Good day, ladies and gentlemen, and welcome to the Fidelity Bank first half of 2023 earnings call. All attendees will be in listen-only mode. There will be an opportunity to ask questions when prompted. If you should need assistance during the call, please signal an operator by pressing star and then zero. Please note that this event is being recorded. I would now like to hand the conference over to the CEO of Fidelity Bank, Nneka Onyeali-Ikpe. Please go ahead, ma'am.
Good day. My name is Nneka Onyeali-Ikpe. It is my great pleasure today to welcome you to the Fidelity Bank H1 2023 earnings call. On the call with me today are the following executives and principal officers of the bank: Kevin Ugwuoke, Executive Director, Chief Risk Officer; Pamela Shodipo, Executive Director, South Directorate; Kenneth Opara, Executive Director, Lagos and Southwest Directorate; Stanley Amuchie, Executive Director, Chief Operations and Information Officer; Victor Abejegah, Chief Financial Officer; Abolore Solebo, Head of Corporate Banking Business; Akintoye Babalola, the Treasurer; Adetunji Mustafa, the Divisional Head, Strategy, Innovation, and Business Transformation; and Sam Obioha, Head, Investor Relations. Our investor relations presentation was uploaded on your website yesterday. I hope you have had time to read it. My assignment this afternoon will be to speak to the facts and figures, the facts behind the figures, and to answer your questions.
On the macro, the domestic economy is facing the same headwinds, namely high inflation, low level capital, capital importation, FX scarcity, a depleted external reserve, which we've always known. Though the GDP is trending upwards, but at a reducing rate this time around. Nevertheless, our expectations are that the ongoing monetary and fiscal reforms will rejuvenate the economy. The strategic objectives of Fidelity Bank are to improve the net interest margin, to increase non-interest revenue, to reduce cost to serve and keep the costs to income ratio within acceptable levels. We also hope to optimize the balance sheet, our balance sheet, by expanding our earnings base. We also wish to continuously enhance our brand equity and our corporate social responsibility. I will now speak specifically to each of these imperatives.
Number one, we improved our net interest margin by achieving an optimal risk asset pricing, while at the same time, reducing our cost of fund and increasing our volume of low-cost liabilities. Total deposits increased from 23%... Increased by 23% from NGN 2,6 00,000,000,000 in December 2022 to NGN 3,2 00,000,000,000 in the reporting period. A breakdown of the deposit numbers showed that we increased current account deposits by NGN 587,000,000,000 , savings by NGN 125,000,000,000 , and reduced tenored funds by NGN 114 ,000,000,000. Low cost funds account for 90.3% of our total deposits, up from 83.6% in December 2022, full year. Our focus will continue to be to leverage on low-cost liabilities to drive balance sheet growth.
Plus, our cost of funds to reduce from 4.6% to 4.5% in this... From 4.5% in December 2022, to reduce to 4.6, from 4.6% to 4.5% in 2022, December. This was achieved in spite of the consistent increase in the monetary policy. The growth in interest income resulted from a higher yield environment. The yield in earnings assets increased from 12.2% in December 2022, to 12.7% in the current year. Overall, our net interest margin closed at 7.2% in the review period, compared to 6.3% in December 2022. We improved our non-interest revenue by driving fee-based income and increasing the level of our customer transactions.
Slide 8 of the IR presentation speaks to the increased volume of customer transactions across our network. The increased volume of transactions led to a rise in the activity income. Non-interest revenue, excluding gains on financial instruments, rose by 209% from NGN 18,600,000,000 in H1 of 2022 to NGN 57,400,000,000 in the reporting period. There was double-digit growth in our digital income, maintenance, account maintenance charges, trade income, and credit-related fee income. The breakdown of our non-interest revenue is shown on slide 14 of the IR presentation. We also keep our cost-to-income ratio within acceptable limits. Year-on-year, our operating expense increased by NGN 22,500,000,000 from NGN 16 ,000,000,000 in H1 of 2022 to NGN 84,600,000,000 in the reporting period. The key expense drivers were regulatory costs and staff costs.
The two lines account for 54% of the total increase in OpEx. We closed the period with a cost-to-income ratio of 48%, mainly due to the increase in our income numbers. We also optimized our balance sheet by increasing the ratio of earning to non-earning assets. Our total assets increased by NGN 1,100,000,000,000 . 67%, or NGN 730,000,000,000 of the growth in balance sheet was invested in earnings assets. Risk assets grew by 25%. However, the real was 4%, while 21% was because of valuation impact. Continuous optimization of the balance sheet is responsible for low idle assets, i.e., the cash balances, build-up of large stock of stable and low-cost deposits, and replacement of expensive purchased liabilities with low-cost deposits. Finally, I'd like to assure our esteemed stakeholders that we will continue to sustain this trajectory.
I'm happy to inform you as well that we have concluded the acquisition of Union Bank UK. The new name has now been changed to Fidelity Bank UK. As part of the strategy to increase our earnings base, we will continue to expand locally and internationally. We'll also increase our capital base by raising additional equity through a combination of rights issue and public offer very soon. We will continue to sustain our culture of increasing shareholders' value through the yearly payment of dividends on their investment with the bank. This year, we are paying an interim dividend of 25 kobo. Thank you for your support. We will take your questions. Thank you.
Thank you, ma'am. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star then one on your telephone keypad or the keypad on your screen. A confirmation tone will indicate that your line is in the question queue. You may press star two to exit question queue. Just a reminder, if you'd like to ask a question, please press star and then one. Our first question comes from Adebayo of Cornerstone.
Thank you very much for the audience. Very impressive numbers. So I have just a few questions. And one of them has already been answered. You've already given an update on the UK acquisition, which is pretty remarkable. So far, are you considering any other significant continental expansion after this? I mean, going forward, just to know where your head is at around, you know, potential, you know, continental businesses. What other countries are you pretty much looking at? Also, what is your target, you know, pan-African contribution in terms of revenue and PBT over the next three years?
Then, my third question is also on, you know, the recently published guidelines from the, CBN on capitalizing the FX gains, and the, you know, single obligor limit, impact on your, you know, capital adequacy, computation. What's to be expected, you know, from that? Certainly now that you've been expected to, you know, share those gains, what does this mean for dividend payments? Should we expect the bank to consider to uphold its, you know, its dividend payout ratio? Which, I mean, that's pretty much been answered already. Also, on CRR refunds, has the bank recorded any material refunds from CBN? What's the outlook on this, seeing that, you know, you have a significant LDR above the, regulatory, limits? And then also, what's driving the significant, movement in your oil and gas NPLs?
Yeah, does the bank have any other Ghana Eurobond exposures, and what's the outlook on that? That'd be all my questions. Thank you.
Okay. Thank you very much for those brilliant questions. On the first question, if I remember, is on the U.K. acquisition. Yes, like I said earlier on, we have completed the acquisition of Union Bank London, Union Bank U.K., and the certificate of incorporation on change of name has been issued to Fidelity Bank by the Companies House, which is an equivalent of the CAC in Nigeria. The next phase for us will be to focus on how to return Fidelity Bank U.K. to sustainable growth and long-term profitability, underpinned by effective risk management practices and strong corporate governance. Your second question was on the continental expansion. Yes, we plan to expand into select African countries in the medium to long term. Our aspiration is to do 2-5 African countries in the next 3 years.
Our approach, of course, will continue to be cautious, and we'll be value driven, and the conditions always have to be right for us to make that decision. So that's for the first set of questions. The second question, if I remember, is what our target is in terms of revenue contribution of the Pan-African contribution. For us, we want our subsidiaries to contribute 10%-15% of the group PBT. And as time goes on, we expect that it will increase over time to anywhere between 30%-50% on the long term. So it's an area of focus for us, expansion, international expansion.
Then the third question, if I remember, was that the Central Bank published guidelines, which only came out yesterday, on capitalizing FX gains and the impact on our CAR computation. My understanding from that guideline is that banks will treat FX revaluation gains as non-distributable income. The idea is for it to act as buffer against FX volatility, and as it is, it does not have any impact on our CAR computation. And then you also asked if it would affect our dividend payout, which we already announced at 25 kobo . No, it would not. It will not affect our dividend payout, neither will it affect our guidance for 25%-40%. We will pay the 25% already announced because the revaluation gains were already consideration before the Central Bank.
The adjusted FX Revaluation Gains was already taken into consideration before the central bank approved dividends. So that was already taken care of. So our 25 kobo , we will pay. Then the next question was on CRR reform. Yeah, there hasn't been any reform of CRR lately. However, we have witnessed additional charges in line with our growth in our deposit liabilities. No, we spoke to the growth in our, the significant growth in our deposits earlier on, but we have witnessed additional charges on that. However, the metrics are now clear and are being applied for every growth period accordingly. Your other question, if I remember, was on oil and gas NPL and the significant movement in our oil and gas. Two things played out here. The oil and gas NPL increased because of the Naira devaluation naturally.
But however, we have one oil and gas services assets that has deteriorated since the last review. However, we are proactively... We have proactively commenced the provisioning for it while making remediation efforts. Thank you very much.
Yeah. So, I also asked about any Ghana Eurobond exposures, right? And, just, you know, just to check this thing. Yeah. So, you mentioned already that, you know, your organic loans grew by just, you know, 4%, you know, versus the historical trend of, you know, 25%. So is this a hint of, you know, possible slowdown in credit creation? And, you know, what are the chances of better credit creation in the second half of this year?
Yeah. The Ghana, our Ghana exposure, our Ghana exposure is $6,900,000 , and we're only exposed to the Ghana Eurobond, the government bonds, not to the private bonds. And our investment is fair value daily, and any resulting impairment is recognized immediately. We have so far recognized about 50% on impairment on this, and the amount is passed to other comprehensive income. There is no formal communication on the final decision from the Ghana government about... Yeah, so the decisions are, the discussions are ongoing, I imagine. We have- There was a question on CAR, on H2-
It was on. Sorry about that, it was on loan creation.
Loan creation.
Loan creation.
Okay. Yes, we have. It is a deliberate strategy for us to grow our loans in H2 cautiously because of the challenging business environment. Our focus will be on growing fee-based income through electronic banking income, through. And of course, improving on our NIM play. Our NIM play has shown a lot of strength and growth for us. So we'll continue to play on the NIM side, which means we'll continue to drive our low-cost deposits aggressively, our savings, and we'll continue to improve our platforms to ensure that we bring in all value chain businesses to increase our low-cost deposits. Thank you.
Thank you very much.
Thanks, ma'am. The next question comes from James Ola Adisa of Chapel Hill Denham. Please go ahead.
Hello. Just wanted to be sure if you could hear me?
We can hear you, sir.
Hello.
Please go ahead.
All right, great.
Yes, we can hear you.
Thank you very much for the opportunity. Congrats on your results. I just have a couple of questions. First of all, I wanted to know if you've done any sensitivity analysis around your capital adequacy ratio, and, you know, at exchange rate levels of around 900 naira to dollar, you know, what does your CAR look like? I also wanted to know that if you, you know, if you strip out the, the impact of the revaluation or devaluation on your loans, what does your core loan growth look like? And, also, I would like to know what the company's CASA mix looks like and what you're doing to improve it. And finally, you know, what is your outlook for interest and its impact on your yield on assets? That will be all.
Let me start from the low-hanging fruit. The core loan growth percent on real growth, that 21% came from the revaluation, devaluation. So all the loan growth was 25%, 4% of it is from the real growth, and the other 21% is from the revaluation, the devaluation, sorry. Sensitivity analysis on CAR at 900% will be taken by the CRO of the bank. Kevin, please.
Yeah. Thanks a lot for that question. Yes, we have sensitized at 900. As you know, there are both upsides and downsides to devaluation. On the upside, we'll get accretion to revenues and to shareholder funds. On the downside, risk-weighted assets increase significantly. So based on the sensitization we have done, we will still be above the regulatory minimum of 15%, albeit just about that, just about around that. So, we still remain comfortable at 900. Of course, if we go beyond 900, we start having some challenges with that, but at 900 we're still good. Right now, it's at about 760, so we still have some room to get to 900, hopefully. So that's...
I hope that answers the question.
Yes, it does.
Okay. Thank you.
James, does that conclude your question?
No, it doesn't. I asked a third question around CASA mix and, you know, what the company is doing to improve it, as well as, the fact that, or just some color around what the LDR ratio is, against the CBN's guidance of 65%, you know, if you are well above it and you're comfortable with where you are.
Okay. Let me just attempt to answer that.
Yes.
The CASA mix is around 90.03% of deposit. So we've grown it from where it was as at year-end 2022, from about 86% to 90.3% now. This was done across from all our effort towards generating low-cost funds. And that's what the MD mentioned earlier, that we need to continue to play the NIM game. So that's what we've done consistently, and we'll keep doing that going forward. Okay, for the LDR. Okay, yeah, LDR, of course, the CBN regulation is 65%. We're around 69% currently, and therefore we are very, very well above that limit. So, and that area has even to tighten more than even the CLR play.
The tightening that we've seen CBN do in the market lately has been around the LDR play, and we're very, very comfortable above the limit of the Central Bank. Thank you.
Your other question was around the outlook for the yields in 2023.
Yes.
Between January and July, as you know, the MPR policy has reviewed upwards like four times, from 16.5% to 18.75%. The increase was targeted stemming the rise in the headline inflation and foreign exchange pressure on the naira. We believe that these factors that led to this exchange and inflationary pressures will change, but not as quickly as we expect. So since these factors will still be there, we believe the yields will remain at current levels. And to ensure that we are not caught out, we're strategically positioning our trade at the short end of the yield curve, so that we ensure that we optimize our returns.
That would be my view on that for the outlook for 2023, for the rest of the year. Thank you.
I thank you very much. Thank you. The next question comes from Oyodeji Dawodu of Banc Trust & Co. Please go ahead.
Good afternoon, and thank you very much for the presentation and your time. Just a few questions around asset quality. I just want to just ask about the Stage Two loans, particularly around three or four major sectors, oil and gas, upstream power, and transport. Could you just give a little bit of information on what's going on there? It seems as though there's been an increase in those sectors, particularly on the transport side of things. And if you can give an update, if possible, on the Aiteo restructuring as well. My second question would be around the higher interest rate environment or yield environment that we are, we appear to be entering. How are you positioning to mitigate potential mark-to-market losses on your investment securities? And those are my two questions, please.
Thank you.
Thank you very much. The increase in stage two loans, three quarters... Three sectors are responsible for 8% of the increase in this stage two loan. Namely, like you said, oil and gas, the power and transport. But however, the good news is that most of this increase was the impact of Naira devaluation. But I can have the CIO speak a little bit more detail into this.
Thank you very much, MD. Basically, it's the growth you've seen is a result of devaluation. The bulk of our exposures in the oil and gas upstream Stage Two is foreign currency. Likewise, we have significant foreign currency in transport, and then in the power sector, we have some foreign currency, and the rest, local currency. So the growth you've seen in the aggregate Stage Two loan book has likely been from currency devaluation. By way of outlook, we remain positive on those sectors. You asked about Aiteo, so I'll get my colleague to speak on Aiteo specifically, for us. And then on the power sector, you can see for yourself that a lot of reforms have happened there, and the output is quite positive. So those are the main Stage Two loans.
I'll just call my colleague to... Okay. I'll pass on to the MD, and then, to discuss further on Aiteo.
Thank you very much. Aiteo has always come up in our IR calls, but we're happy to announce that we have very positive news this time around. Production has started, and the restructuring has almost closed out. So I'll have the head of oil and gas speak more details into this. Thank you.
Okay. Thank you very much, MD. So we are 8 banks in the Aiteo transaction, and the restructure, as you have requested to know about, is led by the CEOs, given the size of this facility. So there's been significant progress on two fronts. One is in the restructure, and the second is the commencement of production. I'm happy to announce to you that production has commenced. We're currently at 38,000 barrels a day, gradually ramping up to 95,000 barrels that we are heated to. And this would put in the hands of the company revenues around $80,000,000 every month. So the commencement of production and the finalization of the model that will fit into the restructure are two signposts to significant progress on the Aiteo loan.
So we're expecting that within the next 45-60 days, we'll wrap up this restructure, while revenues will start to come in. So the loan will thereafter move from Stage Two to Stage One. Thank you.
Just a follow-up question.
Thank you very much.
Did you say at the end of 60 days, it could be back to Stage One?
So at the end of 60 days, we'll conclude the restructure, then we'll now begin the process of moving to Stage One.
Okay. Interesting. Do you mind providing maybe a little more detail on the amount of provisioning made on the Aiteo exposure?
Okay. So if I may, the regulator has made us take a 14% provisioning to date, so that is what we've done so far, and it's been watchlisted by the regulator. And with this significant progress that I've described, we'll work with the regulator to take it back to stage three of that provisioning. Thank you.
... Thank you. The next question comes from Oluwaseun Arambada of FBN Quest. Please go ahead.
All right. Thank you so much for the opportunity to ask questions. Please confirm if you can hear me?
We can hear you very well. Thank you.
Okay. Thank you. Okay, so my first question will be one that jumps out at me, and that's in your pricing expense. I saw that technology costs increased, I think, by over 100%. Could you just shed more light on what's happening there? I think some of the other questions I had have been answered, questions relating to Ghana exposures and all of that. But another question I would want clarity on is how are you performing in relation to the CBN's single obligor limits? I think the limit is about 20% of shareholders' funds. So I just want to know how you are performing in relation to that. I would also appreciate if you could give me the updated numbers for your net long USD position.
The next question would be around the FX revaluation gains. But I don't know if at this time there is clarity on how, you know, it's going to be treated, because many banks, they've recognized this in their PNL. Are we expecting it to be moved to OCI, or maybe should we be expecting some form of restatement? I don't know, but I would appreciate comments around that. But I think my last question on loan growth has been answered. But just one more question on that would be, since year to date, you've done about 4% growth organically, do you still maintain your 10%-15% loan growth guidance for the year? That will be all from me.
Thank you very much for those questions, and thank you for calling in. On the, OpEx one, we all know what's happening in technology. Technology expense are largely denominated in foreign currency, and with the naira devaluation, the cost ballooned. The cost went up significantly, so it's totally out of our control. Within the period, we also upgraded our trade solution and our digital banking suite. Those are big, big items in technology. So these, those account for that significant movement in that. Of course, we also know what's happening with cybersecurity. So we're forever changing and upgrading and patching. I know what it is that's going on in the cybersecurity space. So every day there's a new defense to... A new, a new, something new to help with the challenge that is so big.
So that's the reason for that increase on that particular line. Then you asked questions about... The other question was on the CBN thing. Yes, we have opportunities for all the accounts and all our customers that were affected by the devaluation that threw them above the single obligor. And if you read through the guidance that came out yesterday, we've also been asked to apply for anyone that's been affected by the devaluation. The straight answer here would be that we have all the affordability that we need for any of our customers that are above single obligor. So we don't have a problem on this particular one. Then you also asked a question about our net long position.
Our net long position today is at $163,000,000 . That's where we are. And I think there was another question on, FX revaluation gains and the, the treatment. Yes, I mean, this is very new. The regularly, the FX revaluation is treated along the IFRS guidelines. However, with the new guidelines of yesterday, we believe that, they expect us to treat it, the gain, as non-distributable income. So that is how... That's my understanding of the guidelines of yesterday, but we are waiting for further guidance. Thank you. I think I've answered all your questions. Another question on loan growth. Yes, we'll still maintain our loan growth guidance, but we think we'll stay at the lower end. Lower end of 10%, because we guided for 10%-15%.
We think that we'll be anywhere about 10% for this year. Thank you.
All right. Thank you. Thank you for those answers.
Thank you. Ladies and gentlemen, just a reminder, if you'd like to ask a question, you're welcome to press star and then one on your telephone keypad or the keypad on your screen. Our next question comes from Emele Onu of Bloomberg. Please go ahead.
Yeah. Thank you, madam, for the call. I want to ask, where is Fidelity Bank now with Central Bank in the area of settling matured forward obligations? And what is the regulation around that area now?
Yeah, I-
Did you get me? Hello, madam.
... Sorry.
Hello? Can you hear me, madam?
Emilio, we can hear you. Please remain online.
Okay. I'm asking, where is Fidelity Bank now with the Central Bank on settling matured foreign currency forward obligations, and what is the regulation around that now?
Yes, we are with the Central Bank, but we have not received any formal communication from the Central Bank on this. Nevertheless, we have no doubt that Central Bank will be able to meet its obligations.
... Okay. Okay, thank you.
The next question comes from Muyiwa Oni of SBG Securities. Please go ahead.
Good afternoon, and thank you for taking our questions, and congratulations on your results. I just have a few questions, a few a bit broad. So I think the first is maybe slightly follow-up on the last question, but more your view generally on the FX market and the outlook on that. So, where, how do you see the FX market evolving over the next couple of months? And secondly, on the rate environment as well, your views on that and how you expect that to affect your NIMs. And thirdly, a more specific question, what's the size of your special bills? So, what's your special bills exposure? Those are my questions.
So our special bills portfolio is about NGN 87,000,000,000 as at today. That's starting from the, your third question. Did you hear me? Did you hear me?
Yes, I can hear you.
I said our special bills is NGN 87,000,000,000 .
Yes. Is it 87 or 27? Sorry.
Billion. Yeah, you wanted to know our views on the FX rates as we go to the close of the year, and, yeah. Transitioning from a controlled market, to my view, transitioning from a controlled market to a more liberalized market would naturally bring some volatility in the FX currency rates, which we're seeing already. And, we can see that the market is passing through this phase already. In the spot market, the rates have reasonably stabilized, with average trade on the I&E window closing at about 750 per US dollar. The parallel market, however, has dropped significantly in the last few weeks to about 900-920 per US dollar. So obviously we're still in a seller's market, so we expect the gradual recovery of...
We expect, however, that the gradual recovery of the oil prices, the recent increase in production, and the reduction of the oil theft, as well as the increased focus on non-oil exports, will improve the FX supply as we get to the close of the year and early into 2024. So, we have also seen muted interest from foreign portfolio investors, especially with the recent increase in the treasury bill rates. So, key decisions, as well, have been made around the cumulative backlog of unmet FX liabilities. And all of this, and with the monetary and fiscal policy discipline that we have witnessed, will generate value in the months to come.
We think that we are positive that the outlook is positive and will be stable as we close the year and get into 2024. Thank you.
One, I think I just wanted to clarify the special bills size. So is it NGN 2 7,000,000,000 or NGN 87,000,000,000 ? I'm not sure if I didn't get the number correctly.
Eighty-seven. Eighty-seven.
87. Okay, thank you. Then just to follow up on your comment on the FX market, do you... Can you share some of the key decisions we made on the resolution on the accumulated FX backlog? So you talked about key decisions we made. If there's anything you can share.
Not at this moment, because we don't have a formal communication from the central bank yet. Thank you.
Okay. Thank you. And then on the interest rate environment and the implications on your NIMs, how do you expect that to affect that?
Like we said earlier on, the we have a significant improvement in our NIM, which moved six point three percent to seven point two percent. And this was achieved by optimal risk price, asset pricing, while at the same time our funding cost was kept very low by increasing the volume of our local deposits. And from ninety, from eighty-four percent to ninety percent, like we mentioned earlier on. So if we continue to work with this, we believe that we'll be able to sustain our NIM, our gains on our NIM. And like I said earlier on, we expect the yields to remain the same for the rest of the year. And our focus is, will always continue to be on the local deposits. Yeah.
Thank you.
In the yields, the yields to the end, the end of the year, because the situations have practically the same. So we will continue to play the NIM game, which is to stay on the local deposit side, and to continue to increase our savings deposits and reduce our tenant funds, to ensure that our cost of funds remains... We continue to progressively reduce our cost of funds.
Thank you.
Thank you. It appears we have no further questions in the question queue. I will now hand back for closing remarks.
Thank you very much. Thank you very much for attending this call. I want to thank all of you for attending this call. Over the years, Fidelity has built a resilient and sustainable, sustainable balance sheet through different economic cycles from our scenario planning. I can assure you that regardless of the headwinds in the domestic economy, we will deliver on the guidance we promised at the beginning of the year. I want to seize this opportunity to invite all of you to the Fidelity International Trade and Creative Connect, FITCC, which will take place on October twenty-fourth and twenty-fifth of this year at the George R. Brown Convention Center, Houston, in Texas, the USA. I want to thank you very much for calling in today. Thank you very much.
Thank you very much, ma'am. Ladies and gentlemen, that concludes today's event. Thank you for joining us, and you may now disconnect your line.