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Edited Transcript of FIDELITYBK.LA earnings conference call or presentation 2-Sep-19 1:00pm GMT

Half Year 2019 Fidelity Bank PLC Earnings Call

Lagos Oct 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Fidelity Bank Plc earnings conference call or presentation Monday, September 2, 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 - Chief Operations & Information Officer and GM

* Nnamdi John Okonkwo

Fidelity Bank Plc - MD, CEO & Director

* Victor Abejegah

Fidelity Bank Plc - CFO & GM

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Conference Call Participants

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* Aderonke Akinsola

Chapel Hill Denham Securities Limited, Research Division - Research Analyst

* Emmanuel Adeleke

ARM Research - Research Analyst

* Ola Warikoru

SBG Securities (Proprietary) Limited, Research Division - Research Analyst

* Olabisi Ayodeji

Tellimer Research - Equity Research Analyst of Industrials for Africa

* Tolu Alamutu

Tellimer Research - Director & Credit Analyst of Financials

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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 First Half 2019 Earnings Call. (Operator Instructions) Please note, this call is being recorded.

I would now like to turn the conference over to Nnamdi Okonkwo. Please go ahead.

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

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Okay. Good afternoon, ladies and gentlemen, and welcome to this call. With me today are executive management team members.

So I'll go straight to the first half of the presentation by reviewing the H1 performance. Okay. Our performance for the period showed a decent double-digit growth on key performance indices, like gross earnings, fee income, profitability, loans, deposits and equity.

We achieved NGN 15.1 billion PBT for the period and that was a growth of 15.7% when compared with H1 of last year. However, if you compare Q1 and Q2, we achieved 25.5% growth between the 2 quarters. Now the growth in PBT was attributable to 52.4% growth in fee income, and this led to an actual growth of NGN 5.3 billion and a net impairment write-back of NGN 0.8 billion, which led to a positive variance of NGN 3.4 billion. I'll be explaining this net impairment write-back shortly.

The actual growth of NGN 8.7 billion in both fee income and impairment offset the combined negative variance, each totaled NGN 6.7 billion. And this NGN 6.7 billion came from negative variance on interest -- net interest income, which came in at negative NGN 1.2 billion and expenses, which came in at NGN 5.5 billion.

So let me speak about this impairment write-back and net losses on derecognition of financial assets measured at amortized costs. Starting with the gross impairment, the gross impairment write-back on the financials was actually NGN 5.5 billion. Now this NGN 5.5 billion included a NGN 4 billion impairment write-back on an asset. This impairment was no longer needed, so we wrote back that NGN 4 billion. However, given the IFRS treatment, a net loss of NGN 4.7 billion on the derecognition of financial assets measured at amortized costs was not charged on this same asset, thus giving the net that you see there. This is in line with IFRS 9 treatment, and that particular line has now moved from Stage 2 to Stage 1 after this treatment.

Continuing, our ROE came in at 13.5% and is on track with our 13% guidance for this year. NIM improved to 5.8% from 5.1% in Q1 of this year. This improvement was largely driven by increase in average yield on earning assets to 13.5% with funding costs remained flat.

Total deposits increased by 12% to NGN 1.09 trillion driven again by double-digit growth in both local and foreign currency deposits. But in absolute terms, total deposits grew by about NGN 118 billion on account of 19.9% growth in foreign currency deposits and 10.2% growth in local currency deposits.

Our retail strategy continues to show that we're on the right track. Savings deposits grew 8.6% to NGN 248 billion approximately. And now savings accounts for approximately 23% of our total deposits.

In the area of digital strategy, we continue to see progress with 45% of our customers now enrolled on our mobile and Internet banking products, and digital now contributes 29% of fee-based income.

Our risk assets increased by 17.6% year-to-date to NGN 999.3 billion and this was strongly driven by 4 key sectors that accounted for 95%, and those sectors are manufacturing, transport, agri and oil and gas. Of course, manufacturing is one of the largest beneficiaries, and I'll tell you why. They are one of the largest beneficiaries of intervention funds for all lending facilities, and this has been one of the key strategies we use to access alternative and cheaper funding for our clients to drive business given that the corporate [end]. As you know, we do not authorize those very high risks so we use intervention funds discretion (inaudible) the cost for them and [weaken] them.

Okay? From a portfolio breakdown perspective, our loan book is broken down as Stage 1 is now at, 74.7%; Stage 2, 19.9%; Stage 3, 5.3% -- 5.4%. So our Stage 3 loans increased by 9.7%. NPLs improved to 5.4%, down from 5.7% from our 2018 financial year and this was due to growth in the gross loan book, which was about 15.8%. Key factors responsible for growth in our Stage 3 loans were oil and gas, manufacturing and general commerce. You'll recall that these areas, we keep saying, are some of our key focus areas.

NPL guidance for the year still remains below expected, and we are working hard to achieve that.

On capital adequacy, our ratios remained above the threshold with CAR now at 17% and liquidity ratio at almost 35%. Cost to income ratio is at cross point, so we have our eyes on the ball. And we are working hard to make sure that we will bring it down. We are not unaware of the importance of making sure that we bring down that cost to income ratio.

So I'll stop at this point and then hand you now to Gbolahan, who will take us through the detailed presentation. Gbolahan? Okay. By the way, Gbolahan is now confirmed an Executive Director of the bank by the Central Bank of Nigeria, so that's actually effective 1st of September. Thank you.

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

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Okay. Thank you, Nnamdi. I'll just go straight to Slide 3 -- Slide 4, sorry, just to give an overview of the bank.

Total assets are now at NGN 1.94 trillion (sic) [billion]. That's about 12% growth from where we ended in 2018. Staff strength is still below 3,000, 55%, 45% male and female. 4.8 million account, about 2.2 million of those customers are now using our mobile and Internet banking channel and about 2.1 million cards.

If you go to Slide 5, it just shows that progress on retail and digital banking. Over the last 6 months, account acquisition has grown by 7%. The savings deposit base is up by 9%, and we've seen an uptick in the retail loan book by about 4%.

On mobile and Internet banking customer acquisition, it's grown by about 13% and cards by about 6%. By the end of this year, we expect to have another year of double-digit growth in savings deposit, that should be our 6th consecutive year.

Our retail loans are gradually picking up with the launch of some of our new digital lending products. We launched a new product, Fidelity FastLoan, to keep up with different segments. 45% of the customers are now on mobile and Internet banking channel. 82% of customer transactions are done on electronic channels. And like Nnamdi said earlier, 29% of fee-based income now comes from the digital banking business.

I'll go to Slide 9, which just shows the key performance highlights. Nnamdi has spoken about a lot of this. Cost of risks is at negative 0.2%, one of the net write-back we had. NPLs are 5.4% driven mainly by the growth in the loan book.

Total coverage ratio is 94.9%, but when I get to the loan portfolio, we look at the coverage ratio from different segments.

FCY loans are 39.1% of the loan book. It's now below 40%. It was 41% by the end of the last financial year, and that's due to the stronger growth in the local currency loan book.

Capital adequacy ratio is at 17%. Right now, we are recognizing only 40% of the local currency bond. And then loans to interest bearing liabilities is about 65.8%, with total equity at about NGN 216 million (sic) billion .

On Slide 10 now are just key explanations for what's driving the growth. Gross earnings growth driven by credit related fees, FX income, trade income, digital banking income and account maintenance fees. Each of those lines grew by about 20%, and net interest income on loans was up by 10%.

Net interest margin came in at 5.8%. It's flat when you compare it to the 2018 financial year, but was an improvement on the 5.1% we recorded in Q1. And that's basically due to the improvement in the yield on earning assets to 13.5% over the period. This was basically driven by a 22% growth in interest income in Q2.

OpEx went up by 8.7% and a lot of that was largely driven by 4 expense lines: staff, advert and then regulatory charges, AMCON and NDIC, the last 2 driven by the growth in the balance sheet and then the growth in the deposit base.

Nnamdi spoke about the gross impairment write-back. It was at NGN 5.5 billion and then -- and that NGN 5.5 billion included an impairment write-back of NGN 4 billion on a specific asset that had a modification. So what the auditors did in line with IFRS 9 treatment was they recognized a net loss on the derecognition of financial assets measured at amortized cost of NGN 4.7 billion. So included in that NGN 5.5 billion is the NGN 4 billion impairment write-back on that specific asset, that NGN 4.7 billion net loss on derecognition was charged at.

So PBT was up at 15.7% to NGN 15.1 billion. Customer deposits are getting closer to the NGN 1.1 trillion mark basically driven by both local and foreign currency deposit growth. Domiciliary deposits are now about 20% of total deposits at about NGN 216 billion.

LDR, we're above the threshold that was stretched for banks as of the end of September, which is 60%, but that doesn't mean we've slowed down and landed, but still in line with our risk assets criteria.

CAR improved to 17%. Because of an NGN 11.4 billion growth in Tier 1 capital, a NGN 10.2 billion growth in fair value reserves and then the single obligator limit charge we take reduced by NGN 4.5 billion because of the growth in our single obligator limits over the period due to the capitalization of earnings.

Let's go to Slide 12. This just looks at the key lines H1 2018 from a P&L perspective on H1 2019. Positive variances on a lot of the lines, especially on the fee income lines. Total interest income was up 7.2%. You see the pressure coming from the interest income on liquid assets basically due to the lower yields of other periods. So that was largely flat at 0.1%, but interest income on loans was up 10%.

And then growth in interest expense, I'll take that at 16.5%. So net interest income was down 3%.

PBT, spoken about that already. And then we'll go to the balance sheet on Slide 13. So earning assets were up 14.5%. Much reduction in cash earning. Cash reserves, we're carrying about NGN 308 billion on that line. And then all the deposit products are up, apart from demand deposits that went down about 1.8%. But you see the effect of that in trade income that grew significantly.

Slide 14 does show the breakdown of gross earnings on a year-on-year basis and a quarter-on-quarter basis. You see an improvement in most of the lines. I think the lowest growth line would be interest income on liquid assets.

Slide 15 explains net interest margin. So it had been declining for about 4 consecutive quarters. And then it started to inch up now. We have guided for 6% to 6.5% this year. We're still behind the guidance, but we think there will be an increase in both funding costs and asset yields in Q4 due to the significant fixed income maturities coming up. But if you look at it, funding costs were flat at 6.6%. And then we're able to improve the yield on earning assets from 12.6% to 13.5%. Earning assets were responsible for the movement in NIM from 5.8% to 5.1% back to 5.8%.

On expense, 16.9% growth year-on-year. H1 was NGN 38.2 billion. Our staff costs, NDIC, AMCON and advert were responsible for almost 80% of the OpEx growth. Our guidance was below 70% this year. We're still intend to work that down over the next 2 quarters.

Slide 18 is just an analysis of the funding base. And then apart from demand deposits that I spoke on early on, you see an improvement in all the other funding sources.

Slide 19 speaks of the deposit base. Total currency deposits roughly now about 80% of the deposit base. We've seen strong growth from the foreign currency deposit based from about NGN 113 billion in H1 2018, and it's almost doubled to NGN 216 billion in H1 2019.

Slide 20 just shows the analysis. The savings deposits at NGN 248 billion. Typically, third quarter is normally one of the slowest quarters for us because of the holiday period, but we expect that to pick up significantly in the fourth quarter.

Retail loans are gradually picking up after we launched our new digital lending product and also deepening some of the lending partnerships we have with select fintechs. From a retail deposit perspective, it contributes 40% of low cost deposits.

If we look at liquidity position, net loans to customer deposits is about 69.7%. Liquidity ratio is about 35%. And if you look at the mixture of our liquid assets, there's no overconcentration in any box, so you can take advantage of maturity if there are positive variances in an interest rate movement.

Slide 22 shows the breakdown of the loan book, NGN 906 billion to NGN 1.051 trillion, NGN 43 billion growth over the period, about 15.8%. You look at the loan portfolio, from a net loan perspective, the growth was about 17.6%. 50% of that loan book was coming from the transport segment -- sorry, from the manufacturing segment. Transport segment is about 21%, agri about 14% and then oil and gas another 13.5%.

Just like Nnamdi explained earlier, manufacturing is one of the largest beneficiaries of the intervention funds and we've used that a lot for some of our corporate and commercial names that has a CapEx requirement. FCY loans grew by 12% and 39% of the loan book.

Slide 25, what we've done is just to show a breakdown of the loan book by the various stages: Stage 1; Stage 2; and Stage 3. So out of the NGN 1 trillion gross loan book, about 75% of the loan book is at Stage 1, 19.9% in Stage 2 and 5.4% is in Stage 3, which is basically what we have on our NPL book.

The coverage ratio for the Stage 1 loan is 0.5%; Stage 2, 9.3%; and Stage 3 48.5%. A lot of the net impairment write-backs we have for H1 is coming from the Stage 1 and Stage 2 book.

So NPL, which is our Stage 3 loans, declined to 5.4% basically due to the growth in the loan book. Stage 3 loans developed to NGN 56.6 billion. Major sectors responsible are oil and gas, manufacturing and general commerce. And then we have a major reduction in the transport and education sectors. NPL guidance for the year still remains at 6%.

Slide 27 just shows the variance and the movement in various sectors from an NPL perspective. And if you look at the largest movement, we've seen a decline of almost 43% from the transport sector. And then oil and gas, manufacturing and general commerce are the sectors that had the highest movement.

On Slide 29, you look at the capital. So the capital moved from 16.7% to 17%. And then you see the regulatory adjustment, there is a significant decline from NGN 16.3 billion to NGN 11.8 billion, that's about NGN 4.5 billion, a lot of that driven by the improvement in the single obligor limit because of the growth in the shareholders' funds. We recognized now only 40% of our local debt in the Tier 2 capital computation. The CAR is above both the regulatory and our internal guidance limit.

Slide 30 shows the computation of the various business segments. In the corporate and investment banking, we get about 36% of profitability; from the Lagos area, about 29%; 11% from the North; and 24% from the Southern part of the country.

Slide 32 shows how we've done on guidance for the year. For net interest margin and cost income ratio, we are behind targets on the 2. On the other 7 indices, we are firmly on track.

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) Our first question is from Ola Warikoru of SBG Securities.

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Ola Warikoru, SBG Securities (Proprietary) Limited, Research Division - Research Analyst [2]

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And congratulations on the results. I just had a few questions. The first one was the relation to asset growth. So if we look at other banking reports as a half year, and Fidelity seems to be bucking the trend in that respect, especially with loan growth and the fact that the loan growth is coming from various sectors. So then you mentioned of the interventional funds for some of those key sectors, but then there's still growth across other sectors. So I guess my question really is what is Fidelity seeing that the rest of the market isn't. Secondly, in regards to asset quality, it seems to be under control. But then when you look at the Stage 2 loans, specifically power sector, it seems to be taking up about half of that. And I'm just wondering if you can just elaborate on the exposure in the power sector. And also what mitigants have been put in place that it doesn't cause a blowout for cost of risk and for NPLs in either a couple of months down the line? Finally, I wanted to ask about what's driving growth in the domiciliary accounts and also the term deposits because that seemed to have been -- there was quite a growth with term deposits, which impacted interest expense. So that will be all my questions for now.

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Nnamdi John Okonkwo, Fidelity Bank Plc - MD, CEO & Director [3]

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Okay. Thank you. On the loan growth, I think we have to answer this on a lot of our calls. What are we seeing that a lot of people are not seeing? And I think over the last 4, 5 years, we have consistently continued to lend even when you strip out the effects of devaluation on the loan book. We've looked at each of the sectors from a risk acceptance criteria. From a credit portfolio review of the sectors, we're comfortable with the lending to those sectors.

Intervention funds covers quite a bit of sectors. Obviously, the manufacturing sector has been one of the better beneficiaries. In the Oil & Gas segment, we've also seen an uptick in activity when the oil pricing improved from a services perspective.

In terms of the stage 2 loan book, if you look at that slide that has the breakdown of the loan books, you will see that the coverage on the stage 2 loan book is also high. The coverage on stage 2 loan book is about 9%. Yes, you're right, about 50% of the loans in the stage 2 book is the power portfolio. One of the reasons why it was over there was because we had to restructure a couple of them. But we think from a coverage perspective, that's more than adequate.

In terms of domiciliary deposit growth, I think 3 things are driving it. We've spoken about them earlier. Number one is we've seen a lot of growth from the retail segment on that. On our mobile app, there was an integration indeed with suites where you do domiciliary transfers to any bank in the world and it takes roughly about 15, 20 minutes. So it's almost instant.

Number two is we've seen an increase in the level of liquidity of the customers we have in the Oil & Gas segment. Obviously, that has been driven by the higher oil prices. And the cash flow of these customers has improved.

And number three is just from various trade businesses we do. And then when we look at what some of the customers are doing, we also see -- apart from corporate and commercial clients, we've also seen quite a number of clients also saving money from a domiciliary deposit perspective. And do we think this is going to continue? Yes, but maybe not at the same aggressive growth rates going forward. Thank you.

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Operator [4]

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Our next question is from Tolu Alamutu of Tellimer.

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Tolu Alamutu, Tellimer Research - Director & Credit Analyst of Financials [5]

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I have a few questions, please. The first is on the single obligor exposure which you mentioned. Could you maybe tell us what sector it is and what the current total exposure is, maybe as a percentage of loans or as a percentage of capital? And is this the same obligor that you're taking a charge against capital for? You mentioned that the charge against Tier 1 capital has decreased -- or decreased during the quarter.

Secondly, on cost. Obviously, the cost income ratio was quite high, especially for Q2. If we calculate it, it's around 90-something percent, just for the second quarter. Could you maybe give us a little bit more detail on what the bank is doing to bring costs down in the next couple of quarters and how much confidence you have about meeting the full year 70% cost income ratio target?

Thirdly, on asset quality and loan growth. There seems to be a little bit of overlap between the sectors generating increased NPLs and the sectors where you've also seen increased loan growth, for instance, Oil & Gas services and downstream Oil & Gas. Can you maybe explain to us why you're comfortable still lending to those sectors even though NPLs seem to be rising?

And then on capital. You mentioned that you now only include 40% of the naira-denominated issue within Tier 2. What is Fidelity Bank considering in terms of replacing that? Could you maybe look to the dollar market as an alternative?

And finally, just a broader strategy question. There's clearly a little bit of a push towards more consolidation in the sector given what the CBN has said about recapitalizing banks and so on over the next 5 years. Given that backdrop, do you think that Fidelity Bank can remain independent in this market? Or do you see yourselves partnering with a larger peer?

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Gbolahan Joshua, Fidelity Bank Plc - Chief Operations & Information Officer and GM [6]

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Okay. Nnamdi will take the question on the broader strategy about capital. I'll take the other one. Let me start from the capital question.

In terms of the exposure, it's in the upstream segment. It was a foreign currency limit, still a foreign currency loan. It just indicated facility was part of the syndicate. The loan was granted when the exchange rate was actually NGN 150. So when the exchange rate moved to NGN 300, it went above single obligor. So upon the time the loan was granted, it was about 70% of our single obligor limit, but obviously with the exchange rate moving from NGN 150 to NGN 360 in naira terms, the loan has actually doubled.

Single obligor limit is 20% of our share last month. If you take that loan as a percentage of our capital now, it's about 25% of our capital. So typically the charge you take is the loan -- the balance on the loan is subtracted from the single obligor limit. And then the difference is what you take as a capital charge. So 2 ways to bring down our capital charge is you get pay-downs on the loans. That's number one. And then number two is you have an increase in your single obligor limit, which you get through the capitalization of earnings.

On some of the sectors we've spoken about, if you look at some of the sectors that you said are driving NPLs and we're still lending, for some, for example, the downstream sector, I think on about 3 or 4 calls ago, about 80% to 85% of the NPLs in that sector is from one single exposure. I think that was likely in the media because we took the obligor to the [FCC]. So for some of them, it's quite -- there's some level of concentration there, which is not reflective of the fact that maybe you have 40 obligors and then you have one that has gone bad, but that one was material in terms of the NPL book.

So I think we're still comfortable with those sectors we're lending to. Obviously from an NPL formation, if you look at the last 4, 5 years, even in terms of maturity of the loan book, if there were going to be issues, they would have doubled up in the last 5 years since we've been lending to those sectors.

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Nnamdi John Okonkwo, Fidelity Bank Plc - MD, CEO & Director [7]

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Yes. Speaking about the broader strategy about whether we'll be looking for opportunities to combine and things like that, you'll recall that our 5-year strategy, which ends in 2022, was actually crafted around organic growth. But then we are not an -- or a responsive organization and we know that the environment keeps changing.

So we won't shut our doors to any discussions at all. So long as it aligns with our strategies and so long as we see synergy, we can consider whatever option comes our way and then keep the market informed. But as it stands, we crafted the 5-year strategy around organic growth. But again, I repeat we'll not just block ourselves away from whatever comes up. So I think that's it. Thank you.

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Tolu Alamutu, Tellimer Research - Director & Credit Analyst of Financials [8]

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So just to follow up, if I may. Is this single obligor the same exposure on which you took the charges through the income statement? Or is it completely different?

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Victor Abejegah, Fidelity Bank Plc - CFO & GM [9]

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It's a totally different loan. So if you look at the one that we took the charge through the income statement, that's a NGN 29 billion exposure. If you look at our financial statement, it's clearly stated there (inaudible) on our financial statement. So it's different.

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Operator [10]

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Our next question is from Emmanuel Adeleke of ARM Securities.

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Emmanuel Adeleke, ARM Research - Research Analyst [11]

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I have a few questions I'll ask today. The first one is (inaudible) that was done on the restricted loan exposure, I want to believe they are all the write-backs. And can you just tell us what sectors are these write-backs? And do we expect some more recoveries over the rest of the year?

And the second question is on your loan growth. How much of your loan growth by the year is made up of the on-lending facilities? And the way you look at your loan book now, how much of the loan book do these on-lending facilities make up?

And the third question is I noticed a very strong increase in term deposits. I think it increased by 32% year-to-date. But your costs are also declining from 81.6% in FY '18 to 73.7%. So I was actually hoping to see that trend maintained for the rest of the year. So can you just shed light on this sudden increase? And do we expect to see this trend continue over the rest of year?

And then the last question I have is can you just shed light on the NGN 10.2 billion growth in your fair value reserves? Those are my questions for now.

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Nnamdi John Okonkwo, Fidelity Bank Plc - MD, CEO & Director [12]

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Okay. I'll start with the -- I'll start with the provision. So gross impairment was NGN 5.5 billion. If you take out the NGN 4 billion, then you have NGN 1.5 billion. If you look at the decline in the NPL book, the stage 3 loans, you see a marked decline in the transport segment. It actually went down by about 41%. So we had a significant write-back coming from that.

What percentage of the loan book is the on-lending facilities? Right now it's about 23%. If you go to Slide 13, it shows the breakdown of the funding sources for the bank. So you will see that on-lending facilities, from a liability perspective, moved from NGN 191 billion to NGN 235 billion. That NGN 235 billion is what we've stated in terms of total on-lending facilities with [BOI], asset bailout funds. You take that as a percentage of the gross loan book, which is about NGN 1.50 trillion. So it's roughly about 23% of the loan book. It's funded by on-lending facilities.

Okay. In terms of the growth in time deposits. If you look at growth in the local currency loan book over the period, you will see that we have a growth of about NGN 808 billion, in the local currency loan book.

Now if you look at the growth in terms of on-lending facilities over the period, you will see about NGN 43 billion. So when you look at the gap, obviously taking some of the time deposits and lend it directly to customers, out of the growth in the loan book, about NGN 43 billion out of that is coming from on-lending facilities. That is for the naira loan book. For the dollar loan book, about NGN 22 billion out of the growth of NGN 41 billion is coming from other borrowings. Those are actually (inaudible) borrowings we have with counterparties.

Now in terms of the growth in the fair value reserves, we have a revaluation of some of the investments that we carry in our books. So when the auditors come in, they do a revaluation of the investments we carry at each point in time. And there was a change in the investment -- the value of those investments over the period from about NGN 7 billion to about NGN 17 billion, from about NGN 7 billion to about NGN 17-plus billion. So that's what led to the fair value reserves.

If you look at the financials, it clearly showed the list of those investments that we're holding on that investment portfolio. Thank you.

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Operator [13]

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Our next question is from Olabisi Ayodeji of Tellimer.

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Olabisi Ayodeji, Tellimer Research - Equity Research Analyst of Industrials for Africa [14]

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I just wanted to clarify. Could you please clarify whether the loans you -- the loan growth there through the manufacturing segment has been driven by CapEx projects? Have you gotten a sense of whether that started pick up recently? Secondly, on NIMs, you did mention I expect some pressure on asset yields and an increase in funding costs. But I just wanted to get a better sense of how it is that you expect to achieve the NIM guidance compared to where you are as of the first half of the year? And thirdly, I wondered if you could please give a sense of the spread that -- for the sequential mix on the intervention loans from on-lending facilities and maybe compare that to other sorts of assets.

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Nnamdi John Okonkwo, Fidelity Bank Plc - MD, CEO & Director [15]

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Okay. Thank you. So the manufacturing, there are 2 bits of it. There's a chunk of it driven by CapEx. Obviously, you have some of the companies that are expanding and using the intervention funds to expand. There's also the bit that is the trade bit of the business, which is people in the FMCG businesses who are important. So it's a mix of both of them.

The second question was on -- yes, so on our NIM guidance. For Q3, we've seen obvious pressure from a lending perspective in terms of banks wanting to meet the 60% threshold. So we've seen customers being offered far lower interest rates. But we're seeing a reversal of that now obviously because the yields on the [OMO] instrument are also going up. And that's why we said on this slide that we expect there to be some funding pressure. But we also expect the yields on fixed income security to increase in Q4 in view of the higher maturities. We believe that with those increased -- in those yields, it will moderate some of the pressures we're seeing from a lending perspective by the time we get into Q4. And that should be positive for us. Remember, in our own scenario, we are not under pressure to go out and create a lot of new loans. It's more about defending the market share on the customers we have. And I think so far, so good. We've done that fairly well.

Now in terms of the spread. I think there are 3 types of these loans in terms of the intervention fund. There are those who get the funding directly from the developmental agencies and basically what you make is a guarantee fee. And then the commissions you make on the trade and all of that.

The second is the one that you collect the money directly from the intervention fund and then you only lend to the customer. On that, you basically have a spread of about 4% to 7%. And then the third of those are those that you collect the money directly and then you are lending it directly to the customer.

In terms of the spread compared to other loan types, we've had the lower spread compared to other loan types. But in this scenario, what you have to look at is you can't only look at the spread. You've got to look at is the customer able to pay you back if you are lending to him at the commercial rate. For some of these customers, the only way that CapEx will be viable is if they were borrowing at these concessionary rates. At the normal commercial rate, they might not be able to do those CapEx expansion that will lead to an improvement in their sales volumes in future years.

So for a lot of the customers, what we've seen is they've used this. And I'll give you an example. A customer that takes an intervention fund at 9%, their total finance cost over a 3-year period is less than 30%. Now if you compare that if a customer had to take a commercial rate at 22% or 23% over the same 3-year period, the total financing cost is inching towards 70%. So it's a very massive difference, which means a whole lot to the customer.

So in terms of backward integration, we've seen a lot of customers take advantage of this. Obviously, the funds are not unlimited. And at the point in time -- once it's available, it will be announced. Thank you.

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Olabisi Ayodeji, Tellimer Research - Equity Research Analyst of Industrials for Africa [16]

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Just to clarify, would it be fair to then say that there's been a pickup in CapEx spending for manufacturers? Because I believe that was a bit of a drag on loan growth last year and early in the year as well. So are you seeing a bit of a turnaround in that trend in Q2, Q3?

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Nnamdi John Okonkwo, Fidelity Bank Plc - MD, CEO & Director [17]

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Well, manufacturing is broad, so they're different. There are different areas of manufacturing. So for example, people making [noodles] are manufacturers. People -- I mean producing water. People are producing plastic bottles. So I think in some segments, we've seen an uptick. But I think those are segments that -- 2 things we've seen. There are customers who are now producing products that are local substitutes for what some of the known brands used to produce before.

Obviously because of the pricing pressure and the lower disposable income of the consumer, we've seen a migration towards value brands just because there's lower consumer disposable income. Customers who play in that segment, we've seen an uptick in demand from those customers simply because the consumers are squeezed, and so it's now more of the pricing decision and they're going for value brands.

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Operator [18]

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(Operator Instructions) We have a follow-up question from Tolu Alamutu.

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Tolu Alamutu, Tellimer Research - Director & Credit Analyst of Financials [19]

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Okay. Just to clarify on costs, please. I had asked earlier about your cost income ratio for the full year and what measures the bank is putting in place to make sure that, that ratio improves, please because it was over 90% for the second quarter.

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Victor Abejegah, Fidelity Bank Plc - CFO & GM [20]

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Okay. So for full year, we're still focused on trying to get it below 70%. Obviously, that's going to be a combination of 2 things: higher revenues and then keeping cost growth in check. If you look at some of the lines that have been responsible for the cost growth over this period, NDIC has been one of them. AMCON is one of them. Those basically come with the growth in the business.

So for some of those lines, the only way to cushion cost growth is to have a higher revenue profile because you can't control it in terms of keeping it under check, except you are not expanding your -- on an asset base but you're not growing your deposit base.

So we believe for Q3 and Q4, we should see an improvement in CRR. The major proposition for us is getting it below 70% for the end of the financial year. It will be quite challenging, but that's what we intend to focus on.

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Operator [21]

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(Operator Instructions) We have a follow-up question from Olabisi Ayodeji.

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Olabisi Ayodeji, Tellimer Research - Equity Research Analyst of Industrials for Africa [22]

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I just wanted to clarify quickly. You mentioned that the spread on the -- on lending loans is around 47%. Could you please give a range for commercial loans? And could you also speak to where you expect most of your growth for the next 12 months or so to come more from, more commercial loans or on lending loans?

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Victor Abejegah, Fidelity Bank Plc - CFO & GM [23]

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So commercial loans, it's quite varied, depending on the sector the person is claiming. It could range from 8 to about 14, depending on the sector, when you look at the fact that blended average funding cost is 6.6%. And then for the commercial segment, you start lending from the high end at about 17, 18, down to about 23, 24.

In terms of where the loan growth is going to come from, whether the commercial space or the online lending space, if you look at our guidance for the year, our guidance for the year was actually 7.5% to 10%. So right now, we're on 17.6%. And while we're not going to slow down, obviously, you're not going to see an aggressive increase in the loan growth between now and the end of the financial year. So we don't expect to have a loan growth of 35% by the end of the financial year, having done 17.6% in Q1 -- in H1.

If we repeat the same thing in H2, then we'll be having a growth of 35%. Obviously, we don't intend to have that. So the loan growth will be slower in the next 2 quarters, even though from an absolute growth perspective, that might change depending on how we're able to defend our existing market share of existing loans. But it will not be as steep as the first half of the year. Thank you.

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Operator [24]

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Our next question is from Aderonke Akinsola of Chapel Hill Denham.

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Aderonke Akinsola, Chapel Hill Denham Securities Limited, Research Division - Research Analyst [25]

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So my question is on the recall risk and I apologize if you touched on this earlier. So I would like to know if you expect similar recall risk in the second half of the year. And would your cost of risk guidance still be 1.25%, considering what has happened as at the first half? So how are you seeing the impairment in the second half basically? That's my question.

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Nnamdi John Okonkwo, Fidelity Bank Plc - MD, CEO & Director [26]

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Okay. Obviously, we don't expect to see the same pace of impairment write-backs that we saw in H1, in H2. Obviously, we also don't expect there to be a marked escalation in the cost of goods. Like we said earlier, out of the NGN 5.5 billion we see as a gross impairment write-back, if you take out the net loss on the recognition of the financial assets, it will be NGN 1.5 billion. Comparing that to the net charge last year, which was about NGN 2.5 billion, that's still a marked growth. So over the next 6 months, we don't expect to see an impairment write-back of about NGN 1.5 billion gross on the book.

Are we changing our cost of risk guidance? No. We'll leave it at 1.25%. It's a very dynamic market. Obviously, we don't think we will keep that guidance based on the way we've seen the asset book play out, but we will leave the guidance at 1.25%. Thank you.

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Aderonke Akinsola, Chapel Hill Denham Securities Limited, Research Division - Research Analyst [27]

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Okay. Sorry, just a follow-up question. So where do you think the cost of risk would likely settle by the end of the year, 0.5% or 0.81%? Where would you likely see percentage for the cost of risk?

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Victor Abejegah, Fidelity Bank Plc - CFO & GM [28]

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Below 1.25%.

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Operator [29]

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We will pause a moment to see if we have any further questions. It seems we have no further questions on the line. Sir, would you like to make any closing comments?

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Nnamdi John Okonkwo, Fidelity Bank Plc - MD, CEO & Director [30]

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Thank you all for joining this call. Once again, we reiterate that we'll continue to implement our strategies and hope to achieve our full year numbers. And that's why we're staying with our guidance.

So on that note, thank you for participating in this call. I look forward to speaking to you again soon. Thank you.

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Operator [31]

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Ladies and gentlemen, that concludes this conference. Thank you for joining us. You may now disconnect your lines.