Access Holdings Plc (ACCESSCORP) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Access Bank Plc 2020 Half Year Results Presentation. [Operator Instructions] Please also note that this call is being recorded. I would now like to turn the conference over to Mr. Herbert Wigwe. Please go ahead, sir.

Thank you very much, Kris, and good afternoon, ladies and gentlemen. You're all welcome to Access Bank's Half Year 2020 Earnings Call. We have prepared a detailed presentation, which highlights all aspects of our business, and we're going to be sharing that with you right now. It's posted on our website. On the call with me today are Roosevelt Ogbonna, who's our Group Deputy Managing Director; Greg Jobome, who is our Executive Director in charge of risk management; Mr. Ade Bajomo, Executive Director in charge of IT and operations; Victor Etuokwu, who's our Executive Director in charge of Personal Banking; Chizoma Okoli, who's in charge of Business Banking; Hadiza Ambursa; Seyi Kumapayi, who's our Chief Financial Officer. As a starting point, as you are aware, government mandates, customer needs and our own day-to-day working changes and constraints due to the COVID-19 pandemic have all created some form of an outlier as far as profit and performance is concerned. I'll briefly go over the key performance highlights, after which, we will allow more than enough time for questions and answers with you. This period has been characterized by the supporting of lives and livelihoods by various stakeholders while also making sure that we optimize shareholder returns. In the period under review, the Nigerian and global economy were significantly affected by the twin shock events of the ongoing pandemic and, of course, the oil price crash that happened a bit earlier. This led to the weakening of the naira, inflation acceleration, economic slowdown, investment decline, all this culminating in a 6% thereabout GDP decline in the second quarter. We've also felt the impact of this shock in the bank as it brought us things like asset quality, profitability, pressure on our IT infrastructure, capital as well as liquidity. This now we started, the bank has continued to deliver on its mandates. In addition to the support granted by the federal government of Nigeria and the Central Bank of Nigeria to the vulnerable and key sectors of the economy, we've also put adequate measures in place to ensure that impact of the pandemic is minimized. We are primarily concerned with the safety of our customers and their businesses whilst maintaining our office locations as very safe environments and, of course, making sure that we took care of the safety of our workforce as well. To minimize service disruption during this period, we increased investment in our IT infrastructure to ensure that our alternative channels were up at all times and were safe for our customers to carry their transactions in a secure manner and also support our staff to be able to work effectively in the face of the new normal. Instead guiding our allocation and protecting our workforce, we established a split team arrangement, closed collaboration spaces also to basically prevent gathering and periodic sanitizing of workspaces, make sure to have virtual meetings and provisions for about 70% of our workforce to so that they could work remotely. Speaking more about the group performance highlights. Let me quickly state before we go on the reasons why we had to restate the half year 2019 numbers. As you're aware, the merger with the former Diamond Bank gave rise to goodwill. We have now completed the allocation of the acquired goodwill. This gave rise to some intangibles such as brand, customer relationships and core deposits intangibles. In line with IFRS 3 on business combination, we're required to amortize all of these intangibles. And so we found about NGN 2.3 billion had to be amortized and taken in the half year 2020, and this also required that we restate the comparative figures for 2019 because we had to retrospectively adjust about NGN 1.15 billion amortization relating to June 2019, in line with the requirements of the standard. The gross earnings of the bank grew by 22% year-on-year to NGN 396.8 billion in the period compared to NGN 324.4 billion in the corresponding period in 2019, comprising largely of 62% of interest income and 38% noninterest income. Interest income was down 10% year-on-year to NGN 246.7 billion, and the primary reason was as follows. First of all, there was a 31% year-on-year decline in income from investment securities to about NGN 74 billion. The corresponding period in the previous year was NGN 107.9 billion, and this was a result of a declining yield environment, which saw the yield on government securities drop sharply between quarter 4 2019 and the half year 2020. This was despite of the fact that we grew our investment securities portfolio by as much as 12%. We also witnessed the mild growth in interest income from cash and cash equivalent of about NGN 5.4 billion and a 4.4% year-on-year growth in interest on loans and advances to customers to NGN 167.3 billion, which cushioned some of the impact of the yield drop that we saw on the yield on investment securities portfolio. Our operating income gained about 31% year-on-year to NGN 265.1 billion from NGN 202.3 billion in the half year 2019, owing to a number of significant -- owing to the significant growth in our noninterest income and other operating income. And the key drivers for the operating income were as follows. First of all, there was a significant growth in net trading income to about NGN 68.6 billion compared to a loss of NGN 14.8 billion in the previous year on the back of gains on the derivative contracts on our fixed income securities due to our trading activities. The gain on the derivative instruments increased significantly as a result of the change in exchange rates during the period. However, it will have to be adjusted by an unrealized foreign exchange revaluation of trading loss of about NGN 66.2 billion, which came from the short position on the balance sheet. We also saw a 24% growth in our fees and commission income to NGN 51.8 billion, largely underlined by income from increased transaction velocity across our channels and other e-business platforms. This was despite of the cut in rates on transaction banking charges as contained in the revised guide to bank charges. We will continue to gain more traction on our income from these lines as we extend our retail offerings. So in spite of the drop by about 30% in December last year, we want to see this kind of significant growth. Lastly, we also saw 21% growth year-on-year in other operating income to NGN 29.6 billion from NGN 24 billion, largely from NGN 22.4 billion recovery from fully written off bad loans. Our interest expense, however, increased marginally by 2% year-on-year to NGN 120.5 billion. It was compared to the NGN 117.8 billion in the corresponding period of last year. And this came from the growth in our deposits and temporaries, which we're using to -- which we're continually replacing with low-cost deposits. So basically, what you've seen is a significant change in our CASA as far as the overall mix is concerned. So as a result, our net interest income declined by 19% year-on-year from 15.5% in the corresponding period. With respect to costs, our operating expenses showed a significant growth of 40% to NGN 174.3 billion compared to NGN 124.5 billion, really as a result of the inflationary environment; a 50% increase in VAT; and of course, most importantly, the increase in cost of operation required by the enlarged franchise and other regulatory costs such as our AMCON levy. The largest contributors are regulatory charges and personnel expense, jointly accounting for 46% of the total cost in the period. Other costs include IT and e-business related expenses to support our growing channel platforms and transaction volumes. However, it is important for you to recall that in 2019, which was made up of 3 months of former Diamond Bank only, then -- therefore, when we look at it on a common size basis, i.e., 6 months of Diamond and Access for 2019, the actual cost growth, if you were to common size it, i.e. half year 2019 of Access and Diamond and half year of 2020 of Access and Diamond, what you see that the actual cost growth was just about 6%, which is well below the inflation rate of 12.6%. And of course, you also take into consideration the 50% increase in VAT. And if you look at it on a quarter-on-quarter basis, our cost-savings effort is demonstrated by 700 basis points decline in costs. Speaking to the synergies realized from the merger. At the beginning of the exercise, we proposed merger synergies of NGN 153.9 billion over 3 years, comprising of NGN 99.4 billion and NGN 54.5 billion in revenue and cost synergies, respectively. Thus far, we have achieved total synergies of NGN 94.8 billion, accounting for 62% of total synergies proposed. In terms of our balance sheet, our customer deposits as of 2020 closed at NGN 4.67 trillion. [Technical Difficulty]

Ladies and gentlemen, please one moment. Ladies and gentlemen, apologies for the disruption. We will have Mr. Wigwe back on the line shortly. Please do stay on the line. Ladies and gentlemen, our apologies for the delay. Mr. Wigwe, you can please continue.

I don't know where I was lost, but I'll take it off from the mergers -- the synergies that we realized from our merger. I guess these days with technology, sometimes these things happen. But with respect to the synergies that we expected from the merger, the proposed merger synergies were about NGN 153.9 billion over 3 years, comprising of NGN 99.4 billion and NGN 54.5 billion in revenue and cost synergies, respectively. Thus far, we have achieved total synergies of NGN 94.8 billion, which basically account for about 62% of total synergies proposed. In terms of our balance sheet, our customer deposits as of June 2020 closed at NGN 4.67 trillion, which was a 10% growth from NGN 4.26 trillion in 2019. The growth was primarily driven by a 17% increase in our CASA deposits, reflecting our enhanced retail presence, basically leveraging our innovative digital platform. We have continued our low cost -- to grow our local deposits whilst using it to replace and reprice the expensive ones we have in our books. Today, we have crossed the NGN 1 trillion mark as far as savings/deposits is concerned. Our net loans and advances stood at NGN 3.3 trillion as of June '20, up 11% from NGN [ 3.0 ] trillion in December 2019. The growth witnessed was as a result of capital risk asset creation of good quality corporate names and as well as our retail segment. Our biggest sectoral exposure remains in the oil and gas services at 15.2%, followed by 5.9% to oil and gas upstream. The group's asset quality continues to remain under check as our nonperforming loan ratio remained -- stood at 4.4% in the period compared to the financial year ended 2019 where it was 5.8%. Again, the key sector responsible for this was our oil and gas services at 39%; commerce -- general commerce at 12%; and steel rolling mills of about 8.4%. We will continue to drive the NPL ratio down through a combination of write-offs, of recoveries, of declassification on our loan restructuring for customers that have demonstrated capacity. On a year-to-year basis -- year-to-date basis, we have written off a total of NGN 46 billion, having made full provisions for them. Our expected credit loss charge was up 237% to NGN 16.5 billion in the half year 2020 from NGN 4.9 billion in the half year ended 2019. We've always communicated our approach to ensuring that we keep our NPL ratio to below 5%. One of these approaches is taking adequate provisions and writing off facilities that are considered irredeemable and subsequently pursuing recoveries. This is also to ensure that we have adequate cover for challenged loans taking into consideration the unforeseen impact of the twin shock of the COVID-19 and falling oil price. Accordingly, the cost of risk stood at 0.9% in the half year ended 2020 -- June 2020. Our capital adequacy ratio was 20% on an adjusted-impact basis based on the regulatory transition arrangement. Again, our liquidity was also close at about 44.7% and both of them well in excess of direct minimum regulatory requirements. Speaking to our subsidiaries, we have continued to grow and make significant contributions -- they are continuing to grow and make significant contributions to the group. Subsidiaries' contribution to the group's performance stood at 34% year-on-year, recording total subsidiaries PBT of NGN 25.2 billion, up 20% year-on-year from the previous year. U.K. and Ghana, of course, continued to contribute about 90% of half year June 2020 subsidiaries activity with average return on equity of 6% and 14%, respectively. Speaking more to our retail business. I think our retail business has continued to grow, as seen in the various metrics. Now we started the cuts in transaction banking rates during the period by about 30% because of the revised guide to bank charges on lockdown due to COVID-19. Our various retail business channels have continued to gather momentum year-on-year. Although you saw some decline in the ATM and debit cards utilization as a result of the lockdown, the increase in transactions on our alternate channels were robust enough to compensate for the decline. Obviously, during the lockdown period, people could not use their ATMs and their debit and credit cards. And so most of it happened by way of their mobile telephones and things like that. Retail contributed 24% to the group's revenue during the period at a 51% year-on-year growth. Whilst retail transaction banking income grew by 60% to NGN 29.3 billion in the half year compared to NGN 18.3 billion in the same period of 2019. And this was clearly on the back of increased adoption of our channels in the period. Channels of e-business income grew by as much as 93% to NGN 23.8 billion from NGN 11.3 billion in 2019. Our various retail campaigns have continued to give us significant strides in terms of digital channel adoption by our customers and customer acquisition. One of those campaigns is called Access Channels Grand Prix, which has basically held -- led us to secure more than 1.6 million fresh cards that were issued during the period with over 77% of them active and more than an additional 2 million customers onboarded on our USSD with 67% of them already active. And of course, we will want to have about another 1 million new mobile app subscribers while onboarding them during the first half of 2020. On our financial inclusion of digital lending, our partnership with retail CLOSA agents have continued to grow as we continue to deploy resources to reach the underbanked and unbanked through our agency banking network, strengthening our partnership with the telcos and leveraging digital technology. In terms of transactional volume, NGN 97 billion volume of transactions were processed through 18,600 agents, which was a [ 76% ] growth over the period -- over the prior period, which is just NGN 15 billion. And of course, most of these processed through our telco partners. And of course, what we also saw through our telco partners was yet another growth of about 52% in the period compared to 2019. So we're beginning to see a lot coming through from our agency banking business, which has grown phenomenally. And of course, given the partnership which we now have with MTN and Airtel, the volumes of transactions have grown in geometric progression. Talking about digital lending, which comprises payday small loans, payday loans, small ticket personal loans, salary advances and device financing. We have seen that volume grow by over [ 105% ]. Total disbursements in the half year were as much as NGN 46 billion. And we're talking about unique loans, about NGN 30,000, NGN 50,000, which is basically, in some cases, about $100 or less, all right, compared -- I'm taking of the size of the unique loans, all right, compared to about NGN 18 billion in the corresponding period of 2019. Today, we have about 2 million digital loans, which have been booked during this period. And of course, what we've seen is that there's an increase, all right, of about 1 million unique borrowers compared to the period in 2019. And it speaks a lot to the velocity of the retail loans and the fact that today, the NPL ratio of that book is well below 10%. Our outlook and revised targets for 2020. We remain committed to driving an effective and sustainable business growth by transferring our efforts to, firstly, extract value from new and existing accounts and migrate customers to alternative channels to enhance our transaction banking income. Secondly, we will reduce operating costs through the execution of our strategic cost savings initiatives. Thirdly, we'll continue to pursue aggressive recovery while being deliberate with challenged facilities to make sure that they are performing. And finally, we'll intensify our low-cost deposit drive to further reduce our funding costs to less than 2.5% by the time we get to the end of the year, and this will lead into improved margins. In view of current realities, we have revised our initial full year 2020 guidance as follows. Our return on equity, again, is going to be seen anywhere between 20% and 25%; cost of risk, about 1.2% to 1.5%; our NPL ratio will be less than 5%; our cost-to-income ratio of 55% to 60%; net interest margin of about 6%; our cost of funds will be 2.5% or lower; our capital adequacy ratio would be greater than 20%; our loan-to-deposit ratio will be slightly greater than 65%; liquidity ratio should average about 50%. Thank you very much, ladies and gentlemen. I will now leave the lines open for questions.

[Operator Instructions] Our first question is from Tunde Abidoye of FBNQuest.

I have a couple of questions. Okay. So the first one is on your provisions coverage. So when I look at your Stage 3 loans, the coverage is a bit low at 36%. When I compare that to your peers, your peers do about 50% or so. It also appears that you've made more provisions for your Stage 2 loans because coverage for that is higher than your peers have provided for. Can you provide us some clarification on what is driving this? Then just looking at your OpEx, for H1, it's still a bit high. And when I look at it on a quarter-on-quarter basis, your OpEx was about -- up by about 20% at about NGN 80 billion plus. Should we begin to see this NGN 80 billion plus as the new normal for OpEx in terms of the run rate? Then in terms of the impact of the recent CBN's reduction of the interest rate on savings/deposit, what kind of impact do you see this having in basis points on your cost of funds? And lastly, can you just give us an update on the acquisition of Cavmont Bank Zambia? And also, can you just give us some -- what you're thinking in terms of synergies -- revenue and cost synergies? I know it's timing, but it would be good to know.

Thank you. I'll let Greg Jobome, our Chief Risk Officer, speak to the issue of recovery for Stage 3 loans vis-a-vis our peers as well as the increased provision we took with respect to Stage 2. I would allow Seyi Kumapayi address issues with respect to OpEx, the interest rates and, of course, with savings -- with respect to cost of funds on savings and, of course, a bit more about Cavmont. So Greg, I think you should start.

Thank you, Herbert. So with respect to Stage 3 coverage, I know you mentioned that you think it is on the low side. Well, actually, it's -- I don't believe it is low. When you speak about coverage, 2 things to factor in is the risk and the collaterals and mitigants that you have protecting the facility. So it's all really related to that. We've had historically very strong collateral structures. And that's why you typically will find we do very strong recoveries as well. On the back of that, between 2019 and June, we also did -- there's been an improvement even in that Stage 3 coverage from about 31.9% to about 36%. So there's significant enhancement of coverage over a 6-month period as well as the fact that we have very robust mitigants back in those facilities. The other thing to add is with respect to more provisions for Stage 2. In general, it has been a period of very volatile macro in the light of the guidance we've received from a lot of the standard centers such as globally. The forward-looking indicators also have to be reflected in terms of the outlook that you can see. So you also see a pick-up on the back of that, given the outlook, with respect to things like GDP, inflation, oil price, interest rates going into the future. Now you might find that some institutions will probably not have spent as much time on that. But we're very careful to ensure that those 4 local indicators are updated in the context of the current macro. When those change, then we can have a review again. So that's another source of the enhancement of the coverage situation.

Okay. Seyi, I think you should speak to the question around OpEx. Is NGN 80 billion a new normal? And of course, interest rates on savings, the synergies expected from Access Bank Zambia on the acquisition of Cavmont Zambia.

The cost, and then I will come down to what the projections are for going forward. I mean, you will have observed that the 40% year-on-year growth on the cost between H1 2019 and H1 2020. I think the main reason that has happened is that, and I think you alluded to it, H1 2019 was a quarter of the combined entity and in quarter of Access Bank stand-alone, while for 2020 is 2 quarters of the combined entity. I mean, if you recall, this merger happened in March 2019. And the Q1 impact of Diamond Bank was accounted for through the net assets. Now if you common size and make the adjustment, cost growth is only 6%. And just like you said, it's below inflation. In fact, this growth is largely driven by significant regulatory cost AMCON charge of about NGN 36 billion, which we took in this first half year. And I think the question around quarter-on-quarter is -- actually, it declined of about 7% quarter-on-quarter. So if you look at Q1, cost was about NGN 90 billion. It's down to NGN 83 billion in Q2. So there is no growth. And likely what you are seeing is you are seeing -- the declines, of course, we're executing quite a bit of cost transformation initiative. We also expect cost to moderate in the second half of the year, and we are projecting about NBN 65 billion because the AMCON cost of NBN 36 billion is no longer going to happen in the second half of the year. And therefore, from a cost income perspective, it will then come in line with our guidance of between 55% to 60%. So that's how we are seeing the cost. In terms of impact of -- on savings. So our savings book base is cost [ NBN 1 trillion ]. It's about NGN 1.1 trillion of [ NGN 4.67 billion ] of total deposits will run about 25%. And so the impact that we've seen is about 20% to 25% reduction in the cost of the overall cost of funding. With respect to Cavmont Bank, just like you said, it's a small bank. The synergies are not very significant. It's just about NGN 1.4 billion both cost and revenue synergy that we've identified thus far.

The Cavmont transaction, small as it may be, is capital-accretive. We're not taking any additional capital, as you know, to Zambia. And the construct of that whole deal helps us to shift our ROE closer to 20% in Zambia. There's a question that just basically came through and I just thought that I should speak to it. The question with respect to financial institutions, all of that. It basically refers to the lending by Access Bank U.K., the corresponding bank in lines which it has to different banks across the continent and across Nigeria. So you'd have seen a growth in that. I think it came from [ Randorf ].

The next question is from Adesoji Solanke of Renaissance Capital.

This is Soji from Renaissance Capital. I have a few -- well, 2 questions, basically. The first one is, if could you perhaps spend some time talking about where COVID-19 leaves your multicountry expansion strategy? Has that thinking changed or evolved in any sort of way? My second question is with respect to the Stage 2 book. I mean, at least from the numbers that I'm looking at, your Stage 2 book itself, it actually improved year-to-date. But it's still quite sizable. So what would be useful for me is if you can perhaps just talk about what the large makeup of this book is? What sort of sectors, what kind of problems are your clients facing? And also since -- between April and now, what is the overall sort of trend you are seeing with your customers when you look at their cash flows? Are you seeing any improvements? Or if you are seeing any improvement, is it still quite slow? Can you just give me some, I guess, on-the-ground feedback what you're seeing with your clients?

Thank you very much, Soji. I'll just speak to the first point, which is about where COVID-19 leaves our multicountry expansion strategy. And then, of course, Greg will speak to the issues around our Stage 2 loans, where our customers are taking it today. And then, of course, myself and Roosevelt will add to those points to give you as much comfort as you want. Soji, I think that if you followed our history, each time there's been a big change, like what we're seeing -- going through now, Access Bank has come out is always stronger and better. COVID represents an issue, but it also, in itself, provides an opportunity. Now we remain of the firm conviction that all of these things, cycles of pandemics, will come and go. And it is those institutions that understand how to close and do things this period -- during this period and can basically, in the new normal, all right, manage to protect risks that can grow and take advantage of it. So we remain relentless in terms of the comment, Africa's gateway to the world. The countries in which we want to be present, we will be present in those countries. In itself, this is -- in a very bizarre sense, has also provided some opportunities because some institutions don't even know how to manage the current situation, and it may call for increased capital in specific countries. And depending on the cost structure going into it -- into this deal with -- you can basically come out ahead of this whole thing, perhaps one day when COVID is finished or even in the new normal, and you'd have created the appropriate scale of institution in the different countries in which you want to be present for you to be able to come out profitably. So it has not affect our plans. What it has done to us is that it has made us a lot more diligent, and we are getting better and better at it in terms of working from home and working with people in other countries virtually, et cetera, et cetera, and created our own unique work, making sure that deals are closed and are closed properly. So nothing has changed. But if anything, I believe that coming out of all of this, Access Bank will be stronger, will achieve its objective, inspire the corporate strategic objective of being seen as Africa's gateway into the world. So nothing has happened. But you just find out that we have understood the concept of putting together institutions even during these difficult times. Now this is not any different from 2019. I understand that the pandemic maybe have introduced a bit more complexity, but I think we're learning how to deal with it even more. I'll let Greg speak to the issue around the Stage 2 loans again. And then Roosevelt and I will supporting in terms of how we see our customers behaving and their cash flows have follow that. Greg, please go ahead.

Okay. So with respect to the Stage 2 loans, as you've rightly observed, there's been an improvement over time. Don't forget that we were going through a merger with Diamond Bank -- S.Y. Diamond Bank from last year. And prior to that, we had already set up on a cross to basically clean up the book and work our way back towards below 5% NPL ratio. So part of that, the Diamond transaction came in just at the right time. All of the work that we did throughout 2019 is as if we're anticipating the problem in the market will really settle itself for the market because it means that all the actions of the 2, the conversions, loans from dollars to naira, the driving of paydowns, and hovering of recovery actions, all of that paid off in the current context. And that's why we've seen that improvement. So through very deliberate scenario analysis of stress tests, one-by-one careful evaluation, which meant that we knew what we had do for 2019 on a name-by-name basis and all those actions were taken on a very persistent basis. So like I said, those results were on the back of all of those very intense actions. Totally outside of anything to do with COVID because it wasn't around then. But as it turned out, it prepared us very well for a COVID environment. So that continues. In terms of the sectoral play out, the Stage 2, this is to ensure live [ generosity ] in the rest of the book. So if you look at the sectoral breakdown in the presentation, it generally comes across. Just like with most debts, every sector is represented in debt. But like I said, the real work is to keep it improving and keep -- getting us in a position where we're able to migrate some of them progressively into Stage 1 as they continue to meet the obligations that they fall into.

Roosevelt, do you want to speak about customer behavior briefly?

Certainly, Herbert. Soji, I think one of the things we clearly realized is that, I think Herbert alluded to it, this is yet another macroeconomic shock no different from 2010, no different from 2015 through to 2017. And in time these things happen, there's always an oil story behind it. And then the primary shocks that you find is with the oil and gas industry book. Clearly, there's a secondary shock which affects the rest of the economy. So we're seeing customers in manufacturing, in general trading. And oil and gas primarily also being affected here. But I think one of the things we've done is that we build credibility working with our customers, having gone through this crisis with them. So the times we listen, now when we speak about impending crisis and what they have to do. First thing we have done, just sensing where this was leading, was being quickly converting and crushing our total foreign currency exposure on the trade side as well as on the term loan side into naira. You would have seen that in the conversion of what constitutes local currency versus foreign currency in our loan book today, which has risen from what used to be maybe 50-50 at some point to almost 68%-32%. So we've taken a lot of customers onto naira exposure. Now the other customers who are still in dollars are not largely related to trade. I think our total trade book that has an exposure today is $200 million versus what used to be about $1.2 billion. On the term loan side is only customers who are generating dollars who are there. So first thing, the foreign exchange impact has been minimized across the bank's entire loan book. And I think once it's in naira, it's easier for us to manage customers through this crisis. So they are still doing business. We're working with them to ensure that segments that are under pressure like hospitality and aviation, which is not a significant portion of our loan book, we've had to give payment extensions for those sectors. For customers who are leveraged using the intervention funding, of course, CBN are giving a 1 year -- had advised that banks working with their customers give a 1-year extension of repayment. That, we've also done. But we've also built in a significant flexibility, so repayment can be accelerated. So there's still amortization that is going on for customers who are generating significant cash flows. We have not seen pressures across board. I mean, I give you an example. The cement industry has continued to grow. Customers in that sector have met all their loan obligations as they've fallen due and have not required any extension. Now the entire value chain around cement seems to have been working. Even though not as efficient as we used to know, it still happens. I mean, what you've seen in the short term is that on the trade side, what used to be a 90 -- 60- to 90-day transaction cycle has had to be extended. So we are now seeing transaction cycles going all the way to 180 days; and in some instances, 270 days to enable us to wind down those transactions. So they are still short term. They're still well within 12 months. But the conversion cycles have extended. Now working with the customers, we are finding elegant way to ensure they still run their business, still meet their low repayments without constraining their working capital in the short term. Thank you, Herbert.

Thank you.

The next question is from Ronak Gadhia of EFG Hermes.

Three or four questions. Firstly, could you talk a bit more about your U.K. subsidiary? As you mentioned, it's become quite a significant contributor to overall profits. So if you could just give -- speak a bit more about the performance of that subsidiary. Specifically, it would be useful, I think if you could give a breakdown of its -- of how it generates its income? Is it net interest income, trading income or transaction income? So that's one. The second question is on your derivatives book. Could you just give the figure of what your total exposure is to derivatives and FX swaps? And what would the bank's net open position be once we factor in the derivatives? The third question, also related to derivatives, is could you talk a bit about the sensitivity of this line item, the derivative gains, the sensitivity of that to changes in FX rates and interest rates? And my final question is on asset quality. We've seen significant recoveries during the half. So could you just talk about how -- how that was possible given that the macro environment has been pretty negative? And I would suspect that a lot of your borrowers are in even more duress than they used to be before. So recoveries would have been even more difficult. So yes, could you just talk about how that was achieved?

We didn't hear that last question properly.

The question is about loan recoveries. Just wanted to -- if you could touch on how you were able to achieve such significant recoveries given that the macro environment was quite negative. And I would imagine quite a few of your borrowers were under even more duress than before.

Okay. No problem. Okay. So Seyi, you want to speak to Access U.K. and derivatives, okay? And then, Greg, you'd like to speak to the issue around recoveries? All right. So Seyi, speak about Access U.K. and the derivatives. Yes.

Right. Thank you, Ronak. I mean if you look at the Access U.K. performance and the reason why that business was settled, there's a lot of trade going in there which Access U.K. to today provides lines to a number of Nigerian banks. We also do some asset management, but largely, a lot of the revenue come from the trade revenue. But also, in the services, a lot of Nigerian customers. Access U.K. is our largest correspondent bank and also provide correspondent banking to our subsidiaries. So this is largely the trade engine, all right, for the group. With respect to derivatives, the total exposure is about $2.4 billion that we have today. Now if you bring what is off balance sheet/on balance sheet, it would come to a net on about $250 million shot. So that's the structure of the book today. With respect to sensitivities, what you'll find is that, yes, because of the position -- the situation we have, once there is a devaluation, all right, you tend to see an effect both on the balance sheet as well as -- and that's what has happened in the cost of the year, where we've seen about NGN 103 billion on the derivative side and another NGN 66 billion on the FX devaluation. So that happens in terms of -- so we've looked at the sensitivities. And if a 5% devaluation happens, what happens to this? So that we test, and we care what that comes to.

Okay. Let me just add, Ronak. Yes, depending on the tenor of the swaps, you may find yourself getting into a lot, depending on the situation. But all of these swaps have a maximum of 1 year duration. Yes, you may find [indiscernible] into the next year. But at the end of the day, it is only worth it if you are on. So with respect to the spread, which is basically on the treasuries, we will always be up, all right? In previous years, we have lost slightly longer swaps. And so you have seen that some years, we would have made a lot of money. And then, of course, if you wind it in the subsequent years, that would have seen a lot of good years. That does not happen again right now. So all the income is present in the existing year, pretty much, and of course, the net interest and it's really, for all intents and purposes, is also what would cause for our P&L to be up in that time. But to support what Seyi has said, Access U.K. provides correspondent banking services to Access Bank and our subsidiaries, but also, all right, to other banks that deserving our credit in the different countries in which we do business, all right? So they are very strong corresponding bank, pretty much the same thing that -- and as they used to do before, before they start -- they left Africa. But they provide the same services Access Bank would do, for instance, in Ghana; the same type of service that we're doing in Kenya, et cetera, et cetera. So that is basically how it's important. But from a risk standpoint, and this is within public domain, all right, you will find our risk-weighted extremely high because most of all of those things are secured in strong balance. It could be local treasuries. It could be finance on the trade from a foreign currency funding on their respective institution out there within the U.K. as well. Greg, you want to speak to the prospects of -- to the issue around loan recoveries given at a difficult time like this?

Yes. Yes, I will. We thank you for the question. As with most instruments, I mean, what you see now is the outcome of a lot of actions that started from the last quarter of 2018. So it's usually a combination of very, very robust engagements with the customers, especially on the actual Diamond Bank side, lots of pretense, lots of intense negotiations, lots of travel wherever they have assets globally. So a lot of those actions are taking place area. And what you see now is the outcome of the hard work paying off in various forms, from sale of properties, from the conclusions of court cases and a whole lot of other typical recovery actions. Now the cost is a pipeline. So the terms that were set from 2019, you will see some of them coming through towards the end of this year and into 2021. So that's the usual likely we see between the actions taken and the results achieved. So like I said, those are very, very intense activities that happened, and the outcome of it is what we are seeing at the present time.

And I think you will see a bit more as we go. One of the things that this pandemic has brought is that the stronger players will even get stronger. In 1 or 2 cases, not necessary for me to mention out yet, we've seen a scramble for strong assets that belong particularly in sectors that are large. And what you've seen is that the larger players are using it as an opportunity to acquire all of those assets. So even in this quarter, which have not ended after the half year, we've seen a couple of things like that, that came out of the old Diamond Bank. And so it's happening, but it's coming from the large negotiations and intense pressure that started before COVID. And so you continue to see it probably as we move all right through the end of the year and until next year. Thank you very much, Ronak.

The next question is from Wale Okunrinboye of Sigma Pensions.

My first question is on your interest expense. On the slides., I can see some ways there -- rather on your CASA deposits, the biggest -- the bigger increase is because of reclassification of HIDA. Sorry, can you sort of explain what that means and how that impacted...

HIDA.

HIDA, yes, and how that impacted your CASA deposits? Then my second question is on your net interest margins. The number for the half year looks rather low, were at very low levels. What's your view on it? Is it something that's going to stick given the interest rate environment? Or how do you sort of -- or do you feel comfortable at that level? Or what are you going to do about it? Where do you sort of see it sort of evolving towards over the next few quarters? Then my third question is on your fair value gains on equity. Can you sort of -- I know the last time around, it was around MTN Holdings. Maybe -- has it changed or is it still the same thing? Or maybe just color on those fair value gains on your equity position. Then on stamp duties, I know there was -- sometime in H1, there was an e-mail sent out by Access that you were going to take on, but there was an error around stamp duties with customers. Eventually, I think Access agreed to sort of absorb that. What was the impact of that on your numbers? And then I guess the next question then is -- last question then is on -- okay. Okay. I guess that's the last. So yes, that was all.

Thank you very much, Wale. Seyi, you want to speak to these questions?

All right. Thank you, Wale. You are asking a question about interest expense. So the total impact of that reclassification was just about NGN 200 billion in terms of movement from term deposit to service accounts. So it was not -- that's in this sense of the entire balance sheet. I think I would spend a lot of time to speak to the margins. And if you look at the mark where we were at half year, 4.9%, cost of funds for June ending was about 3.7% and yield on asset about 9.5%. Clearly, I mean, we've seen what has happened to the yield in the market, yield of the signal in [indiscernible]. If you look at what we've projected -- what we've guided, we've guided to -- and that's why we revised that margin from 8% to 6%. Now essentially, the game here is focusing on our deposit mix and bringing down our cost of funding. Today, our cost of funding is down to 2.94% from about 3.7% that you saw in June. Deposit mix is getting better. It's now 66% to 34% from about 62% to 38% that we had in June, and we're looking to get to about 70-30 by year-end. Savings account today has crossed NGN 1 trillion, which is essential about in terms of -- and therefore -- so that is growing. And today, you see that the savings rate has also come down. And I think there was a question on that as well. We're also working on ensuring that -- see, on the corporate side, there's a lot of value chain retention, and within the corporate, which is building our core current account. We're also aggressively pricing down, all right, fixed deposits to bring them -- to contribute to that reduction in cost of fund. We've also focused on a number of -- I think Herbert spoke to it, around our regional campaign, Grand Prix Extra Win, essentially to stimulate local deposit growth and retention. So all of this, all right, is focused on bringing down our cost of funding. All right. The -- hello?

Yes. Go ahead.

So in terms of the equity number, equity gain. Now we do have investment which we hold in dollars and therefore -- so once there is an FX adjustment, this also impact the valuation of those equity holding. So that -- this was not MTN. It's a different company, but it's held in U.S. dollars. The impact of the stamp duty is about, I think, around about [ NGN 750 ] million now with them. Yes, we've agreed to take that cost, and we've expensed that in the half year. Thank you, Wale.

By the way, the stamp duty is not a recurrent thing. Basically, we're going back to charge customers for the stamp duties when that thing happened. The more you go into retail, given our size in retail, the more you realize that some of these things, if you don't take it right on time, it's better you don't take it. So we felt that, considering the reputation risk, it was better for us to just absorb it and make sure that in the future, those things don't happen again. But one of the things Seyi did not speak to with respect to the margin is the fact that we've seen some margin compression. I'll give you a simple example. In my opening remarks, I spoke to government mandates. Again, some of the state governments, we've had to reduce interest rates to them, not so much that they cannot meet the repayment because that is happening. But it was just the general industry agreement that was better for us to do that so that it could basically better pay salaries and be more comfortable in terms of meeting the exposure. That's what. Secondly, I mean, for high-quality corporates, that's where we have significant market share. Most of them insisted, again, coming from where interest rates are and given the issue of COVID, there was strong negotiations with respect to bringing down pricing. So all of those pressures on the asset side, all right, have made it so that, yes, we're bringing down our cost of funds very aggressively, but we think that a NIM of about 6% is a more appropriate number to basically hold on to for the rest of the year. Thank you.

Next question is from Johan de Bruijn of 337 Frontier Capital.

Thanks for the comprehensive presentation and responses to the questions. I have just one more specific question and it's regards to -- and you were talking about it earlier, the cost line. I noticed that your business expense or your business travel expense line hasn't changed at all from last year. And even if I try and reconcile the adjustment for Diamond Bank, I'm struggling to figure out how it is that your business travel expense can be so high during a period of lockdown. Can you just talk through that? I mean, on my calculation, it's about $11 million for the 6-month period, which seems like an extraordinary high amount, especially during a period where I would think business travel would be restricted.

Seyi, you want to address that?