ASA International Group PLC (ASAI) Earnings Call Transcript & Summary

Welcome to the 2020 Interim Results Investor and Analyst Call for ASA International Group plc. [Operator Instructions] For now, I would like to hand you over to the CEO of ASA International, Mr. Dirk Brouwer. Please go ahead.

Good afternoon. Very nice to speak to all of you and have a conversation about our half year results for 2020. I believe everyone will have seen the documents. And I'll just want to take you through it, what the performance has been of the company for the first half of 2020. We had operational financial performance lower than previous year, as we already expected, following the COVID-19 disruption. Ultimately, we realized a loss in the first half of $1.5 million, which compares to a net profit of $60.1 million in the first half of 2019. This was due to 2 specific changes or basically impacts of the COVID-19 on our operations. One was that the interest income, we had to basically make a provision for interest income, which has caused a modification loss due to the effective extension of the terms or the term of the clients' loan during the lockdown period and the moratorium on the loan installments granted to selective clients following the lockdowns. The way this worked is effectively that by extending the loan, in accordance to our loan agreements with our clients, we would not be compensated for the extension. As a result, we basically have to make an NPV calculation, net present value calculation, for what the impact is of that extension on the net value of the loan that, in total, about $13.3 million. Effectively, we receive all the interest, but we will receive it over a longer period of time. The reason we -- this is part of our loan agreement. We do not actually provide in our loan agreement for an extension that there will be a declining balance payment or that we would get compensated. We considered to introduce that to our clients. We actually had discussions with many of our clients in many countries, but ultimately found that it would create potential disturbance with our clients, many clients were a bit upset. If we would do that, put it in place and potentially risk actually that we would -- that we -- that our collection efficiency would deteriorate as a result and that some clients after the end -- after having paid the full loan might actually go elsewhere. So ultimately, based on all that, we decided to not proceed on that basis, which would have already required their consent and to really work as closely as possible, as we would always do with our clients, to ensure that over time, they basically would be able to pay the interest and all the installments which they owed us. We feel -- we think that's the best way to go forward from our point of view, but it does obviously mean that we have a certain cost, and that cost is incurred in the first half of the year. While we do get the interest payments in the second half, it still means that there is actually true impact. That's not the case that the $13.3 million will just be an additional income in the second half of the year because it actually means that by the extension also, many of the loans will be renewed at a later date. So the interest income for the second half, we expect to be just normal for the outstanding loans which are there in each of the countries. So it's a bit long explanation, but it's an important thing to fully understand. In addition, we made a credit loss expense provision of about $8.3 million. This is for potential credit losses, which we could envisage as a result of the long lockdowns and the -- all the associated disruption following these lockdowns in each of our operating countries. We indicated before that we saw -- that we have a potential maximum 2% to 3% loss on our whole portfolio at the time of $450 million. This is what we actually explained to investors in June this year. And we believe that this $8.3 million is actually a little lower than that. And we feel also quite comfortable that this provision will be sufficient -- at least sufficient for the remaining part of the outstanding loans during COVID-19 period in the first half. And in fact, that over time, we will -- we don't expect that provisioning will be further required as long as there's no other new long lockdowns coming forward in the next year or so. In addition, the important part is that the health impact, fortunately, of our staff and clients has remained very low. We still have no death amongst our 12,500 employees, and we are aware that about 15 clients actually died as a result of COVID, which still amongst -- with our 2.3 million clients is a fairly small percentage. The moratorium amount, which after the lockdowns we felt we had to provide to clients who were struggling, that amount peaked in the total amount of $16.9 million in June. That's covered at the time about 485,000 clients out of our total clients of 2.3 million. This amount has now come down. And in September, we basically still provided a moratorium of about $5 million to about 106 -- 136,000 clients. So that's a good sign. More and more clients are not in need of having moratoriums to give them more time to repay our loans. The PAR>30 increased to 3.6% as of June. It's not a particularly relevant number yet because obviously we provided a lot of moratoriums, which then reduced the PAR>30. Plus, many of the countries only got out of lockdown only in June. So the month of June, not many of the clients would have even been able to move into the PAR>30 breadth bucket. At the time in June, we had about $110 million of unrestricted cash and cash equivalents and also a very strong funding pipeline for future loans -- to replace existing loans or for future growth. Regional performance. We saw a decline in our OLP of about 4% in South Asia because many of the clients were able to maintain their balances in India to the moratoriums that there was very little decline actually in India that's -- that has some -- that's the reason why it's relatively little decline. But after the end of that moratorium by the end of August, we expect that there will be a decline. It will stabilize, but it might come down a little bit as clients still struggling a bit after the end of the moratorium in August. The operational and financial performance in South Asia declined quite a bit. And particularly, the Philippines has been very hard hit by a very lengthy lockdown and ongoing restrictions in the movement of people, which made -- has made it very hard for many of our clients to do their ongoing business. Many were not able to buy their goods from marketplaces and then the retailers in their own communities for -- all kinds of restrictions to travel from one community to another community. And that's why the lockdowns have expired, that still actually provides a lot of disruption. So that's one of the countries where we see at this point the biggest problems of all our 13 countries. The other countries where we see some problems are in West Africa -- in East Africa, and it's primarily Uganda which also had a very lengthy lockdowns and ongoing disruption. West Africa's performance was lower than expected, but obviously expected before COVID due to the challenging market conditions. But all in all, actually, West Africa performed very well relative to all the other regions. The East Africa declined quite a bit. As mentioned, Uganda has been struggling, and many of our clients have been struggling there because of these long lockdowns and also -- for also ongoing restrictions in the movement of people. Kenya also has had quite a lot of difficulty as a result of the -- many of the marketplaces where our clients have to trade in accordance to the rules and regulations in Kenya were closed for a long time even after the lockdowns were -- had expired in Kenya. Tanzania, on the other hand, has done extremely well. They have continued to grow. They are still growing their business. They have been not particularly hard hit by the -- any disruption caused by COVID. And so we've seen that those 3 countries have done quite well. Rwanda is quite steady, a little bit more hardship but not the same as we've seen in Uganda. September trading update. Collection efficiency continues to increase in almost all our operating countries. It's -- in many -- 8 out 9 -- 13 countries, it's in the mid to high 90s. All countries are in the 70s or high 70s or 80s. The ones which are still lagging is India. The end of September, it was 74 but has been increasing quite a lot until the end of the moratorium in August when it was at 58. So it has actually stepped up to 78 and now last week was 74. So it's still -- it's a good trend line. Clearly, it has to continue to go up, but local management is very confident that they will be able to keep this portfolio current. Pakistan is in the 90s; Sri Lanka, in the 90s; Philippines, as mentioned, struggling more at 74%. Myanmar has dropped a bit because there are some extra kind of targeted or limited kind of lockdowns in Myanmar. They had some new flare-up of infections in Myanmar last week or the last couple of weeks. And that affected the collection efficiency, which was in the 90s, has come down to 78%. But the other countries have been all doing quite well. Nigeria, Ghana, all in the high 90s; Sierra Leone, in the 90s; Kenya, a bit lower but increasing to 81%; Tanzania is in the 99%. Uganda is improving quite a lot in the last 2 months. The end of August, they were still at 63% and now they've improved to 73%. Management also, they are quite confident that ultimately, they will be able to get all our clients current there. Disbursement increased as well. We were basically at the low. But at the end of the second half, by 13th of June, we basically had about $400 million of portfolio. And that has increased now to $422 million. And in December 2019, we were at $467 million. So we dropped basically by about $67 million in the first half because of the lockdowns. And after the lockdowns, also we focused primarily initially on making sure that our collection efficiency was going to increase before we really started to disburse again. But now almost all markets are disbursing more than what we are collecting, so we are growing -- regrowing our portfolio. By the end of this year, we hope that we will get nearer to the $467 million, which was at December '19. We don't expect to reach that, but it's still very possible that we may make about 450 -- $445 million, $450 million or something along those lines. The fourth quarter is normally one of the best quarters for our business. Many clients do a lot of -- they have a lot of trading activities in the -- before Christmas. And so we have fairly high expectations that will lead to quite a bit of disbursements to clients who actually benefit from the loans. Well, we discussed the moratoriums, which we have granted. The India moratorium is -- moratorium, it's about 32% of the total, which was granted up to September, which is $46 million. That's a different moratorium. This is a moratorium with clients or the government imposed on all the microfinance institutions that the clients could take a moratorium. They do pay interest on the outstanding balance all the time. So effectively, it's not costly for our entity in India to provide a moratorium. But it obviously does build up a lot of installments which still have to be paid over a longer period of time. So that's now ended by the end of August. And as mentioned, we expect that most of that will become current. Philippines, more challenging. It's about 34% of the total. And as mentioned, they're still having -- providing moratoriums now because many clients are truly struggling with their businesses. So we give it a lot of attention at the moment. But at the same time, it's a process which will take time to get -- for all those clients to become current again. And also, if there's going to be the -- any potential write-offs, we would, at this point, anticipate that a fairly substantial portion of that might be in the Philippines. Kenya, it's about 10% and Uganda. So it's not such a large sums. But still, they also need to ensure that those will be gradually collected. PAR>30 increased, 30 September. That's not surprising with the moratoriums ending -- or reducing. The PAR>30 tends to increase because the moratorium is basically preventing the PAR>30 from appearing. So -- and we expect that the PAR>30 through the remaining part of this year will continue to increase probably to about 7.5% group -- on a group basis. When that is actually going to peak, we don't know yet. It might be end of October, it might be end of November, maybe in December. But something along those lines, we expect that it will peak and then gradually come down. The liquidity of the group remained strong throughout the crisis. I mean, as mentioned, we still have about $90 million in cash on our balance sheet, which was about -- in March, we had $90 million. We had $105 million at 30th of September. So we have no shortage of liquidity. And we also maintain a very high pipeline of loans. I mean there's quite a lot of disbursements from loans actually in the last couple of weeks. So that pipeline has come down a bit, but it's still very, very, very substantial. We've also agreed with our lenders that already in June that we anticipate some covenant breaches, particular covenant is the PAR>30 covenant, which generally needs to be below 5%. But we explained that because of the situation that it's very likely we're going to exceed that. And as mentioned, we believe it will -- might go up as much as 7.5% for the -- near the end of this year or this last final quarter of the year. We have secured waivers from almost all our lenders, either waivers, no-action letters or comfort letters. And they also extend to -- most definitely to -- for the end of the year. Some of them are for the full period when we asked for the waivers in June so that basically it will last until, say, the end of June. But we don't anticipate any problems in the current environment and also in view of the current performance of the company that we would have difficulty actually getting extensions for these waivers, if required. The write-offs from COVID, as mentioned, we expect that ultimately, it will not be more than 2% to 3% out of the portfolio, which was at the time $450 million. So that's between $9 million and $13.5 million. So we've made a quite substantial provision already. And we do believe that, that might be actually sufficient. So that would then be obviously better than what we initially anticipated that it might -- what it might look like. We are very positive about the operational and financial performance for the second half of the year. I mean, clearly, we've taken quite a lot of costs. And all the issues, which were caused by COVID, we believe many of them have been now accounted for in the first half of the year. We do see real good demand for loans. And we also have seen for any new loans we have been disbursed -- we have been disbursing, that performance has been very good. So the general view, if you talk to any of our country heads, with the exception possibly of Ghana -- Philippines and Uganda that -- I believe that this quarter will be quite a good quarter for regrowing and -- our business and -- while maintaining or improving our portfolio quality. So that's also -- yes, as mentioned, the -- yes. So I think I would say that yes, basically, based on all that, we believe that the net profits for the year will be about $10 million, which effectively means it's about $12 million for the second half of 2020, so -- because of the $1.5 million loss in the first half. And then we hope that on basis of what we see that there's a gradual normalization of the business environment for our clients and, therefore, also for the environment for us that actually the profitability may continue to improve in 2021 more like at levels which we are normally used to in terms of the type of provisions we have to make, the earnings we can generate and the growth we may be able to achieve. Dividends. We have decided based on the performance of the first half of the year and also the ongoing uncertainty, which still exists, that we would not going to declare our dividend for the year 2019, but that we do plan to reinstate the standard dividend policy of 30% of group earnings for the year 2020. Yes. The next slide, I will not really go through it. I think it speaks a bit for itself and that if there are any potential questions when we have kind of questions, we can go through it. I mean we discussed most of the items and the issues of the points there. The next slide on Page #6, the operational and financial performance. Well, we've seen basically the growth in branches has continued in 2020 because of the -- many have been opened already. So we have a very strong branch network now. So once we can start growing our business again, we can leverage that because, clearly, we're paying for those branches. We have them stopped, but not many of those branches, which have been recently opened, we have not been able to get them at full capacity, clearly, when the COVID hit. So there's a real leverage effect once we can start growing the business that we have those branches in place that will help and assist in growing faster. OLP gone down, as you can see. As mentioned, OLP per client also has gone down. And also the ROAs have come down. This is a year-on-year ROA. So it's about -- in the year 2020, it's -- the first half versus the second half of 2019, ROA is still about 3% with an ROE -- average ROE of 15.3%. And all the asset quality margin developments, yes, obviously, the -- you see the big gross yield reduction. As a result of the modification loss we made in the first half, that has obviously a major impact. That's basically was the cause of -- that we are not generating a net profit in the first half of the year. Growth strategy is the same as before, not much different. We continue to focus on building a sustainable growth of -- maintaining a sustainable growth of our portfolio. We try to ensure that we get as many deposit-taking licenses over time. We believe that's very important because it will reduce our cost of funding, but it also will enable us to provide broader services over a period of time to clients as well. So that's -- and that's -- we're continuing. We are succeeding with that in many ways. We have -- we're very close to securing the bank license now in Pakistan, and that's an important business for us, as you know. So once that has been secured, that will be very good. And we also have been able to now to merge the NGO activities in Nigeria into the MFB, the nationwide Microfinance Bank we already have in Nigeria. So that's all under one umbrella, which is also very good. And then we're also in the process of upgrading our license at the moment in Tanzania towards deposit-taking license. That will take 2 steps, but that might still all happen in the next 12 months as far as our local management believes. We continue to focus on trying to build our proprietary of -- to build our digital platform for doing transactions. We have our real-time banking platform, our core banking system rolled out now in all countries. It's being -- we're working with it on a day-to-day basis. This is -- allows us ultimately to link in our banking system to any payment platform in any of the countries. It's set up in such a way that it's quite easy to get it linked. So ultimately, our clients should be able to start transacting with us via those payment platforms with us as their banker effectively. And then that would make -- the service would improve for our clients and also the cost for our clients doing transactions with us will be -- will over time become lower, we believe. And it will also provide us with potentially a high level of efficiency in terms of the reach we may have for our branches and our clients if we can do more and more transactions, but also our meetings with clients online. Funding profile has not much changed from previous -- from the year-end 2019. As you can see, it's actually been all pretty stable. So I really don't think we should go through that. Portfolio is still very balanced and, as you can see, with South Asia being obviously the biggest, particularly because of the size of the -- our Indian business. But all the entities are producing generally on a positive basis for our -- for the group. As you know, the ROAs in Africa are higher, West Africa, most definitely substantially higher than any of the other regions. Although East Africa, the economics are the same just because East Africa is still smaller and in this particular case is obviously also affected by COVID. But ultimately, East Africa is -- has the same ability to generate the type of ROAs we can actually achieve in West Africa at this point in time, subject to obviously further regulation, which may come in place at some point. Southeast Asia, very much affected by COVID, which has basically brought it down to a negative on a year-by-year basis even. Regulatory update. Well, I mentioned already Pakistan and Nigeria, Sri Lanka and Myanmar already happened in 2019. I won't go over that, but it's important steps. And then Tanzania, I also mentioned that we're in the process of taking first a nondeposit-making license and then further upgrade that to a deposit-taking license. Financial position. Well, we discussed. I won't go through that further. $150 million (sic) [ $105 million ] unrestricted cash. No material refinancing requirements at the holding anticipated until 2022. So that also provides us with lots of stability of funding at the level of the holding. We have secured $100 million of new loans since 1st of March, the start of COVID, and 30 September. So the flow of funding has been very good. We just recently signed also a loan facility with Citibank for about $10 million. That's actually -- that's gone beyond -- that's on top of the $100 million because that's in October. And we still have a pipeline of new loans of about $147 million as of today. Yes. Then we have -- I guess on Page 15, we have the updates of -- from the field. We discussed that already. I won't go through that. And there's -- that's all in the appendix. And then there's a lot of other slides with the moratorium data for anyone who has an interest in that as well. So I would want to close the discussion now from my side and open it up for questions.

[Operator Instructions] We can now take a question from Nick Padgett from Frontaura.

I have 2 things I want to ask about the modification loss. The first is a measurement question, then the second is more the business decision. So I would have thought the modification loss calculation would be a straight present value calculation. But in the notes, you mentioned the need to do sample testing and how that -- those estimates may have some inaccuracies. I don't really understand the sample testing need. So perhaps, could you explain that? And then with regard to business decision, most financial institutions that we've seen where there's moratoriums, they have continued to accrue interest. You explained that you didn't do that because the contracts weren't written that way and you would have -- got a lot of pushback from customers. And I certainly can understand that trying to push through that change would have been difficult. I guess I have 2 things I'm asking. One is in India, you said you were able to accrue interest. Was that because the contracts are written differently in India? Or because the government rule overrode how the contracts were written and allowed for the accrual of interest? And then I guess on a go-forward basis, wouldn't it make sense to write your contracts such that you could accrue interest? Of course, you could always waive it in the moment if that was the business decision, but it would seem like just to put you in a stronger position. And I guess I'm interested in your thoughts if your client base could withstand the accrual of interest. Or was that something that would have pushed them into default and so it just wouldn't have been the right business decision even if your contracts allowed for it?

Yes. I'll just start with it. It was -- the exact details of how we did it, I will ask Mischa to explain it to you because he can do that better. But just on the side, clearly, yes, we are actually -- we are changing our loan documents with our clients. In fact, all our loans which we provide to new clients starting actually in October are all basically on a declining balance or EIR methodology, which means that if a client does -- misses a payment or even in a holiday environment, basically, the -- there's a -- it will be accrued, the interest will accrue during the life of the loan. So it will be following the same methodology as we have in India. In India, we changed that already before because there was -- the regulation was in place. We had to change it as well. And it also follows the regulation, so it's also used by all microfinance institutions in India. Obviously, the rates are substantially lower and also the margins are substantially lower. It was also at that -- in that regard, it's very important. We were clearly interested to see if we could actually have the clients carry that. And we have -- actually, we have prepared for that in May. We made all preparations and we rolled that out in all the countries with quite a bit of reservation by the country heads, in fact, because there were concerns. And -- but we did pursue it and had longer discussions with many clients about actually doing that. But in the situation where we were in at the time, ultimately, there was a high risk that clients who basically -- that we felt that we would basically force them to pay effectively at the end of cycle a new amount of interest, which was not part of the original contract from their point of view that, a, they would potentially leave -- would not be prepared to pay it and would leave effectively. And keeping in mind that many of our groups are, say, of 20, 25 women, it could create -- well, it has the risk. In fact, I mean we experienced that it was disruptive within the groups. And basically, many other clients got concerned about it, were not even had to pay it yet because it really was going to be paid at the end of the loan cycle. It also would basically mean that we would -- basically, the clients who were more near the end of the loan cycle at the time of COVID when the lockdown started would have to pay very little, but the ones who got them just before and were equally harmed by the COVID or the lockdowns in their ability to trade would have to pay substantially more. So it would not just be an issue that overnight, we could change it. It would basically be something which continues through the whole life of 6 months. And you can say a country like the Philippines where 6 months loan -- the end of clients will be -- at the end of the loan cycle, they would have to add quite a bit of extra funds to pay off the loan. So ultimately, we decided that the risk of disturbance or that it actually would trigger default by our clients -- more willing default as well as -- that it's -- yes, that clients would basically break the cohesion of a group, which we felt ultimately was the risk was too high and that clients might just willingly start to default. And ultimately, it's in our most important interest that actually clients fully repay the loan, feel well treated by us and take new loans, keeping in mind that the interest rates in many of the countries where we operate are substantially higher than in India. And you talk about that in the Philippines, it's around 40-plus percent. I mean it is losing clients in that environment would also -- even if they repay the loan and then they say, we'll take a new loan from someone else because we don't want to deal with this particular situation, which also have a risk that we lose more clients than ultimately necessary and that actually what we would have gained would have easily outweighed by the drop of the clients -- the dropout of clients. So yes, it was a tough decision. But we said, look, it's better to take -- make the decision now. It's going to cost us one thing for now, but at least what we now can be certain of or be -- we can work very closely with our clients in making sure that they will pay their installments over a period of time. And yes, it's a bit of interest loss, clearly. But ultimately, we think it's in the best interest of the company to proceed in this way. So that's the question on why and how. The other question just on the actually mechanics on the sampling. I mean, Mischa, would you want to answer that?

Yes, Dirk, I can. The simple answer to that is that we didn't perform that calculation for the modification loss for each and every of our 2.3 million borrowers, but we took a sample of 25 contracts per country and we extrapolated that to the entire loan portfolio and the affected clients either for the lockdown period extensions and for the individual moratorium extensions afterwards. And so that's basically why we have disclosed it's on a sample basis. And therefore, there is some estimation difference. But in our view, the outcome is actually quite comparative to some different estimates that we made. So -- but that's the explanation for the sample disclosure. I hope that answers the question.

Now with that system -- is that a system implementation that you're -- that actually mechanically cranking through all the modifications across all the loans in all the countries just wasn't possible to calculate?

The...

Yes. Go ahead, Mischa.

Yes. So indeed, this is a detailed discounted cash flow calculation on each and every contract. Indeed, the contracts are different per country and the loan products are different. So indeed, this was not modeled in our system yet to take it out of the system.

Okay.

I mean just 2 points on that. I mean we did actually prepare for a little lockdown interest in the system. So the system was able to do that. But then we did not have specific system changes made that is quite -- it's more complex in a sense because you do 2 things. You look side by side. And so it's quite a complex. And it's not a usual thing coming out of our system basically. So it might be a shortfall coming in that sense. But it was not -- you couldn't just pop it out straight away. Well, we did do a double check whether the actual amount of this modification loss, what the impact was in the second half because clearly, ultimately, it's partly accrued than provided for in the first half what the impact is on our performance in the second half. So we looked basically what's the average with a certain level of growth of our portfolio in the second half, what actually the impact is of the modification loss in the second half, if we would actually collect all those installments. And so it releases effectively. And if you then actually look, I mean the amount of difference is basically, it's about $1 million that's -- in that way. So there is -- we feel pretty confident what that means actually for our interest income for the second half of this year, which is very -- yes, it's quite clear for us now based on the first 3 months and what we can be able to achieve in the last 3 months of the year. Clearly, it all depends a bit on how many -- if we're going to still be forced to provide some more moratoriums in 1 or 2 countries.

[Operator Instructions] We can now take our next question from Hugo Cruz from KBW.

So a quick question. I think you -- in the statements, in the CEO's comments, you mentioned some plans to potentially expand into other geographies in both Asia and Africa that have been put on hold by COVID but that you could revisit next year. Can you give us a little bit more color on those plans?

Yes. Well, we had a list of countries which we were going to explore to see whether we could start basically a greenfield operation that included particularly Indonesia, which we were -- we had seriously considered already a long, long time ago, many years ago. But then ultimately, we decided not to proceed because we didn't feel comfortable with the license which we could get. There was some uncertainty whether we could actually properly operate under that license. That license has actually -- continues to produce itself without difficulty. So we are now reevaluating that. But clearly, at this point, it's still on hold. But if the environment is opening up, the markets are basically opening up, then it will be possible for us to actually go there and travel and do a proper market assessment, then we will be quite keen to pursue that because Indonesia is still a competitive market. It is definitely -- in our view, at least the last time we looked at it is definitely an opportunity for us to build the business there as well. And then we have already in our -- in the countries which we want to consider is -- over a period of time is in certain parts of Africa, I mean like Ethiopia, we've been looking at, but that all depends on regulatory changes. Senegal, we've been looking at and 1 or 2 other countries in Africa, which we feel might be interesting for us to potentially start a greenfield operation.

There are no further questions on the line at this time. I beg your pardon. We have more signals for questions. We can now take our next question from Nick Padgett from Frontaura.

I'll just ask a follow-up on the -- this one on the loan loss provision. I want to make sure that I understood you clearly. So you said that your estimate originally had been a 2% to 3% loss on a book of, let's say, $450 million which would translate to $9 million to $13.5 million of possible losses -- write-offs due to COVID. You had a provision through the income statement of $8.3 million in the first half. So am I correct to assume that your best guess on further COVID exposure and need to take further provisions would be in the -- just the difference between that first range and what you've already taken? In other words, between $700,000 and $5.2 million? Is that the correct -- that, that could occur in the second half or I guess possibly even into 2021 but that would be your best guess right now as to further income statement impact from credit risk due to COVID?

Yes. Well, yes, we hope not, in fact. That is not necessary. We basically reviewed this with all our country heads, what kind of provisioning they consider or ultimate write-offs they would expect to see as a result of COVID. It's -- in many countries, it's quite a bit lower than the 2% to 3%. In some countries, it's 2% to 3%. It will be dependent a bit, I would say, on 2 things. One would be ultimately how we -- how the situation will further develop in the Philippines and also how we are actually -- how long it will take us to clear but the -- basically, the installments, the extended installments in India. Now in India, our local management is very optimistic and very positive and doesn't believe that -- it will just take time, but it's not going to be -- it will -- in their view, it's going to be all paid. And since it can take time because it doesn't cost the company a lot by extending it because it gets compensated for that with the effective interest rate, they can give it more time effectively. That's not the situation at this point in the Philippines. But the Philippines environment is also truly quite a bit more difficult at this point. So that's the one area where we would see more uncertainty at this time. We feel very confident that all the others will stay within that bracket, but -- and what we have now currently provided, hopefully, will be sufficient. So that's the current hope. But yes, you're right that clearly, if something goes out of control in a country like the Philippines, it might well be that we will reach that higher level.

Can I just ask, in the Philippines, could you -- you've consistently mentioned on this and other calls as one of the countries of concern. I think it's just that the lockdowns are more severe there. And thus, it's just going to take more time to get back to normal. Is it -- do you see it just as a matter of time? Or is there something else that's more specific to the Philippines that makes the economic environment there different than the other countries? Is there a factor causing more uncertainty there other than just the lockdowns were more severe?

Yes. Well, I think the issue there is I find -- we've been there obviously for a long, long time. We've had credit designs a long, long time ago in 2010 where we had some serious issues in the Philippines, but that's all. Since that time, it's actually performed very well, very steady, not massive growth, but very steady, a very strong cash flow generator for the group, in fact. But it's been quite complex for them or it's been quite difficult for them to basically get their collection efficiency up. And we see the same problems also with some of our big peers who also follow the same model which we do. So it's fairly widespread. And this, the lockdown, although it was already a very long lockdown, there is or it has continuing targeted lockdowns in the Philippines, which makes the environment just more challenging, just as I mentioned, because clients find it more difficult to go from their -- from the place where they retail their goods to the place where they buy it in bulk or the wholesale markets where they buy their stuff or material which they sell. So it's just a more challenging environment. And that's why we mentioned it quite a bit because it's probably -- it's the largest country in our portfolio where we have a serious concern. Clearly, yes, Uganda is also a challenging market at the moment, but it's -- the improvement is fairly consistent. From where it come from, it's only gone up in terms of collection efficiency at this point. But it also represents a much smaller portion of the whole pie. And so therefore, it's less -- yes, it's still extremely important for us, but it's -- the impact on the group is just less than if the Philippines is stuttering.

Okay.

I mean I don't know. I mean -- or do you want to put any points about the Philippines? I mean you obviously -- any point you want to make?

Yes. Actually, I mean the country scenario, if you're comparing the 2, the similar and the biggest competitor, actually, the Philippine operations is being very fine. And also, the one important only thing is that our -- I mean disbursement, actually, it's competitively more than the competitor. So that also indicated a good recovery schedule there. I think the only big issue for Philippines is the way actually the government works. It means that the central government, they have their own way of tackling the issue and they did it for long. Then they actually gradually decentralized in the local government level and where actually initially local government level, I mean putting different sorts of restriction, full, half, partial, to their inhabitants. So that actually created additional temporary, I would say, difficulties for our client to move and do business or come back like this. But it seems that the things are gradually going for good. That is why we have seen the last 1 or 2 weeks, the recovery rate really had gone up to like 74% and also the disbursement actually crossed the collection amount. So that's indicated the confidence on the operation. So yes, there's concern as we compare it with the other country where we don't face a similar kind of additional layer at the level of difficulty from the regulator. But in terms of operation quality decline, we are very confident.

And next question comes from Rahul Shah from Tellimer.

[ A couple of ] questions. First is, you mentioned that you might be seeing some localized lockdowns. If you were to go on a more localized lockdown situation just as you experienced in March, April, May, do you think the impact on the overall business would be worse because clients would probably be stressed? It may actually be better because of what we've learned from earlier in the year. A question again related to lockdown. But in other businesses, we've seen a [ bigger kind of ] ways looking. I was wondering if you can maybe talk a bit about your experience during the lockdown and ask if you have longer-term plans in terms of full strategy.

I couldn't hear it extremely well. I'm not sure if anyone could -- whether it's some mic problem or there is -- that it's rolls or it broke up a bit.

I can try and repeat now.

Yes. Yes, that would be helpful.

Okay. So briefly, I was just wondering if we do get into a more severe lockdown situation, whether the impact on your financials would be worse than what you saw in Q2 because clients are already stressed? Or perhaps it could be because the experience that you've had? So that was the first question. And the second question was just on the digital strategy and how lockdown has affected or perhaps accelerated your plans in that area.

Yes. Yes. I think -- okay. I think the -- I mean, obviously, if there's new lockdowns, that would not be particularly great, those lengthy lockdowns. I mean short lockdowns, particularly with localized lockdowns, I think we are -- it's disruptive. I mean it's just happening right now as we speak in Myanmar where they are locking down certain parts of Yangon. So that has an immediate impact on our business there. But it's not -- as long as it's not nationwide and enforced nationwide, then it's -- it becomes a bit more -- clients now know how to deal with it in a much more comfortable way. Having said that, clearly, lockdowns are not what we're looking for. And also the potential cost of longer lockdowns would still be there. If clients are going to have to defer payments again for a couple of weeks, that's not something -- or a month, that would not be -- that will be not a positive sign for us. The -- but generally, what we see is that clients are more and more used to operating in an environment -- in the new COVID environment and are able to do their -- start to do their businesses in the way they used to. I mean that's one of the things which definitely has -- it hasn't really surprised us but has reconfirmed to us that the resilience which our clients have in actually running their businesses. I mean they -- there's one thing which doesn't happen in -- with our clients. They generally don't go bankrupt because there is -- they don't have staff which they need to fire when things get hard or they have to continue to pay. It's basically, they -- generally, most of our clients, they have very small businesses, many doing their businesses by themselves. So if they have no income -- no business, no income, but then they just can live as they normally live because their husband will pay, they will just have less income, but they will continue to survive. And when the environment then improves, generally, they are out there and they are basically continuing to be able to start -- restart their businesses. And that's what we've seen despite those fairly lengthy lockdowns is all that disruption which it caused, our clients gradually come back up to speed. And this is what we have experienced for so many years also with all kinds of natural calamities that our clients do actually have the ability to get back on their feet and basically start doing their business and gradually -- and generate enough income to repay their loans. So that's why if you look at the past history of the company, we have -- as you know, we have basically a write-off ratio of points -- 2% of our whole portfolio was about $5 billion, which we have disbursed over the life of this company. So it just -- it does actually show that they are very resilient and are very able and willing and keen to kind of basically repay their debts and continue to borrow from us to support their working capital which is based in their -- tied up in their business. Now this is a global event which affects us globally. So it's all, in that sense, different. It's very -- it's not like a local type of natural calamity, but the mechanics are somewhat similar. And therefore, we do believe that all our clients ultimately will work very hard towards repaying what they owe us and that we will also still will be with them during that whole process. And we'll provide them with new loans when they are ready for it. So -- and what we already see with clients who repay loans and we provide new loans to them, actually, performance is very good. There's very little overdue of any of the new loans we've been providing. It's all the stuff which is still following the lockdown which has provided more issues. That's why we believe that, ultimately also you will see the PAR>30 come down once we basically collected the tougher loans, which have been more hampered as a result of the lockdown, and that the fresh loans will basically -- will have a very good -- very low PAR levels. So that's important. But yes, so that's -- yes. We think that the business will gradually improve and continue to perform and that the longer -- after this has happened that these problems will gradually also disappear, unless the whole situation will become very different with a second wave in the countries with serious lockdowns. But the good thing is that at this point, the impact of the disease is very, very, very limited in the countries where we operate, even in countries like the Philippines. Actually, if you look at the data, it's nothing particularly shocking to compare to what we've seen in Europe and the United States. It's -- and not even comparable to many of the Latin American countries. So in that sense, it's a lot of fear and disruption. But ultimately, our clients will have to continue to do their work. They need their funds to build or capitalize their businesses. So we're very confident that, that will happen and that also will reduce the ultimate write-offs, which we will -- we need to incur -- which we may incur. Now with regard to digital finance, a comment there is that yes, it is actually -- there is more activity, but it doesn't go overnight because again, we need good payment platforms for clients to be able to transfer money to us. And the payment platform in many of the countries are still very expensive. And not many clients are truly very interested at this time. We were very keen to have more clients, for instance, in Ghana, to start paying digitally, either by M2M or Airtel, but they're just not particularly interested. It's hard for us to push it if they have not a strong interest to do so, to not pay their installments in cash. But keep in mind that many of our clients trade -- live and trades in the environment where also the group meeting takes place. So for them, actually, generally, to pay the installment, they still do all cash transactions in their daily activities. And so they effectively -- when the group meeting takes place, they take the money out of till and bring it to the group leader or sit through the whole group meeting and pay it at the time when the loan officer is there. So the true benefit is not so big yet for the clients. But that will -- I'm sure will change. But we want to be ready, but we can't drive the pace of change. Does that answer your question?

Yes. That was very helpful.

I would now like to hand the call back to the host for any additional or closing remarks.

Well, thank you very much for your interest...

Well, first -- sorry to interrupt. We have also some questions through the webcast which we would like to discuss. So there are a number of questions on similar topics, which I will combine. First is on the modification loss. One of those question is, what will be the frequency of evaluating these modification losses? And how will reversals be accounted for? And do you expect reversals are more likely or further modification losses are more likely? I can also answer that, Dirk, give the first answer on that, if you like.

Yes. Go ahead.

So the frequency of making calculation for a modification loss is when there is a modification in the loan contracts. And in our case, it's when we do an extension of the loan which is not in the original loan contract. So obviously, with lockdowns when we provide a moratorium, then we'll have to make that calculation but also when we provide these individual moratoriums. So these levels of moratoriums have gone down considerably, significantly. So that impact of modification loss in the second half year for new modifications on loan contracts is much lower until now. Of course, we need to make a caveat for possible new lockdowns and moratoriums given to clients. And so the reversals are much more likely to take place than new high modification losses. Then the other question around the same topic, is the NPV hit due to timing issue with regards to collections? And has there been any regulations which bans MFIs from accruing the income? Can you take that one, Dirk?

Yes. So there are no real limitations for doing this in the countries. We obviously -- it's in accordance what is in the loan agreement with our clients. So -- but there's no limitations by external parties or by regulators which would allow us to do what we currently do. Does that answer your question? Or -- what was the first part of the question again, Mischa?

I think so.

Okay.

Yes. What is the -- basically, the reason for the modification losses? Is it due to timing issues with regard to the collections is the question. And I think we can say yes, it is because we provide an extension to the clients for which we do not receive interest compensation. We have to take that modification loss. So you can see it, indeed, as a timing issue under the current loan contracts. And we are now changing the loan contract for new disbursements where the interest will always accrue according to the declining balance method. These were the questions on the modification loss. Then on a different topic, we have a question on where do we see the 2020 growth, in which markets and when will growth resume in India and the Philippines?

Yes. I think we're generally quite positive that many markets will -- there's a real desire for growth. It depends obviously on the business environment ultimately which might be affected by COVID here and there, more so in some countries than in others. But we see good demand for loans in countries which are gradually normalizing. So I mean what we've been seeing in Pakistan, we've seen good growth. Yes, there's a little flare-up at the moment, it slows it down a bit. But ultimately, it's not that it stops. It's just a bit -- there's a bit of sentiment about it as well. We've seen in -- of a -- important markets for us obviously is Ghana. It's -- generates continuing growth. It's continuing to grow its portfolio, bigger loans, high performance of the portfolio. So we -- it's almost as if nothing has happened in Ghana. Nigeria, also COVID-related issues are not so big. They're there, but it's not necessarily a lot worse than in Ghana. But there's still -- it's a more complex market, Nigeria, with more security issues. And also the economy is really not doing that great. So clients are struggling and have been struggling also before COVID more. So the growth of the portfolio as a result is just not at the same level as we've seen in Ghana. So most countries, actually, the demand is good. As mentioned, the countries where, still, you would see a little bit more moratoriums being granted for a longer period of time. And clearly, that means that more clients are struggling. And it also means that generally, the appetite for new loans across the whole client group will be somewhat lower. If a large group of clients are struggling, then generally, everyone is struggling to a more or lesser extent. It's not normally that just only one group of clients doing one specific activity are struggling because many of those business activities are quite similar even if they trade in -- their trading activity can be very different but still, the economic activity in that community is just generally then lower.

Okay. The next question is, what will be the OpEx growth for the second half of 2020 and '21? And what will be the areas of investment?

Yes. I think at this point, OpEx growth, it will just be -- I think we need the stuff we have to basically manage the business. I think we will not focus a lot on growth yet until actually the portfolios are all good. And obviously, in countries like Ghana, Pakistan, we will be continuing to grow. But in some countries, we're just going to be a little bit more careful and not that -- well, we're going to be a bit more cautious in opening new branches. But it will happen, but not maybe at exactly the same level as we have done in the past, unless the operations are truly -- have normalized and the environment has normalized to an extent that the business activity completely justify further expansion and adding a lot of branches. So that's, I would say, generally for the case for the markets, that we will focus on that. New investment, I mean I think we will continue to invest in our digital platforms. That is important. Although I wouldn't immediately expect a massive change, as I've mentioned before, that we are still dependent on other providers' payment platforms, basically, low-cost payment platforms to make it sufficiently attractive for our clients to really start utilizing the digital services we can provide to them.

Okay. Thank you, Dirk. There is a question on the level of collection efficiency in India as of the end of September. For that purpose, I want to direct the listeners to the presentation on our website, which has appendixes to it which were not shown in this webcast. And on Page 15 and 16 of that presentation, you will find the country-wise collection efficiencies and the moratoriums provided up to September, as we have also presented in our recent monthly trading update. So the answer can be found there, but maybe you can also give some color to that, Dirk, the collection efficiency of India. And also, the question on that is how does it compare to its peers, which some of them show rates higher than 9%?

Yes. Well, that is -- we've basically seen 78% to 74% in the last 2 weeks. So it dropped by 4%. I'm not 100% certain what the cause is for that specific drop. I did speak to our MD about that. I mean it doesn't say it's not specific. It's just because of how the situation currently is. I mean you obviously -- so it's from there -- from his point of view, it's a temporary thing. It's not -- the trend line continues to go up. At the end of August, it was 58%. Ghana peaked briefly at 78%, 74% now, but we expects it to continue to go up, go into the 90s over a period of time. Now we do know or we've been told that [ Bombom ] is already at the 90s. So that's good. So that's what we are striving to achieve to. And [ Bombom ] is clearly is the biggest competitor we face in the market when you're basically in the same regions in the East -- Northeast. So we expect that we will also get to those levels. There's no particular reason why we would not be able to do so. We also are disbursing in India. So there's -- we're increasing our disbursements, in fact, at the moment. The clients are not distressed. And also, we feel they're quite resilient. So yes, it's more a matter of time. That's basically what we have been told. So I've been -- what the latest was what I heard from our MD there, that it will just take time.

Okay. There is also a related question to that for specifically India. And that is, when do you expect NPLs to peak and total credit loss expectation and by when will it be recognized?

Well, it will follow basically our normal provisioning now. I mean we -- at the time, because of the moratoriums, we didn't do provisioning. Now their clients are basically -- they have to pay their installment. If they don't pay their installments on time and the -- then effectively, they will -- then they will go into PAR>1 buckets. They will go in the PAR>30 buckets or 90 and ultimately, in the PAR>180 bucket. And then we will ultimately write it off. But that is -- yes, that is obviously means something for the client. Keep in mind that there's a very strong credit bureau and very effective credit bureau in India. For clients to willingly default on the loans with us or with anyone else, it really does actually impact their ability to source new loans. So clients are generally very focused on making sure that they can repay the loans. And at this time, we don't see distress in any particular place in the Northeast where we operate, which causes our management to believe that we are going to have a substantive potential write-offs because these clients are truly distressed and they will not be able to rebuild their businesses, so to speak.

Yes. Thank you, Dirk. And I also agree with the introduction of IFRS 9, the provision should include all the expected credit losses. So the current ECL provision also includes what we currently expect on future losses. So that's been already recognized in these half year numbers. The next...

Now that's important to point out because clearly, those credit losses are not credit losses. They are just an assessment of what is we consider to be the worst case of the portfolio we're managing at the time, at the half year, at 30th of June.

Correct. Then let's move to the next question, which is a bit more similar but more overall for the entire company and that is, when -- for the total loans at risk captured in NPL and moratoriums, are these all covered? Or is there another set of customers which are not yet captured in these 2 buckets?

Yes. I don't think there is any other type of buckets that we have, right? So...

Yes. No, I fully agree. As disclosed at the ECL provision, capture is the normal process of historical default on our total loan portfolio and includes then additional loans for overdue loans. And then we have captured a significant management overlay on top of that for loans which are not in those overdue buckets yet because of the recent lockdowns, especially looking at the 30th of June. So those loans do not appear in those aging buckets yet, but we have accounted for expected credit loss for those loans as well as well as for the loans who got moratoriums individually after the lockdowns. So I agree, there's no other groups which have not been captured which we would consider to have a higher risk profile at the moment. Then I would like to move on to a next question, different topic, and that's on the funding side. For how long are the covenant waivers and no-action letters that we received?

Yes. Basically, that depends. Some of them, they are extended until the end of the year. Some of them are basically until the end of June 2021. It varies a bit. Different lenders have different approaches in that regard. We generally ask for one for a year. At the time in June, some basically give it on a -- they've given it until the end of the year and then say, well, come back to us. We don't anticipate real problems, in fact, with any of our lenders at this point in time that they will basically not extend waivers. I think generally, we have very good relationships. And I think also on the scale of most MFIs many of our lenders are dealing with, we're performing quite well.

Yes. Thank you, Dirk. Another question is on the funding side is, how do the interest rates for the loans in the pipeline compare to the ones which we already got disbursed? And this is especially considering the huge liquidity in the market. And so do we see that interest trend going upward or downward?

It's a good question. Not 100% certain I will be able to give a proper answer on that. We haven't seen much difference at this time as far as -- I mean we are -- the interest rates are coming down because the base rates in the local countries go down. We borrow from both local sources as well as from international sources. And then often, the loans will be in U.S. dollars and we hedge them locally or offshore, depending on what's the cheapest. But we've not seen actually the yield on, say, our U.S. dollar loans come down a lot. In fact, the Citi loan increased a bit in value, the margin increased a bit because this was actually agreed before COVID even -- was not even -- it wasn't even existent yet, but we were having the term sheet signed with Citi at the time. And the -- so they increased their margin a bit, but that was completely offset by the LIBOR rate coming down. So ultimately, from our point of view, the cost wasn't higher for the period of the loan. So yes, there is a little bit of upside, I would imagine, in some of those loans -- future loans that their cost of funding for the lenders who provide it to us is lower. But generally, yes, it makes -- yes, it might make 1% difference. But if you look at what the loan actually produces for us, it's -- generally, the spread we make is so much, much bigger that it's -- yes, it's never been a real big stumbling block for us.

Yes. And so the last question we have so far is then on the yield. How will that develop over the coming 3 years? And then as a result, what is the development in the spread over the next 2 or 3 years?

Yes. It's -- I mean, historically, our rates are fairly stable. I mean they do move a bit with the base rates in different countries but not necessarily by that much. So if rates go up, our interest margin might go down a bit. And if rates go down, clearly, or its margin will widen, in some countries, we follow very clearly. That's in India, but that's really the only country where we follow that. So -- well, we have to follow it there. So that's how we follow it. But most other countries, our rates are really market rates, which we charge vis-à-vis what our peers charging. And they are generally quite stable. So some -- when base rates or LIBOR rates go up in local currency, then there might be a little bit of a squeeze. But then as rates come down again, then they widen. And then in our case, often, obviously, when we bring in U.S. dollars, which we then going to hedge, we also have the cost of the dollars, which can go up and down a bit. But generally, also when we borrow from the sources we are using, it's also -- yes, it's -- there's not a huge amount of variation. Yes, it might sometimes make a difference of 1%, one way or the other. But the more important part for us is actually maintaining the yields on our portfolio through the effective rates we charge to our clients.

Yes. Yes. I fully agree with that, Dirk. And one thing that I could add is that we've seen some decline in the yield over the past few years due to the mix in the portfolio while India was increasing and has a lower yield. And therefore, with that increasing percentage-wise over the last few years, that reduced the overall yield somewhat. But indeed, the rest of the yields remained very stable. This was actually the last question that I have. I'm not sure if there's any callers that came in with questions in the meantime. But otherwise, these were the questions for today.

Okay. Well, thank you very much to all the participants. And I hope it's been helpful in giving you a good perspective on where we stand at the moment with the company.

Thank you. That concludes today's...

Thank you very much.

Thank you. That concludes today's conference. Thank you for your participation, ladies and gentlemen. You may now disconnect.