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Edited Transcript of UBN.LA earnings conference call or presentation 30-Jul-19 1:00pm GMT

Q2 2019 Union Bank of Nigeria PLC Earnings Call

Aug 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Union Bank of Nigeria PLC earnings conference call or presentation Tuesday, July 30, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ikechukwuka Emerole

Union Bank of Nigeria Plc - Head of Treasury

* Joseph Mbulu

Union Bank of Nigeria Plc - CFO

* Kandolo Kasongo

Union Bank of Nigeria Plc - Chief Risk Officer & Executive Director

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Conference Call Participants

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* Emmanuel Adeleke

ARM Research - Research Analyst

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Presentation

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Operator [1]

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Hello and welcome to the Union Bank of Nigeria, Plc Half Year 2019 Investor and Analyst Call. (Operator Instructions) Just to remind you, this is being recorded.

So today, I'm pleased to present Jo Mbulu, who is the CFO. Please begin, sir.

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Joseph Mbulu, Union Bank of Nigeria Plc - CFO [2]

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Thank you. Good afternoon. It's a pleasure to be able to share with you our financial performance for H1 2019. Here with me, I have Mr. Kandolo Kasongo, who is our Chief Risk Officer; Mr. Kunle Sonola, Head of our Commercial Banking; Mr. Ikechukwuka Emerole, who is our Treasurer; and Mrs. Lola Cardoso, who's our Chief Digital and Innovation Officer.

Without much ado, we'll jump into the slides. The outline is simple. We're looking at our operating environment, Union Bank update, our H1 financial performance and then some view of the future.

Yes. We'll go straight to Slide #5, which looks at the macroeconomic update. We mentioned a few key highlights here. The monetary policy rate has been stable since the 50 basis points reduction in February. And we don't think it will vary that much going to the end of the year. Oil prices have revolved around $60 to $70 all year. And given the various factors at play, we're of the opinion that the prices will remain in that neighborhood for the remainder of the year. And this is way above our internal benchmark for oil and gas portfolio.

For credit to private sector, the policy rationale of the Central Bank today should accelerate growth of credit to the private sector and will have a positive influence on cost of funds and consequently lower lending rates.

We'll quickly jump to the next Slide 7, where we basically remind us of the ambition of the bank. We desire to be Nigeria's most reliable and trusted banking partner, working seriously to achieving that. We want to be a leader in retail and transaction banking. We also desire to be a leader in citizenship, sustainability and innovation. On the right-hand side of that slide, we present our 2019 priorities that should help us achieve our ambition. Specifically, relating to portfolio diversification, we have reduced our share of oil and gas and power sector in our loan portfolio, while expanding the retail, SME and portion of other critical segments in the economy. It's a focus of ours in 2019, and we're working hard towards that. The ecosystem play for us is very important because we seek deepen our wallet share of the ecosystem around our rich base of corporate customers.

On the next slide, Slide 8. We just provide a glance of the bank as at the end of June 2019. Our total equity of NGN 239 billion, assets NGN 1.7 trillion, ATM were 1,000, debit cards about 4 million, POS 6,700, our customer base 4.9 million. In the middle, we see our stable ratings. These have remained stable for the past few years, and we seek to keep it so going forward.

On the right-hand side. We continue to be recognized for innovation, for our retail play and for our efforts around sustainability and CSR.

Slide 9. We present a picture of our growth, driven by digital evolution. Customer growth from average growth rate over the last 4.5 years is 28%. And this is driven by the digital platforms. You can see growing by 111% for mobile banking. Online banking has grown by 95% on average over the last 1.5 years. And our debit cards have grown by 37% on the average over the same period.

On Slide 10, we provide some more details of our digital footprint. 96% of our transactions are driven off these platforms, leaving the branch to get over 4%. On the mobile banking platform, we see huge growth both in the user base, the volume and the value of transactions. We see on the ATMs, we are not deploying ATMs for the fun of it. We make sure there is value add, and we see that translate to higher growth in the value by ATM than the count, where we continue to be strategic in deploying ATMs. The item that appears to have declined, which is the volume of online transactions, is a reflection of the migration of transactions from our online platform to the mobile platform, which is more efficient and easy to use and is increasing in value to our customers. We, however, see an increase in the average value of transactions on the online platform, from an average of NGN 640,000 -- from average of NGN 530,000 per transaction in 2018 to NGN 640,000 in 2019. And this speaks to the security and stability of our payment platforms.

On Slide 11, we provide some more details of our achievements in 2019 year-to-date. Our customer acquisition drive continues with an increase of 400,000 customers over the last 6 months. We're keen on gaining market share, higher market share of our customer base with our innovative products. And we're also looking at new customers in special segments: SME, education, technology and with a focus on women.

Our portfolio diversification. We have started this last year, and we'll continue. I did mention that oil and gas as a proportion of our portfolio has reduced from 35% in 2019 in June to 38% as of the end of -- sorry, from 38% June 2018 to 35% June 2019.

Around operational efficiency, we, given the high cost/income ratio at the start of the year, have launched and are implementing a program we call LEAP, which is Long-term Efficiency Acceleration Program. And this was launched to reduce our cost base in a sustainable way and then influence our future spend in Nigeria going forward. And we've seen a 4% year-on-year drop in total expenses, and this is driven by a 31% decline in major overheads and a 5% drop in staff expenses. And we will continue to optimize branches for better efficiency, providing new formats that are appropriate to our customer base, and there are basically different needs across the country, and we want (inaudible) formats to do this.

On digital and automation. We have both, on the customer acquisition and revenue generation component as well as on the middle and back office efficiency area, we're seeking to both acquire customers, grow revenues and get more efficient. We've deployed the robotics process automation. We did that last year. We've seen a reduction of the time to process ATM reconciliation, for instance, from over 6 hours done by over 100 people to 1 hour, and this is for the entire ATM platform. Settlement, for instance, we've seen a reduction of the time to settle transactions from 80 minutes to 10 minutes, and then reconciliation for auto pay from 1 hour to 5 minutes. And these are just LEDs and we have a lot of transaction types that will come under the robotics automation process.

On Slide 12, we see -- just let me share with you the results of our bond issue. We have continued to tap the market as part of our NGN 100 billion bond program. This is the third in the series. We did a NGN 30 billion bond, which was fully subscribed, testament to the confidence the investor public has for the bank. And this is actually the largest 10-year bond ever issued in the corporate institution in Nigeria. We -- this is actually a 10-year bond with a 5-year callable option. And we are pretty happy, and -- that this was fully subscribed.

On the next slide, Slide 13, we talk through the strong interdependencies and increased interdependencies within our businesses -- or amongst our businesses. And strengthening and leveraging the business has helped to increase productivity and will definitely help our future top line. On the retail front, for instance, we're leveraging our fully electronic channels, and we focus on digital evolution's innovative products to not only help customers, but to serve customers. We have seen a growth in the monthly retail loans, the actual transactions from an average of 12,000 loans in 2018 to an average of 21,000 loans in the first half of 2019. This is a 75% jump year-on-year. We also are doing about 100,000 new-to-bank accounts per month.

On the commercial front, we have solid platforms. I spoke to the reliability and the trust that we're seeing from our customer base. Our fin transactions grew from NGN 33.9 billion in the first half of 2018 to NGN 41.8 billion in 2019 first half.

Our corporate spend. This is where the anchors to our value chain lie and we've seen a 14% growth, for instance, in the payroll sign-ons year-on-year. So we're looking at about 13,000 new payroll account signed on for the first half of 2019, that was about 11,000 for the entire 2018. We also see signing of key distributors of our anchors, and we've done about 1,200 in 2019 versus 908 for 2018. We'll continue to drive this interdependencies to extract revenues and return more deposits.

On Slide 15, we present our group financial performance, where we show gross earnings declined by 9%, and this is driven by a reduction -- not a reduction, it's actually lower loan portfolio. If you remember, last year, we did a significant write-off from our loan portfolio, and we're just rebuilding that loan book. So the impact is still here, and we will see a complete reversal by the end of the year. So we saw a 9% reduction in gross earnings. Net revenues after impairment is down by 2%. Our operating expenses on the back of initiatives I mentioned earlier is down 4% year-on-year. PBT up 4%.

And ratios. Cost to income ratio is down from 77% in H1 '18 to 76.3%, and we will see that trajectory continue. On the bottom around the balance sheet. We see growth in deposits of 4%. Loans have grown by 8%. And we'll continue to do that to replace the loans we wrote off 2018. Our capital adequacy ratio is 19.4%, was 16.4%, on the back of our successful Tier 2/1 issue. NPL ratio is down to 7.3% for the bank versus 8.1% that we had at the end of '18.

On the next slide, Slide 16, we present a more detailed view of our earnings. We did mention gross earnings came down 9%. Interest income definitely led that reduction because the loan book is less than it was in 2018. We basically booked NGN 43 billion new loans in first half 2019, and we'll continue to do that. Our noninterest income was down 11% on the back of a lower interest of environment. And we also, of course, have a lower trading income. We recently reduced rates of treasuries and other treasury deposits. However, we see recoveries grew by a whopping 169% on the back of aggressive recovery, which we embarked upon in 2018 when we wrote off the significant amount of loans.

On Slide 17, we present a detailed view of our operating expenses. The 2 items that increased year-on-year are depreciation on the back of investments [a bit] in our systems in the past and regulatory expenses, AMCON, NDIC and those are outside the control of the bank. We see a reduction in staff costs, which came down 5%. We also see a reduction in other overheads. And on the right-hand side, we provide some more details of the key items in the other overheads bucket. General expenses includes things like cleaning, entertainment, stationery, postage, telephone. And that came down close to 46%. And we see a reduction of 12 -- 19% in repairs and maintenance, fleet and vehicle expenses of 17%, accommodation and travel 42%, and this is on the back of our aggressive cost management program.

Next slide, Slide 18, is a broader analysis of our net interest margin, which came down 100 basis points. We see that the funding cost is up 20 basis points on the back of some repricing and the timing issue. This will reverse in the next very few months coming, as we begin to reprice expensive deposits. The bottom left is our industry trend and the margins -- loan margins are thinning. We will leverage our value chain to make sure we can book loans with higher margins in a more secured structure.

Slide 19 looks at liquidity metrics, where on the right-hand side we show the total loans to customer deposits. This has become a very important metric in Nigeria today, and we are at 63% at the end of June. Our liquidity ratio at 38% is way above the regulatory guidelines.

Slide 20 provides a view of our funding mix, where we see, on the right-hand side, growth of 4% -- I'm sorry, it's 5% in the low-cost deposit bucket, current and savings account, and about 4% of the deposit growth. At the bottom, we see a breakdown of our deposit by segment, where we have called out SME for emphasis and we're beginning -- these are early days, beginning to see some growth in the deposit base.

Slide 21 is a view of our loan portfolio. And here, we show a decline in the oil and gas proportion of our loan portfolio, from 38.2% at the end of '18 to 34.6% H1 '19. We also look at the power sector, power and energy, and we see a decline from 7.7% to 7.2%, and these declines are on the back of our focus in growing the retail portfolio and other segments that are growth segments in Nigeria today. We will keep this focus and chose an improved distribution of loan.

Slide 22 has some more details of our NPL portfolio by sector. And obviously, power and energy, and oil and gas continue to be the biggest chunk of our portfolio. This is Nigeria and continues to be significant. But we're managing those as we're managing loans that we booked in this segment. The NPL ratio, I had mentioned, declined from 8.1% to 7.3%.

So going to Slide 24, which represents our guide -- we gave this guidance earlier in the year. Basically, a report card of where we are versus our earlier guidance. At half year, we are on track to meet the guidance for the areas we indicated, right? Loan growth, NPL ratio, return on equity, return on assets and the cost to income ratio. However, there are a few areas where we have to work harder, and we will work harder to meet the guidance. One is deposit growth, and we will continue to drive the value chain. And with increased liquidity in the system, repricing of deposits, we should work harder to get close to meeting -- closing this gap. The net interest margin is a timing issue, we were repricing our liabilities, but basically replacing expensive deposits return and lower price deposits. And that should help us close this gap, while we look at loans with better margins within our ecosystems.

Okay. Thank you so much for your attention and for listening in. And I think we'll take questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is of the line of (inaudible) of Meristem Securities Limited.

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Unidentified Analyst, [2]

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I was just digging through your CAR. I noticed that CAR has improved significantly, it's maintained over 19%, mostly on internal capital generation and the new issuance of debt facilities. So I wanted to confirm if we would (inaudible) in issuing new debt going forward or there's still a planned increase issue for that debt facility? What's happened in the capital market (inaudible)

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Joseph Mbulu, Union Bank of Nigeria Plc - CFO [3]

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Thank you for your question. So we did set up a program. The program is NGN 100 billion program. We will come to market as needed. But right now, we've done that recently. So we are fine where we are. But it's a program, which we can tap into as needed.

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Operator [4]

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Our next question is from the line of Emmanuel Adeleke of Austin Investment Managers (sic) [ARM Investment Managers].

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Emmanuel Adeleke, ARM Research - Research Analyst [5]

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So first question is, I know there is a significant increase in placements with other banks. Can you just shed more light on these placements? And also where are these placements? And secondly, how do you think the civil restriction of capping of your participation in government's auctions, how do you think it's going to affect Union Bank? And the third question is, what was the recoveries on NPL, especially oil and gas, and power sector? And the fourth question is, can you just shed light on the [cov] repurchase the bank has been doing? And should we expect further write backs in coming quarters?

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Joseph Mbulu, Union Bank of Nigeria Plc - CFO [6]

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Okay. So our treasurer will take some of this and then I will jump in as needed.

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Ikechukwuka Emerole, Union Bank of Nigeria Plc - Head of Treasury [7]

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Okay. So I think, for the placements, that will typically follow the general trend in the market, depend on where there's surplus liquidity or deficit of liquidity will typically put money in the market. But most of these funds are secured. And I think if you look at the trajectory of the market from last year to this year, there have been quite some bit of movements in the rate volatility over this period. And so we just take advantage of where we think there's an opportunity to [offlay] liquidity in the market. I think that's what every other treasurer or treasury will do.

The second one. So I know -- so in terms of [a city] auction, there's still -- there's no official restriction for now. I think at the end of the day, in line with the strategy of the bank, if you look at what we've done, we've actually [led this] finer asset book into different parts of the market in terms of whether its SME loans or other retail (inaudible) part of the market. That's where we're going to see a lot of activity. So even if that restriction comes, I think we're well covered for that. If you look at the trajectory of the asset book, we've grown from generated date, and there's still plans structure to grow that part of the book. It also speaks to increasing the margins that we have on our balance sheet. So I think for that, we're pretty fine with that, wherever the market -- whatever regulation comes out. I think we have the balance sheet to actually manage whatever changes coming into the market on the regulatory side.

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Joseph Mbulu, Union Bank of Nigeria Plc - CFO [8]

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And I'll let the Chief Risk Officer to talk about the oil and gas portfolio.

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Kandolo Kasongo, Union Bank of Nigeria Plc - Chief Risk Officer & Executive Director [9]

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Well, the oil and gas portfolio, as you've seen has been reducing. And some of it is linked effectively to the payment of the subsidies. We received finally payment of the first tranche at the end of last year, early this year. There's a second tranche that is on its way. And this was the sticky part of the portfolio. And therefore, we would expect to continue to see some repayment of the sticky part, but we are not out of that market. We will continue to take the opportunities and to finance the oil and gas portfolio, but within reason, within our portfolio limit. There was a question also on the recoveries. And recovery is a long process. It is a process that takes a bit of time, but we will continue to focus on that part of our balance sheet. We have last year taken a number of impairment. But this year, we are very much focused on recovering as much as possible of the previously written-off portfolio. You've seen the performance in the first half of the year. There may be some timing differences, et cetera, but we expect to continue to recover.

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Joseph Mbulu, Union Bank of Nigeria Plc - CFO [10]

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So is that fine?

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Emmanuel Adeleke, ARM Research - Research Analyst [11]

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All right. That's fine.

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Operator [12]

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We now go to the line of (inaudible) of FBNQuest.

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Unidentified Analyst, [13]

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I think I like to ask some very few questions. First of all, you read the bond agreement. I just liked to know the current (inaudible) cost of capital pre the bond issuance and post the bond issuance. Also, secondly, you gave the guidance of deposit growth of about 12% to 15%. And in your presentation, you said you've tried to see how you can reprice the deposits, letting go of expensive deposits. So I just want to know the driver of loan growth that will make Union Bank achieve either 12% to 15% target by year-end. Also another question, is there going to be any equity issuance in terms of right issue from the bank? And I will also like to ask, I think a couple of weeks back, we had rumors of Axis Bank acquiring and that was debunked both (inaudible) categorically. Should we expect any fall in acquisition or an acquisition in terms of any bank coming to acquire Union Bank in the future as an outlook for the year?

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Joseph Mbulu, Union Bank of Nigeria Plc - CFO [14]

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Yes. I think we will note your name, and we'll get back to you on the weighted average for the capital, right, pre and post bond issuance. (inaudible) write down and we'll get back to you, okay? Around the deposit growth, I did mention what we are currently doing for the last 1.5 years, which is around the acquisition play, right? So one thing is to reprice the expensive deposits. That will help us with the cost of funds. But with the cost of growing deposits is really around providing services and products that would make deposits stay in the bank. And that revolve around the ecosystem we have invested in, right? So we'll put in some structures. We invested in some systems. Our systems are more efficient. I did mention that transaction values and volumes have grown. So we are basically going to leverage the structures we put in place for that in the second half, right?

So they are separate items. The reprice will help with the cost of funds. But in terms of volume growth, we'll stick with what we know we want, which is around value chain driving customer transactions, right? As we make transaction, balances will be left in the account. So that will help us close this gap in deposit base. You asked about rights issue. There is none in our purview right now. We -- as I mentioned, we have a bond program which is working, and we'll tap the market as we need it. On the whole issue of acquisition, the official commentary has gone out and we will leave it at that. Truly, it's been responded to. Thank you.

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Operator [15]

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Our next question is over to the line of (inaudible)

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Unidentified Analyst, [16]

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My name is (inaudible). So my question is based on the loan-to-deposit ratio. Based on my estimates, your loan-to-deposit ratio stands at 52.3%, while the CBA recently set the minimum target for banks at 60%. And pursuing that deal, NPL ratio is already at 7.3%, which is above the 5% ratio. How are you going to respond to this development in protecting your asset quality?

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Joseph Mbulu, Union Bank of Nigeria Plc - CFO [17]

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Sorry, I want to clarify, did you say in your own computation, loan-to-deposit ratio is 62% or 52%?

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Unidentified Analyst, [18]

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52.3%.

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Joseph Mbulu, Union Bank of Nigeria Plc - CFO [19]

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Truly, I don't know how you arrived at that. Our numbers are transparent on the slide. And as far as I know and we know, it is 63%.

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Unidentified Analyst, [20]

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Okay.

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Joseph Mbulu, Union Bank of Nigeria Plc - CFO [21]

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Yes. So in terms of NPL ratio, the 5% is -- yes, CBN is at 5%, but we are working our numbers down, and we'll see if we can confirm double digit to single digit, and we have a guidance. And I think work with our guidance, and we should be fine.

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Operator [22]

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(Operator Instructions) Okay. There are currently no further questions in the queue at this stage. So I'm going to please pass the call back to you for any closing comments.

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Joseph Mbulu, Union Bank of Nigeria Plc - CFO [23]

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Well, thank you so much for calling in. We appreciate the interest in our bank. And we'll do this next time. Thank you so much.

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Operator [24]

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This now concludes the call. Thank you all very much for attending. You may now disconnect your line.