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Edited Transcript of FBNH.LA earnings conference call or presentation 25-Oct-19 10:59am GMT

Q3 2019 FBN Holdings PLC Earnings Call

Oct 31, 2019 (Thomson StreetEvents) -- Edited Transcript of FBN Holdings PLC earnings conference call or presentation Friday, October 25, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ini Ebong

First Bank of Nigeria Limited - Group Executive of Treasury & International Banking

* Olusegun Alebiosu

First Bank of Nigeria Limited - Chief Risk Officer & Group Executive

* Patrick Iyamabo

First Bank of Nigeria Limited - CFO & Group Executive

* Urum Kalu Eke

FBN Holdings Plc - Group MD & Director

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Conference Call Participants

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* Clement Adewuyi

Rand Merchant Bank, Research Division - Equity Analyst

* Karim Sawabini;Moon Capital;Vice President

* Muyiwa Oni

SBG Securities (Proprietary) Limited, Research Division - Heads of Equity Research for West Africa

* Olawale Olusi

United Capital Plc, Research Division - Analyst

* Oluwatoyosi Oni

Renaissance Capital, Research Division - Research Analyst

* Ronak Gadhia

EFG Hermes Holding S.A.E., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, and good afternoon, ladies and gentlemen, and welcome to the FBN Holdings' 9 Months 2019 Results Conference Call. Following an overview by the Group Managing Director of FBN Holdings, an interactive Q&A session will be available. Today's call is being recorded.

I would now like to hand the call over to Mr. UK Eke, Group Managing Director of FBN Holdings. Please go ahead, sir.

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Urum Kalu Eke, FBN Holdings Plc - Group MD & Director [2]

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Thank you very much. Good afternoon, and good morning. Welcome to the FBN Holdings Investor & Analyst Presentation for the 9 months ended September 30, 2019.

My name is UK Eke, the group Managing Director FBN Holdings Plc. Let me quickly introduce my colleagues on this call. You know them already. Sola Adeduntan, the CEO of FBN Limited; I have Kayode Akinkugbe, the CEO of FBNQuest Merchant Bank; Ini Ebong, he is the Group Treasurer and Head of International Banking; Wale Ariyibi, CFO at the Holding Company; Segu Alebiosu, the CRO of FirstBank; Patrick Iyamabo, the CFO, FirstBank. I also have Val Ojumah, the CEO of the Life Insurance Business who will be speaking for the Group -- Insurance Group.

We had earlier posted the results pretty much early, and I hope you've had time to look through. So I'm going to run through the presentation. The intention is to do a very short presentation for the 9 months, and then we'll have enough time for Q&A.

I think the key message we want to pass to the investment public is that we are on course, very much so to deliver sustainable long-term performance.

For the 9 months to September 30, 2019, we are happy to report significant improvements across most metrics that we're on track, largely around asset quality, diversified revenue and, of course, profitability.

And then specifically on Slide 5, you will see a clear statement of how we have set on the journey. We have been able to bring down the nonperforming loans down to 12.6%. Recall that by September -- sorry, by June, we're 25.9%. We, therefore, affirm that we will be below 10% by year-end. Let me repeat, please. By December of 2018, we're 25.9%. By June, we were 14.5%. And now September, 12.6%. So we reaffirm our commitment to delivering the single-digit NPL ratio by year-end.

And given on that, the credit impairment charge improved by 62.6% and cost of risk is down from 4.5%, 9 months of 2018 to the current level of just below 2%, precisely 1.9%. We have also seen 17% growth in profit before tax, and the buildup of that is the noninterest revenue up 6% year-on-year. Again, we are fast-tracking our transaction-led model, which we reported was key to us. And we also have strengthened our electronic banking activities, and you'll see that year-on-year, there's an improvement of 45.9%. Now the increase in electronic banking income relative to the total noninterest income continues to soar. September 2018, it was 25.3%, electronic banking contribution to total noninterest income. This time around, we have inched up to 34.8%.

Let me then turn to the efficiency ratios, which you have on Slide 6. We are aware of the declining rate environment. And so we are reporting margin compression with earnings yield down 11.2% from 11.7%. And then the net interest margin is also down 7.3% from 7.7%. However, as you can see in the presentation, the posttax ROE has inched up to 12.2% for 9 months 2019 from 8.7% corresponding period of 2018. And the posttax return on average assets also improved to 1.2% relative to what it was last year, 1.1%.

Now I will also call out the cost-to-income ratio. Recall that during the first half 2019 call, we did say that cost-to-income ratio will remain elevated for the 2019 financial year. And so we are reporting also increase in cost, but if you look at the operating expenses, we're going to give you the breakdown when we'll get into the question and answers, but clearly, they are related to ongoing strategic projects, which have continued to improve our noninterest income. So we do believe that we are doing the right things when it comes to investments for future growth. Notwithstanding, we do believe that we're going to close 2019 in a very comfortable position.

Now we like to say that, if you go to Slide 23, there's a bit of revision which we are making to the guidance numbers, and that is because, based on what we see, we think that 4 ratios will be impacted by this revision. One is the cost-to-income ratio. We have guided the market to 58% to 62% cost-to-income ratio. But from what we see, we are revising that ratio to about 71% cost-to-income ratio. Cost of risk, we have guided to 3.5% to 4%. This is a positive adjustment where we are guiding to 2% to 3% because we have done quite a lot of heavy lifting in the first 9 months. Deposit growth, we had also guided the market to about 10%. From what we now see, we are revising the growth rate to about 5%. And finally, on loan growth, we had suggested 5% at the beginning of the year; 9 months, we have done 8.1%, which is above what we have guided. So we are revising that target to below 10%. All other guidance numbers remain unchanged.

So this concludes the highlights of the slides that we have shown or presented to you. And we do hope that you like the progress we have made, but we are certainly ready to take your questions. We then open it up for questions, please. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll now take our first question. It comes from Toyosi Oni of Renaissance Capital.

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Oluwatoyosi Oni, Renaissance Capital, Research Division - Research Analyst [2]

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So my first question is just an update on asset quality trends at the bank. So we know that you drove NPLs down. Just wanted to catch upon how much of this came from recovery through structuring and write-off? And also, just ask if you foresee any further pressure on asset quality going into the end of the year? My second question is on efficiency and your operational losses. Please, could you share more light on this a little bit because it seems a bit clouded right now. I just wanted to better understand what is going into this operational and other losses line. My third question is on your loan growth. So the macro is still fragile, and there were significant loan growth this quarter in light of the LDR requirement. So I just wanted to ask what's driving this. What sectors are driving this? And what's your outlook on that, too, especially for the new minimum in December, which will be 65%? And my last question is on the macro, the general macro and the CBN. So we've seen a number of circulars coming in the last couple of days. And I just wanted to pick your brain and hear your thoughts on this, especially in light of the excess liquidity that would be going into the system.

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Urum Kalu Eke, FBN Holdings Plc - Group MD & Director [3]

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Thank you.

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Olusegun Alebiosu, First Bank of Nigeria Limited - Chief Risk Officer & Group Executive [4]

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Segu Alebiosu, Chief Risk Officer. We don't foresee pressure on our NPL. So as guided, we are moving towards a single-digit NPL, and we don't expect this to change. On what we achieved in Q3, the gain distributed across the 4 variables. Loan growth, we saw improved loan growth, so we have implication for NPL ratio. The recovery was about 30% of that, restructuring was about 28% and write-off was about 22%. So we equate across. So in relative assets, you have that costs, so we did that. And in restructure, some fell off and then loan growth contributed other. On LDR and loan growth, as you must have observed in our financials, we grew loans in Q3. We will grow loan, but within our risk appetite. We will, as a bank, prioritize the fact that we must remain disciplined with free cash. So we don't foresee loan growth to contribute further NPL down the line.

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Patrick Iyamabo, First Bank of Nigeria Limited - CFO & Group Executive [5]

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Okay. This is Patrick. So the question around the OpEx trend year-on-year. There are 2 bits to that. You have the nonreoccurring costs and then you have the BAU costs. But I'd like to start off by saying that when you adjust for the nonreoccurring costs, you're actually looking at OpEx spend, 2015 to date at less than 5% CAGR. Now to the nonreoccurring costs, they fall into like the 4, 5 buckets. The first is the, what we described as exceptional losses and these relate to charges that we've had to recognize in terms of disputes with government agencies. I think we mentioned 1 or 2 names on the previous call. We believe we have a good position with this -- on this transaction, but as we clean up our books and we position for next year, and we don't want to be distracted, we've taken in some of these charges.

The second bucket has to do with our efforts to reposition the workforce to continue to drive the business going forward. And in this instance, we are talking about the productivity uplift from the workforce. We're unionized entity. Again, we proceeded to deal with this issue in a manner that presents minimal destruction to business and management. We've had to take charges, again, nonreoccurring charges to address this workforce optimization efforts.

The third cost bucket has to do with our franchise. Again, this is about doing 2 things; celebrating who we are and how long we've been around, about 125 years, and then pivoting that to drive our franchise, our presence -- present countries and that's in Africa and in Europe. We have to incur costs, again nonreoccurring. And in terms of what we've done across our -- of that present countries to jump-start the brand awareness we want to push in those markets. We're at least seeing the benefits from those in terms of the revenue pickup we've seen in some of those markets.

The last 2, I would like to touch on, are regulatory and investment in technology solutions. Regulatory is not a nonreoccurring cost, but you know most of the details between AMCON and NDIC and as you think about the group in our balance sheet as well as the group in our deposits, and you layer on top of that, the change in the AMCON rules, you can see where the growth in our regulatory cost is coming from. That alone has driven up our OpEx bucket by at least NGN 3 billion. We've been talking on the call about our investments in IT to drive the business, to drive productivity, and that is showing up in terms of our maintenance costs as well as our depreciation. So these are really the things. If we back out -- if we think about this cost profile, the nonreoccurring elements account for more than 90%. So we are confident that the balance, which is really meant to drive productivity and efficiencies, is money well spent.

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Ini Ebong, First Bank of Nigeria Limited - Group Executive of Treasury & International Banking [6]

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Okay. This is Ini. Just to answer your question around the macro and the recent release of various Central Bank circulars. I think the more important circular was around the elimination of leveraged T bill purchases. And if you step back, and listen to the Central Bank's comments, I think they are concerned around people using or banks using leverage loans to boost their LDRs. And I think in clarifying that they are barring such T bill purchases, and that effectively dealt with that. So you get real credit growth in the real sector. And I guess, we'll see that pan out in the numbers that will be reported as we get into Q4.

With respect to the additional ones, which relates to participation of OMO and all of that, I think the net summary, you alluded to in asking the question. By excluding MDFIs largely from that segment, it forces them to look at primary market issued T bills and bank deposits. So naturally, we'd expect in that segment of the market, rates to decline. So when you look at it, from -- the value credit from the bank's perspective, it's probably more NIM accretive to the extent that we would expect deposit liability rates to probably trend down in a lower rate environment, whilst the OMO segment remains open for banks and portfolio investors to play. I think it's still early days. We need to see how the dynamic will play out. These circulars were released just last night and then suggest we may see some rate volatility or indeed, maybe even FX volatility in the markets as we go forward.

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Urum Kalu Eke, FBN Holdings Plc - Group MD & Director [7]

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Okay. Next question, please.

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Oluwatoyosi Oni, Renaissance Capital, Research Division - Research Analyst [8]

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Please, I would like to follow up on some of the answers I got, if that's okay.

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Urum Kalu Eke, FBN Holdings Plc - Group MD & Director [9]

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Okay.

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Oluwatoyosi Oni, Renaissance Capital, Research Division - Research Analyst [10]

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All right. So the first one is on the credit growth. So what sectors are you lending and what are the catalysts that you're seeing in these sectors that make them attractive? And then also with the explanation on the cost, I suppose the next question is for next year, where do you see the costs trending towards? Are we expecting a significant fall in OpEx next year?

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Olusegun Alebiosu, First Bank of Nigeria Limited - Chief Risk Officer & Group Executive [11]

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Our credit growth have been through telecoms, manufacturing, retail, through consumer and trade. And for us, telecoms, if you observe, in 2019, you've seen the top 2 telecom companies coming to the market to raise fund to spend on CapEx and to expand. And that is a lot about their business plan, their growth and their future, and we tried to invest in their future. Manufacturing, we've seen expansion and government interest in lending to the retail sector, which we have seen, and we prefer to participate in that because we believe that the future of the country is manufacturing and that the economy will aspire along that. The retail and consumer, of course, every (inaudible) manufacturer has the consumer and then looking at the market and the population, the retail and consumer represent enough proportion. And of course, that is part of our plan. And trade is not for everything because you need to import raw materials to manufacture, you need to do all things and Nigeria population will also need to consume. And so these 4 sectors fit into our plan and the risk appetite criteria that we have set.

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Patrick Iyamabo, First Bank of Nigeria Limited - CFO & Group Executive [12]

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This is Patrick. So in terms of the OpEx trend, like we pointed out a short while ago, we have a very good handle of our costs. We have a clear distinction between the nonreoccurring and the occurring costs, which are frankly investments for business growth. If you adjust for the nonreoccurring costs, we are confident that we can maintain our historical OpEx growth rate into next year. As pointed out earlier, 2016 to date that has been CAGR, less than 5% CAGR.

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Urum Kalu Eke, FBN Holdings Plc - Group MD & Director [13]

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Thank you, Patrick. Let's move on to the next questions, please.

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Operator [14]

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(Operator Instructions) We'll now take our next question, which comes from (inaudible).

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Unidentified Analyst, [15]

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I just wanted to ask, I mean, with -- by the 9 months, you didn't meet the new LDRs requirements by the CBN. And I mean, looking at your capital, will you be able to meet the new target by the end of December without the need to raise fresh equity capital?

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Urum Kalu Eke, FBN Holdings Plc - Group MD & Director [16]

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I think the straight answer to your question is that we did not meet the LDR?

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Unidentified Analyst, [17]

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Yes, I mean, that's from the numbers that I can see. I think that you didn't meet the 60%, I mean, from the numbers that I see. I mean maybe -- I might be calculating it wrongly. But I mean, from my calculations, you are around 50% something, 54%, 55% LDR, that's from my calculations. I might be calculating it wrong. But I mean, what I wanted to ask is, will you be able to meet the new requirements because still looking at your capital ratios by the 9 months, would you be able to meet the new requirements by the end of December without the need to raise capital?

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Olusegun Alebiosu, First Bank of Nigeria Limited - Chief Risk Officer & Group Executive [18]

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Okay. Let me say that capital is growing about where it was. What we need to grow to 65% is 1.5% cut. And in 9 months, profit provides that. So for us to grow cash by December to meet 65%, capital is very constrained. But what is more important to us is that we are disciplined with the cash. And so we have to grow the loan in line with our risk appetite and tolerance limit. And so if we have loans that, I think, would have been really, really great. But if we don't, we will look towards pipeline and see how we make it.

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Patrick Iyamabo, First Bank of Nigeria Limited - CFO & Group Executive [19]

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And this is Patrick. Just to add to the comments made by Segu, the CRO, our estimate is to close the year at a CAR of not less than 17%.

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Unidentified Analyst, [20]

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And so meet the minimum LDR requirements?

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Urum Kalu Eke, FBN Holdings Plc - Group MD & Director [21]

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No. I think the question around LDR has been answered. First of all, capital is not a constraint. And we have a very rich pipeline. Therefore, we are considering all of those requests, case-by-case basis. We have sufficient capital to meet if that were an issue. But the second question was, do you have enough capital to hit 65%? The answer is yes, if we wanted to and if we see very good transactions. We're not going to sacrifice the loan growth here out of the capital. So that would progressively lead to erosion, if we make the wrong calls.

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Operator [22]

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Okay. We can move to our next question. Our next question comes from Karim Sawabini of Moon Capital.

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Karim Sawabini;Moon Capital;Vice President, [23]

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Just a quick question just to make it more clear. When you look at the cost-to-income ratio in 2020, and you remove what you deem as being nonrecurring, what is the range of the cost-to-income ratio you think we should be expecting?

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Olusegun Alebiosu, First Bank of Nigeria Limited - Chief Risk Officer & Group Executive [24]

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So let me respond this way without giving guidance for 2020. If you look at 2019, and you adjust for the nonreoccurring, our cost-to-income ratio is actually about 64%, which is approximately what it was in 2018 of about 63 point percent. So again, into 2020, our OpEx CAGR, we expect to maintain what we've done in the previous period on a BAU basis, i.e., backing out the nonreoccurring, and we are optimistic about our rev growth potential. So we do not expect that 2020 will be add back relative to the adjusted 2019 cost-to-income ratio.

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Karim Sawabini;Moon Capital;Vice President, [25]

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Okay. So basically, what you're saying if 54% is sort of the cleaner cost to income ratio for 2019, you should have, obviously, positive jaws in 2020, and therefore, it should come below that range.

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Urum Kalu Eke, FBN Holdings Plc - Group MD & Director [26]

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Correct.

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Operator [27]

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We'll move to our next question, comes from Ronak Gadhia of EFG Hermes.

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Ronak Gadhia, EFG Hermes Holding S.A.E., Research Division - Research Analyst [28]

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Thanks for the presentation. Before I ask my questions, I'd just like to say congratulations on the NPLs. It's been a long road, but glad to see that you guys are gradually getting there. With that being said, just 2 or 3 questions, which are more or less a follow-up of the previous callers. Firstly, on the LDR, it would just be helpful if you could just tell us what the LDR number is because there's a bit of confusion as to what is included in the denominator in terms of various funding sources and whatnot. So on the back of that, what the LDR -- what's the LDR? And what's the amount of loan growth that you need to achieve in absolute terms to achieve that 65% minimum? The second point, again, related to what (inaudible) was asking on your capital. Could you just tell us what your capital adequacy ratio is on a full IFRS 9 basis? From what I understand, what you've reported is it probably includes the transition reserve. So it'd be useful to know what the pre-IFRS or the full IFRS 9 number is. And the third question, again, is just to continue with the discussions on regulations. I guess Ini mentioned some of the regulations. But apart from that, there was also the introduction of the cashless policy, which seems quite punitive and could be counterproductive. There was also the introduction of the stamp duty on electronic transactions and other 1 or 2 regulations. So if you could just talk through what impact that could have on the bank and on the system in general.

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Olusegun Alebiosu, First Bank of Nigeria Limited - Chief Risk Officer & Group Executive [29]

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It's clear that we did not meet the LDR or LFR, as of September. The more important being is our plan towards one, maintaining healthy loan book; two, growing loan book within our risk appetite; three, ensuring that we have a very strong balance sheet. I mean December is 2.5 months away, it's our plan to meet 65%, but within our risk appetite. So it's our plan to meet it, yes, but it has to be within our risk appetite. And as we said earlier, it has something to do with capital. When capital is sufficient for us to grow that 65%.

While I would not be able to give you the exact number because it's dependent on what the funding base will be, it looks like at any point in time. So if by December, if the funding base increases more than today, are we to book more loans. If by December if my funding reduces, I also need to book less. So I will not be able to confirm the exact figure to you.

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Patrick Iyamabo, First Bank of Nigeria Limited - CFO & Group Executive [30]

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Okay. This is Patrick. To the question about capital. I will respond to your question in 2 parts.

In terms of our CAR at the end of Q3, I mean, as you know, it was about 15.1%, adjusting for the transition forbearance, it comps by about 10.2%, of which C1-related is about 9.8%. However, we are comforted with the plans we have to capitalize through year-end. 3 key things to note. The first is, if we capitalize our earnings by year-end and then we layer on top of that, the T2 rate that is ongoing and will be consummated soon. We are about 17.5%. The portion of the forbearance is going to follow-up about NGN 30 billion, but we also expect to claw back our [regulatory] risk reserve as our loan portfolio gets cleaned up.

So net-net, the transition adjustment gets taken care of by regulatory risk reserve. And between the capitalization of our T1 earnings and the T2 support, we still expect to be about 17.5%. I would describe this as north of 17%.

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Urum Kalu Eke, FBN Holdings Plc - Group MD & Director [31]

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Omar, just to give you comfort. I know this question would come up again. You've been quite engaged in (inaudible) capital. Obviously, you desire that we have very healthy buffer. We share that sentiment. We need to have healthy buffer. But remember that full year 2018, we were at about 17.3% CAR and that we guided you to 5% loan growth. Remember where we are now, we've grown about 8%. So that tells you that our deliberate efforts are increasing the loan book, particularly after we wrote off the big item, AE. So we found the opportunity to grow. That meant capital consumption, risk-weighted assets increasing, but it was deliberate, and we have seen the impact of that on the revenue flowing down to the PBT. So it was deliberate, which is why we said that we can comfortably get to 17-plus at the end of the year. So there's benefits in sweating the capital that we saw.

But let's leave 2019 and make the point that 2020 will be a far better year for us because there are very few encumbrance is to growing our business. The impairment charges taken care of. And so we do think that for CAR 2020, we should be looking beyond 18% even after growth. So that should give you some comfort. We haven't leveraged our Tier 1, which is what Patrick talked about. We believe that the process we are under right now should yield the Tier 2 euro -- Eurobond, and that obviously was the increased our capital base.

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Operator [32]

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We can move to our next question. Comes from Wale Olusi of United Capital plc.

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Olawale Olusi, United Capital Plc, Research Division - Analyst [33]

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I want to start by congratulating management on the result. And of course, the progress on the NPLs. Obviously, the conversations have been around costs, and asset quality. So most of my questions have been asked, but I just want to quickly get some more color on what's the risk climate framework or the strategy going forward will be like for the bank? I know someone mentioned something about risk appetite. But I'd like to know what the risk appetite looks like for the bank. I'm looking at efforts from the Central Bank lately, almost looking like to compare banks to lend? What are your views on -- what the NPLs in the entire industry is going to be looking like going forward?

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Olusegun Alebiosu, First Bank of Nigeria Limited - Chief Risk Officer & Group Executive [34]

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Our risk appetite is targeted at moderate risk. And uncalled on weighted average risk rating, noting the fact that NPLs are lagging indicators. So what we've done is for us to map our risk universe. And for credit risk, in particular, that impacts so much on NPL, able to dimension our target market and our risk (inaudible) criteria. And for our target market [we prioritize] and try to look at sectors that are less volatile and also reduced concentration.

So what we've done was to map our risk rating and to ensure that only the best customers can take the highest loans and that the valuable ones will take the less loans. And I think we -- the impact will be lower on the books. Of course, realizing the implications of these sectors, we decided that we'll prioritize retail, we'll prioritize manufacturing and export because historically, we've had the [low] NPLs. And that, again, moving forward, makes that when we do transactions, what happens is that we have a good view of what we do from trade, from collections or from stores. And that, we fit completely into the risk profile.

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Urum Kalu Eke, FBN Holdings Plc - Group MD & Director [35]

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The only thing I will add to that is just to remind you that when we started this journey in 2017, we said we had a full cost to refund the entire risk management infrastructure of our institution. We maintain the fact there. We are putting new people. We implemented new processes. We deployed technology, or more importantly, the governance around our entire risk architecture has been significantly enhanced. And the results that we have shows clearly that we've done the right things, the (inaudible) is little less than 0.5%. We do not intend to change this new structure that has worked for over the last 3.5 years. We would work within the defined risk appetite, and we are comfortable that we have designed a new risk architecture that can deal with all and, of course, risk. We should not find ourselves in the position where we had [fund over time], weak position compared with our peers. So that is what should give you the comfort that we don't only fix the fundamentals and the fundamentals are working.

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Operator [36]

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And we can now move to our next question, comes from Muyiwa Oni of SBG Securities.

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Muyiwa Oni, SBG Securities (Proprietary) Limited, Research Division - Heads of Equity Research for West Africa [37]

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I just have a few follow-up questions. First is on the interest rate environment. I'm trying to have a view of where loan yields are right now and your view on loan yields in the medium term, given the pressure on the -- from the LDR policy.

And secondly, when -- you did answer the questions on USSD. So I just wanted to get a sense of what's happening in that space, particularly with the sort of the issues around fees on USSD with telcos? And then secondly, your e-banking business overall. So just trying to gauge with which of the channels drive more profitability, USSD or mobile banking? And then also just trying to figure out how you're positioning for PSVs and the likely risk on that given the stronger income you're seeing on e-banking?

And then thirdly, just still wanted to get a view of where your ROE -- medium-term ROE outlook is?

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Olusegun Alebiosu, First Bank of Nigeria Limited - Chief Risk Officer & Group Executive [38]

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The interest rate environment, I think is clear. Directionally, it looks like rates will trend lower certain on the liability side. Now on the asset side, we did see some decline in asset pricing, especially in the top-tier segment in the runoff to meeting the initial September 30 deadline. As you would expect, in the scramble to put on quality assets, we saw rates come down. Our view is that rates should start to normalize going forward. Because if you think about it, it's a onetime event, whatever loans have been put on as of September to comply with the LDR as at that time.

Now that the -- briefly, the deadline has been moved to December and the limit has been increased, you expect that, at least in that segment of the market, rates may remain a bit subdued there. However, for the rest of the market, we haven't seen any significant decline. So our sense is that this appears to be a bit more NIM supportive, directionally, going forward.

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Urum Kalu Eke, FBN Holdings Plc - Group MD & Director [39]

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On the issue of USSD mobile banking, digital income. What I would say is, for us, the platforms are very important to us. They are strategically important to us. Today, we have, by far, the largest number of customers on the USSD platform. We have about 8.5 million FirstBank customers actively transacting on our USSD platform. We have over 3 million people on our FirstMobile platform. So these are very important platforms for us. Regarding the dispute with the telcos, we believe we're going to find a landing that will work for all the parties. We are meeting. We're having conversation, and we believe this will be resolved shortly. We've also been very deliberate around our agency banking. We currently have about 37,000 agents. So when we show what we've done vis-à-vis your question on the PSV bank, we think we are well-positioned to keep and maintain our space. However, we are also not completely averse to cooperation. We do have very good relationships with all the telcos, and we believe in the fullness of time, what we will emerge will be some sort of cooperation, When we built our business up and we're still building it up, and we have enough -- we have sufficient skill in that when you combine all our relevant businesses to maintain our market share.

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Patrick Iyamabo, First Bank of Nigeria Limited - CFO & Group Executive [40]

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This is Patrick. In terms of the ROE, here's how we could look at it. And first of all, we imagine that when you say in the medium term, we're looking at 1 to 3 years out. So by the end of this year, we would have made significant progress with our workforce optimization. We've made excellent investments in IT and process improvement initiatives, we would have dealt with most of our balance sheet issues, both for loans and nonloans. We will have a stronger balance sheet from a funding perspective. Frankly, the things that have shackled us would largely have been dropped off. So over the next 3 years, which is the guidance that have requested, we have no doubt, whatsoever, that we will easily exceed 20%. Easily.

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Operator [41]

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(Operator Instructions) And we now take our next question. It comes from Clement Adewuyi of Rand Merchant Bank.

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Clement Adewuyi, Rand Merchant Bank, Research Division - Equity Analyst [42]

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So first is, before the line cut off I heard that you said your adjusted CAR is around 10.2%. And also, you mentioned that you're planning to raise (inaudible) Eurobond and clawbacks some risk from your primary risk reserves. Can you share what value of -- how much are you looking to raise in (inaudible) bond? And also from your estimates, what are you looking at in terms of clawback from the risk reserve?

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Patrick Iyamabo, First Bank of Nigeria Limited - CFO & Group Executive [43]

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Okay. This is Patrick again. Correct. The -- about the 10.2% of which, again, I pointed out that 9.8% of that was T1 related. Our expectation by the end of the year to be in the north of 17%. And I think -- and I also explained that it's going to be a combination of a couple of things, capitalizing our retained earnings, so that will give us the capital boost. And then I didn't see Eurobonds, but consummating T2 -- ongoing T2 raise efforts to boost our CAR.

Again, we expect to close the year north of 17%. Now in terms of -- there are 2 businesses that I'll be sticking out. The first is a transition adjustment portion, which I explained earlier that was about NGN 30 billion. The regulatory risk reserve is about NGN 32 billion. So they're actually much of. And we are confident about making progress on that to the extent of our loan book cleanup, and the results will have views to make that less necessary. But then again, even if all was in all inventory base, we still have capital headroom by the end of the year.

[Speaking] about next year. Given with all the things we've done this year and with the balance sheet we have for next year and all the ongoing initiatives, including the transactional income growth potential, the earnings potential of the group will be significant. So we will be once again in that position to freely, freely accrete capital from earnings during the period.

So short answer to your question. NGN 30 billion transition versus NGN 33 billion, that we can use to double what we expect to get. Capitalization of our T1 of our earnings and complementing that with [interest] rates with should take care of us beautifully by the end of this year. And all the organic capital accretion for next year to just provide any additional capital headroom that we want.

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Urum Kalu Eke, FBN Holdings Plc - Group MD & Director [44]

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Okay. Just to clarify again please, because you referenced the comment around Eurobond. You recall that when we had the first half conference call, we said we are considering several options and that we would be able to make a call.

Every option is on the table. They're not just necessarily be now, but into next year, all of those options are still on the table. And that question was -- that answer was given in the context of where we expect to be by end of next year. So we have enough time to look at several options. But clearly, what is indisputable is that we have not leveraged our Tier 1, and we still have opportunities to do a Tier 2 capital. But what it's going to take is what we disclose at the right time.

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Operator [45]

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Can I move to our next question from Ronak Gadhia of EFG Hermes.

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Ronak Gadhia, EFG Hermes Holding S.A.E., Research Division - Research Analyst [46]

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Sorry, I got cut out before. I could ask a follow-up question. I just come back to the LDR issuance, sorry for keep coming back to this issue. Because from my point of view, I think it is the single largest issue, I think the bank and the industry right now, particularly the bank given the assets quality and capital issues that you have been -- you work hard to try and resolve over the last 4-or-so years. Segun, I understand your point that you cannot give us what the exact figure is because your funding base is dynamic. But at least, it would be very useful if you could tell us what the funding would include because as of now, we're not sure what that is. Previously, we were led to believe that it would include only deposits. But from our understanding, it also includes other borrowing sources. And given that you are in the process of potentially issuing Tier 2 capital, that could, therefore, mean that you might have to grow your loan book even more. So even if you can't give us an exact figure, it would be useful if you could give us some sort of a range in terms of how much loan growth you need to achieve? That's it from my end.

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Olusegun Alebiosu, First Bank of Nigeria Limited - Chief Risk Officer & Group Executive [47]

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On the LDR, yes, I'm sure you'll have seen the template, regulator supplied across banks. And it's more of loan to funding. Yes, you're correct, includes growing potential and order. It was also important to see that the loan book being considered by Central Bank also includes bonds, corporate bonds, so not strictly loans. I mean if you check our financials today, you look at my loan to customers. So when Central Bank is looking at it, you also consider corporate loans, corporate bonds, which will not show in their books as loan to customer in the first place. So there are a lot of variables that you calculate it back, just take the balance sheet and compute as you go. You need to see how (inaudible).

While I want to give you details and the fact that yes, and we have Tier 2. Well, it's not my Tier 2 might not represent what we brought in my funding will have looked like in the first place. So it's also moving. Again, I will not be able to guide because I know that it is possible because deposits -- I mean, the funding we'll be looking at include both local and foreign deposits. So it depends on the time and maturity of deposits, these things will have operate. So it depends on what it looks like. So I won't be able to give it that.

But I know that looking at what we have today, if I took 5% of my deposit base today, I mean, took that as proxy for moving from 60% to 65%, assuming that at the end of October, I met 60%. I'd do much -- I'd remark until 5% of my funding base, I'm sure it's good to proximate. But the reality is that capital is not issue for us. The more important thing is for us to have assets within our risk appetite for us to book.

And specially important for us to sit here that before we took care of AE in Q2, our loan deposit ratio was actually 59.9%, so which means that we start with, I mean, transacting AE in Q2 we would not have been under any LDR pressure or demand. So it's not something that is material us to meet, our balance sheet [already took care of that] before. So we are always trying to rebalance the books, and it's not something that's material for us to handle.

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Operator [48]

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There are no further questions at this time. I would like to hand the call back to Mr. Urum Eke for any closing remarks. Please go ahead, sir.

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Urum Kalu Eke, FBN Holdings Plc - Group MD & Director [49]

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Okay. Thank you so very much for your continued interest in our FBN Holdings story. What is clear is that we have done all that we promised we're going to do to reposition this franchise to profitable and sustainable growth.

Next year, we're going to commence a new planning cycle, which means that we'll be guiding you to new numbers by the time we also present our full year 2019 results. But at the meantime, if there are other concerns or questions you'd like to take up with us, please feel free to reach out to Tolulope, the Head of HR (sic) [IR], or any of our officers that have been on this call. Again, we thank you sincerely for your interest. Bye-bye.

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Operator [50]

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This concludes the FBN Holdings financial results call. Thank you for your participation. You may now disconnect.