Good day, ladies and gentlemen, and welcome to the Guaranty Trust Holding Company's half year 2023 Investors and Analysts Conference Call. All participants are currently in listen-only mode, and there will be an opportunity for you to ask questions later during the conference. If you should need assistance during the conference call, please signal an operator by pressing Star and then zero. Also, note, this event is being recorded. I will now hand the conference over to Mr. Segun Agbaje. Please go ahead, sir.
Good afternoon, everybody. Welcome to the investor call for half year 2023. On the call, I've got Miriam Olusanya, who's the MD of the bank. I've got Adebanji Adeniyi as well, who's the Group CFO. In case there are things I can't answer, I'll refer to them. Our usual practice is we try to put the presentation on the website about two days before, so we will take it that that has been done and read. So we will go straight into questions and answers, and thank you once again for dialing in.
Thank you very much, sir. Ladies and gentlemen, if you do wish to ask a question, please press Star and then one on your touchtone phone or on the keypad on your screen. You will hear a confirmation tone that you have joined the queue. If you wish to withdraw your question, please press Star and then two to remove yourself from the list. Our first question is from Muyiwa Oni of SPG Securities. Please go ahead.
Good, good day, Segun and team, and thank you for, for the time to take questions, and congratulations on your, on your call. Just wanted to confirm that you can hear me?
Yes, I can. Thank you.
Okay. Yeah, thank you. So just have a few questions. First, it's a bit more macro. Want to get your sense of how you see the monetary policy environment evolving, given the changes we've seen in the central bank, and so suppose issues like CRR, the FX environment, how do you see that shaping up over the next couple of months to a year? And then, think secondly, around your asset quality outlook, how should we be reading the increased loan loss provisions you've taken? And I suppose names like WAMCO in the past you had classified as stage two. How is that affecting this decision? And then I think secondly, on your net impairment charges on other financial assets, want to get or further elaboration on the NGN 56 billion impairment charges on contingents.
Just want to understand how to read and see that, and then I think I'll pause now and maybe come back on the queue later for if there's room to ask more questions.
Okay, thank you very much, Muyiwa. Let me start from the macro, and, first of all, I think that our view is that, unlike before, we are moving towards what I would call more market-driven macros. Generally, because if you look at the rate of inflation and you look at the pressure on foreign exchange, our view is that we're in a period of tightening and that we're in a period where interest rates will continue to go up, as you've seen. We have seen one-year bills at about yields about 16%. The tightening will come in different forms. It might not be CRR, for example, there's tightening going on on your loan to deposit ratio.
So whatever we call it, though, I would say that we're going to be in a period of tight liquidity, and that there's not going to be a lot of liquidity overhang in the system going forward, as we, even as a country, need to get to interest rates that are real. I mean, when you look at it, our negative interest rates are a bit too low. The margin's too wide, when you look at what the rate of inflation is versus what interest rates are doing. In terms of FX, again, we've gone to a market-driven way of determining FX, and I think that we are still in a price discovery. We will settle.
I think, yeah, the best I can say about FX is we are in the right direction of finding a price discovery, and that hopefully, over the next two months, we will start to know where this thing will settle. And so that's kind of my view on interest rates, FX, CRR, and tightening. In terms of asset quality, we did 4.6, but the truth of the matter is, if you look at what the macros are today, we are in a tougher environment. There's been a devaluation, there's been an increase in pump price, there's been an increase in inflation. So you've got to know that at some point, this must affect the quality of your loan book, even though we're not really sure exactly by how much.
So what we have chosen to do as an organization is be proactive, and we've taken those two loans you've always - you talked about, which are stage two, which is basically WAMCO and Itaú, and we've run our ECL model again, and we've decided that irrespective of what happens, we do not believe it can deteriorate further than NGN 82 billion. And so you'll see that we opt our loan impairment by NGN 82 billion. We believe it's a nice cushion against whatever deteriorating macros might happen. In the event that they do not happen, this is available for right back to the PNL. You talked about the impairment on financial assets. Essentially, what we're looking at when we look at contingents is we look at the Eurobonds we have in Ghana and our exposure to Ghana. We've only taken 30%.
The Ghanaian government has not yet settled its Euro bonds. It's done its local bonds, and it's done its local USD. We also have one or two subsidiaries that have it. And so what we've done is take an impairment against financial assets of a total of NGN 81 billion, of which you referred to part of as contingent.
Thank you very much. The next question is from Ronak Guardia of our EFG Hermes. Please go ahead.
Good afternoon, Segun and the team. Hope you can hear me. Firstly, congratulations on the results, and taking the time for our questions today. My first one, I guess, is just a bit more of a follow-up from Rivers on the macro side. Just on the FX side, like you said, it's early days and trending in the right direction, but based on what you're seeing so far, are you seeing, you know, the market has positively changed for now? Are there any positive indicators when you look at your clients or your own book, when you're sourcing FX from the CBN, has that changed compared to what it was maybe three or four months ago?
Also on the macro side, again, there has been some suggestions that the CBN has been refunding banks CRR. Could you just highlight where GT is with regards to those refunds and how those refunds are being deployed, if indeed you are getting refunds? Third one, also, again, just to follow up from the macro side, as you indicated, interest rates are on the way up. So maybe could you just give some guidance on what you expect on your NIMS in the second half of the year and going into next year? Those are the three questions for now.
Okay. Thanks a lot, Ronak. Okay. FX, honestly, I think for me, it's positive. There's no way we could continue living at 461. Made absolutely no sense. And so at about the 700 range, sounds like that's kinda where we are. We'll have to see if the price discovery ends there. We definitely did see an increase in flows. We saw domiciliary account holders converting, and that as this settles and we go through the price discovery and arrive at some sort of stable for FX, the flows will increase. But I definitely think that the devaluation of the currency has increased the flow and has made people more receptive to bringing money into the country.
CRR refunds, I really can't tell you how much is being done as an industry, but from Guaranty Trust Bank's perspective, I wouldn't say we've had any major CRR refund. We're still at about 37% of total deposits, CRR NGN 1.1 trillion. So that's kinda where we've been. So we really haven't had extra liquidity from CRR refund perspective to throw into the market. In terms of interest rates, just like you said, I do believe interest rates are going up, and that if you look at where we were at half year, the yield on the fixed income portfolio was about 6.8. On the loan book, was about 13.5. Total asset yield was about 9.9. You had NIMS of about 7.8.
As you started to see, fixed income yields of 16, we're going to push, and we're going to try to push the yield on the fixed income portfolio and see if we can arrive at NIMS of about 9, at least before the end of this year. We will then see whether this momentum continues, and if the momentum continues, we're going to push the NIM projection for next year. But we're definitely going to push for NIMS of 9% between now and end of the year. I hope I answered your-
Thanks. No, no, that's useful. Just two more quick follow-ups. Again, when you're answering Rivers' query, you indicated, you know, the way the CBN is tightening is increasing interest rates and also controlling the loan to deposit ratio. Could you just maybe expand on that? Has there been anything new on the LDR side? And just a last question on dividend payment. Historically, as we know, you've always paid 50% as dividends. Given that the capital ratio remains pretty strong, would you be sustaining that this year as well, given the elevated profit levels?
Okay. The LDR, you know, the CBN has always had a loan-to-deposit ratio target, which they want banks to have. Obviously, we're halfway or we're below that. We're at, like, 36%. I believe LDR is, like, 70%. So one of the things that has started to happen is, you know, the policy was always that they would debit you about 50% of your shortfall. They haven't been quite as aggressive, but they've been doing enough debits, where you have loan to deposit ratio shortfalls. And so whether it's coming in the form of CRR or LDR debits, money is being withdrawn from the system, and it is tightening. In terms of dividend policy, we've always said we will do about 50%-60%. We're not going to change that. Dividend payout ratio remains 50%-60% ratio, and...
Yeah, we'll stay consistent with that. We will remain in that band of 50%-60% in the payout ratio.
Okay, understood. That's it for now. Thank you.
Thank you.
Thank you very much. The next question is from Timothy Wambu of Absa. Please, go ahead.
Good afternoon, Segun and team. Thank you very much for taking time to answer our questions. My first question is on the FX revaluation. And, you know, just to understand, you know, from my, from my, assessment, were you a bit modest in terms of the FX revaluation gain that you, that you posted? And tied to that, it looks as if your swap position doesn't change that frequently. I recall two years back, it was $613 million. I can see it's $563, same figure it was last year. Maybe you can just help me understand, what's going on there. And maybe just tied to that is that, when I look at your PBT guidance for full year, in a sense, we shouldn't expect an increase in this FX revaluation.
That's the first question. I know it's a loaded question, but that's the first question. Second question is on the guidance you've given for deposits and loan growth. Are this in constant currency, and are this with, with the base being FY 2022, or is it half year 2022? Maybe you can clarify on that. And the third question is really a follow-up to some of the earlier questions, and it's to do with this net impairment on financial assets. When I look at your Ghana, your Ghana subsidiary, I mean, they did post a strong growth in PBT of about 22%, so it appears that the incremental impairment was not-- was not that significant. So it was more of your off-balance sheet and LC's. Should you expect, an increase in this, you know, going forward at full year?
Should we expect you to impair further? And then on your cost of risk guidance. So you've indicated cost of risk of about 3.7%, but I believe annualized should be about 8%, and yet you're guiding at under 1%. Just help me understand what's going on there with. Do you expect strong recoveries, or do you maintain that, you know, going forward? Thank you.
Okay, let me do the cost of risk since I didn't have a chance to write it down, and it was the last question. Cost of risk, as you can see, it's everything we've said, because we took a loan impairment in the ECL model of another NGN 82 billion, which is precautionary, and that's why the cost of risk is up. So we don't expect the cost of risk to get to 8%. If anything, if we don't hit the kind of headwinds that we've projected, because these are just guesstimates, cost of risk will actually come down as we write back those impairments. In terms of FX, FX reval, it's about NGN 1.1 billion long position, 461- 769, and so we posted it.
What we did do, though, which is what you're seeing, is that we took an impairment on the loan book of NGN 82 billion and on financial assets of NGN 81 billion, which I will explain. It will then take me to your Ghana story. Yes, Ghana at half year, the auditors have allowed us not to take further impairments, waiting to see what happened with the Eurobonds between now and the end of the year. Because the Eurobonds are meant to be the whole negotiation around Eurobonds are meant to happen and be concluded before the end of the year. If it is not done, every auditor is going to make you take further provisions if you have Eurobonds on your books.
You must even remember that they have June 2023 Eurobonds, which have matured, which they haven't said anything about, which means if you're holding that at end of year, you're going to take 100% provision. So even though you have not seen us taking provisions at half year, the discussion with the auditors is very clear, that if this hasn't been resolved by year-end, you are going to take further provisions, and that's why we've provided against financial assets. In terms of our swap position, I really don't think there's much of a secret as to why it's stayed the same. The swaps are with the Central Bank of Nigeria. The Central Bank of Nigeria has not redeemed the swaps. We have about 200 due December of this year. We will see if it's redeemed.
The remaining 363 odd is due next year, we'll see. So the reason it's not coming down is that we have one due in December, the other two are due next year, and we'll see what will happen. In terms of our PBT guidance, which you have spoken about, I think if we take our beginning of year PBT guidance, we've exceeded it, and, yeah, we're not going to re-advise. We're just going to push the business, the core business. We don't expect any revaluation gains to come through again between now and the end of the year. If anything, it is possible you might have some reversal of the revaluation gains, but we don't think it'll be anything substantial. When we guide our loan-to-deposit growth, we guide it against, in real terms, against financial year-end 2022.
Just as you've alluded to, if I do that, even though we're seeing a 23% growth in the loan book, and we're seeing about a 37% growth in the deposit base, if you adjust for the devaluation tailwind, loan growth is about 3%, and deposit growth is about 16%. So we will still push for what we advised on a nominal basis using financial year 2022. Yeah, I think that probably answers all the questions you asked me that I was able to jot down, but if I'm missing anyone, please let me know, and I'll answer it.
Yeah. Maybe just, yeah, so just repeat my original question. You know, in terms of the revaluation of your net asset position together with the swaps, did you take a modest approach to it? Is it something that normally requires approval from the CBN with regards to how much you can revalue? Maybe just to shed some light on that. Thanks.
Of course. The financials we have we're discussing at the moment have been approved by the Central Bank. So whatever parameters you have used for your revaluation, yes, you have agreed, and you signed off with the regulator. Absolutely.
All right. Thank you.
Thank you very much. Ladies and gentlemen, a reminder, if you do wish to ask a question, you may press Star and then one on your touchtone phone or click it on the keypad on your screen. The next question is from Nabila Mohammed of Chapel Hill Denham. Please go ahead.
Good afternoon. Please confirm you can hear me.
Yes, I can.
Okay. Congratulations on your results. I just have a couple of questions. One... The first one is a follow-up question. I just want to know, what your outlook is on yield on financial assets, given the current interest rate environment, and how, what its attendant impact will be on your net interest margin, seeing that as at half year, you're already above what, management, guidance is at 7.5%. That's my first question. Then secondly, we see that you did some sensitivity analysis, based on three levels of devaluation. I just want to get a picture of what your CAR comes to on an exchange rate of, 900, as you stated on the presentation. Then thirdly, my final question for now, would be on your non-banking subsidiaries.
We see that they are still relatively small in terms of their contribution to PBT. I just want to know if there are any plans by management to upscale this contribution over the medium to long term, and also, how open are you to acquisition opportunities, especially in the pension industry, considering where your current AUM is at NGN 72.5 billion? Those are my questions for now. Thank you.
Okay. Thank you so much, Nabila. Let me start with the last one, non-banking subsidiaries. First, you must remember that the banking in Nigeria has done so well. So if I take non-banking subsidiaries, they're 1%. But if I take the absolute amount, it's close to NGN 3 billion. I always joke when I look at it, that that's as profitable as some small banks which you have. So when you take the absolute for our first year of operations, I think they're doing quite well. What we have as a target is about 3% at the moment, but, you know, we've had a great tailwind in Nigeria, which we accept. I never like to discuss acquisitions ahead of time or not ahead of time because we might not do it, and then it will look like I lied.
If we do it, then, you know, I might be spiking the acquisition price myself. So I would rather still wait and see. I think we are trending nicely. I think even though the AUM, I don't want to go too much into the pension industry, but, I think there is a difference between RSAs and AESs, and so if you look at our profitability and our ratios, I think we're okay, and we're trending nicely. So I think the non-banking subs are doing okay when you look at it against the scale of the other businesses for the first year of operations. In terms of capital adequacy, you will find that probably at about 900, our capital adequacy will still be around 18%, and what we need to be at is 16%.
But it will get even better, even though I'm not the financial controller, because it would also depend on how much capital you retain and how much you pay out. I'd answered the first question, but I'll answer it again. We're expecting, we're going to push for a NIM of about 9% between now and the end of the year. Just like I said, even if we cannot push the yield on the loan book, which is currently 13.5, we can definitely push the yield on the fixed income portfolio, which is currently 6.8. And if we go to a NIM of about 9, then we'll probably go to a yield on assets of about 12.
I think we are pretty optimistic about what will happen to the NIMs between now and end of the year and what will happen to the yield on the total asset book. I hope I answered all your questions.
Yes, for now. Thank you.
Thank you very much. The next question is from Oluwaseun Aramade of FBNQuest. Please go ahead.
Thank you. Thank you so much for taking my question. Please confirm you can hear me.
Yes, I can.
Okay, great. So the first question I have has been asked somewhat by Timothy, but just for more clarity. So it's about your loan growth guidance. You have a loan growth guidance of 10% for 2023. And looking at that, Q1, you're already doing 23%. Yes, I hear you. You said, if we back out the impact of the revaluation, the loan growth will probably come to about 3%. So if, if we include the impact of devaluation on a full year basis, what kind of loan growth numbers should we be expecting? That's one. And the second question will be on the Itiel and WAMCO, you know, exposures. I think the last as at last year, Q1 call, you may mention about the fact that that loan was being restructured. I'd appreciate some kind of update on that. Thank you.
Okay. On the second one, the good thing is your FBNQuest. You guys are doing the modeling, so we're hoping that Itiel will be done in about a month, hopefully. I think the modeling has been done, the terms have been agreed, so it's just to make sure that the banks, it's a syndication, so it tends to move a bit quickly, sorry, a bit slowly. So we're hoping that in the next month, the Itiel restructure will be done, and we'll start to run it. WAMCO is a bit trickier, because it's a lot of bilaterals. Some money has come in, some assets have been sold, but that restructure has not been concluded. But Itiel, we're hoping will be done in the next month.
In terms of loan growth between now and the end of the year, honestly, I don't want to look at what the devaluation will be, but I think that we're going to go for at least 10% after removing the devaluation impact. The reality of it is we're in very tough macro conditions. We do have headwinds, and so we are not going to be overly bullish about loan growth, and we will remain measured. And if we arrive at 10%, taking out the impact of devaluation, I think we'll be pretty happy.
All right. Thank you.
Thank you very much. The next question is from Mohammed Abubasha of EFG Hermes. Please go ahead.
Yes, thank you very much. Just making sure that you can hear me?
Yes, I can. Thank you.
Okay. Thanks again for taking the time. Just maybe bringing you back to the, to the topic of foreign exchange, I guess, you know, you said that we should, you know, continue in a phase of, price discovery, you know, in the next maybe month or two. Can you explain a bit like how, how would things be, you know, different from what we've seen in the last maybe two to three months? How, how you think, you know, this price discovery can, you know, kind of succeed in a way, and how we can see, how you'd expect volumes in terms of the, the INE Window to start picking up?
Okay. I think that honestly, the way bonds pick up, at least. There are two sides of it. There will always be demand, so that's one thing. So what you have to do is increase the supply. Part of what's going to increase the supply is once people start to believe that you've removed some of the volatility, and you're getting to a price that's not going to move more than ±3, probably ±5. So it's a bit of a chicken and an egg. People are not going to come in until they're sure that there is a certain amount of stability around the rate, and that's where we are. I mean, I think we got to about 799 and 800, and monies came in a bit more.
Then, as I said, we closed half year at about 769, so we came down again. We go up to about 770, sometimes we come down to about 740. I think once we can prove as a country that over a period of about 4-8 weeks, that you are not seeing price volatility of more than ±3, ±5, you will start to see the inflows increase. Because inflows are not going to come until we are sure, or we can show, that the price volatility is not moving in any marked way.
Thanks. And in terms of these flows, I mean, do you mean these are just domestic dollar flows starting to show up in the market, or you would expect that there will be foreign money coming in? Because I guess also part of the problem is part of this chicken or the egg problem is obviously the backlogs and, you know, until people see money going out, then it's hard to expect money to come in.
Well, I think it's a bit of both. The first money that goes into any country is diaspora money, because first, the natives of a country must show that they have confidence in the economy. So I have to say, these are my own views, not like I can't speak for the country, but for me, if I look at what happens, is that the first money that comes in is diaspora money. On the back of diaspora money, you start to see other monies coming in. So I think the first monies you're going to see coming into Nigeria will be diaspora flows. You're right, but the Central Bank acting governor has said that the forwards will be set, will be... Yeah, will be resolved. And so I'm sure that will happen in the not-too-distant future. But like I said, it's going to be a perk in order.
First money you'll see coming is diaspora flows, then we'll start to get the other type of foreign money. That's why I said 4-8 weeks, because after we settle whatever the backlog is, then that backlog, again, will open the second door. The first door is already open, and that's the one that, for now, is coming in, and we have to make sure continues to come in.
That's clear. So if I bother you just with my final question. So, I guess, you know, as you said, I guess we, we all, you know, are kind of, you know, looking for interest rates to go higher from here. Ideally, what do you think, you know, rates should go up to? And, I think also the second question here is: how do you think this is going to happen? Are we going to see more of, you know, tightness of liquidity primarily, or you would expect also the central bank to be, you know, aggressively raising policy rate as well?
Well, my experience in Nigeria is that the policy rate is not necessarily what moves it, as you've seen. Because we had policy rates in the 20s, and we had interest rates in the 2, 3, 7, 8, 9 percent, and what is moving interest rates is what you started to see, which is the cost of bills, whether you call them OMO, which happened once, or NTBs. So I think the movement in interest rates is going to be around fixed income securities, which, like I mentioned earlier on, you've already seen a yield of 16%. I think around those levels, 16%-18%, probably in that region, in terms of fixed income yields, will be high enough to do what we need to do in terms of local tightening and maybe attracting some flows into that market.
Okay. Thank you very much.
Thank you very much. Ladies and gentlemen, just a reminder, if you wish to ask a question, please press Star and then One. The next question is from Damilola Michael of Stonex. Go ahead.
Yeah. Hello? Hello.
Hello. Hello, can you hear me?
Yes.
All right. Thank you for the opportunity to ask my questions. A lot of my questions have been addressed. I will just ask the one left.
Okay.
So sometime this week, there was a report in one of the dailies, you know, where the CBN governor had mentioned that the CBN was working with banks to clear up the unmet demand, you know, the backlog of effects. You know, they estimated that to be about $2 billion-$2.5 billion. Now, I want to ask GT Bank what role are you playing? And I would imagine that your bank is also working closely with CBN, you know, to do this. Can you just explain to us how that would happen and to also confirm if the time frame of the two weeks he gave, you know, if it's feasible? That's my first question.
In the light of the crisis in Ghana, can you please tell us what your exposure to other African sovereign are, and what percentage of that, you know, constitutes your total investment security books? So let's say your Eurobond exposure to maybe Egypt or Angola or maybe other African countries, you know, that would also be useful as well. My last question is your NPL split by currency. So I see that you have about 21% of your total NPLs, you know, is in foreign currency. Can you please be specific to what sectors are those exposures, you know, skewed? Or if you can even drill down to specific names, you know, that would also be as helpful. Those are my questions for now. Thanks.
Okay, I'm going to try to answer them, but. Okay, let me start with the first one. The first one, you've asked the wrong person. You'll have to ask the acting governor what he really wants to do with backlog. It's a regulator's thing, and I'm not sure we would ever be able to give you the answer. The only thing I can answer is that, do I think it's visible to do it in two weeks? Absolutely. But what the solution will be, you know, you'll have to ask the CBN governor. Unfortunately, at half year, we really, our exposure to Eurobonds is only Ghana. We don't really have any other ones. We did disclose it in the financial year 2022 figures by country. I'm only going to take a stab at it. I think Ghana is about $50-something-odd million left.
I think Rwanda is about 6, and I think Liberia had about 3. So you're probably talking $7-$80 million, nothing significant. We really don't go around, and I think Nigeria had a little bit. So we don't do a lot of Eurobonds. So in terms of our fixed income portfolio, it's relatively material, and we only have Ghanaian Eurobonds. In terms of the FCY split, I'm not sure there's any particular sector that that I would say was predominant. I think we had one particular loan at the time, which has now been. We've written off whatever is left and, yeah. So, unfortunately, I can't. There's really nothing significant there, and if I had to drill down, I'd have to give you a whole bunch of big, long, little, little, little names.
There's not one significant exposure that accounts for it, and that's why I'm having a hard time. But I'm sure we can always send you the list if you want, or it might, I don't know, Banji, do we have a detailed breakdown in financial statements of the names that make up the NPLs?
Yes, we do. We can share with him after the call, sir.
Okay. Or if you can refer him to the page, please, that might be easier.
No, no, it's not disclosing.
Oh, it's on the financials. Okay, we'll make sure we send it to you. But like I said, if there was a name of concentration, it, it'd be easier for me to give it to you. But because there are lots of names, it's better we just give them to you. Okay?
Thank you very much. The next question is from Isaac Osaro of WSTC Financial Services. Please go ahead.
Can you hear me?
Yes, I can. Thank you.
Okay, so, I think someone already asked a question earlier, but I didn't get that clearly. As regards to the net impairment on other financial assets, I didn't get that. I didn't get your response clearly, so I would, I would love if you can please repeat.
Okay. What I said is that we have Eurobonds in Ghana, we have Eurobonds in Rwanda, and I think in Liberia. As of end of June, the Ghanaian government has not yet come up with a solution on the treatment of Eurobonds. It has done it for its local USD bonds and its local bonds. What we have been told is that between now and the end of the year, the treatment on how they will handle the impairment or the default of Eurobonds will become clearer. So what we have chosen to do at half year is create almost like a reserve against if, for whatever reason, we are taking 30% impairment on those bonds at 12/31, and in Rwanda we are taking 49%.
If the situation turns out to be worse than what we've already taken at the end of 2022, we will have this to take any other additional impairment. If it happens to be better or exactly what we have taken, then we will write it back to the PNL at the end of the year.
All right. Thank you very much. I understand now. Thank you.
Okay.
Thank you. The next question is from Ronak Guardia of EFG Hermes. Please go ahead.
Thank you. Just a couple of follow-up questions. Segun, I know you mentioned you don't like to comment on M&A, but just to maybe take it back a bit in that direction. As I mentioned before, your capital adequacy ratio is at around 24%. Seems pretty robust. At the same time, we're seeing some of your peers look a bit more tight. Many of them are doing rights issues. So is this an opportune time to maybe try and grow market share inorganically? I know that's something you've shied away from historically, but I'm wondering if that view has changed given current valuation levels. And the second point, and maybe this is just a bit—focusing a bit more on your payments subsidiary.
Again, we've seen a very strong growth in volumes over the last six or so months. Is it possible, firstly, to give a breakdown? I can see that the volumes were at around NGN 986 billion as at first half. Is it possible to get a breakdown between gateway and switching? And within that, you know, within those volumes, how much of those volumes are actually traditionally GT, GT core volumes that were going through other gateway providers, which are now migrated to your own platform? And therefore. I'm just trying to get a sense of what the growth rate on new business is, if you can clarify.
Okay, no problem. The payments business is growing 2x every month. And if I take it between payments and switching, we're probably around 20% switching, 80%... Sorry, 80% switching, 20% payment gateway. Both are growing, like I said, 2x. Most of it, where you see a lot of GT volumes, we've been switching, and the payment gateway is pretty much new business. So yeah, I think, and we would like to maintain that momentum at about 2x. We look at our business in the payment space in three ways: We look at it as the switching business, we look at it as the merchant acquiring business, and we look at what we call value-added services. And I think all three are growing. Our desire would be for the merchant acquiring business to completely cover our operating expenses.
Once we do that, then we know we really have a business on steroids. So that's kinda how we look at the business. Obviously, the three together are making lots of money today, but we would like the merchant acquiring to grow to the point where it's covering all the OpEx, and then that would not be GTB related at all. So you would have a business that's standing on its own, and it's pretty much P&L break even. In terms of M&A, I think it's a great time. I think we have the capital. I think it's a great time to think about M&A. Will we choose to do it in the banking space? Will we choose to do it in the asset management space or in the pension space? We'll have to play with one of those options, but you're absolutely correct.
It's where we got the capital, so we've got a lot of dry gunpowder, but it's where we choose to M&A. But we will consider it. I'm not really sure which of the business verticals will do it in, though.
Okay, understood. Just quickly going back to the payments business. Could you share what the blended take rate is for that business for now?
The blended what, sorry, I missed that?
The take rate, so, you know, the commission rate on the volumes that you're generating.
I think about 0. 2.
Okay. 0.2%.
Yeah.
If I take 986 times 0.2%, that's roughly the revenue-
Yeah.
- you're generating.
That's kind of what it is. Yeah, you see about 0.2.
Okay.
And then the value.
How are you?
Yeah.
Very good.
Yeah, and then the value-added service, you make a little bit more money, 'cause in the value-added service, you also sell airtime, where you have back-end commissions.
Okay.
It's not a model. All is not commission-driven. So your switching business is commission-driven, your merchant acquiring business is commission-driven, your value-added services has commissions outside of switching.
Right. Right, and I would assume that's relatively small at this stage, value added?
No, value add is quite big. Airtime and SMS, it's a decent chunk.
Right.
That's why I said we look at our business in three verticals when we look at the income. We look at value-added services, we look at switching, and then we look at merchant acquiring, which is basically payments.
Okay. And could you just talk about the competitive dynamics within that space? Obviously, you've got the traditional switches, the fintech. Some of the other banks have also acquired payment license. So how are the competitive dynamics playing out?
Okay, first, let me say that it's very difficult for me to comment on the competitive dynamics, because most of them don't publish any results. So you're operating in a bit of a vacuum because I, I really don't know what people's results are looking like. So what we are basically doing in this business for now is setting our own benchmarks and setting our own targets and making sure we're PNL positive and we're running our own model. We will probably all, both you and I, be in a better position to do parent competitor analysis if we could get the more traditional players to start to publish their results.
Okay. Understood. Thanks again for your time.
Thank you.
Thank you. The next question is from Landry Sagbo of Particles for Humanity. Please go ahead.
Good afternoon, everyone. Please confirm you can hear me.
Yes, I can.
Oh, thank you, Segun, for you know, your responses and all that. A question from your perspective, which may not be directly linked to other things that we talk about. How do you—how do we reduce this sustainably, this dependence we have on foreign currency, and mostly US dollars in our countries? And yes, we will say increase domestic production and all that. But do you think that that drive, what we had at a certain point in having a unique currency within ECOWAS or even in Africa, can help in some ways? And how do banks actually helping towards that? Thank you.
Okay. I think ultimately, every developing economy, as you started to see with the bricks, must reduce its dependence on foreign currency because it's not sustainable. One of the things you've rightly pointed out, first, we can always do import substitution. We all have to work at that. We have to make sure that a lot of the input of local industries are sourced locally. Then we have to, as a region, maybe ECOWAS or as an African region, find ways of settling our own trade in our domestic currencies without having to refer to either the dollar, the euro, or the sterling. And I, I really think that's the way forward, is that there have to be. There has to be a bit more collaboration around countries where we can offset a net of trade in our various local currencies.
I think at a very low level, one or two transactions have been done, but more of it needs to be done. And then we really have to stop paying lip service to income substitution, and we have to make sure that local input into the things we do in our various economies goes up, and we have to do this deliberately.
Thank you very much. The next question is from Brad Verbitsky of Equinox Partners. Please go ahead.
Hi. Thank you. I have three questions. The first one is, I saw in your presentation you talked about a 12-year limit on executive and non-executive directors of banks. I was wondering how that impacts you and why they would introduce that regulation in the first place? The second question is, in your OPEX breakdown, the customer service related expenses were up over 3,000%, and I was sort of wondering what that's related to. And then, the third question is related to the. There's a lot of news articles that I've seen regarding difficulties you're having with the reliability of your banking application. And I was wondering sort of if you're comfortable with where you are there today, and if not, what are you working on?
Okay, let me start with the last question. I think your comments on the IT, and I apologize at the end of last, at the end of beginning of 2023, because it was correct at the time. But now, IT, in terms of core banking application, is actually stable. I promised you in that call that we would stabilize it, and we have. However, going forward, we are changing our core banking application to Finacle. I think we've done a press conference, so there's no secret around it, and over the next 14 months, we will move. But in terms of IT stability, core banking application, we're stable. What we did is we, the last thing we did, which might have caused us a bit of problems, but, you know, it was the absolute correct thing to do, is that we've changed our mobile banking app.
We had an app that people thought was good, but truly is not relevant for today, and it's not up to date. So we've changed that mobile banking core application. In the whole transition of customer base, there was a problem with the back-end infrastructure, and I think we fixed that, so we've got about 1 million people working. We have shown the app to the people, and we're watching on the App Store. It's got stars, but it's got rates of about 4.3. So it's a really good app. We could always choose not to innovate and die because we're scared of things going wrong, or we continue to change. We believe that this app is going to give us a competitive advantage going forward in terms of another delivery channel.
So our IT is stable, core banking application is stable now, and we will be migrating to Finacle over a 14-month period. In terms of 12-year limit, honestly, it's a CBN limit, but I always have to remind people that I'm no longer a bank MD, so it doesn't apply to me. The rules that apply to me now are the holding company rules. I think CBN has seen it fit to have a maximum limit, but I'm not a bank MD, so. In terms of customer OpEx, a lot of what you're seeing in customer OpEx are the different platforms we're putting in place, the different IT spend we're doing, both here and across, our other subsidiaries. So there is a lot of IT platform spend going on, and that's what you see in customer service to enhance it.
We are going through spending some money on our IT to stabilize for the next push. Because when you look at our customer base and the absolute number of customers we have, we don't have a bricks and mortar strategy. At this point, and next year, we're going to have to do some IT spend to be ready for the next push in terms of customer acquisition and delivering, like, great experiences for customers, and that's what that increase is.
Okay, great. Thank you. Appreciate it.
Thank you.
Thank you. The next question is from Timothy Wambu of Absa. Please go ahead.
Okay.
Yeah. Great, thanks. Just, just a couple of follow-up questions. The first one is, you, you sound optimistic on the direction of treasury rates. You know, saying that probably you see them hitting 16, 17, 18%. I'm just wondering: What do you think. Do you think there's that capacity with the debt service ratio close to 90%? You know, I think obviously 2017, 2018, we did see a huge increase, you know, where we had real returns. But in the current environment, do you think there's that capacity, given the debt service ratio? Second question is on the CRR debit. In fact, I'm quite surprised that the CBN is still conducting this.
Should we be worried, given that, as you've rightly mentioned, yours is somewhere close to the, you know, mid-30s, yet I believe the last figure was about 65%-70%. Are you concerned with this? And tied to this question is: In an ideal environment where inflation is down to single digits, the naira is stable, do you think CRR refunds are an immediate possibility in such an environment? I think there's this conversation about some of those funds being tied up in the intervention funds. I just want you to maybe help me understand whether you think that is something that might happen. And then, maybe just lastly, there was this hit on your Tier-1 capital due to excess exposure to one obligor. Maybe just shed some light on that. Thank you.
Okay, let me start with the Tier-1 capital. Well, as you saw, our upstream exposure is now 33%, and you know they're dollar loans. And so it was basically ITIO and, I believe, Aeroton. So when you translate to naira as a result of the devaluation... So it wasn't like we booked the loans above one obligor, but the devaluation impact pushed them above one obligor, and so we had to provide some capital against them. But as the paydown comes and the capital goes up, that will all rectify. I think the central bank also understands that. Well, we didn't go up to breach one obligor, but when you have dollar loans and there's a massive devaluation, there's a risk of that, and I think that we, ours is even lower than most people's.
If everything you said happens, we certainly have stable exchange rates, single-digit inflation, and all those nice macros, then I'm sure there could be talk about CRR refunds, but it would have to be at that point, which means that tightening would no longer make sense. Where we are now, the macro variables are such that we still have to tighten, and for as long as we have to tighten, then CRR has to remain. So but I like the words. If we get all those macros where they are, then we would be able to release it. You talked about treasury bills. We already sold 1-year bills about 3-4 weeks ago, sold at a yield of about 16%. So we are kinda there.
Whether we will get to 18, I don't know, but we've seen 16 already, so I think that's where my optimism comes from. My optimism comes from that we have seen yields of 16% already, and for as long as we have pressure on the FX rates, I mean, one of the ways you tighten is through monetary policy, and one of the traditional ways is fixed income. So yeah, I am pretty optimistic that we should be able to see a fixed income regime of about 16% yields.
The question on the CRR debits, should you be concerned, you know, given.
Uh-
You're way below that minimum? Yeah.
Well, no, we're above the minimum. The minimum is meant to be 32, we're at 37.5, and if you add special bills, we're at 54. So if anything, we can only benefit from a refund. So if you're looking at Guaranty Trust Bank, you should have absolutely no concerns because we're at 37.5% CRR, 54% CRR, plus special bills. So-
Yeah, sorry, can I come, can I come back again?
Sure. Yeah, yeah.
Yeah, yeah, so just referring to an earlier comment you made, I think at the very beginning of the first questions that you fielded. You mentioned that your loan-to-deposit ratio is extremely low, and this gives the impression that the, you know, the infamous loans-to-funds ratio directive is still in play. That's what I was referring to. Given that you're shy of that loan-to-funds ratio minimum requirement, does that do you think you probably get docked for that? That's what I was referring to. Is it still in play?
Okay.
Or that's what you mentioned earlier.
Okay. Sorry, it's 'cause you mentioned CRR. Yeah, yeah, we've got to keep an eye on that. We've got to keep an eye on the loan-to-deposit ratio. That's why we'll try to grow the loan book, and we'll try to manage it. But yeah, definitely in the next couple of months, between now and the end of the year, we definitely need to keep an eye on our loan-to-deposit ratio and bring it into consideration in our liquidity management. Absolutely.
Thank you.
Thank you very much. The next question is from Melissa Cook of African Sunrise Partners. Please go ahead.
Thank you, and thank you, Segun, for the great call. Following on Landry Sagbo's question, Nigeria has been trying to do import substitution for a long time, but business conditions are so difficult, it's hard for companies to justify making more and more investment. Do you see the current government having the commitment and the ability to tackle some of the reasons business is so difficult for domestic companies and for potential foreign investors? You know, the infrastructure, the electricity, the high cost of doing business. 'Cause I think that would make a big difference. Thank you.
I think you're absolutely correct, and if I take what they've done in. I saw a headline, I didn't realize 100 days have gone by. I think they've shown commitment to fixing things. I think they've fixed the most immediate problems. If you tackle that, in the long term, we will have to deal with the infrastructure problems, we will have to deal with the costs of doing business. And I guess if I had to judge it on the first 100 days, my simple answer would be: I think it's a government that's capable of handling it, and I think it's a government that will think about it.
Okay. I mean, it should be. Given that we now have the worst has happened already with the currency. Hopefully, that's not a premature statement. But foreign investors now have seen the devaluation that everybody knew had to happen, so it's a good time for them to take a closer look at the market. And I just wonder, you know, looking at results from public companies in the manufacturing and other productive industries, is it going to get better enough that foreign investors will start to say: "Okay, this is a good place for me to start today?" Or do we still have a lot more work to be done?
I wouldn't say a lot more. I would say we have some work still to do for the things you said. We need infrastructure, we need ease of doing business, we need to make people feel welcome. However, if I look at the results of the manufacturing companies, the top line went up, which means that the business is there. Part of what it looks like many of them, happened to many of them, are FX losses, maybe on receivables they were carrying or payment to parent. So I really don't think that's going to be a deterrent, 'cause that doesn't happen every year. That's kind of a black swan event that has happened, because there was a massive correction in the currency.
But if I were running a manufacturing company today, what I'd be more concerned about is the top line, and at least for a few I looked at, the top line did go up, and the losses were a lot a result of the devaluation. So yes, there is still work to be done, but in a country this size, there's also plenty of business still, and the top line growth is there. So yeah, if we fix infrastructure, ease of doing business, my simple answer, we're here doing business, obviously, I'm biased. So yeah, I think this is still a great place to do business. Yeah, if we tweak one or two things.
Great. Thank you.
Thank you very much. The next question is from Curtis Slacht of Sustainable Capital. Please go ahead.
Hi there, Segun. Thank you so much for making the time. I just want to take you back to the customer service expenses. I just want to understand if that's kind of, you know, going to be more elevated levels over the coming years and then drop off, or if we're looking at a new base. And then just with regards to the impairment charges taken on the contingents, just to kind of get your outlook on how that provision will unwind going forward.
Okay. On the OpEx, I expect it's going to drop off. I think once we finish the core banking application implementation, I expect it to drop off. That's the last big piece in what we're doing. I think we've incurred most of the expenses of the app and the other things we're doing. So I think you my simple answer is, I think once we finish, CBA will drop off again. My hope and my desire is that the impairment on financial assets will go back to the P&L, and that under no circumstances will the Ghanaian Eurobond situation take us be higher than a 30% haircut. But we'll have to wait and see, because I don't know. I'm sure there are people on this call who might have them as well, and there's been no active engagement yet.
I am hoping again, that just the way the OpEx will drop off in the future after we finish the core banking application implementation, that what we have taken in terms of the contingent for the financial assets, which is predominantly what's happening with Ghanaian Eurobonds, will come back to the P&L.
Great. Thanks. Oh, as well, are we I mean, are you saying that that full, NGN 80 billion, I forget the exact number, the full, kind of, NGN 80 billion numbers, is that entirely all the Eurobonds or?
No, 50, about 50 something of it is, and then there are other things we put in the model for other financial assets as well. But all those. It's 81.
Yeah
In total, about 57 is that, and about the remaining 20-something order for other financial assets. But we will look at it. Because we also know that everywhere we're operating today, a lot of the economies and the countries we are operating are challenged. And I guess the experience we saw in Ghana has told us that even on those instruments, for example, in Ghana, we had to take a 3% provision on treasury bills, whether they were in default or not, which was something we used to argue against, but we have started to realize that you probably even on all... And if you look at the book, we're growing fixed income, especially treasury bills in every country. So we've also decided to create a reserve against those growing treasury bills in every country we're in, which we're investing in them.
Excellent. Thanks so much.
Thank you very much. The next question is from Shruti Patel of EFG Hermes. Please go ahead.
Thank you. Hi, Segun. I'm just going to assume you can hear me.
Yes.
Okay. I have a two-part question. The first part is, what are the top, the biggest three things that you personally are spending your time on at the Holdco these days? I'll ask the second one after.
Okay. Got the three biggest things, I mean, I take them as one. I take the non-banking subsidiaries and growing them, obviously, as pretty important. Capital planning is very important for us at Holdco level, in case we need to do mergers, we need to do acquisitions. And then thirdly, we have to make sure at Holdco level, that all the banking businesses are working. So my biggest thing is strategically trying to make sure that all the verticals we created are functioning properly and are working as one. Thanks. And, in the Holdco, are you spending your time on one specific area?
Thankfully, no. So no, I try to spend my time and distribute my time among all the different businesses which we've spoken about, because it is essential. The success of what we have put together. A holding company only works if you can derive the different synergies across all the different verticals. So if you concentrated on only one, we would have missed all the potential opportunities of creating a holding company structure. So we have to make sure that all the verticals work like an orchestra, and that they're all singing to the same tune, dancing to the same music. So there's no overconcentration on one. It's making sure that, like, this is the power of one working as one.
Thank you. I'll just ask one last question then, following up on that. In five years' time, which subsidiary do you think is going to be top of the pops, singing loudest?
It depends. We would have to look at in terms of absolute profitability, return on equity. You know, it would depend which. Yeah, it would really depend what we're using to determine which is top of the pops, you know. The banks have so much scale at the moment in terms of profit, but many of those businesses are fairly mature. When I say to you on payments, we can think of growing 2x every month. I wish we could say that about the banking business, but, you know, then we'd have something. So they're all going to grow differently. I think as we've always said, our desire for about 5 years is for the banking business, both inside Nigeria and outside Nigeria, to be no more than like 70%-80% of total group, in terms of profit.
Thanks a lot. Good luck.
Thank you.
Thank you very much. Ladies and gentlemen, that is unfortunately all the time we have for questions, and I would like to hand back to Segun Agbaje for some closing remarks.
Well, thank you very much, everybody who came on the call. Thanks for bearing with us patiently, and hopefully, we've given you a bit more color on what we did in the first half of the year, and hopefully, what the second half of the year will look like. Thank you for listening and dialing in.
Thank you very much, sir. Ladies and gentlemen, that then concludes today's conference, and you may now disconnect your lines.