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Edited Transcript of FIDELITYBK.LA earnings conference call or presentation 31-Oct-19 1:00pm GMT

Nine Months 2019 Fidelity Bank PLC Earnings Call

Lagos Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Fidelity Bank Plc earnings conference call or presentation Thursday, October 31, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gbolahan Joshua

Fidelity Bank Plc - Executive Director and Chief Operations & Information Officer

* Nnamdi John Okonkwo

Fidelity Bank Plc - MD, CEO & Director

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Conference Call Participants

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* Emmanuel Adeleke

ARM Research - Research Analyst

* Gbolahan Ologunro

CSL Stockbrokers Limited, Research Division - Analyst

* Tolu Alamutu

Tellimer Research - Director & Credit Analyst of Financials

* Tunde Abidoye

FBNQuest Capital Limited, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Fidelity Bank 9 Months of 2019 Results Conference Call. (Operator Instructions) Please note that this conference is being recorded.

I'd like to hand the conference over to the Chief Executive Officer and Managing Director of Fidelity Bank Nigeria, Nnamdi Okonkwo. Please go ahead, sir.

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Nnamdi John Okonkwo, Fidelity Bank Plc - MD, CEO & Director [2]

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Good afternoon, ladies and gentlemen, and welcome to this conference call today. I have with me members of our executive management team. I'll start by giving you performance update as at close of Q3. Performance for 9 months ended September 30, 2019, showed strong growth on key performance metrics, like gross earnings, profitability, deposits and loans as well as improved asset quality.

We closed the period with a PBT of NGN 23 billion, and this was a double-digit growth of approximately 15% when you compare to 9 months of same period last year. The growth in PBT was attributable to 12% growth in interest income and 43% growth in fee income, and this translated to a 9.3% increase in operating income.

Now to give some color, operating income actually grew in absolute terms by NGN 6.8 billion. So I'll give you a further breakdown. The 12.2% growth in interest income was driven by 18% growth in our earning assets. While the key drivers of the 43% growth in fee income are broken down as follows: credit-related fees grew by 132%; digital banking income grew by 43%; trade income increased by 32%; account maintenance fee increased by 18%.

Then, in addition, we recorded a one-off asset disposal gain of NGN 2.4 billion. NIM improved within our guidance for the year to 6% as the growth in our yield on earning assets outpaced increase in funding costs. We've always talked about the fact that our retail banking would be driven mainly by digital play, and this has continued to gather momentum with customer base crossing the 5 million mark.

Savings deposit is now approaching the NGN 250 billion mark. Over 230,000 unique loans have been processed through our fintech digital lending partnership in less than 6 months. Now we have over 46% of our customers enrolled on our mobile app and USSD products, and digital banking now contributes over 31% of our fee income. So we love that because this is like in line with what we had projected when we set our 5-year plan.

For ROE, at almost 14% or specifically 13.8%, we are on track with our 13% guidance for this year. On deposits, it increased by 14% to NGN 1.1 trillion. This was driven by a 6.7% growth in local currency deposits and a strong 46% growth in foreign currency deposits, and I'll give some color to that.

The foreign currency deposit growth has been driven mainly by our customers in energy, export business and retail segments riding on an app, our mobile app. Under the mobile app, you could transfer foreign exchange within the Central Bank limits on your own without even approaching the bank. So our customer [trend] is very convenient. And what this does is that a lot of customers now build up domiciliary account deposits so that they can transfer conveniently using the mobile app. So we've seen that impact positively on our foreign currency deposit volumes.

So foreign currency deposits have increased by over 145% in the last 12 months. It now accounts for 25% of total deposits. Loan term advances increased 26%. Now out of this, the increase between local currency and foreign currency are like 21% and 34%, respectively.

Now which sectors are we growing loans from? There are 3 key sectors that account over 80% of our loan growth, namely manufacturing, oil and gas and transport sectors. We've had to answer questions on online, that's quite a number of times. And as we progress, we'll probably talk about that more.

Intervention funds also contributed 22% of our total loans, and almost 50% of the growth in our local currency loans in 2019 came from intervention funds. Again, this is another area we'll be glad to provide more color as we progress.

Our gross loans to funding ratio without applying the 150% weight assigned to retail and SME loans, stood at 68.4% when compared to 64.2% same period last year. Now our loan-to-deposit ratio remains above the Central Bank -- the new limit Central Bank set at 65%. So we are above 65%, and so we expect to continue to comply with the new rules by Central Bank throughout the year.

NPL ratio came down to -- improved to 4.8% from 5.7% in 2018 financial year-end. This is due to loan growth and 4.9% decline in absolute NPLs in Q3 of this year. Other regulatory ratios remained above required thresholds. Our capital adequacy ratio is at 16.4%, while liquidity ratio is approximately 33%.

Okay. To round out this segment, I'd like to make an announcement, even though we've done that already to the stock exchange, to the effect that our Deputy Managing Director, Mohammed Balarabe, will be retiring from the bank on December 31, 2019, having attained the retirement age. Mohammed joined the bank on April 1, 2012, as Executive Director in charge of Northern businesses. And in May 2016, he was appointed Deputy Managing Director. He has contributed significantly to our progress so far. He was not only instrumental to the crafting of our growth strategies but led the entire Northern directors to achieve impressive business growth over the last 5 years, and our presence in the region have strengthened under Mohammed.

So as Deputy MD, Mohammed has been a solid backup to me as well as lends his deep experience towards successful execution of our strategies. So on behalf of the Board, management and staff, I wish Mohammed well as he prepares to commence the next phase of his life.

So in line with our succession strategy, the Board has appointed Hassam Imam, who was a former backup to Mohammed in the North. He's now Executive Director in charge of our North Directorate. His appointment has also been confirmed by Central Bank of Nigeria. But it will take effect January 1, just 1 day after Mohammed retires. So Mohammed -- Hassam will be replacing Mohammed.

So on this note, I'd call on Gbolahan, Executive Director, to take us through detailed financial presentation, and then we'll take questions thereafter. Thank you.

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Gbolahan Ologunro, CSL Stockbrokers Limited, Research Division - Analyst [3]

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Okay. Thank you, Nnamdi. I'll just go straight to Slide 4, which is just an overview of the bank, and accounts are now 5 million, Nnamdi spoke about that. Mobile and internet banking customers are 2.3 million, and the card business is about 2.1 million.

I'll go to Slide 5, which speaks about our retail and digital banking. 9% growth in savings deposits already this year. On accounts acquisition, we've already done 11%, added 0.5 million customers. And that's about the strongest growth we've had in the last 4, 5 years.

The retail loan book is up 25% on the strength of some of the partnerships we've done and new digital lending products. Internet banking customers are up 22% from the last financial year, and then the card business is up 5%.

If you look at numbers, 82% of the transactions are now done on the electronic channel. Digital banking is now 31% of fee-based income. And for savings, we are firmly on track for the sixth consecutive year of double-digit growth.

I'll go straight now to Slide 9, which just speaks about the key performance highlights. Nnamdi has spoken a lot -- about some of them. Interest income was up 12.2%. So despite the lower yield environment, we're still able to grow interest income, obviously on the back of the 18% expansion in the earning assets base. Our expenses were up 14.5%. Cost-to-income ratio is still sticky at about 71.7%. But PBT is up almost 15% to NGN 23 billion. Cost of risk, because of the net write-backs we've had, it's basically 0% compared to 0.5% in 2018.

NPL is down to 4.8% from 5.7% in combination of a growth in the loan book and also a decline in absolute NPL volumes in Q3 by almost 5%. Capital adequacy at 16.4%. Liquidity ratio, 32.6%. It's come down. As you can see, we've also expanded our earning assets with private lending.

Gross loan to funding ratio is 68.4%. Last year, it was 64.2%. And total equity is at NGN 222 billion. Speaking on the financial highlights, I think Nnamdi has spoken a lot about the key factors that led to the growth in the PBT and the revenue for the year.

So I'll go to Slide 12, which just shows the year-on-year PBT income statement numbers. And you see a growth in most of the lines. Interest income on loans is up 11.6%; liquid assets, 14%; fee income, 43%. The NGN 2.4 billion one-off asset disposal gain, it's in the other fee income line. So that line where you see the growth of NGN 4.3 billion, about NGN 2.4 billion of that comes from the asset disposal, and then profit was up 15.7% (sic) [14.7%].

If you look at the quarter-on-quarter trend, 6.6 -- NGN 6.7 billion for Q1, NGN 8.4 billion for Q2 and then a NGN 7.95 billion for Q3. So we've sustained the performance trend over the period.

On Slide 14, you see the balance sheet were translated at NGN 362 and then this marked decline in the treasury bills book, and then we see some growth in the bank placement. But obviously, 21% growth on local currency loans and 34% growth on foreign currency loans.

Foreign currency liquidity has been very strong. Foreign currency deposits have grown by about 46% on a year-to-date basis. Demand deposits are up 10%; savings, 9.2%; and time deposits, about 32%; other borrowings, about 67% (sic) [68%]; and then on-lending facilities have expanded by another 24%.

So if you look at the total loan book, which is slightly over NGN 1 trillion, NGN 236 billion, which is about 23% of the loan book, is from on-lending facilities. And if you look at Naira loan growth of NGN 105 billion, about NGN 45 billion out of that is coming from the on-lending facilities.

If you go to Slide 15, it just shows a further breakdown of the income lines on a year-on-year and on a quarter-on-quarter basis. And if you look at it on a year-on-year basis, there was growth in each of the lines, from interest income to FX income, digital banking, trade and other income.

On a quarter-on-quarter basis, you see a dip in FX income and trade income. The dip in FX income is because we had some forward transactions that have not settled. And based on the rate exchange marked in the balance sheet at NGN 362, it's a timing difference. By the time we settle that, obviously we processed about NGN 900 million back to profit. It was about $30 million in total.

Slide 16 shows a trend in net interest margin. It was 5.4% in Q1, 5.8% in Q2 and now 6% in Q3. We guided 6% to 6.5% for the year, and that's basically driven by the 100 basis points increase in the yield on earning assets between Q1 and 9 months. So it's moved from 12.8% to 13.8%. Funding cost over the same period has grown by about 50 basis points. So that's been very positive for the NIM.

The next slide on Slide 17 just shows the breakdown -- expense breakdown. So even though expenses are up 14.5% on a year-on-year basis, on a quarter-on-quarter basis, expenses are actually down NGN 1.8 billion, about 8% decline.

I will go to Slide 19, which shows the funding base. For all the funding lines, you see a growth in all of them, from equity to demand deposits to other borrowings and on-lending. But on a quarter-on-quarter basis, you see a decline in tenor funds by about 8.8%. That's about a NGN 23 billion decline.

Slide 20 just shows an analysis of the deposit book. There's a very strong growth in foreign currency deposits, Nnamdi just spoken about that. This time last year, it was NGN 107 billion. Now it's NGN 263 billion. So from contributing about 11% to our total deposits, it now contributes almost 24% of total deposits.

The next slide shows the contribution of the retail banking, and you it see moved from NGN 284 billion in absolute numbers in 9 months 2018 to NGN 331 billion, contributed about 38% of low-cost deposits. Retail assets have picked up gradually, and it's about 4.2% of the loan book. The savings book is about NGN 249 billion. It's getting close to the NGN 250 billion threshold.

Slide 22 just shows the breakdown of our liquid assets, and you see the gross loans to funding ratio move up from the 65% range to about the 68% range. Obviously, that will reflect on our liquidity ratio, which has come down slightly over the same period.

Slide 23, the breakdown of the loan book. The 3 key sectors Nnamdi has spoken about, the manufacturing, transport and the oil and gas sector, about 80% of the loan growth. But if you look at all the sectors, 3 sectors, you see a decline. You see a decline in the government sector, the real estate sector and then the finance and insurance sector. And then if you look at the split of the loan book: manufacturing is now 19% of the book; consumer loans are 4.2% of the book; and then oil and gas, upstream, is 11.7% of the book.

Slide 25 just provides more color on what's driving the growth in the loan book and the currency trend. And so you see that foreign currency loans -- local currency loans are now 56%, and it was about 61% in H1 2019, but obviously due to the strong growth in foreign currency loans in the quarter under review, driven by increased FX liquidity.

Slide 26 shows a breakdown of the loans into Stage 1, Stage 2, Stage 3. You see a slight increase in the Stage 2 loan book, especially coming from the government and real estate sector. Some of the obligors there had some payment delays in Q3, which has now been rectified in Q4. And that's one of the reasons for the 6 -- additional NGN 600 million impairment you saw in the numbers.

On the NPL trend, it's declined from a ratio basis, 5.7% to 4.8%. But a lot of it is coming from the increase in the loan book and then, on a quarter-on-quarter basis, a decline in Stage 3 loans in oil and gas, manufacturing, real estate and construction.

So if you look back at Slide 26, the coverage ratio for Stage 2 is 8.5% and for Stage 3 is now 51.2%. Slide 28 just shows the movement in the NPL book. We see the biggest movement is in manufacturing, transport, real estate and education. And then Slide 29 just shows the traditional NPL pressure points. Not much has changed, downstream, manufacturing and the transport segment and then general commerce.

Slide 30 speaks to capital adequacy. It's 16.4%. As of H1, it was 17%, a decline due to -- for 2 reasons. Number one, there was a growth in the risk-weighted assets, coming from the credit risk-weighted assets. And then number two, obviously, the profits for Q3 have not been capitalized by the end of the financial year. When we capitalize the profits for H2, we expect to see an improvement in capital numbers.

Slide 31 shows the contribution of the various business units. The corporate book still has about 48% of the loan book and then contributes about 35% of profitability. That's the corporate and investment banking, which includes treasury. Lagos business, about 30% of PBT. The South business, about 24%; and then the North, about 11.4%.

Slide 33 shows how we fared on our guidance. There are 9 industries there. We're on track on all the indices, except the CIR numbers, which we will still work towards getting below 70% by the end of the financial year.

Thank you, and we'll now take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Emmanuel of ARM Securities.

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Emmanuel Adeleke, ARM Research - Research Analyst [2]

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I have 3 questions. So the first one is, can you just shed light on what is happening on funding costs, especially on time deposits and borrowings? So for the borrowings, I think I know there's a reclassification from other liabilities to borrowings, which was in the form of letter of credits. I don't know if that's connected to the increase in borrowing costs. And secondly, about the strategy to improve NIM, given the possibility around reduced clean investment securities together with the possibility of lower loan rates coming from increased competitions from your competitors, [association and your own banks]? And then thirdly, about the intention to keep liquidity ratio above regulatory benchmarks, are we seeing any possibility around raising additional equity? That's all for now.

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Gbolahan Joshua, Fidelity Bank Plc - Executive Director and Chief Operations & Information Officer [3]

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Okay. Thank you. On funding costs, on time deposits and borrowings, if you look at the presentation, when we're looking at the balance sheet, there was a growth in the other borrowings, right? Yes, we have the reclassification from other liabilities there, but other borrowings went up from NGN 67 billion to NGN 113 billion. Also, there was an increase in the mark-to-market rate used on the balance sheet. So there is an increase from about NGN 360 to about NGN 362. And then we have some of our other borrowings actually in foreign currency. So we have $400 million eurobonds and then the other borrowings is roughly about another $300 million. But the good thing is even though you're seeing a growth in the interest expense on other borrowings, you can see a corresponding growth also in the interest income on loans and on liquid assets. So net-net over the period, our net interest income did not come down. It actually grew marginally by 0.1%. So we're still able to defend our margins.

The second question is on how do we improve our NIM play in line with what is happening in the market.

During the H1 call, we alluded to the fact that we expected to see some compression from a funding and from a lending perspective because of the LDR pressure coming from the 60% directly from the Central Bank. But what we've also been able to do is that we've been able to optimize our yields. So if you look at Q3, we've had the highest yields in Q3. And so even though funding costs were up by 50 basis points and you can see the yield on assets was up by 100 basis points.

For this year, we targeted an NIM of 6% to 6.5%. With the recent circular that have been issued, we expect there to be a decline in funding costs coming from the depth of investment outlets for some of the maturing investments. And also we expect there to be a reduction in the yields also on the T-Bills. But net-net, we expect to be positive. We don't expect to go below the 6%.

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Unidentified Company Representative, [4]

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Okay. Emmanuel, you also asked about possibility of raising additional equity. I think we've answered this question time and time again. No. But right now, we have a 7-year NGN 30 billion bond that's callable after 5 years. Currently, that bond only contributes about 40% when we're computing capital adequacy ratio. So before the middle of next year, we are likely to go to the market and reissue that bond so it can count for Tier 2.

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Operator [5]

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The next question comes from Tolu of Tellimer.

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Tolu Alamutu, Tellimer Research - Director & Credit Analyst of Financials [6]

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Just a very quick follow-up question first, and then the questions I had before. You just mentioned something on Tier 2 issuance, unfortunately my line dropped off. Can I just confirm that, that's in Naira rather than in dollars, please? And secondly, on your capital ratios, you mentioned that your Q3 profit hasn't been capitalized yet and so on. Where do you expect your Tier 1 and total capital ratios to be by the end of the year? And thirdly, on asset quality. The disclosures on Stage 1 and Stage 2 and Stage 3 are great, thank you for that. Within Stage 2, can you maybe tell us how much of those -- what percentage of those loans are NPLs that have been restructured? And what percentage are loans that are just less than 90 days past due? And finally, on the outlook for next year, given how strong profitability has been this year, do you think that the bank can continue to sustain the levels we've seen? Or could we see some moderation in profitability?

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Unidentified Company Representative, [7]

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Okay. So just to clarify, for the Tier 2 capital, it's local currency, so it's not foreign currency. The existing instrument was issued in 2015. And so next year will make it 5 years. It's callable after 5 years, the NGN 30 billion bond.

In terms of the capital numbers, where we'd like to see Tier 1 and Tier 2, internal guidance is 14% and 2%, which takes us to our internal guidance of 16%. But in terms of forward looking, by the end of financial year, we'd like to see it at about 14.5% and at about 2.2%, 2.3%. We don't think the Tier 2 is optimal since we already have a bond in issue, and then that's why we'll be thinking of recalling it and refinancing it.

The third question. In terms of profitability, in 2017, it was about NGN 20 billion and then in 2018, we projected a growth of about 25%. And this year, we're looking at a growth of roughly in that range. We don't expect there to be a slowdown in that going into next year. But I guess by the time we're taking our full year conference call in March, we'll be able to give a better guidance to the market.

Now in terms of the Stage 2 loans, if you look at the movement over Q2 and Q3, a lot of the growth came from the real estate sector and the government sector, and that was because there were 1 or 2 delayed payments over 30 days. And so those loans moved into Stage 2, which has been rectified as we speak in Q4. But just like we said, that's what led to the additional impairment of about NGN 600 million. In terms of what percentage of that book has been restructured, about NGN 150 million to NGN 175 million of that book has been restructured and a lot of the restructuring is from the power sector, the transport sector and the construction sector. That's where you have a lot of those that have been restructured. Yes. I think I've taken all the questions. Thank you.

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Operator [8]

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(Operator Instructions) The next question comes from of [Muywa] of Standard Bank.

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Unidentified Analyst, [9]

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I have kind of a few questions. First is on your digital loan product, could you elaborate on that? I recall you talked about the 35k loans that you've issued so far, just trying to understand what the current size of that digital loan book is and the kind of growth you expect going forward? And then also within your digital banking product, wanted to get a sense of the kind of contribution you expect to see from NIR going forward with about 31%, where do you expect that to be, and the kind of growth you expect to see as well? On your costs, wanted to understand what lowering [input] you see to improve your efficiency and bring down cost-to-income ratio to 70%. And then on loans, wanted to understand what's driving your foreign currency loans. And so sectors and the kind of growth outlook you expect from that? And then also to share what's driving your transportation loans as well? And if there is any concerns about some of the exposure you have there and the kind of risk you see? Those are my questions.

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Unidentified Company Representative, [10]

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Okay. Thank you, [Muywa]. On the digital loan products. So when Nnamdi was giving the overview, so we had this partnership we did with a fintech, we provide the customer base, they provide the balance sheet. So we have about 3 loans in that digital segment. So there is one where we don't fund with our balance sheet. The payday loan where we fund directly with our balance sheet. If I speak to the first one, which is the Fidelity quick money, and in 6 months, we've had over 220,000 people apply for the loan. You can apply either using the app or you can apply on the USSD channel. App downloads have been about 50,000 and then [there's still] people on USSD have been about 175,000. In terms of disbursement, we disbursed about 45,000 obligors, and in terms of the size of that book, it's less than NGN 0.5 billion. So there are basically loans between NGN 10,000 and NGN 80,000. Short-term loans between 2 weeks and 4 weeks.

For the other product, which is the payday loan, it's a 30-day cycle loan. It sits directly on our books. If you recall, on our call in Q1 and Q2, we said we are first going to use the partnership to learn and understand the market. So it's still a pretty new product, but it's expanded about 50% of what the other numbers have expanded. So it's still about a NGN 250 million book. What we've done is that the traditional loans we've had, consumer financial portfolio, we'll also digitize that in terms of how customers apply for that, and that's where you've seen the chunk of the loans that have come in from the retail banking space.

In terms of digital banking product contribution, our target is between 25% and 30%, that's the range. It's at 31% this period, obviously, there are some of the fee income lines that have underperformed based on our own modeling and one of them is the FX income line. So towards the end of the year, we expect it to be about 25% and 30%.

In terms of what we intend to do to bring down CIR, we see more scope for CIR coming down from an increase in revenue rather than a decline an absolute cost numbers. And so if you look at the strategy we've been pursuing on a year-on-year basis, you see we've been quite aggressive from a revenue growth perspective, both from operating income, interest income and fee-based income. So we see more scope for CIR coming down from a revenue growth perspective rather than an absolute cost reduction perspective. Nnamdi will take the question on FCY loans.

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Nnamdi John Okonkwo, Fidelity Bank Plc - MD, CEO & Director [11]

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Okay. Thank you. Like I said earlier, our FCY loan growth had a number of factors accounted for it. One, the increase in oil price, which remains stable. Some of the upstream customers we have are well. Their production has been stable as well. So that accounted for the increase you're seeing. Then the other one we've talked about is the build-up of -- I mean, domiciliary current account. Because of this digital transfer, you can transfer FX using your mobile phone within CBN limit. So most of our customers don't even have to walk into the bank now to ask funds transfer officers to make those transfers. So then they can use their phones to do the same, especially people in the commercial segment. So that's one.

And you also asked questions about growth in the transportation sector for loans. These are mainly vessels for the oil and gas industry. But right now, we -- at some point, we had pressure points some years ago when it came to financing general kinds of vessels, [the oil carriers] and all that. So we refocused on security patrol vessels. Those ones are hardly called off like the others. So even when the economy is down, you see that most security vessels are still working. So most of our transportation exposure is invested, but mainly for security vessels. We hardly do the other generalistic ones. At the moment, oil prices go down. You find out that most of them don't have contracts anymore. So we've done this now for a number of years, and I think that decision was right, because we haven't seen any pressures from that area. Thank you.

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Operator [12]

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(Operator Instructions) The next question comes from Tunde of FBNQuest Merchant Bank.

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Tunde Abidoye, FBNQuest Capital Limited, Research Division - Research Analyst [13]

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So my question is basically on your cost of risk. Looking at the guidance you've given, 1.25% seems a bit too conservative and implies that a significant portion of your provisions will crystallize in Q4. I understand that you've given us worst-case scenario estimates. Can you kind of give us like a best-case estimate for cost of risk? Then for your noninterest income, we've seen some volatility over the last 3 quarters. And in Q3, we saw a push from the asset disposal of about NGN 2.4 billion. If we back this out, can we use this as a proxy for what we expect to see in Q4?

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Nnamdi John Okonkwo, Fidelity Bank Plc - MD, CEO & Director [14]

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Okay. I'll start. Thank you, Tunde. I'll start with the noninterest income -- fee-based income. So yes, if you take that out, it will use it for a proxy of what you could see in Q4. But from a modeling perspective, I think we adjust number by about NGN 1 billion, which is due to the timing difference we have in the forwards that were carried on our books and have not matured and because of the price -- the mark-to-market price of the balance sheet from a $30 million perspective and the NGN 32 differential affected FX income by about NGN 950 million.

For cost of risk at 1.25%, yes, it's a worst-case scenario. In terms of a best-case scenario, if you look at what happened in Q3, where we have to -- we have some loans that had delays in payments, and because of that, we had almost NGN 50 billion, NGN 60 billion bumping into the Stage 2 loan book. Now the good thing is that they've been dealt with. But over the period, it has taken an additional impairment of close to NGN 600 million because of that. So what we can guide for is that we will not exceed the 1.25%.

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Operator [15]

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The next question is a follow-up question from Emmanuel of ARM Securities.

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Emmanuel Adeleke, ARM Research - Research Analyst [16]

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All right. It's just a follow-up to my previous question. So I wanted to be clear on what's really driving on earning costs on time deposits. So I look from -- I think since -- starting from Q2, started seeing that spike on interest expense on time deposits. So [what is really] causing this? Also [going on] when you look at some of your [cash out risk], I think cash out risk improved by year-on-year now. So I don't know what's driving that some pressure on funding cost and time deposits?

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Unidentified Company Representative, [17]

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So if you look at the numbers in Q2, we had a bump up in terms of the volume of time deposits. I think that's a quarter where it was higher. So it grew in Q1, its highest growth was in Q2, then it came down at the end of Q3. And obviously, the numbers we are looking at are balance sheet spot positions, which are not reflective of the averages over the quarter. So from a funding cost perspective, we also saw some pressures when the maturities were happening and new and more issuances were coming up. And even on our own yield and earning assets, we saw a spike in the yields on our own earning assets over the quarter. And a lot of the customers obviously -- the large retail customers in the FI and corporate space [which] benchmark the pricing of their funds to what they can get on government fixed-income securities. However, this quarter, all things being equal, we expect the cost to come down. But for us, it's not just focusing on the cost of that time deposits as a specific line. We'd like to look at it from a NIM perspective. If the cost of time deposits are going up, we can take those time deposits and use those funds and generate a higher yield on earning assets and it's NIM accretive, well, that's fine for us.

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Operator [18]

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(Operator Instructions) Well, a question from Gbolahan of CSL Stockbrokers.

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Gbolahan Ologunro, CSL Stockbrokers Limited, Research Division - Analyst [19]

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So just some clarifications on your financials basically. So in your financials, days -- in net -- an item net losses on the recognition of financial assets of about NGN 4.7 billion. So I need more clarification on that. Then in addition to that, like you mentioned, there was a profit on disposal of property, plants and equipment of about [NGN 2.5 billion]. So can you like provide more information in terms of the components of making of that disposal? Is it particularly leading to property or what exactly?

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Nnamdi John Okonkwo, Fidelity Bank Plc - MD, CEO & Director [20]

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Okay. Let me start with the first question. So in H1, we had a loan that the cash flow and the loan was delayed, and we had to -- we reworked the repayment period. And so what the auditors did was, they took the new -- the present value of the modified cash flows, compared it to the initial present value of the cash flows on that loan. And the difference between that was charged as a modification loss, which was NGN 4.7 billion. However, we had made a provision on impairment on that loan of NGN 4 billion. So what they did was, they reversed the NGN 4 billion impairments we have made, they reversed it back and then they made a modification cost of NGN 4.7 billion. So when you look at those -- look at the [net writebacks] we have of NGN 5.4 billion thereabout, that figure -- that NGN 5.4 billion includes the NGN 4 billion related specifically to this asset where the modification loss of NGN 4.7 billion was charged on. And that's why when we pick it up in the financials, we basically add the 2 numbers together to get what our net impairment over the period is.

In terms of looking at the asset disposal, it was basically property. And so the net disposal gain was about NGN 2.4 billion. And so there was a property we had acquired with a massive expanse of land and someone needed to make an expansion, and they wanted some additional land. So we sold part of what we have to them, and then we have disposal gain of NGN 2.4 billion. So why we say is one off, it's not something that we went into the market to go and look to dispose of. Someone had a need for it and we felt it was a good deal since we're not using it at that particular time. So it's a one-off event at NGN 2.4 billion, strictly property.

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Operator [21]

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(Operator Instructions) We have a follow-up question from Tunde of FBNQuest Merchant Bank.

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Tunde Abidoye, FBNQuest Capital Limited, Research Division - Research Analyst [22]

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Just a follow-up on the OpEx question. I kind of missed the explanation. To get to a 70% cost to income ratio, it means your OpEx would drop significantly, sort of about NGN 15 billion, NGN 16 billion in Q4, is that kind of right?

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Nnamdi John Okonkwo, Fidelity Bank Plc - MD, CEO & Director [23]

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No. It will not drop to that level in Q4. What I've said earlier is that we see more scope for the improvement of the CIR coming from a growth in the revenue rather than a reduction in the absolute cost numbers. So if you're modeling for 70% CIR by the end of the financial year, it will be driven more from a revenue growth perspective rather than a decline in absolute cost numbers.

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Operator [24]

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Gentlemen, we have no further questions on the lines. Sir, you have any closing comments?

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Nnamdi John Okonkwo, Fidelity Bank Plc - MD, CEO & Director [25]

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Well, thank you. Well, just to say thank you for participating in this call today. As usual, we will remain focused on achieving our full year plan, and I think that will be it. So see you first quarter next year, where we'll be doing the full year conference call, thank you.

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Operator [26]

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Thank you. Thanks very much, gentlemen. Ladies and gentlemen, on behalf of Fidelity Bank, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.