Good day, ladies and gentlemen, and welcome to the Zenith Bank Plc H1 2023 financial results. All participants will be in listen-only mode. There will be an opportunity to ask questions later during the conference. If you should need assistance during the call, please signal an operator by pressing star and then zero. Please note that this call is being recorded. I would now like to turn the conference over to Ebenezer Onyeagwu, CEO. Please go ahead.
Good afternoon, ladies and gentlemen. It is my pleasure to welcome everyone to the analyst call, where we will be speaking to the key highlights of our performance for half year 2023. Joining me on this call are my colleagues, Dr. Temitope Fasoranti, Executive Director; Henry Oroh, Executive Director; Adobi Nwapa, Executive Director; Anthony Buranti, Executive Director; Mukhtar Adam, the Group CFO; Joshua Uwadimise, AGM in our risk group; Kayode Akindele, AGM and Head of Strategy and Planning; Nchika Umuorin of our Financial Control group; Eugene Ewubor, he is also of the Financial Control group; Michael Adegbeye, also of Financial Control group, and lastly, Folashade Keleko of the Investor Relations group. Ladies and gentlemen, we are happy to present our performance, which is coming on the back of very-very challenging macros, both at the global and at the national level.
The past six months have been characterized by a lot of hiccups, challenges in the entire macro system, but we have continued to remain a resilient, creative institution. Hence, we have been able to deliver a very sterling performance. However, it is also important to mention that in terms of our geography, our own market, a few important highlights have taken place. Since the inauguration of President Bola Ahmed Tinubu, we saw the immediate unification of the exchange rates and the abolition of the subsidy regime. These have produced a very remarkable impact in the market. Our market reacted very favorably, and we have also seen that upon the implementation of this immediate reform, the stock market rallied tremendously like never seen in the last six years. However, it is also important to know that inflation remains very high. At the last count, it printed at over 24%.
The currency issue still remains a very major challenge. It remains a supply challenge, and hopefully, we expect that reforms being inaugurated and the roadshow being embarked on by the president should begin to bring in positive results to address this. I will leave our Group CFO to throw more light with respect to the specifics of the performance. As we bring up questions, we will be able to provide the answers that give more clarity to the performance for the half year. Thank you.
Thank you very much, MD CEO, and good afternoon, ladies and gentlemen. In the half year 2023, our performance shows that gross earnings have increased by 139%. That is NGN 967 billion. The net interest income was NGN 261 billion. Our non-interest income was NGN 515 billion, which gave us a profit before tax of NGN 350 billion. That is about 170% year-on-year growth. Our profit after tax was NGN 291 billion. We have seen significant improvement in the performance. On the balance sheet side, our customer deposits have grown by 30%. That is close at NGN 11.6 trillion. The loan book has also seen 30% growth. That is NGN 5.4 trillion, with a total asset base of NGN 16 trillion and our total shareholders fund of NGN 1.8 trillion.
These are very significant growth in both our income statement and balance sheets. The growth in income statement came largely from interest income that grew because of the increasing interest rates within the environment. Although we also had increase in the interest expense, we still had a net interest margin that was positive. We also have seen significant growth in non-interest income, largely from the trading book has grown, and we have revaluation gain that also has shown some growth. When we put all these things together on the back of growing inflation, we have seen that the cost has increased. Staff cost has increased because of the challenges that we have seen cost-wise, growing inflation and other parameters. We have seen general operating costs also growing, but they were all in line within the limit of inflation. The total OpEx growth is 23%.
Inflation is about 24%. Yes, we are retaining some value despite the cost pressure. We ended up with an earnings per share of NGN 9.2 compared to NGN 3.55 last year. There has been some level of pressure on NIMs because the NIMs, the interest income, the repricing of the interest expense side moves faster than the interest income. However, quarter on quarter, the NIMs have improved. Cost of funds has also moved up because of the growing cost in the money market environment and the general inflationary pressure. We have seen cost of risk moving up from 1.4% to 8.8%, largely because of the increase in the impairment levels. Impairment charge increased from NGN 25 billion to NGN 207 billion.
That is coming largely because of significant additional impairments that we have taken to take care of the growth in the loan book that resulted from the devaluation of the naira or the conversion of the naira. The exchange rate has moved, the loan book has grown. We have made a revaluation gain of about NGN 350 billion, and we are taking significant impairment charge to take care of the dollar loan book. That is the reason why cost of risk has increased to 8.8%. This is just one-off, and it is not going to continue. You would also realize that NPL has not increased. NPL ratio is 3.9% because the additional impairment charge did not arise from asset quality deterioration.
Cost-to-income ratio has moderated downwards significantly, and we plan to keep it down below 50% into the end of the year. Other prudential ratios we are within limits. We are above the regulatory limit for most of the prudential ratios. Going forward, we expect that we will continue the growth into the end of the year and in subsequent periods. I want to end it here so we can take questions. Thank you very much.
Thank you. Ladies and gentlemen, if you would like to ask a question, you are welcome to press star and then one on your touchtone phone or on the keypad on your screen. If at any wish to withdraw the question, you may press star and then two to remove yourself from the queue. Once again, if you would like to ask a question, you may press star and then one. The first question we have is from Kato Mukuru of EFG Hermes. Please go ahead.
Hello. Can you guys hear me? Hello. Am I on?
Yes, we can hear you, Kato.
Thank you. Thank you, sir. Thank you to the entire team for organizing this call, and also thank you for the detailed presentations you have sent us, financial analysis. Particularly on that, I saw your currency risk analysis, and I saw the amount in USD that is due from other banks at the first half 2023 was NGN 1.537642 trillion . What I wanted to know, does that number include the swaps? Is it on balance sheet effectively is the question. Thank you.
Okay. CFO, you want to take that?
Okay. The amount due from other banks that you have seen represents the cash that we have, our cash and bank balances with correspondent banks and other banks that we do business with. The swap that we have with counterparties, we have moved the physical money to the counterparties. The amount you have seen as due from banks does not include the swap. When it is time, when a swap matures, that amount of dollar will come in as an inflow. We also have borrowings that was largely used to fund the swap. We have used that to settle the borrowings. What you are seeing as the cash does not include the swap. Thank you.
It is not necessarily, if I may continue with that. Thank you. It is not the cash really. It is the due from other banks. What is this? This is your loans to other banks, right?
No, not loans to other banks. We have lines with other banks. We also keep deposits with other banks. Remember, if you go to the liability side of our balance sheet, we have borrowings. When we take money from an international bank, it goes into our bank account first before we utilize it. When people deposit, our customers, they also have deposits with us, the domiciliary deposits. It's in foreign currency, so it also sits in our bank account. So those due from other banks are the corresponding asset for some of our dollar liabilities.
Understood. If I could ask a follow-on question, if that's okay? If I'm allowed.
Yes, go ahead.
Yes. So we're hearing that the CBN with regards to the forwards, that it would like to clear in the next couple of weeks. It's currently having discussions with yourselves and all the banks, the Bankers' Association, on how to do this. One of the options I've heard, and correct me if I'm wrong, please, is that they could fill the forwards actually with naira at the spot, I mean, spot rate, as opposed to returning dollars. Because I understand we're talking about $9 trillion of forwards, which maybe the CBN does not have currently. So that might be one solution. Is that something you've had discussions with the CBN regarding? If so, what is the potential impact on your financials if that was the case? Would you have to take losses on the gains that you've already booked on some of the forwards? Thank you.
Thank you, Kato. Conversations are ongoing. CBN has not come out categorically to advise banks on what options. Whatever you heard is mere speculation.
Thank you, sir. Thank you for the clarification.
Yeah.
The next question we have is from Nabila Mohammed of Chapel Hill Denham. Please go ahead.
Good afternoon, and congratulations on your results. Please confirm you can hear me.
Yes, we can hear you.
Oh, okay. Thank you. I just have a couple of questions. The first is around your core loan growth. I see that there is a roughly 30.5% growth in your gross loans. I just want to know which part of this is devoid of the effect, devaluation element. That's my first question. The second is, with regards to your net interest margin, we recognize that there was about 1.2 percentage points decrease in your net interest margin. I just want to know what the outlook is for H2, given the current interest rate environment and, the impact to have on yield on financial assets. Those are my questions for now.
Okay, thank you very much. First is to say that we guided our loan growth to be 10%. What you see us achieve is 30%. If you net off the impact of the translation effect of the exchange rate, you will end up with 10% loan growth. I think that should answer the first question. Out of the 30%, 20% is what has given rise to 20% is the impact, the translation effect of the naira. Net Interest Margin, the CFO already spoke to that. That's usually what you see is that, when we face this situation where there is rising interest rates, it's always in terms of the cost. While the implication for the cost is like effective, the transmission effect of the upward review of customers lending will take a while to be achieved.
In some cases, you have covenants where you need to give two weeks' notice. Before the two week notice, you also have to have a period of engagement. When you have MPR move, automatically, your interest rate, especially on savings, moves immediately. That explains why you have that bit of gap.
Okay. Thank you.
The next question we have is from Olumide Sole of Vetiva Capital Limited. Please go ahead.
Good afternoon, everyone. Can you hear me?
Yes, please.
Okay. My first question is, like for your year outlook, what are your earnings expectation as like for your profit after tax or profit before tax, and also for your other revenue line items, like what do you think will be the major drivers for that outlook that you would like it yourself? That's my question.
Typically, if you look at the performance of Zenith, you will realize that second half is always we have, we build up momentum. That is also explained by the fact that first half, you are contending with some heavy hitters like the AMCON and the NDIC charges that you have to assume into your P&L immediately. Second half, you don't have that coming again. So that improves the run rates. We expect that we should What will be the key driver of our business? Of course, we remain a very creative, dynamic, and relationship-focused organization, so we will continue to offer premium service. Even though our products and services are homogenous, our delivery makes us unique and a partner in the market. That will continue to be the key driver. We also monitor changes we see in the market.
As events are unfolding and evolving, new opportunities are being thrown also. We will be the first to capture such opportunities, and we've been able to demonstrate it because if you look at the key projects we have now that are like new projects, game-changing projects in the country, Zenith remained the primary bank for those projects. I don't need to mention the names. Of course, in all our major relationships, we remain the strong number one. Where we are not a strong number one, we are a very close number two. That is not going to change. We also deploy our treasury play. We are quite profound when it comes to treasury management, so we will notwithstanding the CRR regime that we sit on.
The treasury team, with their skills and talents, we think we should be able to have a decent play on the treasury side. Our subsidiaries too are also coming on strong. Zenith Bank UK is coming stronger and stronger. Ghana has recovered from the debt restructuring program, and Ghana's performance is coming on much stronger than what it was last year. Our retail banking, yes, we are revamping. We've had a lot of performance enhancement in it, and we expect that our loan rate will pick up even much faster notwithstanding the challenges we suffered in Q1, especially Q1, as a result of the naira redesign that burdened the system. I think we are confident that the performance will be stronger, and really, I think we can give the assurance on that. We don't expect that there will be a revaluation gain again.
I think we don't expect a further devaluation. The reverse gain is one also. If you net off the reverse gain and just nip off the gains, our performance for half year, we would do better than we have done first half.
Okay, thank you. I still have one more question. You mentioned Ghana, and for Ghana Eurobonds, I want to know if the bank was in a position of suffering from the very possible default for the Ghana Eurobond. Because just like every other bank, we know that some banks have holdings in the Ghana Eurobond. I want to know if you are in a position to suffer from any suffering or any other impairment charge for Ghana Eurobond.
Well, nothing has been discussed or come up with Ghana Eurobond. We are aware that coupon payment is lagging behind, and conversations are on. But we don't have any exposure on Ghana Eurobond.
Oh, thank you.
Thank you.
The next question we have is from Mr. Ronak Gadhia of EFG Hermes. Please go ahead.
Good afternoon, team. Thanks for taking the time to take my questions. My first one, I guess, is a bit more hypothetical. But generally, what we have seen in Nigeria is that the policy environment seems to be normalizing. In this environment, if we were to hypothetically assume that the CBN winds down the swap positions, could you just help us understand what are the implications of that? I'm just trying to understand, what are the accounting treatments that we would see come through on your balance sheet and P&L, assuming your swap portfolio, which you've highlighted is about $1.6 billion, is wound down? The second question is on your fee income. On a year-on-year basis, we saw a pretty significant decline of around 32%. This is despite the strong growth.
When we look at the breakdown, it was being driven by a pretty strong decline in e-banking receivables. If you could just help us understand why the e-banking income reduced significantly despite the growth in volumes. The third one, I guess related to the second topic, is e-banking receivables and payables. Once again, we have seen a pretty significant increase during the six-month period, both in receivables and payables. Could you just help us understand what was driving that and how should we be looking at it from a risk perspective given the uncertainties in the economy? Thank you.
Yeah, thank you. I think your first question is a bit too presumptuous because if CBN settles the forward, actually it has no implication for my books. Unless you are assuming something else that we do not know about. Even for the swap, if CBN decides to redeem it, of course, we do not see any implication because the resources will be deployed elsewhere. We will be creative to find other means on how to deploy those resources. For the forwards, if CBN settles this, of course, it has no immediate impact. Like I said, conversations are ongoing. We know that they are working extensively to see that the swaps are properly covered. I will leave my colleague, Ope, to take on the fees and commission.
Yeah, thank you. On the fee income, my group MD earlier said we saw the market borrowing by the naira redesign. We saw challenger banks add some mileage. Nevertheless, we still saw growth across the parameters. Accounts, if you look at the customer numbers, grew. Cards grew. What has driven our retail journey in the last three years is technology. Basically, we continue to be very creative and innovative. We have no doubt that if we stay focused on these parameters, we will surely see our fee income bounce back in respect of the electronic fees and commissions. There is a lot of innovation we have adopted in the last few months, and already we are seeing the scaling of the income in the last one or two months. By the end of the year, you will surely see that this has reversed. Thank you.
Thank you. Ladies and gentlemen, just a reminder, if you would like to ask a question, you may press star and then one, and if you can please limit yourself to two questions at a time and rejoin the queue if necessary. The next question we have is from Randolph Osei of Old Mutual Investment Group. Please go ahead.
Hi, good afternoon, everyone. Thanks for your time. I just have two questions. The first question is, if you could just refresh me on the CBN overdraft. They were going to securitize that and sell it as bonds. I have kind of lost track of that. Just want to know if you have got an update on that. The second one is on the currency swaps with the-.
Randolph, we have lost your audio. Please go make sure you are not muted. Okay, since there is no audio from that line anymore, sir, if you can just address the first question.
Okay. We said another person, so hopefully we get him back.
Okay. The next question is from Josh Arowolo of Stanbic IBTC Pension Managers. Please go ahead.
Hi, good afternoon, team, and conversation on your results. Please confirm you can hear me.
Yes, we can. Please go ahead.
Thank you. I just wanted to get a reaction to CBN circular regarding the payment of, or the circular which said revaluation gains can be used as payments for dividends. There have been mixed reactions from analysts across board. I thought it would be great to get a sense of if indeed that circular has changed management's thinking regarding dividend payments for full year 2023. That is the first question. The second question is just to understand, or to get a view from the group regarding the interest rate environment, and how do you see that evolving for the rest of the year? If you can just tie that as well into the new guidance for the year, that would be great. Thank you very much.
Okay, thank you very much. With respect to the CBN circular on payment of dividends on revaluation gains, I will say that it does not impact on us, because clearly, what the CBN circular is attempting to address has already been addressed by us. Essentially, we did the following two items, which are revaluation gain. One, we look at the level of impairment is increased. That is because we had to also make that equal provision because it is really prudent to do that. We have also in that we built up a reasonable balance for counterparty cap offer. Then it was after that, we now took what was left into P&L. If you look at the dividend income we are paying, it pretty much comes to, it is for half year, is not significant. Then we also look at our dividend history.
Our dividend history, you will see that, we usually pay dividend within a certain level. Even if we enhance the limit of dividends to be paid subsequently, there is no way we are going to be eating deep into our revaluation gain. The way we see it is, because it is not realized yet, it does not make sense to spend that proceed. So it sits in the book as a result as it were.
The next question we have is from Oluwaseun Arambada of FBNQuest. Please go ahead.
Hi. Thank you. Good afternoon, and thank you very much for the opportunity to ask questions. Please confirm you can hear me.
Yes, go ahead.
My first question is related to the CBN directive as well. I just want to get a clear sense of how the FX gains will be treated going forward. How is it going to reflect on your books? Would you be treating it as gains on, say, sell to maturity instruments, and as such, passing the CC CI? I just want to get a sense of how you are thinking about that. Secondly, would be on your guidance for the rest of 2023. I can see that yesterday you have done, I think loan growth of about 25% already. Organically, how much do you expect in terms of loan growth?
I would appreciate it if you could give organic loan growth guidance, backing out the impact of FX, and also guidance, including the impact of FX, so we can get a clear sense of what to expect. If you can do this for loan growth and also deposits. That will be all for me.
Okay, thank you very much. Let me repeat that. The revaluation gain sits in two buckets. You have the one that comes below the line under the CCCI. That speaks to the revaluation gain on your investment in, especially subsidiaries, and other foreign currency investments. But for the other one, in terms of our non-naira position, that is where it comes straight into the P&L, and we subject them to three treatments. One, we make heavy impairment out of them depending on the quantum, to build up the countercyclical buffer. These are the two, I mean, they are critical in the waterfall. The last item in the waterfall is what is left after this, is what goes to P&L. It is about using it to enhance our results and also improving the level of our provisioning for the level of provisioning.
I think that for guidance, we will continue to look at it. If you look at what we have guided, we have said loan growth 10%, that is actually organic backing out the impact of revaluation. That has been the case since the beginning of the year, and we are not moving away from there. We think that is achievable.
The next question we have is from [Emily Onyewu] of [ Bloomberg]. Please go ahead.
Yeah, thank you for the call. I want to find out, could you give us an update on your holding company status? I read from your earnings statement, where you said that you will be adding new verticals and also enter new frontiers. I want to assume that what you are actually talking about is establishing new non-banking subsidiaries and also going into new foreign countries. Could you be specific to tell us which non-banking subsidiaries you are looking at, and also which foreign markets? Thank you.
Thank you very much for that question. Very interesting. What you read is what it is. Unfortunately, it is difficult for me to be specific. Just take it that work is in progress with respect to the transition to HoldCo, and we are not relenting. Every word that you have seen in our statements, we will see them through. Yes, will we build new verticals? The answer is a big yes. Are we thinking of going into other geographies? That is also a big yes. At the right time, we will make the appropriate announcement to the market.
The next question we have is from Timothy Wambu of Absa. Please go ahead.
Thank you. Good afternoon. Thank you for taking time to answer our question. My first question is on your PBT guidance that you have given us, NGN 510 billion. I just want to understand, do you see more growth in your FX revaluations, derivatives income to push that figure? Maybe just explain why we are seeing a dip in your cost of funds. The second question is could you comment on the status of the loan-to-funds ratio directive? Is the CBN still on that trajectory? Thank you.
Okay. I will get the CFO to take the first question, then Henry will take the LDR question.
Okay. You wanted to know FX revaluation and derivative income. I think those are things that are driven by market dynamics. Your revaluation income is a function of our non-USD position that we are holding, which will not change significantly between now and year-end. What will make more evaluation gain to come through the books will be if the exchange rate moves significantly. From our estimation, we don't think we are going to have that significant jump that we have seen in H1 coming through in H2. So we think that income would stabilize as it is now. Then the derivative income. Again, we have our derivative instruments. What brings about the derivative income is a mix bag of a lot of things. The interest rate environment, the exchange rate, and the position that we are taking. We think the significant volatility has happened already in H1.
We don't expect significant volatilities again in H2. So we think those income levels would stabilize. We will just have some incrementals around these income levels, which is what we have factored in our guidance. Thank you.
With respect to the LDR requirement, you see there in the mainstream, the removal of the areas where banks are meant to comply, especially in the last few months, where the need for compliance has become extremely increased. We are not there yet. The requirement is 55%, but we are very close. The opportunities in the market are not coming as fast as that level that we're required to meet. But we are guided to meet the 55% by end of year. So the bank is poised and determined to see that we comply to that requirement by end of year as we have guided. Thank you.
Let me add that. Yes, we are determined to meet the LDR because we are not desperate. So we will not be desperate to book loans just because we want to meet the LDR. So we will continue to choose and pick. That has always been our slogan. We would rather have performing loan in the books and have our liquidity quarantined than make take provision for bad debts.
The next question we have is from Ngozi Odum of CardinalStone. Please go ahead.
Who tell you say? You tell me and hear I say. Nobody say me. Come, please people to come.
Ngozi, your line is live.
Who telling you? Just let me go to conference.
It seems that there's no response. The next question is from Isaac Osaro of WSTC Financial Services. Please go ahead.
Good afternoon, please. Can you hear me?
Yes, we can. Go ahead.
Okay. I am looking at the past records. For the past seven years, your payout ratio had an average of 44%. I was expecting something higher than that this year, considering we saw a different payout ratio in Italy. Do you think we will see something higher than that, or we see close to 50% in your dividend payout this year?
Thank you very much. If you look at what we are paying out interim, you will see that is an enhancement. We will continue to reward shareholders for their investment, but we will be guided by the CBN circular with respect to payment of dividends. We are not going to be paying dividend out of revaluation gain. The limit of what will be paid will be determined by the actual organic profit we have in the books. We will try as much as possible to keep shareholders happy.
The next question we have is from Nick Padgett of Frontaura Capital LLC. Please go ahead.
Hello, and thank you for the call. My question is on the normalization of the exchange rate. When I contrast what has happened this time with back in 2017, in 2017, while there was some starts and stops and maybe some initial missteps, after about three months, the market had normalized and was a properly functioning two-way market. This time, despite the initial enthusiasm, we are at about the three-month mark, and at least for foreign equity investors, it is not a two-way functioning market. There is still money trapped from shortly after the pandemic began, where you cannot get that money out of the country. We have got some money out, but we still have more remaining. I welcome any perspective you have on how the Central Bank might get from where we are today to an actual proper functioning two-way market, specifically for foreign equity holders. Thank you.
Thank you. Very interesting question. What you see is the circumstances of 2016, 2017 you refer to and now are completely different. First was in 2016, 2017, there was nothing like forward. CBN was not doing forward then. Neither was there an issue like non-deliverable forward. But here, rolling forward to current situation, we have forward. The important thing to note is that CBN has stopped the issuance of forwards. The idea is to clear what is left, and as soon as this is being done, I think it will take a process. Market will correct itself. We already have willing buyer, willing seller idea in the market. I think I cannot really put a timeframe to it, but we are on the path of correction, so it may take some time, but certainly the market will correct.
The next question we have is from Tasleemah Lateef of Cordros Capital. Please go ahead.
Hi, good afternoon. It is confirmed you can hear me.
Yes, we can hear you. Please go ahead.
All right. Good afternoon. Thank you for having me. My first question would be, please, if you could help with the group's net FX open position. That would be very helpful. Also, the second question is around the news that we heard yesterday in the statement of maintaining an equitable CRR maintenance process across the banks. We would like to know if Zenith Bank has been able to benefit from any CRR reforms that relates to the customer participant was made. Lastly, you mentioned that given the LDR reinforcements by the CBN, that you are not desperate to do loan growth. I am looking at the harsh macroeconomic environment. Just wanted to know, what is the plan? Are we looking at the extra CRR eating the profitability of the bank or reduction in the debt of the bank? Thank you. That will be all for now.
Okay, thank you very much. On the net FX open position, the CFO will take that. The CRR maintenance issue. Let me say that CRR is dynamic, and going by the experience we have seen, it is not as if once CBN takes CRR, it is quarantined forever. No. When we are pressed for cash or liquidity, we write to CBN with a justification.
They release us. Yes, we are not desperate to achieve LDR, but we are disciplined. We will be disciplined to achieve it. We continue to look at the opportunities there. Our economy is big, is huge. There are quite a lot of things happening. So we follow the opportunity trend, and what I can assure you is wherever there is a big opportunity for lending, if there is going to be any institution that will be first to know, I think it is going to be Zenith Bank.
We are prepared, and the good thing again is that notwithstanding the LDR implementation, we will still remain the most liquid bank in the country. Credit for that goes to the profound treasury management and exceptional skills that we have. Treasury play has always been our thought, so we are not relenting in that area. CFO, can you take on the one on the net FX open position?
Okay. Thank you very much, sir. The net FX open position, we have disclosed, if you check our half-year report, you check page 109. We have the FX open position for various currencies, the FX balance sheets. You have the naira, the dollar, GBP, euro, and other currencies in that respect. But the dollar, which is a significant one, we have a net FX open position that is more than over $1 billion. And then we have also disclosed our swap position there, and that we have a swap of about $1.6 billion. So that disclosure will give you more insight into our FX open position. The net is what gives rise to our revaluation gain. Thank you.
The next question we have is from Olumide Sole of Vetiva Capital Limited. Please go ahead.
Okay, thank you. First, I have other questions to ask, but I just want background regarding the dividend ratio. On average, you have about 40%, 44% dividend payout ratio. Are we expecting Zenith Bank to maintain that ratio first? That is the first point. Secondly, you mentioned the business is looking to overtime increase or go through an local business, looking to expand and enter new markets. So the strategy you are looking to adopt to grow business into other markets, is it product or should they expect M&A and things like that? Thank you.
Thank you, Olumide. We will pay dividend from our organic profits, which is in line with the legacy of circular. Even if the circular wasn't there, we have always maintained a tradition of being conservative when it comes to issues around unrealized gain. So I know that markets will be expecting that if we have made NGN 3 to NGN 2, they can begin to project the number, what it will be for end of year, and say, "Are we looking forward to 44%?" Well, my answer to that is that we have literally have a guidance to follow. So we will be guided by that guidance. HoldCo. Well, everything we say we will do, we will do. But we are not in a position to begin to discuss our strategy on a call. But just watch us and see us when we begin to implement.
The market will know exactly the direction and the state of play. HoldCo, we are going ahead. Thank you.
The next question we have is from Kato Mukuru of EFG Hermes. Please go ahead.
Hello. Just a follow-up question. The NGN 356 billion in FX revaluation gains that you booked for the half year, could you split that out between how much was from forwards versus swaps so we can get a better sense of how that evolves over the second half of the year? The second thing is, I noticed on your treasury bills held at fair value through the P&L, the portfolio halved from NGN 1.2 trillion to around just over NGN 600 billion. Yet you are still able to book a net trading gain of NGN 22 billion. I am trying to understand how that works given the fact that we are in a rising rate environment. I know your treasury is spectacular, but that seems because that is a big offload in your treasury book, and yet you were still able to book a gain, which is pretty impressive.
I just want to understand how. Thank you.
Okay, Kato. I will get Mukhtar Adam to answer your questions.
Okay. Kato, the first question you are asking for the revaluation gain. You are asking for a split? I did not get that bit of the question, please.
Yes. Again, how much of it relates to forwards?
One, two, three, four.
Yeah. How much relates to swaps? Just because we know if it's a swap, there's an unwind, but in the forwards, we know there is no unwind. That way we could forecast second half.
Okay. Thank you. If you check our notes on the other income, that has our trading gains there, right? Page 153, note 10. You have the trading income there that shows the income from trading treasury bills and bonds and so on. The one that you have as revaluation gain, that is the long position that sits on the balance sheet that we translate using the current rate. Within that long position, for you to arrive at the revaluation, you know that what is funding the swap is coming from the liability that we have taken. The liability also gives rise to revaluation loss because it's a liability to you.
That revaluation loss is also moved to report to where the instrument that is bringing the revaluation gain. What you have in the derivative book, that is where the swap is sitting. The liability that is holding the swap, the revaluation loss that is associated with that swap is reporting as part of the revaluation gain in the Note 10. That is the hedging half of our accounting for the revaluation gain. If you look at the notes that we have on our hedge accounting and accounting policy, I'm sure it will be clearer. But if we need more detailed discussion, we can have that. I hope that is clear. Going forward, these numbers can move significantly only if we have significant movement in the exchange rates, which we have said we do not project significant movement.
We are going to just have incremental movement, which is what we refer to as organic. If this massive movement has not happened, what would we have reported? That's what we are going to see between now and the year-end. Thank you.
The next question we have is from Ngozi Odum of CardinalStone. Please go ahead.
Hello. Can you hear me?
Yes, we can. Go ahead.
Okay. Thank you very much. Good afternoon. Thank you for having me on the call. I just wanted to talk about the fee and commission income. I do not know if this has been addressed. I just want to know, what are the strategies or what are you seeing in terms of improving that? We saw a decline in your fee and commission income. So I just wanted to know what drove that decline. I know that volumes were up, the electronic fees and transactions. But what are you seeing in terms of turning this around? Thank you.
Yes. Temitope will just take that.
I think I spoke to that earlier in respect of our naira redesign impact on the system, and we saw a lot of banks hoardings. Okay. Many banks have evolved now, expanded their capacity, and we're going to stay focused on our core objectives using innovation and creativity to drive our acquisition, to drive card adoption, to drive channel growth, agency banking optimization. We expect to see that by year-end. You will see that reversal of these numbers. Thank you.
The next question we have is from Timothy Wambu of Absa. Please go ahead.
Yeah, thanks. Just a follow-up from my end. The first one is, could you give us your view on the outlook for treasury yields? Do you see more upside? Certainly, we have seen that the real returns remain negative. I just want to get a sense of your view on that. Second question is on your NIM guidance, which is quite a jump. I know you mentioned that you expect to price some of your lending going forward. Maybe just touch on the reduction in your cost of funds. Where do you expect a reduction in your cost of funds? Thank you.
I'm not sure we got your first question, whether it's something that has to do with treasury, but I can take on the last one.
If you want.
Do you want to repeat the first question?
Yes, I can. I am asking about your views on the movement in treasury yields. What is your view? Do you think that you will see an increase in yields across the curve that results in real returns? I just want to get a sense of your view. Do you incorporate such a view in your NIM guidance?
Okay. I know we can do that. If you look at our treasury bills holding, and half year 2022 versus half year 2023, you see a 12.4% growth. It is also feeding from the fact that we have very expansive channels for getting liquidity. Of course, given our brand and all that, we are also a good destination for customer deposits. That trajectory will continue. We continue to grow our treasury bill holdings. As the CEO said, it is an area where our credit is also very scaled, and we continue to drive that portfolio for profitability moving forward. Thank you. Okay.
Further to that is to say that we expect that there will be a lot of market response and correction, and certain dysfunctional tendencies will begin to be eliminated from the market for us to see proper integrity of the market because there are so many things that you cannot put together. Inflation at where it is and risk-free instrument at where it is. It seems time to be the question. Given what we see that the government is doing, the new government is doing, we think the kind of reforms that will be implemented will lead to some market adjustments and correction, and that should help correct whatever abnormalities we see in the treasury play. I think the other question is on, is it on guidance? On the NIM. I will leave the CFO to take that.
Okay. You mentioned cost of funds. Yes, we have guided at the beginning of the period our cost of funds. Now we are going to close with 3.2%. Half year we have done 2.6%. You want to know how we intend to bring it down. We have said that our interest expense has repriced faster. We are going to reorganize our portfolio to reprice some of them and reorganize and get more cheaper funding to further reduce our cost of funds. That is a strategy that we have started pursuing after the half year, and we are beginning to see some results in that direction. The objective is to reduce interest expense to increase our net interest income so that we can boost our organic income growth, which is consistent with what we do every year.
If you look at most of the time, end of year, second half of the year, our cost normally we try to bring it down. We do better there in the second half of the year than in the first half of the year. That is why we have kept the guidance at 3.2%. Now we are doing 2.6%, but we hope to achieve that. You asked about yields. We are hoping to grow our yields. We have given guidance. We are going to push it aggressively to 8% because we are repricing the asset side of the interest. We still leave this guidance like that. Thank you.
Ladies and gentlemen, that does conclude the Q&A session. I would like to hand back over to the MD for any closing remarks.
Okay. Thank you everyone for your questions and the participation. What we can assure you is that as we move towards the end of the year, we will be unrelenting in making sure that we deliver far more superior performance. We will maintain the improved run rates, because if you look at the performance so far, net of revaluation gain, I think the run rate for this second half is already higher than what we recorded in the first half. We will continue to deploy our sense of creativity.
We will continue to drive our digital and retail marketing initiative far more aggressively. There has been a lot of performance enhancement we have built into the system. Our IT transformation program is on. It is being done on modular basis. We have cut over to the first module, and before the end of this month, we will cut over to the second module.
Hopefully by Q1, we should be cutting over to the third and final module that should give us a brand new IT architecture that is fit for purpose to drive incremental business in the digital and retail banking space. Corporate banking, our core area, we will continue to maintain our markets and even get more. We will keep our eyes on the ball, watch the reforms as they emerge, and be able to identify new opportunities. We will also continue to elevate our risk management principles, because given the way the environment is, we see that the risk environment is highly elevated, so we are not unmindful of that. We are not going to unduly expose the balance sheet to risk. We will make sure that we take calculated risk. Notwithstanding what we see the challenges, we will continue to deploy our high adversity quotient and remain very resilient.
We promise the market at end of the year, we will be able to deliver very impressive and outstanding results. We thank you very much.
Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.