; and Mr. Seyi Kumapayi, who is our Chief Financial Officer.

As you are aware, we've completed our merger with Diamond Bank in 2019. And therefore, most of the numbers I will share with you will reflect the impact of the merger. I will briefly go over some of the key performance highlights, after which we will allow more than enough time for questions-and-answers session with you.

Let us speak to delivering on our strategy and merger synergies. As earlier said, we've now completed the merger and operate as one organization, one culture, one system, one set of processes, achieving the target value creation set for ourselves. We've realized merger synergies of about NGN 59.9 billion, comprising largely of recoveries, lower cost of funds and contract renegotiations. And this puts us far ahead of our run rate, because at the time we're sharing with you, the major synergies we saw coming from this combination were expected about NGN 355 billion over a 3-year period. And in the first year, we have made about NGN 59.9 billion, which is about NGN 60 billion in the first year.

The merger has started to create value as post-merger metrics have far exceeded those of the individual banks on a stand-alone basis. Some of the metrics are as follows: When we look at the customer deposits, Access Bank as of the end of the first quarter 2019 was NGN 2.8 trillion in terms of deposits. Diamond Bank was NGN 1 trillion. And so the combined was about NGN 3.9 trillion. We closed the year 2019 with NGN 4.2 trillion of customer deposits.

More interesting are the retail metrics. If you look at the retail transaction income for Diamond Bank for the first quarter of 2019, it was 4.7 -- NGN 6.7 billion. Access Bank was NGN 4.3 billion. And so if you combine it, it was NGN 11 billion. And on an annualized basis, about NGN 44 billion was expected in 2019. However, at the end of the year, we did about NGN 52 billion, which is 17% above the combined entities when you annualize the income.

Same thing with respect to point-of-sales collection. On a combined basis at NGN 34 billion (sic) [NGN 103.7 billion] at the end of the first quarter, which meant annualized, it could have been about NGN 414 billion. We ended at about NGN 518 billion.

Our monthly cards volumes on a combined basis was about 243,000 cards, which meant that in the full year, we would have done about 2.9 million cards in issuance. But what we did was 4 million cards, which is 39% growth.

With respect to USSD, same thing. Combined, NGN 158 billion (sic) [NGN 174 billion] on a quarterly basis in terms of transactions, meaning that we'd have run about NGN 697 billion for the full year on a combined basis, but we did about NGN 1 trillion. Mobile and internet banking, basically on a combined basis, would have been about NGN 3 trillion in the first quarter, meaning NGN 12 trillion -- NGN 12 billion (sic) [NGN 12 trillion], sorry, at the end of the first -- at the end of 2019. But what we did was NGN 17 trillion. Sorry, these are in trillion naira terms. Basically, it just shows that in terms of the combined entity, with respect to the retail metrics, we are beginning to see the value coming out of it.

Let's go into the group performance highlights. Our gross earnings grew by 26%, closing at about NGN 666 billion in the period, compared to NGN 528.7 billion in 2018, comprising of 81% interest income and 19% noninterest income. Interest income, of course, was up by 41%, so about NGN 536 billion. And of course, the key contributors to this growth include 86% coming from investment securities, which rose to about NGN 193 billion in the period, compared to NGN 103 billion in the corresponding period of last year. We saw a 28% rise in interest in loans to about NGN 334 billion compared to NGN 262 billion in the previous year, of course resulting from combined and growing loan book. As a result, our net interest income from the overall balance sheet improved by 60% to NGN 277 billion in the financial year ended 2019 compared to NGN 173 billion for 2018.

Our operating income increased by 25% to NGN 389 billion from NGN 311 billion in the corresponding period of 2018, owing largely to the significant growth in net interest income and other operating income. The key drivers of our operating income are as follows: a 48% increase in our commission and fees to NGN 91.8 billion in 2019 compared to NGN 62.1 billion in 2018. This was, of course, attributable to the increased retail transaction charges, commissions on channels and electronic business income as well as account maintenance charge. We will continue to gain traction on these income lines as we continue to extend our retail offerings and as we basically grow as one combined institution, basically stabilizing for growth.

Also, we saw increased contribution from our other operating income, which basically came from gains from other financial services, disposal of property and equipment of about NGN 38.4 billion coming from the recoveries of fully written off bad loans, which was one of the 8 things that we said we'll basically pursue aggressively as soon as the combination was done.

On the other hand, we saw a decrease in our net traded income to a loss of NGN 17.7 billion from a gain of NGN 72.6 billion in 2018. Of course, this was accounted for by our foreign exchange losses and, of course, the revaluation and reduction on the gain in derivatives and equity investments. When you analyze this properly, you will see that there was significant unwinding of both of the underlying derivative contracts, which were maturing as we move closer to maturity of the instruments. However, as you will see in 2020, these have been very carefully modeled into our financial plans to minimize and ensure that there's minimal impact of volatility as far as profitability is concerned.

Our interest expense increased by 25% to NGN 259.6 billion in 2019, coming from NGN 207.3 billion in 2018. This was largely driven by the size of the enlarged deposit base resulting from the merger and interest expense on our structured funding. We have largely wound down and repriced this book, and this is beginning to reflect in our cost of funding, which has continued its descent by 50 basis points in the last quarter of the last financial year. And today, that figure is roundabout 3.5% (sic) [5.0%] in terms of our composite interest cost when you compare it to 5.5% as at December 2018. The full impact of that figure, obviously, will be felt in 2020 as we begin to enjoy the benefits of low interest rates and the fact that we've been able to migrate our cost of funds downwards significantly and increase our savings account, current accounts mix in terms of overall proposition in 2020.

As regards to costs, operating expenses were up by 31% year-on-year to NGN 253.8 billion compared to NGN 194 billion in 2018. Now this was a result of increase in personnel expense, depreciation, AMCON, IT and E-business expenses. The primary reason we've seen this growth was the fact that we had to create a lot of slack in the course of 2019 to ensure that integration will not affect our overall customer experience and service while we're basically coupling the 2 institution. Secondly, we have to ensure that we harmonize our base function of the combined entity, so you've basically seen that increased growth. But as you will see in 2020 when we talk about the outlook, the impacts are coming from the natural attrition of staff and all of that, this figure wind down very, very significantly in 2020 as we move into the year.

With respect to customer deposits, this closed at about NGN 4.26 trillion, which basically reflected a 26 -- a 66% year-on-year growth from NGN 2.56 trillion in December 2018 and 0.4% quarter-on-quarter from 20 -- from September 2019. The growth was primarily driven by the 93% year-to-date increase in our CASA deposits. So what we're beginning to see is very significant growth as far as our current and savings account is concerned. You'll see it more in 2020 from the sales account levels, where we expect that very shortly we shall cross the NGN 1 trillion mark. This will basically come from our enhanced retail presence, leveraging on our innovative digital platform and the synergistic effects of the merger.

With respect to loans and advances, this stood at about NGN 3 trillion as of 31 December 2019, again up from NGN 2.14 trillion in December 2018. Again, this has come from the combination, our careful risk asset creation to quality corporate names and also supporting the retail segment in line with some of the things, which the Central Bank intend to project.

Overall, the group's asset quality remains under check as our nonperforming loan ratio stood at 5.8% in the period compared to the 9-month figure which was 6.3%. And of course, the key sectors that are responsible for this are: the oil and gas services at 14.8%; general commerce at 11.1% (sic) [11.0%]; real estate activities at about 7.4%. We will continue to drive down the nonperforming loan ratio to our traditional levels, which we were used to prior to the merger through a combination of write-offs, recoveries, declassification and loan restructuring on a year-to-date basis on loan restructuring. On a year-to-date basis, we have written off a total of about NGN 93 billion, and we incurred full provisions on the debt.

With respect to our expected credit loss charge, this was up by 27% to NGN 21.7 billion in 2019 from NGN 14.2 billion in the previous year. Of course, this was to ensure that we have adequate cover for challenged loans in order to drive our nonperforming loan ratios down to our traditional levels. Accordingly, our cost of risk as of the end of the year stood at about 1.9% in 2019 financial year. This would have been what we expected. In any type of a merger like this, you will find a couple of things which you didn't see before the merger in terms of loans, some of it also coming from the changing macro. And therefore, we need to basically increase our provisions towards the end of the year.

With respect to our capital adequacy ratio, it closed at about 18.2% on a full impact basis. However, if we consider the regulatory transition arrangement, our capital adequacy ratio stood at 20.4%. Liquidity ratio was around 47% and both of them far in excess of our regulatory minimum requirements.

What are the things we need to address? First is cost. Our operating expense was up by 31% year-on-year, largely by our (inaudible) cost, personnel expenses, as I shared before, depreciation, amortization and outsourcing costs. If you break it down, you will find that personnel recruitment and training expense grew by 33% year-on-year, of course, coming from the enlarged staff strength and harmonization as well as increased salaries. We also saw depreciation and amortization increase by 57%, reflective of the larger infrastructural base, CapEx investments to support the larger institution and to create enough room for our strategic drive with respect to more customers and increased activity.

You'll also find about 67% increase in the deposit insurance premium driven by the enlarged deposit base and the inclusion of 9 months NDIC premium amortization for the post Diamond Bank. The 13% increase in AMCON expense also reflects the growth in the asset base of Access Bank between 2017 and 2018. Our outsourcing costs went up by about 92%, driven by expanded branch network as well as the harmonized compensation to the increased outsourced staff, which we needed to, basically, to support our drive as well as the direct sales agents and some of the initiatives that we are pushing as far as agency banking is concerned.

Net trading income decreased by about 124% year-on-year due to a significant drop in the fair value gain on equity instruments and, more importantly, derivative instruments coupled with foreign exchange loses and foreign exchange loss on revaluation. So we saw FX trading loss which is about 500% year-over-year, and the gain on FX derivative was basically about 60% on a year-on-year basis. And of course, this was completely as a result of the unwinding of derivative contracts as we move to closer to maturity of those contracts. Some of those contracts were 3 years old, and what we saw was, in the last quarter of the year, a lot of -- a very significant portion of that -- of it basically matured.

Little bit on our retail strategy. We will continue to consolidate the gains of our various strategic decisions targeted at pushing our retail business in line with the next phase of our transformation. We're very heavy on analytics to facilitate understanding of our customers' behavior and preferences. This is done in order to tailor our products, offerings and marketing efforts, thereby positioning ourselves to capture the huge opportunities in the market.

With respect to financial inclusion, we will deploy the necessary resources to reach the unbanked and -- the underbanked and the unbanked by increasing our agency banking network, strengthening our partnerships with telcos and leveraging digital technology. Today, our agency banking network has continued to increase with 2,000 agents. We have 18,607 across all 36 states.

During the year, we were able to reach far-flung places where there were no or low presence of banks or within demographic and economic requirements. Altogether, this has helped us to deliver value propositions such as Access CLOSA, which essentially refers to our endeavor to basically take moderately priced branches right to the hinterland or get closer and closer to the customer and, of course, take our products to millions of customers and facilitated transactions worth about NGN 378 billion as of the -- as at year-end from NGN 29 billion in the first quarter, which has showed very significant growth as far as our digital transactional business is concerned.

The CLOSA initiative was launched in August, later introducing digital transactions such as funds transfer, bill payment and airtime vending. Our CLOSA endeavor accounted for about NGN 140 billion worth of transactions carried out by future banking customers.

On retail digital lending, our digital lending strategy continues to gain momentum as we make available channels of opportunities to eligible customers to finance their dreams and lifestyle, and like our fulfillment of our promise to deliver more and more to our customers. In this period, we recorded 107% and 129% year-on-year growth with respect to transaction count and volume, respectively, through this flagship product. So basically, through our PayDay Loans; our salary loans, our Small Ticket loans as well as Device Financing. I think we were able to grant about 3.1 million unique loans or as to different customers throughout the year.

With respect to our outlook for 2020, and we'll speak to the (inaudible) a bit later. We are committed to driving an effective and sustainable business growth by intensifying our efforts to extract value from new and existing accounts and migrate customers to alternative channels to enhance transactional banking income, which is getting stronger and stronger by the day. We will reduce our operating costs by aggressively executing strategic cost-saving initiatives.

Our culture -- we will create a culture around aggressive recovery, which we've already done, and decisively deal with challenged facilities. We'll significantly increase the productivity of our people and resources to enable us enhance our operational efficiency. We will intensify our newfound drive to reducing our cost of funds, thereby enhancing liquidity and margins. Now this is particularly important because one of the greatest criticisms we had from analysts was our cost of funds. But I think, where we are today, we basically closed the gap at least by about 85% when you look at us against our comparator banks. And we believe that by the end of the second quarter, we should get the bank very close to the same cost of funds structure as our comparator banks in the industry. We'll enhance our core loan growth with increased focus on asset quality, which is one that we are known for.

Let me try and give you guidance for 2020. With respect to profitability, we expect that the -- we are basically looking at getting our ROE anywhere between 22.5% (sic) [20.0%] and 25%. Asset quality ratios, our cost of risk, we see anywhere between 1.2% and 1.5%. Our nonperforming loan ratio will definitely be below 5%. With respect to our efficiency ratios, we think our cost-to-income ratio will be anywhere between 55% and 60%. Our net interest margin will be about 8% while our cost of funds is expected to be less than 3.5% composite as we run average through the year.

With respect to our prudential ratios, capital adequacy will certainly be north of 20%. Our loan-to-deposit ratio will be about 65%, and we expect to continue to maintain liquidity ratios north of 50%.

Thank you very much, ladies and gentlemen. We will now take questions from all of you. Thank you.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question we have is from Tolu Alamutu from Tellimer.

--------------------------------------------------------------------------------

Tolu Alamutu, Tellimer Research - Director & Credit Analyst of Banks [2]

--------------------------------------------------------------------------------

Okay. I have a few questions, please. The first is on your foreign currency position. Can you maybe tell us whether you're short or long dollars at the moment and give us some idea of how short or long you might be?

The second is on foreign currency liquidity. Can you tell us how much you estimate that you have available to meet near-term maturities? And do you have any plans to return to the Eurobond market? Then can you also give us some more information on your exposure to Slok Nigeria? How large is that exposure? How much of it has been provisioned? Any information that you can give would be greatly appreciated.

And then also related to asset quality. When oil and gas contracts were restructured in the past, what oil price was assumed in those contracts, please? And how have you stress tested those exposures?

And can you also give us some idea of what the impact of a much weaker naira would be on capital and other metrics? I remember, in the past, you had said that you had stressed your capital up to, I think, NGN 450 to the dollar or NGN 500. But any detail that you can give on stress testing that you've done now would be appreciated.

And finally, just going on the CEO's recent comments regarding your strategy and expanding into more African countries and so on. Can you maybe give us some idea of what you would consider an ideal split in terms of revenue or profitability of your -- of Nigeria versus the rest of Africa?

--------------------------------------------------------------------------------

Herbert Onyewumbu Wigwe, Access Bank Plc - Group MD, CEO & Executive Director [3]

--------------------------------------------------------------------------------

Okay. With respect to -- I will get Roosevelt to speak to asset questions from foreign currency position, short or long. We are pretty much square now almost. Foreign currency liquidity, our ability to meet near-term maturity and whether we will return to the Eurobond market, Roosevelt, speak to that.

--------------------------------------------------------------------------------

Roosevelt Michael Ogbonna, Access Bank Plc - Group Deputy MD & Executive Director [4]

--------------------------------------------------------------------------------

All right. So on the FCY position and FCY liquidity, on the position, we're about square today. Given some of the actions we've agreed to do within the course of the next 7 days, we will be net long, but it's not a significant position in that sense. For us, it is not to expose ourselves unduly. We're not seeking to make significant gains from it by taking any aggressive position in that sense.

From an FCY liquidity perspective, we look at maturity between 7- and 180-day buckets, which are the more immediate pressure points. We are fine across all the buckets. We are positioning ourselves to ensure we have liquidity buffers about 10% of our overall portfolio just to protect ourselves in the event that any market shocks that happen that might affect our ability to meet near-term obligations. But 7 to 180 days, we're very comfortable. We have some negative gap between 270 and 360 days; and 2 years over, we are very long on those positions. So we are comfortable. We are monitoring it very closely, and we're -- with this, we have no plans of returning to the Eurobond market, not at this time, at least.

--------------------------------------------------------------------------------

Herbert Onyewumbu Wigwe, Access Bank Plc - Group MD, CEO & Executive Director [5]

--------------------------------------------------------------------------------

Thanks. Let me just add to Roosevelt's comments. We try to use very sophisticated measures as far as liquidity management is concerned, more specifically around foreign currency liquidity management. And we use measures that are quite close to the ELA just to make sure that from a contractual standpoint, all right, we don't run into any problem, particularly given what and how we see the market evolving over the next couple of weeks. We think, just as Roosevelt said, over the next 180 days, we are clean, which represented the most significant pressure points, given what the coronavirus is doing to the international market and the repricing and the capital outlook which we are seeing. So I think we're doing quite well.

I would like Mr. Jobome, our Chief Risk Officer, to basically speak to issues around Slok and, of course, the stress test and the impact on capital adequacy.

--------------------------------------------------------------------------------

Gregory Ovie Jobome, Access Bank Plc - Chief Risk Officer & Executive Director [6]

--------------------------------------------------------------------------------

Thank you, Herbert. So with respect to Slok, obviously, whilst trying to skirt the borders of confidentiality, all I can say is that we will do the prudent end, as you know Access Bank for. We have taken significant provision. And as we watch this space, we'll be able to tell you a bit more. But like I said, there's only so much I can say for client confidentiality reasons. But if you can look back at the way we handled other significant exposures in the past, you know we are very swift. We take decisive action on all of those, and this is not going to be any different.

With respect to potential devaluation, well, as we have shared in every meeting for the past number of quarters, we have been very, very careful to anticipate the market as it relates to potential devaluation. Obviously, no one could have predicted coronavirus, on this -- the immediacy of what has turned out to be the case. So we did anticipate, should there be devaluation up to NGN 550, we stressed our book up to that level. And at those levels, we were still meeting the regulatory requirement. So that gave us an upper band. Of course, we wouldn't want to see those kinds of risks because, at that exchange rate, you will find that a good chunk of the markets will face a lot of stress. Every sector -- whatever sector you are in, whether you're oil and gas, manufacturing or general commerce, you will have a bit of a problem. So our role is to be prudent and prepared should that eventuality happen. Like I've said, at those levels, we will be fine.

With the combination with Diamond Bank, of course, that level now comes down. So at about NGN 500, if we maintain the transitional regime that Central Bank has, we'll still be okay. At NGN 550, with transitional regime, we will still be okay. Beyond the transitional regime, both our bank and every other bank will, of course, have to think again and probably even the regulator as well. But no one is expecting to see exchange rates at that level. So we keep our fingers crossed on that.

--------------------------------------------------------------------------------

Herbert Onyewumbu Wigwe, Access Bank Plc - Group MD, CEO & Executive Director [7]

--------------------------------------------------------------------------------

Let me speak very briefly with respect to our strategy, both African and international, i.e., outside of Africa. I think what we're trying to create is to create an institution that is resilient, would stand the test of time, would have diversified income not just across the continent, but outside of the continent. You will see us having today one of the strongest African banks in the U.K. with increased contributions from a percentage standpoint and also, therefore, creating a natural hedge because we operate in a very, very strong currency. And I've talked about Access Bank U.K. It also houses operations in Dubai, which, by the way, is profitable. And our expectation is that, over the next couple of years, we will be present in 2 or 3 more of the world financial centers.

What does that do? It helps to enhance our overall risk rating and to ensure that, if you are in soft currency countries, in the main, you'd have hedged yourself. And over time, from a risk-rated standpoint, you could see very significant countries.

Now our ambition as well, of course, in the course of the next 5 years or going up to 2023, rather, is to be known as Africa's gateway to the world. What that means is that we also need to be present in some of the major trade hubs within the continent. And so we will be present, and we're spreading to a couple of countries outside of Nigeria, as you see, where we can see huge trade volumes benefiting from (inaudible) trade volumes coming from the contiguous nature and networking around the continent as well as what we will refer to as one bank means -- which refer to which are largely big African nationals that have presence across continent.

My expectation is that, if we take our overall diversification efforts, Nigeria still represents, within the context of Africa, a very, very significant player and for the rest of Africa to basically contribute up to 25% will take us a bit of time. But my expectation is that, perhaps over the next 5 years, the rest of Africa together with what we have outside of the continent should start to approach something like 40% contribution. And when that happens in full steam, it has -- it will lead to an upgrade, where we start to almost look as if we are beginning to pierce the sovereign ceiling. So that is how we intend to see -- or that is how we see our internationalization, not just within the continent, but also outside the continent. Thank you.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

The next question we have is from Oyinkan Ogungbemile from Rand Merchant Bank Nigeria.

--------------------------------------------------------------------------------

Oyinkan Ogungbemile, [9]

--------------------------------------------------------------------------------

I just wanted a bit of clarification on the swap, the unwinding of swaps that you earlier discussed, if you can please clarify on that. What happened there?

--------------------------------------------------------------------------------

Oluseyi Kolawole Kumapayi, Access Bank Plc - CFO & GM [10]

--------------------------------------------------------------------------------

Okay. All right. If you recall, at 2019, we guided that we have seen an unwinding of about NGN 15 billion a quarter on the derivative book. What has happened is not inconsistent with what we expected. What you see is that this comes on the back of the income -- timing of income recognition. And definitely, we tend to see this unwinding towards the maturity of the instrument. However, what we have done is that we've carefully modeled our financial plans so that you don't see that volatility anymore. So that's what has happened on the short book.

--------------------------------------------------------------------------------

Herbert Onyewumbu Wigwe, Access Bank Plc - Group MD, CEO & Executive Director [11]

--------------------------------------------------------------------------------

Well, a very significant proportion -- with respect to the swaps, there's a significant proportion, which were of a 2-year tenor coming at the end of the last quarter of the year. But I think, going to 2020, we are going to think of how to model it a bit differently so that we are going to visibly get out of this volatility. And that is what Seyi is speaking to.

We believe that the swaps also represents the very, very strong additional source of income for 2 reasons. One, is there any institution you can lend to, particularly at a time like this -- and this is going to be tested and you're assured you'll get your money back. I think the sovereign must represent the best risk. That's the starting point.

Now secondly, with respect to liquidity around it, we've been able to build upon liquidity base to ensure that we can to carry this amount of swaps without any liquidity mismatch throughout the period.

Thirdly, I think, from an earnings standpoint, what you're going to see is that, in 2020, it is going to represent a smoother source of income with less volatility on a quarterly basis because of how it is going to be modeled. So we come up with very stringent measures, all right, with respect to how we monitor the portfolio basis so that we don't see this type of volatility that we saw in the previous year.

And finally and most importantly, we're not taking this long detail as we did in the past, so you are not likely to see a 2-year swap. All swaps are technically within 1 year. And as much as possible, we try to ensure that there will, or if there's any spill of that, you will see it in the very early parts of the next year. So that is the thing we're doing. Thank you very much.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

(Operator Instructions) The next question we have is from Rudo Maisiri from FMO.

--------------------------------------------------------------------------------

Rudo Maisiri, [13]

--------------------------------------------------------------------------------

I have 2 questions. The first one, it's possible that I could have missed in your explanation of the stress testing that you've done recently the effect of the lower oil prices.

And the second question is on the LDR, which -- or the loan-to-funding ratio rather, which is lower than the current CBN from expectation and what's your plan is around that?

--------------------------------------------------------------------------------

Herbert Onyewumbu Wigwe, Access Bank Plc - Group MD, CEO & Executive Director [14]

--------------------------------------------------------------------------------

Okay. Greg will speak to the issue around the lower oil price, that impact on CAR, and I suppose the loan-to-deposit ratio.

--------------------------------------------------------------------------------

Gregory Ovie Jobome, Access Bank Plc - Chief Risk Officer & Executive Director [15]

--------------------------------------------------------------------------------

Okay. So like I said earlier on, what we do as business as usual is anticipating potential market shocks. And in line with that, we do stress for oil price. Typically, we've done stress tests around $30 or $40 per barrel, which is precisely where it is hovering right now. So with hindsight, that was a good decent benchmark to pick for the stresses. Now for that, of this -- into a certain exchange rates once in your market historically. And typically, that would take you anything north of NGN 450, NGN 500, NGN 550. So those are the levels that we apply for our stresses. And like I said, we've done this for a good number of years now, so they're not even like new tests that we do. So we're very well familiar with this territory. And we have prepared even down to sectoral level what kind of impact for oil and gas borrowers, what kind of impact for manufacturers, what kind of impact for a whole raft of sectors. But what is common across all is that eventually every sector will be touched, just like I said, if those levels of exchange rate do crystallize. As we've said, those tests help us to anticipate these developments and to prepare for them. So the real benefit for us from those stress tests was that we have taken steps as far back as 2016, 2017 in anticipation of any sort of insurance.

With respect to LDR, naturally, the goal is to meet all regulatory requirements and to support our regulator in every way possible, and that's precisely what we're doing. To balance that is our challenge. We do still have to be careful so that we don't end up creating an asset quality issue in 12 months' time or 24 months' time. So we are striving to achieve those -- that level of 65% or even exceed this, but with good-quality names, so that we do not have an asset quality or capital issue on the back of that. So we are pushing our book. The 2 key areas we are looking to grow in, which we are doing already, one is through investment-grade names, which are the names you can count on in times of stresses. So just as we've said, with respect to the macro. So our investment-grade names, we have grown our loans to those names over the past 6 to 9 months already. The other area that we are pushing several of our strengths is retail. So again, we see some good significant lending that we've picked up with respect to digital lending and other aspects of retail lending. So these are 2 areas that we are pushing, and we should see the numbers picking up with respect to meeting the LDR. And all the interest opportunities that come, we will take them safely, as I've said already.

--------------------------------------------------------------------------------

Herbert Onyewumbu Wigwe, Access Bank Plc - Group MD, CEO & Executive Director [16]

--------------------------------------------------------------------------------

Let me just add a little bit to what Greg said. As an institution, we have -- we took a position to try to derisk our balance sheet right from when we did our combination with Diamond. And so some of the currency exposure that existed at that particular point in time, we've made rapid efforts, obviously, to derisk to do this combination. And the simple reason was the fact that we believe that, quite frankly, this situation will not always remain the same over time. However, we know that our regulators obviously focus on price stability. We'll do what's necessary together with ensuring that whatever we need to do to visibly boost our reserves, we will ensure that price is managed, if you like. But what we've done as an institution is to make sure that we try to insulate ourselves reasonably as much as possible from the problems that we see.

We note the recent excitement coming up with the markets that is making a lot of foreign portfolio investors to take their monies out. But we also see monies coming in to the system. And as a result of all of that, what we've done is to basically revisit our portfolios and look at them very, very carefully with a view to stress testing them for currency risk, stress testing the whole thing for liquidity risk and basically ensuring that we migrate very quickly, even though we've done that for a long time, towards the better-quality names if we were to get any type of foreign currency exposure. So those are the things which we've done to basically try to insulate ourselves, given that a lot lower oil prices which we're beginning to see at this point in time. However, like Greg said, it's not possible for there to be a complete meltdown and any sector will be protected. But as much as possible, the idea is for it to be local currency, where you know that the natural charge will be to earnings and you will be in a position to manage it. Thank you very much.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

The next question we have is from Simi Ojumu from Absa.

--------------------------------------------------------------------------------

Timothy Wambu, Absa Capital Securities Proprietary Limited, Research Division - Research Analyst [18]

--------------------------------------------------------------------------------

This is actually Timothy Wambu. I just want to ask a few questions. The first one is, how much scope do you see for lowering the cost of funds? As you mentioned, it's at 5%. You will see that's quite high, I would say, compared to the next bank.

The other question is about your treasury yields, which, again, when I compare to the next bank, were quite high. Does that imply that you're probably interested in longer-dated papers? I just want to get a sense as to why your treasury yield was much higher compared to the next bank here.

And then just lastly, what's your strategy in Kenya, given that you've gotten your license? A transactional bank, being a fairly small bank, what strategy do you have in mind? What do you intend to achieve?

--------------------------------------------------------------------------------

Herbert Onyewumbu Wigwe, Access Bank Plc - Group MD, CEO & Executive Director [19]

--------------------------------------------------------------------------------

Roosevelt, do you want to speak to them?

--------------------------------------------------------------------------------

Roosevelt Michael Ogbonna, Access Bank Plc - Group Deputy MD & Executive Director [20]

--------------------------------------------------------------------------------

Yes. Okay. So on cost of funds, what you had looked at was historical average, which was about 5%. If we look at what it is we've done between December and today, we've shaved off about 200 basis points on that cost of funds that you have. So -- and that's something we're tracking every day. The impact you will see on the Q1 numbers. Our cost of funds on the naira side has dropped about 250 basis points. On the dollar balance sheet, about 150-odd basis points. So we've tightened that delta that existed between ourselves and the next bank, as you referred to. And we expect that there will be another significant drop in March. And then the next time we see a significant impact is sometime in September/October. So we're confident that the delta will not be more than 100 basis points at the end of the year, given all the work that we're doing and the repricing of our balance sheet that has gone on for the last 3 months.

On the treasury yield, we are not doing anything significantly different from the rest of the market. So I guess the question would be what are the other banks doing that is not showing the real yields on their treasury portfolio. I mean the numbers in themselves, we show a yield that is well within market yields and return of those instruments that we're carrying. So nothing exciting that we're doing and nothing different that we're doing. As you know, the treasury and fixed income portfolio just manages excess liquidity, and any financial institution has a turning point. And that is what we are doing with significant liquidity we have.

On Kenya, we're excited to be in the market. We recognize it is a different market from several African markets. Our idea with Kenya is that it's going to anchor a lot of the conversations we're going to have within the Eastern African market. We want to be dominant in Kenya. We don't want to remain a small bank. Then the platform of TNB just gives us an opportunity to get our foot into the market and begin to do interesting things as we see them. Trade finance is one aspect of the business in Kenya that we intend to focus on. But I think, beyond trade finance, the retail banking opportunities that are there, recognizing that we have to do so with scale, means that we have to do things differently. I'm not going to give out too much of what we are planning to do with TNB at this point because that would be sharing too much. But clearly, Kenya will be dominant for us for East Africa. We're going to acquire scale in Kenya, and TNB is just the beginning of the platforms that we are going to use towards achieving that.

--------------------------------------------------------------------------------

Herbert Onyewumbu Wigwe, Access Bank Plc - Group MD, CEO & Executive Director [21]

--------------------------------------------------------------------------------

Let me just add a little bit of light to the issue around the cost of funds. Like I mentioned earlier, that was one of the points were criticized for. And today, if you look at our average cost of funds down to 3.5%, like Roosevelt said, compared to the next bank, if we had to split cost of funds structure, if you take only the local currency part of it, we are probably at about -- very close 0 level. It's about 2.38%. That is for the local currency portion. I'm not sure that you have any of the other banks that's doing more than 20 or 30 basis points better than that.

So what has happened is the long-term funding sources of our dollar needs to be repriced. And the structured funding, now as they mature, we are repricing them. So you are going to see the full impact as we move on through this year. Now none of them can get the full benefits as we would, all right, because from the efficiencies that they have, it's impossible for them generate any better. But in our own case, if we bring in and tighten that delta to 150 basis points to 100 basis points against the balance sheet of our size, I think you'll see the significant improvement in efficiencies of Access compared to the rest of the market as we move on.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

The next question we have is from Jerry from CardinalStone.

--------------------------------------------------------------------------------

Jerry Nnebue, CardinalStone Partners Limited, Research Division - Analyst [23]

--------------------------------------------------------------------------------

Yes, Herbert. I just want to know if we are to expect in 2020 more one-off costs, one-off integration costs. I mean I know you said last year we did see some of this coming. Do you expect more off-costs related to integration to take place in 2020?

Secondly, so last year, a lot of focus was on loan recoveries and restructuring and all that. I just want to have a sense of what your loan growth expectations would be in 2020. And you had mentioned that you're looking at investment-grade names. So what kind of sectors are you looking at in that regard? So what sectors do you think will give you the kind of resilience that you want to see as you make your lending decisions. Yes. Those are my questions for now.

--------------------------------------------------------------------------------

Herbert Onyewumbu Wigwe, Access Bank Plc - Group MD, CEO & Executive Director [24]

--------------------------------------------------------------------------------

Okay. I think Seyi can speak to the issue.

--------------------------------------------------------------------------------

Oluseyi Kolawole Kumapayi, Access Bank Plc - CFO & GM [25]

--------------------------------------------------------------------------------

All right. With respect to one-off costs, the integration is done. We are now operating as one bank. What -- as Herbert said, one process, one people. So everything that you see will come in as business as usual. So there is no integration costs coming in for 2020.

--------------------------------------------------------------------------------

Herbert Onyewumbu Wigwe, Access Bank Plc - Group MD, CEO & Executive Director [26]

--------------------------------------------------------------------------------

Greg, do you want to speak to the issue around loan recovery on loan growth?

--------------------------------------------------------------------------------

Gregory Ovie Jobome, Access Bank Plc - Chief Risk Officer & Executive Director [27]

--------------------------------------------------------------------------------

Yes. Okay. So as we advised earlier on, I think we had, in our previous calls, we have been asked about the loan growth expectation for 2020. So that has not changed. We're still looking at 10% to 15% growth range. Of course, in the current environment, we have to keep watching that space. The variables are up in the air. But that growth, we are targeting investment-grade names, like I said earlier on. There are a good number of sectors. So that second that you might say, well, this sector is not a good sector right now. And the usual scapegoats are real estate, et cetera. So we would not be looking to grow significantly there. But there are areas, even in oil and gas, with the right name, you will be able to do some lending. Prior to now, that would have held water. But of course, with the current coronavirus threat, everyone is going to watch that space for a few months. Your good, stable manufacturing. Your good, stable, fast-moving consumer goods. Retail, as I said earlier on, those will always be fertile harvest grounds because they are reasonably diversified by definition. And conglomerates are also a good place to lend in times of uncertainties. So that is not going to be different. But investment-grade names are the primary group, whichever of these sectors we do play, and retail is a primary important for us as well.

--------------------------------------------------------------------------------

Herbert Onyewumbu Wigwe, Access Bank Plc - Group MD, CEO & Executive Director [28]

--------------------------------------------------------------------------------

I will just add a few words to what Greg said. There are some interesting opportunities that are beginning to rear their heads in terms of areas to lend, one of which is infrastructure done through a closed structure to ensure that we are not open to government risk and things like that. So that is coming up very strong. There are things in the telecom sector coming up very strong. Some reasonably good foreign international oil and gas names, particularly in majors. Gas is looking a bit interesting. So across all of the sectors.

But one of the things and areas we want to be known for, make sure that the growth will not measure up in terms of the overall size, will be with respect to retail. We are investing a lot of money in analytics and artificial intelligence to basically understand lifestyle products and to look at how to integrate the entire retail lending loan. If you ask us 3 years ago or 4 years ago, would we be lending to SMEs, we would have said no. How much was to be the portfolio to individuals, we'd have said very, very significant.

But what we are beginning to see and because of our share size, the portfolio based on PayDay Loans is very significant. There are some months now or some years -- some months, some days, when we give about 40,000 individual loans to people, who are basically taking short-term loans to run to the supermarket, to pay salaries, to pay people, et cetera, et cetera, et cetera. The yields there are significant. And if you have the right algorithm, the cost of risk is not that much, okay? So we are beginning to develop aspects of our lending to begin -- to make sure that it starts to grow.

When you meet other international banks, whether it is Barclays organization or JPMorgan, et cetera, et cetera. Those skills have been formed over time, right, and they're able to lend to people in a manner that they can collect their money. Working together with the Central Bank and what I just referred to as the GSI, all right, we believe that we can strengthen that portfolio, all right, and make it profitable and all of that. Those are one of the significant reasons why we did this combination with Diamond. And it would be wrong for us not to also look at the lending side of the book while growing cheap retail deposits to make sure that the overall yield is enhanced. We've done it so far, and I think we're getting more successful at it. In terms of the proportion to the land base, you do not see that much, but in terms of where the portfolio is going to, I think it is significant and it is diversifying and basically supporting the overall value chain. So those are the areas you are likely to see us doing a bit more.

--------------------------------------------------------------------------------

Jerry Nnebue, CardinalStone Partners Limited, Research Division - Analyst [29]

--------------------------------------------------------------------------------

Okay. So as a follow-up -- yes, as a follow-up, so still speaking to loan and especially from an assets point of things, based on your experience last year dealing with some of the inherited or imported asset quality issues from Diamond Bank, can you speak to the kind of engagement that you had and what you expect in 2020? So of these loans, how much of them do you think will be written off and how much of them do you think can be restructured based on the experience or from the engagement that you've had with some of these obligors? I just want to know what's going to be the key driver to bringing the NPLs down, if it is write-offs or we're going to see some improvements in restructured loans from that side.

Then secondly, if you can speak to the implications or the impacts of what we've seen on the CRR side of things. It appears that the Central Bank had been a bit arbitrary in the debiting banks. How -- in what ways have that constrained your liquidity? And you just said you're not looking at them because the market to raise Eurobonds. So would you be adept getting funds domestically or -- I don't know. Just can you speak to that?

--------------------------------------------------------------------------------

Gregory Ovie Jobome, Access Bank Plc - Chief Risk Officer & Executive Director [30]

--------------------------------------------------------------------------------

Okay. Let's see the first. Okay. So with respect to the erstwhile Diamond Bank's loan book. Of course, we've done a significant amount of work on this. We've been doing that for about a year now. Actually, it's exactly a year now. So the main thing that we've done has been around restructuring, which we've also shared with you in the past. Restructuring means that, in some cases, you'll find some names that are in business, they are running, except that the structure that was in place at the old Diamond Bank no longer suited their current realities. So those were straightforward. These were willing and able players, and all we had to do was create the right structure. In some cases, it was migrating them from a clean vanilla term loan to a project finance facility. And that has made a lot of difference over this 1-year period. Some of them have already made the first payment post restructuring, which gives us the confidence that we are on the right track. In this -- If the pending headwinds from coronavirus do not subsist, we should see them pick up and from then on migrate up the ladder probably back up to stage 1 at some point. So that's the first main thing.

The engagements, like you alluded to, are very, very robust from day 1, at the highest levels of the bank, which meant we've met all the significant borrowers of the old Diamond Bank. And name by name, we're able to agree actions to take. In some cases, when there was a cancel clause, it was a clear case of recovery, technical provision, write-off, pursue for recovery. And even on the recovery side, like Herbert said earlier on, we have achieved a measure of success, and there are a few more that we've written off that we are still chasing for recovery. With respect to the outlook for those names post restructuring, now that they are on the right structure, we do expect a good chunk of them to perform in line with that expectation because the cash flows are fresh, cash flows on a day-to-day basis. Site visits to see what exactly that they are capable of, and we have verified those recent developments.

For those that are not able to meet it, we do the normal prudent thing. So over a 12-, 24-month period, depending on the structure, if there's 1 or 2 that are not stepping up, it will be called BAU for the bank, just like we would treat any other Access Bank borrower. So that is the stage that we're at now. There's not any distinction at this point between the old Access and the old Diamond, just the cash flows that we have to see and performance. And when we see any deterioration, we will take decisive action.

--------------------------------------------------------------------------------

Herbert Onyewumbu Wigwe, Access Bank Plc - Group MD, CEO & Executive Director [31]

--------------------------------------------------------------------------------

With respect to CRR, I think that the Central Bank is determined to ensure that banks lend to the real sector. So I won't describe their actions of being arbitrary. They will take the actions that are necessary to ensure that banks continue to support the real sector. Obviously, it puts everybody under pressure. Because rather than looking for the low-hanging fruits, we all have to concentrate on seeing how we can support retail, seeing how we can support the real sector and start to see opportunities are that many. But I think we are known for our capacity to create good-quality loans or create good business in other pipelines, so that's what we're working on.

But are we coming back to the market to issue bonds? I can tell you for now that's not on the table. We are determined to bring up our overall cost of funds. So even looking at the domestic market, it is something that is not a high priority to us, all right? What's more important to us is that cost of funds, which is down to about 2.38% on the local currency side, how do we basically push it for at least to the same level, which is not below normal, at 20 to 30 basis points in terms of our comparator banks and how do we bring down our overall cost of on foreign currency on our dollar balance sheet so that on a composite basis, all right, we'll probably be at the same level. Even on some of our balance sheet, we think that once that's done in terms of the overall results, return on equity, return on assets and things like that, we will be where we're supposed to be.

There's always a lot of excitement each time there is a combination. We also know that, quite frankly. Yes, we have done more combinations than other people or more than other banks in the industry. And therefore, we're in a better position to generally tell stories with respect to what can happen. There is no rule or thing that says that you cannot have another thing blow up or risk of concern, if you like. Well, let me simply put it this way, the reasons behind the merger, the cost synergies and all of that will always, always, always, all right, be in far in excess of anything that comes out because I think we've gone through this balance sheet and assets with a toothpick to identify what the quality on a risk basis, whether it is 1, 2, 3, whether the restructure is based on changes in the macro or the cash flow situation of the enterprise. So we have gone through all of that, and we know that sometimes, in some cases, we may see some vulnerability. But in the main, we think that the overall synergies that come from the combination will be far in excess of all of those things.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

The next question we have is from Wale Okunrinboye from Sigma Pensions.

--------------------------------------------------------------------------------

Wale Okunrinboye, [33]

--------------------------------------------------------------------------------

I have 2 questions. One is on your -- I don't know if it's been answered, if it's been asked because I just joined the call. One is on your disclosure with regards to in interrelated trading. Early in January this year, we saw -- I don't know, you had closed -- you had a close period at the end of last year and then was suspended. I'd like to get a clear explanation of why the suspension took place. What is the internal policy with regards to trading during closed periods? Or what is the policy around closed period? And also -- around also suspending closed period, what informed most of the decision?

And secondly, the CEO has been selling down shares for the last 2 years. What's driving that? Is he no longer convinced about the case? Or what exactly is it? Because he's sort of sending a different message to those of us in the market.

And then thirdly, on the FX losses, can you maybe provide any information on that? I would suspect you must have answered it earlier in the call maybe, but just a bit of color on that. That would be all.

--------------------------------------------------------------------------------

Herbert Onyewumbu Wigwe, Access Bank Plc - Group MD, CEO & Executive Director [34]

--------------------------------------------------------------------------------

All right. Thank you very much, Wale. My name is Herbert. Let me speak to the one that deals with me specifically, then I'll let my colleagues speak to the closed policy issue. In fact, I will let Roosevelt speak to it, and then we'll take it from there.

--------------------------------------------------------------------------------

Roosevelt Michael Ogbonna, Access Bank Plc - Group Deputy MD & Executive Director [35]

--------------------------------------------------------------------------------

All right. So Wale, thank you for your questions. I think it's wise to state that, with respect to insider trading and the issues that you alluded to, the bank has continued to lead governance within our market. And with this, in respect to trading of key stakeholders in the institution, that is no different. So I know there's a level of excitement in social media. We all get excited reading bad news or what we think is bad news. Unfortunately, in this instance, that's not all the case. So all the rules that apply to any listed institution was followed through. And I'm sure you would have seen that both SEC or NSE had nothing to say with respect to this. I don't think we should give it too much air. Because if we do, we're always supporting and encouraging sensational reporting to continue. So that's one.

Secondly, with respect Herbert's holding in the institution, I'm not sure where you get this information of about him selling. So you can look at the bank's financial statements for the last

18 years and look at if his holding has been increasing or reducing. I think let's not give rise to excitement. Let the facts speak for themselves. The financial statements are there. You can review from 2002, when we joined the bank, to 2019, the last report that you have, and then you can make a call yourself. So I'm not sure we should give it too much air.

--------------------------------------------------------------------------------

Herbert Onyewumbu Wigwe, Access Bank Plc - Group MD, CEO & Executive Director [36]

--------------------------------------------------------------------------------

Seyi, you want to speak to the FX losses?

--------------------------------------------------------------------------------

Oluseyi Kolawole Kumapayi, Access Bank Plc - CFO & GM [37]

--------------------------------------------------------------------------------

Yes. I think I will just review what I said before. I don't know whether you were at the March investor call where we stated that we will see some unwinding, I think about NGN 15 billion a quarter. And I think what we've seen is not inconsistent with what our expectations were.

What is happening with that is this, is issue a timing issue of recording of the income. And as you see, the instruments, when they get to maturity, all of these things tend to unwind. So this is -- we saw this -- we knew it was going to happen. We planned for it. And if you look at our financial model that we have, this is already built in. And therefore -- so for us, it's something that we know what's going to happen and we have planned for it.

--------------------------------------------------------------------------------

Herbert Onyewumbu Wigwe, Access Bank Plc - Group MD, CEO & Executive Director [38]

--------------------------------------------------------------------------------

Let me just -- I'll just make a few comments with respect to some of the things Wale said and perhaps we can close that or move to another question.

We've run this bank for 18 years and a bit. And right from the very beginning, we are determined to create an institution global in scale, global in scope, following best practice, coming out of Nigeria, coming out of Africa, who can truly create a global enterprise. We're also aware that this has never been easy ask and that as you move on through life, you will come across several, several puzzles, some you have nothing to do with. Some you may have someting to do with. Some may just be communication issues, et cetera.

But in this part of the world, what tends to happen more often than not is that as you grow, particularly when you grow inorganically, you would see a lot of these heightened issues come at you more than you would ever expect. We will not run away from these challenges. We will continue to adopt best practice and confront them as they come.

Suffice it to say, Wale, the fact that you are not on the call at the time we shared strategy, local, particularly within the context of Africa and in terms of globalization, that we're determined more than ever to create a global enterprise. And for me, that's what's most important.

On a net basis, we continue to have greater shareholding than we've done before. We will not allow social media or wrong news or fake news to basically -- to cloud our decision-making context or our determination to create a global enterprise. I hope that solves the -- suffices for you. And if you have any other questions which you wish to take off-line, please, please feel free to call me or call my colleagues or call my company secretary, and we'll answer those questions to the letter.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

(Operator Instructions)

--------------------------------------------------------------------------------

Herbert Onyewumbu Wigwe, Access Bank Plc - Group MD, CEO & Executive Director [40]

--------------------------------------------------------------------------------

Thank you. In the absence of any more questions, I just want to thank you all for hooking up to this call. I will look forward to seeing you in a few weeks when we'll be taking our first quarter 2020 presentation. Thank you very much.

--------------------------------------------------------------------------------

Operator [41]

--------------------------------------------------------------------------------

Thank you, sir. Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines.