FCMB Group Plc (FCMB) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. And thank you for standing by. Welcome to today's FCMB Group Plc's First Quarter 2020 Results Webcast and Conference Call. [Operator Instructions] I must advise you that this conference is being recorded. I would now like to turn the conference over to your speaker today, Mr. Ladipupo Balogun, Group Chief Executive of FCMB Group Plc. Please go ahead, sir.

Thank you. And good afternoon, ladies and gentlemen. Welcome to our first quarter 2020 investors and analysts presentation. I have on the call with me today a number of my colleagues from the bank. Mr. Adam Nuru, the Chief Executive Officer of FCMB Limited; I also have Mrs. Yemisi Edun, the Executive Director, Finance, and Chief Financial Officer of FCMB Limited; Mrs. Toyin Olaiya, the Chief Risk Officer, is also on the call and will be speaking; and we have the Chief Digital Officer of the bank, Emeka Eboegbune. From our Investment Management division, we have James Ilori, who is the CEO of FCMB Asset Management. And from the holding company, we have Mr. Femi Badeji, who is the Executive Director, Corporate & Investment Banking, and he will also be speaking; Kayode Adewuyi, the CFO of the holding company, who will also be speaking; and Ms. Ori Rewane, the Head of Investor Relations. As you can see from the agenda of the presentation, we will be following our usual format, where I will begin by giving you an overview or a quick introduction. And then I'll be handing over to Kayode to give us a more detailed overview of the results. So I will move straight to Slide #4. And on Slide #4, we see that generally our performance has been on the upward trend, most indices showing double-digit growth rates. Our profit before tax stood at NGN 5.4 billion, which was a 26.5% rise from the year before, same time last year for Q1. Our balance sheet has also grown quite strongly with total assets now approximately NGN 1.9 trillion and growing about NGN 1.43 billion (sic) [ NGN 1.43 trillion ]. All the other indices are as shown on the slide. What is really driving this performance is the fact that we have been able to successfully diversify our business model. Some of our high-growth areas are now achieving scale, and they are beginning to basically contribute a bigger proportion of our revenues than some of the more volatile areas. We believe this trend will continue in spite of the challenges that we are currently facing with the economy, the health situation and oil prices. Moving on to Slide 5. There are 3 key strategic themes for us at the moment that we're pursuing. The first is to build resilience. We have been gradually strengthening our capital base. Capital adequacy ratio stands at 17%. This is in spite of a 24% growth in our loan book. We have been adding to it very gradually, with a little bit of Tier 2 raised towards the end of last year. And of course, we've been maintaining fairly modest dividend payout ratio. Liquidity is also improving. It improved from 32.9% at the end of last year to 36% at the end of Q1 largely as a result of deposit growth that we've achieved. I think it's important to stress that our cash reserve requirement now stands at about NGN 313 billion compared to NGN 208 billion in December 2019 and NGN 161 billion a year ago. So what this demonstrates actually is that -- the fact that we have been able to keep liquidity at fairly buoyant levels in spite of the very significant amount of our balance sheet that has been quarantined in cash reserves. Equally important to us is diversifying the business. And the first way in which we sought to diversify our business was just to make sure that we're acquiring a lot of customers and we have less concentration in the business. In this regard, we've seen that our customer numbers grew from 5.6 million a year ago to 7.4 million 12 months later, so that is almost 2 million customers acquired in the last 12 months. We've also seen that Personal and Business Banking now account for 73% of our deposits, 29% of our risk assets and 66% of our net revenue. This speaks to the point I was making earlier about some of our less-volatile, high-growth businesses now accounting for a majority of our revenue. Asset management is how we are seeking to diversify away from banking, which we know is fraught with quite a lot of regulatory risks and also much more sensitive to the macro environment. And in that regard, we've seen that business grow significantly in terms of profits, where we have a 37% year-on-year growth in PBT. And this now accounts for about 9% of our overall PBT as a group. Assets under management similarly have increased by 26% year-on-year to NGN 427 billion; and this is largely coming from our non-pensions business, the growth that is, as we are able to leverage the bank's distribution channels to acquire more customers. We've also seen steady growth in the Pensions business. Innovation really is the key to achieving long-term success and a full transformation of the business, and some of the highlights in our innovation journey are contained in this slide. For example, you'll see that our commissions from the mobile side is -- has grown in terms -- well, certainly the volume has grown, of transactions, by 14% quarter-on-quarter and 70% year-on-year. However, we did see a drop in revenue year-on-year by about 3% as at the end of Q1, where we had [ NGN 106 million ], but a much drop of 40% compared to Q4 2019. We do believe that we will be able to restore the Q4 2019 commission numbers by the end of this year, latest, as we get into beginning of next year because we are seeing very, very strong volume growth, which has actually been compounded by the health situation that we're seeing currently. And many of our customers have migrated to using alternate channels. We're also seeing the new mobile app that we've launched, which allows us to be much more agile and more responsive, give a better customer experience and also ensure that we keep a bigger share of all revenues. And we've seen the volumes in that business or in that channel grow substantially at NGN 203 billion of transactions done in the quarter. This has basically been an 83% Q-on-Q growth from Q4 last year. Similarly, at 3.5 million transactions, we're seeing that the transaction volumes have grown by about 58% Q-on-Q. What this suggests is that we're actually seeing more of higher value or higher profit transactions happening on the channel than we were towards the end of last year. Another key point for us is the tools that we're using to acquire customers. Our Easy Account is our next-generation mobile money and level 1 KYC product. We've seen over 1.18 million accounts acquired through that channel over the last 12 months, 317,000 of that occurring in the last 4 months, and this represents about 50% of all accounts opened. Digital lending is an area that we are quite excited about in the business because the benefits go beyond just giving a much better customer experience, but it's also helping to reduce our own cost-to-income in the lending business. We've successfully been able to achieve digital lending not just for personal banking customers but also our SME customers. And the book now stands at NGN 16.3 billion of all digital loans, and it makes up about 7% of the Personal & Business Banking loan book. The trends that we are seeing in the month of April, during lockdown, is actually seeing an acceleration even in digital lending. And the asset quality continues to hold up. Our ESB/API platform is banking-as-a-service platform which enables us to sell our services through fintechs and other third-party providers. We've launched the platform and have so far acquired about 15 fintech partners and their customers thus far. I would like to move to Slide 6 and just summarize some of the things that we have been doing vis-à-vis COVID. I think this is relevant not only for the performance of the business but also demonstrating as an institution we are doing all we can to keep our staff safe and also ensure that our customers' business is not disrupted. So first of all, in terms of protecting our employees, we had instituted a work-from-home policy during the period of the lockdown. Our plan now that we're in a relaxed lockdown situation, at least for now, is that about 50% of our workforce will continue to work from home for the entire 2020 or unless we find that there's some significant change in the situation. However, we also see that -- long term as a business, that work from home is going to become a more integral part of improving productivity for us and also improving just employee satisfaction. We will be raising our number of open branches actually now from 50% to about 60% of our branches will be open. So just about 40% will be closed for the time being. All ATMs, however, remain open. 60% -- the staffing in the branches will be reduced by about 60%, and others will work from home. And of course, we will be carrying out measures to make sure that the branch environment is safe, which will include regular cleaning and disinfecting, sanitizing, temperature checks, use of masks and a maximum of 10 customers in the branch. Of course, in our head office, we also want to minimize our void office visitations. Travel restrictions remain. Board and shareholder meetings will remain remote. And old staff that have underlying health conditions will not be required to return to the office. In terms of community support, we have budgeted about NGN 400 million for the year. We have already expended about NGN 250 million of that for the coalition set up by the Central Bank and other participants in the private sector. And we've also set aside about NGN 150 million for other interventions, many of which have already been deployed, such as testing, where we've helped catalyze 3,000 tests in a particular state which are ongoing; making food donations; as well as donations of personal protective equipment. In terms of our customers, we've tried to ensure that all our services are available remotely or digitally, including account opening, which you've seen has remained fairly strong, whether it'd be business accounts or SME. Payments, foreign exchange, lending and investing are all happening digitally and remotely. And we're trying to ensure that, that becomes increasingly the new normal for our customers. Even where customers have documents, physical documents, which need to be submitted for transactions, we're encouraging scanning of those and only in a few instances that we need verification of the physical documents or the originals. We have, in conjunction with the Central Bank, reduced our intervention loans to 5% interest rate, which we have about NGN 50 billion of intervention lending right now. And we have also both preemptively as well as in response to requests from our customers sought to restructure approximately about 50% of our entire loan portfolio. In terms of other business areas, things that we're doing, we expect that we will see some expense reduction from the run rate; and this is coming from restricted travel, limited branch operations as well as the work-from-home policies we've introduced. We're ensuring, as we saw in Q1, that in spite of the cash reserve requirement issues, that we continue to strengthen our liquidity, where possible, raising wholesale funding, mindful of the fact that, of course, 50% of that will be deducted as cash reserve. So pricing is very sensitive, but more importantly, mobilizing particularly low-cost funds at this time and continuing to drive our digital acquisition. We're mindful of preserving our capital, so we continue to explore Tier 2 capital-raising opportunities. And we'll maintain a modest dividend payout ratio. We see a lot of our loan growth this year outside of the retail and SME space coming from the top-tier corporates. And we are pursuing a number of intervention funding transactions for those top-tier corporates, particularly in agriculture, manufacturing and healthcare. We think part of the effects of COVID globally as we are seeing is depreciation in the currency and, of course, the inflationary impacts of that, so we are quite active now in our asset management business, cross-selling products and solutions that will hopefully help people counter the inflation effect. Thank you. I will now hand you over to Kayode Adewuyi, who will talk us through the results in a little bit more detail.

Thank you, Ladi. Good afternoon, ladies and gentlemen. I'll speak quickly through our overall group performance. I'll be speaking from Slides 8 to 10. Slide 8 provides a summary of the key performance ratios for the group. Return on average equity grew from 7.9% in the first quarter of 2019 to 9.3% in Q1 2020. This was largely because of improvement in our net interest income and some FX revaluation gains that we recognized in the first quarter. Net interest margins improved from 7.6% to 7.8% largely because of reduction in interest expenses as a result of the current drop in interest rates. Our nonperforming loans ratio has improved from 4.3% in the first quarter of 2019 to 3.5% in the first quarter of 2020, though I should point out that our cost of risk improved -- increased from 1% to 1.7% in the same period. We will provide more details on this under the risk management review. Our capital adequacy ratio improved from 16.4% in the first quarter of 2019 to 17% at the end of the first quarter of 2020. This was partly helped by a Tier 2 capital raise that was done in the last quarter of 2019. Our liquidity ratio dropped from 47% in the first quarter of last year to 36% at the end of March 2020. This was largely because of significant CRR debits by the Central Bank. Our risk assets grew year-on-year by 24%, while deposits increased by 21% to over NGN 1 trillion. Slide 9 shows a summary of the contribution of the different businesses to overall group performance. Our Commercial and Retail Banking group remains the largest, contributing 67% of revenues and the bulk of profits. We will provide more details about the performance of the different business groups in subsequent slides. Slide 10 shows a snapshot of our income statement. As you can see from the slide, net interest income and noninterest income grew by 24% and 12% year-on-year, respectively. Our profit before tax, as stated before, grew by 26.5% year-on-year. The subsequent slides will provide more details on the overall group performance. I will now hand over to Adam Nuru to take us through the Commercial and Retail Banking group performance.

Thank you very much, Kayode. Good afternoon, ladies and gentlemen. I'll be speaking through Slides 12 to 23, focusing largely on the Commercial and Retail Banking business. Starting from Slide 12, we see the contribution of various segments as well as our subsidiary. Personal Banking continues to perform well with a 40% contribution to net revenue. Our retail strategies is paying off. And we've seen consistent growth in this segment largely leveraging on technology, where we see good growth in customer acquisition, deposits as well as loans. SME Banking contributed 30% of net revenues, driven largely by growth in net interest income as well as noninterest income. Digital lending has improved loan origination and processing, and there's a further slide later on that highlights this further. Commercial Banking and Institutional Banking contributed 2% and 5%, respectively. And our subsidiary FCMB UK contributed 3%. I'll move on to Slide 13, where we see the quarter-on-quarter performance and the key highlights. There was a 13.4% year-on-year increase in PBT largely due to increase in net interest income. However, there was a slight decline quarter-on-quarter in PBT. Net interest income increased 20.9% quarter-on-quarter largely owing from a growth in low-cost deposits. Noninterest income grew 47.6% quarter-on-quarter and 27.7% year-on-year, largely driven from FX income and revaluation gains. Operating expenses grew. There was good risk assets growth of 7.6% quarter-on-quarter and 28% year-on-year; deposits growth of 3.5% quarter-on-quarter and 16% year-on-year, which is largely in low cost. Going on to Slide 14, we see analysis of noninterest income. There was a decline in net fees and commission of 21% quarter-on-quarter. This is largely a result of the CBN-induced reduction in charges. We hope to restore growth, as stated earlier on, from increased volume in the months ahead. Trading income declined 8.9% quarter-on-quarter largely due to reduction in trading activities in government-backed securities. There's a decline in revaluation gains quarter-on-quarter, albeit a major improvement year-on-year. There's a decline in other income quarter-on-quarter, largely around reclassification. However, it grew year-on-year. Slide 15 speaks to the breakdown of interest income and earning assets. Total earning assets increased 3% quarter-on-quarter and 32% year-on-year. Interbank placements declined quarter-on-quarter but grew marginally year-on-year. Gross loans grew 8% quarter-on-quarter and 29% year-on-year. Our gross loan book represents about 40% of our earning assets. On Slide 16, we had an analysis of loans by segment. We saw growth across all the segments, consistent growth in Personal Banking as a result of the implementation of our various digital initiatives. There was good growth in SME, again leveraging on technology. We expect to continue to see digital loan growth this year. Moving to Slide 17, looking at distribution of deposits by segment. We saw growth of 7% quarter-on-quarter and 16% year-on-year in deposits. Personal and SME Banking deposits contribute about 86% of our total deposits. Slide 18 looks at deposit distribution by type. Low-cost deposits grew and now constitute about 77% of our total deposits. Slide 19 looks at the breakdown of our operating expenses. OpEx grew largely due to reclassification of litigation-related expenses, reversal from noninterest income to operating expenses in Q4; as well as regulatory expenses, largely AMCON and NDIC premium. Slide 20 to 23 will be focusing at the impact of our digital transformation on the business. Slide 20 looks at customer acquisition and digital channels adoption across mobile, Internet banking and mobile banking transaction volumes. Approximately about 70% of our customer base of 7.4 million now do transactions on our mobile channels. In absolute terms, this translates to over 5 million customers. Going to Slide 21, you will see the impact of digital on our Personal Banking business, which has continued to witness increased adoption. By Q1 2020, about 85% of Personal Banking transactions were done both on alternate and digital channels, digital contributing about 49% to channel usage. Slide 22, still focusing on impacts of digital on the business. Personal Banking, we see significant improvements, as about 90% of Personal Banking loans were processed digitally by Q1 2020, indicating more adoption of digital channels by our customer. And this is very significant particularly as we move to the next phase of our growth. Slide 23 focuses on SME loans. We've seen over 6x growth in digital SME loans over the last 8 months. Today, 1/3 of our total value of SME loans are being processed digitally, and we intend to grow that number significantly in the months ahead. Thank you very much. I will now hand you over to Femi Badeji for the Corporate & Investment Banking presentation.

Thank you, Adam. Good afternoon, everyone. Before we dive into CIB's numbers, I would like to spend some time enumerating the strategic focus of the CIB business as we continue to drive the business towards business improvements and profitability. We continue to renew our focus on top-end clients, want to continue the process of improving our capital efficiency, the cross-sell of IB or investment banking and transaction banking products to corporate banking clients to increase noninterest income as well as leverage the distribution capacity of our Investment Management and stockbroking businesses to further enhance the profitability and returns to the group as a whole. If we move to Slide 26, we can discuss the numbers in a little more detail. Whilst CIB gross earnings of 4 -- NGN 14.6 billion showed a quarter-over-quarter and year-over-year growth of 22% and 45%, respectively. The business experienced a loss of about NGN 1 billion driven largely by the impairments on financial assets. Net interest income was flat quarter-over-quarter, which showed growth of 35% year-over-year. Whilst noninterest income of about NGN 930 million represented a quarter-over-quarter decline of 35%, it grew 9% year-over-year. The bright spots being the -- over 100% growth in advisory and capital raising fees as well as the rebound in trading income. Loan growth year-over-year was 20%, to reach approximately NGN 507 billion, whilst deposit growth year-over-year was 50% to reach NGN 159 billion. CIR showed a 14% year-over-year and 27% quarter-over-quarter reduction, with further reduction of CIR being a key focus point for this business going forward. NPLs have also seen a strong decline due to our focus on higher quality client names. Moving on to Slide 27. As I have mentioned just recently, financial advisory and capital raising fees grew 129% quarter-over-quarter and 97% year-over-year due to the completion of some transactions in the pipeline within the quarter. We are currently experiencing a low interest rate environment, which makes it an attractive time for companies to issue commercial paper and long-term debt, and we have been able to participate in many of these transactions over the past 3 quarters. Brokerage commissions declined 18% quarter-over-quarter due to discounted pricing as share prices tapered. It did, however, grow 9% year-over-year due to increased trading volume, which was largely driven by foreign investors who were divesting of their portfolios. Net fees and commissions increased 20% quarter-over-quarter, driven by loan growth, but declined 6% overall year-over-year, with the decline mainly was a result of a decrease in transaction charges based on CBN's recently released revised guidelines on charges and tariffs. Trading income grew 51% quarter-over-quarter and 37% year-over-year, driven by gains on short-term positions in the market. On Slide 28, we have the breakdown of total earning assets, which show that it's increased 7% quarter-by-quarter and 20% year-over-year due to significant growth in loans driven partially by FX revaluation and majorly by an increase in loan to clients. Investments in governments and corporate securities did fall 9% quarter-over-quarter and 42% year-over-year primarily due to a sharp drop in rates for T-bills and other money market instruments in the market. On Slide 30 or 29, we reiterate, based on the loan growth that we've seen, that our strategy is -- to grow the loan book is to continue to bank quality names with viable transactions within our defined risk acceptance criteria and to do so in a sustainable manner. Corporate Banking deposits grew -- rose 27% quarter-over-quarter and 50% year-over-year, primarily driven by CASA deposits as a result of an extensive reengagement efforts with our quality Corporate Banking accounts. I will now hand over to Toyin Olaiya, Chief Risk Officer of the bank, who will take us through the risk management review.

Thank you, Femi. Good afternoon, everyone. I will be taking you through the risk management review on Slides 32 to 35. I now move on to Slide 32. This slide speaks to the analysis of gross loans by sector. Loan book grew by 7.1% quarter-on-quarter, largely driven by transactions in commerce, finance and manufacturing sectors. Growth in oil and gas sector came mainly from foreign exchange rate movement in Q1. 23% year-on-year growth in the loan book came mainly from our focused sectors, i.e., agri, individual, manufacturing and commerce. 24.6% quarter-on-quarter growth in finance sector emanated largely from our U.K. subsidiary, and these are secured loans to financial institutions in Africa and in the U.K. The 20% year-on-year growth in individual was across all our retail business groups. Growth in the bank was due mainly to new product initiatives and strategies. Moving on to Slide 33. This slide shows NPL distribution by sector. We witnessed 3.5% growth in NPLs quarter-on-quarter. The quarter-on-quarter growth was due mainly to slight deterioration in agri sector and naira devaluation impacts on some foreign currency-denominated facility. The quality of our loan book continues to remain a priority across the group. Moving on to Slide 34, looking at cost of risk trend analysis quarter-on-quarter and year-on-year. Growth in cost of risk quarter-on-quarter was due mainly to low recoveries experienced in Q1 of 2020. We anticipate that the palliative measures introduced by Central Bank of Nigeria will cushion the impacts of COVID-19 on our cost of risk this year. I now move on to slide 35. This is a brief overview of the possible impacts of COVID-19 and crude oil price crash on the loan book. We expect higher ECL provisioning this year across vulnerable sectors. We observed higher PDs, with growth ranging from 200 to 300 basis points, Loss given defaults also increased within the range of 300 to 500 basis points, all resulting from impact of forward-looking macroeconomic variables and anticipated lower recoveries. Additional collective impairments will also be set aside to offset losses in our unhedged oil and gas upstream portfolio. 30% of the portfolio remains unhedged at this time. We also anticipate lower recoveries this year due to lull in collateral markets. Vulnerable sectors oil and gas, SME, retail, trade commerce worsened asset quality, however, the regulatory forbearance introduced by Central Bank of Nigeria and the restructuring that we will have to do will provide cushion this year. Also, 37% of the foreign currency loan book with their receivables in naira remain exposed to foreign exchange risks. I'll now move on to the various action plans we have put in place to mitigate to a reasonable extent some of these issues and risks that I have identified. So we have evaluated the loan book and identified eligible means for restructure. So looking at the CBN palliative measures and the various guidelines therein, the risk management department conducted an independent review and were able to identify specific accounts that would qualify for restructuring in line with the palliative measures introduced by Central Bank. So 50% of the portfolio will be restructured, based on this review, in line with regulatory forbearance. 7% represent intervention fund exposures because CBN in the guidelines were also specific in granting moratorium extension, interest rate reduction to the intervention funds that they have released to the various obligors. So the other part of the book that will be restructured are coming mainly from oil and gas, power, SME and consumer. The restructure terms, in line with the CBN guidelines and in line with our various engagements with our customers, constitutes on the average 6 to 12 months moratorium on principal repayment and 1- to 2-year tenure extension. Also, as I've mentioned regarding the book exposed to foreign exchange risk, the conversion to naira of these foreign currency loans with naira receivables has commenced. The exercise is ongoing, and we expect to make significant progress before year-end. Customer engagement is ongoing at this time to ensure we are positioned to provide needed support and intervention as may be required. Loan monitoring has also been strengthened group wide to ensure asset quality remains within tolerance limits. Portfolio growth, cost containment and revaluation gains should offset increased impairment losses this year. I now hand you over to Mr. James Ilori, CEO, FCMB Asset Management, to take you through Investment Management. Thank you.

Thank you, Toyin. Good afternoon, everyone. We grew assets under management by 6% quarter-on-quarter and by 26% year-on-year, to close the first quarter at an AUM or with an AUM of NGN 427 billion. The group benefited from working more closely with other arms of FCMB Group, particularly in terms of distribution of products. Also we gained from adopting a more targeted direct sales strategy. And in addition, we continued the implementation of our digital transformation strategy with the launch of our pensions online enrollment platform. Our Pensions business accounted for 76% of the NGN 427 billion AUM that was achieved in the first quarter. That compares with 79% in the previous quarter. Also, our Collective Investment Schemes business line contributed 78% of the NGN 24 billion quarter-on-quarter increase in assets under management. Despite the negative impact of a fee reduction that was imposed by the pensions industry regulator on all pension fund administrators, we still grew PBT by 37% year-on-year to NGN 474 million, which accounted for 9% of overall first quarter PBT of FCMB. I'll now move to the next slide. We expect the group's full year assets under management to grow by about 15.3% year-on-year, so we are looking to close the year with assets under management of NGN 465 billion. Contributions to assets under management from our Collective Investment Schemes and wealth management business lines should account for 26% of the projected year-end assets under management. That comes to around NGN 121 billion. This would represent a 5% increase from last year's 21% contribution. Lastly, we expect full year PBT to close at NGN 1.91 billion, with our Pensions business contributing about 60% of that figure. The 2020 full year PBT forecast represents a 12% year-on-year growth. Thank you. I will now hand you over to Mr. Ladi Balogun, who will conclude by giving the general outlook for FCMB.

Thank you, James. So the year clearly has started off on a positive note vis-à-vis the trend this time last year, but clearly as a result of the lockdown and the more severe oil price decline that we saw at the beginning of Q2, we do see some downward pressure on our earnings. Particularly, this will come from reduced fees and commissions and noninterest income. We also see that impairment charges will rise but certainly within manageable levels. I think we have a fairly good grasp of the portfolio at this point in time. Regulatory risk remains high. Cash reserve requirement debits could also persist. So these are some of the things that we think could dampen the performance in subsequent quarters. However, I think there are a number of things that we're doing that will counter that. We expect that loan growth will remain robust. We've forecasted somewhere between 10% to 14% of full year loan growth. We've already done about 7% plus. And I think it's therefore very likely, barring any unforeseen circumstances, that we'll probably be at the top end of that range. We do have significant revaluation gains. We've only recognized actually just a small percentage, I think, somewhere between 20% to 25%, in our management accounts of the revaluation gains from the devaluation to NGN 380 that we experienced in Q1. So that's just starting to smoothen out our earnings and also make sure that, in the event of spike in NPLs or loan loss impairment losses, then we can also smoothen things out a little. Of course, by the time we do our typical Q3 audit, whatever the fall position is, we'll be required to recognize it, but we do have some room in terms of revaluation gains to help take care of any potential hits. We see a lot of the growth this year actually coming from fairly low-cost-income ratio business lines, particularly our digital lending and our digital businesses generally both on the lending side as well as on the payments and CASA side. We think a lot of the growth is going to be coming from the digital side which is low-cost-income ratio. And then also our Corporate & Investment Banking business, I think, is likely to see continued robust growth in revenue, especially if the intervention funds that we expect to come through do so, but in spite of that, we also expect that there will be fairly strong growth without any material increase in expenses from -- to achieve that growth. We certainly see some downward pressure on expenses as a result of our responses to COVID. And finally, as it's been mentioned earlier, we expect at least 15% AUM growth. Therefore, we should see earnings growth in our asset and wealth management business compared to what we achieved last year. So priorities for us will remain to be very supportive for our customers and communities during these challenging times. We will be focusing on keeping our employees safe by remote working and trying to encourage as many of our customers to migrate to digital services as much as possible. Thank you very much, and we look forward to answering your questions.

[Operator Instructions] And your first question comes from Tunde Abidoye from FBNQuest Merchandise (sic) [ FBNQuest Merchant Bank ].

My -- I have a few questions, and my first one is on your restructured loans. You did mention that you're trying to restructure, I think, 50% of your loans. And then can you give us an indication, what proportion of loans have been restructured so far? And also, on the palliative measures from the CBN, where are you with that? Also you mentioned that you continue to explore Tier 2 capital raise. Can you give us an indication of the potential size of the loans, the Tier 2 raise? And what FX rates are you adopting for your books at this point in time? And can you give us an indication of your organic loan growth excluding the FX impacts? That will be for now.

Thank you. I think there are 4 questions. And maybe I would ask the -- in terms of the restructured loans and the palliative measures, maybe I could ask Toyin Olaiya, if you have the details of that and where we are, as far as those are concerned, please.

Okay. And like I mentioned, we intend to restructure 50% of the loan book. We have achieved about 25% of that, and we intend to complete that in the next few weeks. So we have made significant progress. Like I mentioned, the 7% to 10% has to be the intervention funds, we have completed that. And the Central Bank has all the documentations to confirm the intervention fund exposures. The restructuring has been concluded. But for the others, we've concluded [indiscernible] to be concluded and then we are on track with our plan. Before the end of the month, we will have them completed as expected. And then to give further details on the palliative measures of Central Bank. The Central Bank is asking that we should grant a 1-year extension of moratorium on the facilities that have granted the intervention funds on NGN 25 billion for 1 year, effective 1st of March 2020. Also, Central Bank granted reduction of interest rates in intervention funds from 9% to 5%, also effective March 1, 2020. Also, in the palliative measures, they've also allowed banks to restructure and extend tenors of facilities granted to businesses that could be affected by the COVID-19 pandemic, and they were quite specific. They mentioned ag group. They mentioned oil and gas; and also in general businesses, small businesses that will be affected in terms of not meeting the ultimate obligations. So what that means is that CBN has stated because of the pandemic, people in the region, small businesses or companies that are impacted by this pandemic are unable to meet their contractual obligations, they are allowed to grant payment holidays. And also, IFRS and International Accounting Standards Board have also come up with propositions in favor in terms of the IFRS 9 model, whatever forbearance is granted, whatever holidays are granted would not have a significant increase in credit risk. So that means they're coming in the stages that forbearance boosts sales. So that is what we're doing. So I believe that has answered the questions. Then to the sectors that we are looking at. So of the 50%, if we're looking at the oil and gas, oil and gas accounts about 21% of the loan book that we're restructuring. Retail that is both SME and consumer is about 18%. Power sector is about 6%, and others about 5%. So that's basically the structure of where we are looking at making [indiscernible]. Thank you.

Okay. I believe you also asked what the FX rates for our loans will be. I'll come back to the one about the size of the loan growth if you exclude the revaluation gains, but the FX rate for our loans as at Q1, Yemisi, can you answer that question?

So yes. We used the FX rates which was NGN 386.51 as at 31st March.

Okay. So yes. And I believe the other question you had asked was what percentage of the loan growth -- you wanted to know how much of that was coming from underlying loan growth? How much of it was coming from revaluation? Is that correct?

That is correct, yes.

Okay. We don't have that calculation at hand. And if we were to give you a figure right now, there might be some degree of speculation, but I will see that -- Yemisi, do you have an indication for the bank? And yes, what are your thoughts from the banking side? Or would you like...

We may need to come back on that question. Just as you have said, we don't have the figure right now. We have actually looked at it portfolio-wise, inclusive of revaluation, to get our loan growth of about 14% in the year, but we may need to come back on this, please.

Okay. Just 2 more questions. What's your loan-to-funding ratio if you use the CBN's measure? And at this time, what's your effective CRR? Because I know that's quite high at this point.

Okay. Yemisi, can you answer that question, please, CBN loan-to-funding...

Yes. So loan-to-funding CBN ratio was 69%. And then the effective CRR, 46%.

Okay. So we have a question that was posted here. Maybe I could just go ahead and read it out, on the webcast, which is I'll share our view on the CBN forbearance granted to restructured loans. Can we share the size of our book likely to be affected and the sectors to be most affected by COVID-19? I think Toyin has answered much of that. The implications for transparency in bank's financial reports given concerns that banks are likely to restructure weak loans without making prudent provisions. And then how are we looking at credit growth given COVID-19? What risk do we see to the growth expectations? And remind us about hedges in place for the oil and gas book. And exchange rate for the balance sheet. Exchange rate for the balance sheet has been answered. There are a lot of questions that were asked there, so I'll just try and summarize generally. Yes, granted that there will be some issues around transparency. I think you will find that some of the weaker loans will be restructured. I think that restructuring of loans that are otherwise challenged is not necessarily a new thing, but maybe I would also ask Toyin to comment generally on this point or this question about how one would ensure adequate provision has been made in the event that weaker loans are being restructured.

Okay, yes. Thank you, Ladi. To answer that question. So the FCMB, like I mentioned, the risk management department individually reviewed the entire loan book in line with the guidelines of Central Bank. And we actually came up with the identified names and moved the eligible for restructuring. And in doing that, we excluded nonperforming loans. And lot of you mentioned that we have a model in place in the bank that, to a reasonable extent, ensures that conditioning in line with IFRS 9 based on the model is being done in an independent manner and is always validated by the external auditors. So I can say that there has been some prudence in this regard. And like I also mentioned, the IASB, International Accounting Standards Board; the IFRS; the global standard-making organizations have also realized that working with regulators globally in terms of granting forbearance have also tweaked the requirement for the IFRS 9 model. And so to that extent, I believe that there will be transparency because globally most banks are coming up with figures as to the book that they will have to restructure. And the guidelines that are being presented by these accounting standards board, they are quite clear as to why these holidays that we're granting were not the same, as significant -- so it's a dialogue, it's a discussion that is ongoing. So I don't see a major issue on this but just to mention that in FCMB, this is the methodology and the model we have in place. So we regulate, the investor mitigates your concern. Thank you.

Okay. I think there are quite a few other questions asked. I will just comment on this issue around credit growth on COVID-19. What risk do we see to the growth expectation? I think globally what we are seeing actually is that there is going to be more credit requirements as a result of COVID-19, for those companies that are certainly healthy and able to justify getting credit. So we don't see our projections being at risk as a result of COVID-19. If anything we think there is a risk, when we combine the devaluation effects, that we may find ourselves having to contain growth. We may have ourselves having to contain growth and hopefully be able to take the higher quality names in terms of the growth. Now I think most other questions have been answered in some way, shape or form. The percentage of hedging is 70%. Details of those hedges, we don't have at hand, I don't think. And we've also commented on the exchange rate of the balance sheet. So if you don't mind, I'll move on to a question from [ Tim Zhang Guotao ] of Meristem that's also been posted here for us. Comment on our net dollar position. And are we long or short? So we're net long dollar. We recognize just about, as I said, between 20% to 25% of our gains in Q1, which was around -- Yemisi, can you confirm the figure of the gains that we recognized?

We recognized about NGN 850 million. That's about the 25%.

Okay, okay. Now in terms of the outlook for the rest of the year, it's very hard for us to say. I think it all depends on whether or not -- the Central Bank, how quickly they seek to unify the rates; and what happens with oil prices over the next few months. And I think it's hard for us to predict, so we're not making any predictions on this call as to the rates. A follow-up from Meristem is the surge in impairment charges in Q1, if we could comment on that. Do we -- I guess, maybe, Toyin, can you give any clarity on what caused the increase in impairment charges in Q1?

Yes, okay, like I mentioned. So the cost of risk is usually the net. So you have the gross and then you have the effect of recoveries. Like I mentioned, recovery was actually low in Q1. So that accounted for that spike you're seeing within the various analysis. So that's the major cause of that lower recovery in Q1. Thank you.

Thank you, Toyin. Any more questions?

We have no further questions on the phone line.

Actually, there -- Ladi, there is a follow-on question from [ Tim Zhang ] that's been posted.

Okay. I only see one follow-on, which I've answered.

Okay. And there is one more.

Okay. So the question is, "Given your expectations for higher ECL provisioning needs and more specifically against all sector loans, why did the bank not take a higher cost of risk in Q1? What is the expected cost of risk for the full year? And what is the quantum of unrealized gains in terms of devaluation, and will these be realized in Q2?" Maybe Toyin could respond to our provisioning strategy vis-à-vis ECL and specific provisions and why we did not take a higher cost of risk in Q1.

Okay. So well, like Ladi has mentioned, we cannot give specific NPL or cost of risk guidance. But just to mention that we have concluded our stress test and scenario analysis. Based on the IFRS 9 model that we have in place, the impairment provisioning is in line with the outcome of our scenarios. And while we are looking at our risk is mix in our workplace and the approach and what we have adopted at the bank. We cannot share those details right now, but just to mention that, that is the basis. We have no cause or reason to adjust right now, but like I mentioned, we will set aside some additional collective impairments for those sectors that I've mentioned. And the model handling that [indiscernible], and that rules clears over the course of the year. So that, basically the approach that we're checking in that.

I think what I'd also add is that the trend we have been seeing prior to COVID was our cost of risk was coming down fairly sharply year-on-year. And we expected that, that trend would have continued were it not for COVID. So while you may not see, all other things being equal, a dramatic increase in cost of risk, let's say, from 2019 to 2020, there will be some increase. The reason is that our provisioning, were it not for what we're seeing in terms of COVID and oil price, would have been far lower in 2020 than is now being the case; and certainly lower, significantly lower, in 2020 than it was in 2019. So I think it's important to note that generally the quality of the book was improving. Our provision coverage ratios were very, very high already; and that has given us some cushion. Now we've already given some indication about the revaluation gain, which I think was part of what you're asking about how much of it was unrealized. It's about, give or take whatever, 3x, NGN 850 million would be. So I don't have it off top of my head, but you can do the math. So that's what's, so far, unrealized. Then that would be realized in subsequent quarters and that's what we expect to do. I think the next set of question is from David Adu. What sectors is our loan growth coming from? And can we provide information about why there's no spike in NPL? I think we've answered. Why there was a spike in NPL, sorry, in finance, insurance, real estate and ICT. What is our net dollar position? Yemisi, what are your -- do you have an actual figure on the net dollar position?

Yes, I do. The net dollar position is about $150 million as at Q1.

Okay, thank you. I think, the details in terms of why there was a spike, I'd prefer to get back to you offline on those. I don't think -- I think something to appreciate is that our concentration in some of these sectors are very few names. So if you have just 5 or 6 names or a dozen names in a sector, one loan that goes bad is going to lead to a spike, of course, within that sector. I don't think it means that there is anything fundamentally wrong are going on in that particular sector. So I think that's the way to look at it, but generally we don't have a large number of concentrations in any one sector may be quite high, but when you consider that we are lending to over a dozen sectors, then of course, across the book, it is much smaller. Questions from [ Jerry Neboe ]. Can we speak to expectation of overall cost efficiency? In what area do you expect that there will be downward pressure? Two, for organic loan growth, what sectors are we targeting since most are likely to underperform? And three, what's our base case scenario for improving economic conditions that you've used in your loan growth Q3 or Q4? And do we see possibility of higher lending rates due to increased credit risk from obligors? So if we look at the first one, overall, cost efficiency and where do we expect to be downward pressure. We think it's going to come significantly from operating expenses. That's where we're looking at. I think just a lot of activities have moved to work from home. A lot of activities have moved to mobile and digital, and also we're seeing obviously a lot less travel costs and things like that. So administrative costs, operating costs, I think, is where we're going to see most of the savings. As we've seen, the Central Bank will not permit us to -- will not permit any bank, not specific to FCMB, to engage in layoffs. And I think it's always been our intention to focus really during this period on where we can have savings from non-staff-related costs. In addition to that, you asked about organic loan growth and which sectors will it be coming from. Generally, we're still seeing growth in consumer and SME -- please hold on. I'm sorry. Yes, we're still seeing growth in consumer and SME. We also expect we'll see growth in sectors like agriculture, manufacturing and healthcare. I don't know if, Toyin, there are any other sectors that we forecasted growth beyond those.

No, those are the sectors [indiscernible]

Okay, okay. Our base case now for economic improvement for this year. I mean we believe it's going to be a tough year all around, but I think there'll be -- so overall, I think everyone is expecting that recovery will be a function of primarily oil price. And so it's very hard to say when that will kick in, and there'll probably be a lag. So for us, I don't think our loan growth is driven by the -- what happens in terms of economic activity per se because we believe that a number of our customers will be investing ahead of a pickup in investment activity or economic activity. And also we see that working capital will be stretched generally for customers. And do we see a possibility of higher lending rates due to increased credit risk of obligors? I think that it is, interest rates are fairly low right now. What I would say is that there could be slightly higher credit spreads generally during the course of the year, but that's to be seen. I mean we are not modeling that in at this point. Next set of questions is from [ Emmanuel Adeleke ]. "What are your plans on meeting the loan-to-funding requirements? And can you explain why only 25% of revaluation was booked in Q2 -- in Q1?" I'm sorry. The plan for us in terms of loan-to-funding is that we will just steadily grow the book. Whatever debits have been taken for the variance on loan-to-funding have already been taken, so our risk in terms of additional CRR because of loan-to-funding ratio is limited. We believe that, by the end of the year, we will get to the 75% or close to -- sorry, to the 65% or close to that, but we're not going to try and -- it's not strictly our goal that we must hit 65%, I think. If we're off from it maybe by maximum 1 or 2 percentage points, but there's a plan to just steadily try and achieve it during the course of the year. Why we recognized just 25% of the revaluation gain, I think this is really just a practice in our management accounts that we're trying to smoothen out the earnings and not have undue spikes in a particular quarter, but any time we're doing audited accounts, certainly, we'll make sure we reflect the actual position. Next question. What proportion of the loan book was in FCY as at Q1? I don't know whether either Toyin or Yemisi can answer that question.

Yes. About 52.1%.

Okay, 52.1% is in FCY.

Yes, yes. And 47.9% in local currency.

Okay. Now next question from [ Abiodun ], who asks why there was a 300 basis points reduction in Pensions contribution to AUM. And why -- so the decline was in relative terms because we saw rapid growth in our non-pensions assets under management, as opposed to any decline in our Pensions AUM. We've actually seen growth in that area. Okay, I don't believe there are any more questions for now.

Ladi, there's one more question. I'm just pasting it.

So our net impairment loss on financial assets increased by 61% to NGN 3.7 billion from NGN 2.3 billion in the prior year, partly due to the impact of -- okay. This is not a question. It's just a quote. Ori, I don't see a question.

That -- he's asked -- at the end of it, he said, "Kindly expatiate on it." So can...

Okay. I don't think you posted that. You didn't post that. Okay, so the -- what I have here is the net impairment loss on financial assets increased by 61% year-on-year to NGN 3.7 billion for the first 3 months of 2020 from NGN 2.3 billion for the same period prior year due partially to the impact of devaluation on impaired assets and provisions for newly classified loans. That's all that's written and what's been posted. Is there more to the question? Is there more to it? I can't see anything...

Yes, and then he goes -- okay. Then he goes on to say, "I lifted the above statement from the press release. Kindly expatiate on it."

Okay. So yes. I think maybe -- I don't know whether Toyin, can you see that statement? Can we expatiate on that?

No, I can't.

Do you want me to take it?

Okay, you can answer -- yes. So maybe, Yemisi, you take it, please.

Okay, yes. Okay, thanks. So what was basically explained on the press release is that the increase that was recorded in the impairment loss on financial assets was due to -- phase 1 is the devaluation of the impaired assets before in the books because the FX devaluation will automatically increase the translation to naira of the impaired assets. So that's one big contribution. The other contribution is that we saw few other loans that we classified during the period. So those are the main contributors to the increase that was noted in the impairment loss. Thank you.

There are no further questions on the phone lines. Please go ahead.

Thank you very much. And we appreciate the time and the interest in FCMB. We wish you all a safe period going forward. And we look forward to seeing you in -- at the beginning of Q3 when we go through our H1 results. Thank you, and have a good evening.

That does conclude our conference for today. Thank you for participating, you may all disconnect. Speakers, please stand by.