Fidelity Bank Plc (FIDELITYBK) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Fidelity Bank Plc 2019 FY Results Conference. [Operator Instructions] Please also note that this call is being recorded. I would now like to turn the conference over to Nnamdi Okonkwo. Please go ahead.

Good afternoon, ladies and gentlemen. My name is Nnamdi Okonkwo. I'm the CEO. I welcome you to this conference call. Our first in the year. I'll start with the financial performance commentary and talk about some futuristic issues given the circumstances we're in at this time, and then I'll hand over to my colleague, Gbolahan, to make detailed financial presentation. So financial performance review. We closed the year with NGN 30.4 billion, and this translated to a double-digit growth of 21%, while profit after-tax grew by 24% to NGN 28 billion. In absolute terms, PBT grew by about NGN 5.3 billion, and this was on the back of strong growth across key income lines. Highlights of those lines on total interest. Total interest income grew by 15.8%. Credit-related fees grew by 125%. Trade income grew by 19.7%. Digital income increased by 13.3%. Net interest margin improved from 5.8% in 2018 to 6.2% in the year under review. And this is -- or this was on the account of higher yields on our average earning assets. This is in line with the guidance we have given you last year where we had projected between 6% to 6.5% as guidance for NIM. We had total credit loss reversal of NGN 0.6 billion in 2019. This was a combination of NGN 5.3 billion impairment write-back, I guess we can comment on this later, and NGN 4.7 billion net losses we took as the recognition loss on a specific customer loan that, so far, had dropped in expected cash flow. As I said, we can speak to this further. Operating income after impairment increased by 15.6% to NGN 112 billion, while operating expenses grew by 13.7% to NGN 82 billion. This was driven by NDIC, AMCON charges, technology costs, adverts and accounted for over 60% of cost growth for 2019, those lines I just mentioned. NDIC and AMCON are the reflection of our balance sheet expansion by which we believe will slow down in 2020 given the global scourge and depressed crude oil price. Our net loans and advances grew by 32.6% to NGN 1.1 trillion. 4 key sectors, which represent 60% of this growth. The sectors are manufacturing, transport government, oil and gas, downstream, etc. For the public sector growth, we have already had paydowns of over 15% of the portfolio in Q1 2020. And some of the assets in Q4 were to meet short-term funding requirements. We're glad to say that our NPL ratio improved to 3.3%, down from 5.7% due to 30% growth in our loan book combined with a 25.1% decline in absolute NPL book. I'll speak further on the NPL book. The drop in NPL was largely due to NGN 12.3 billion loan write-offs with general commerce, transport, oil and gas-related sectors accounting for over 75% of the write-offs. Total deposits increased by 25% to NGN 1.2 trillion. And in absolute number terms, this was NGN 245 billion when compared to our December 28 position. We achieved strong double-digit growth across all deposit types, demand savings, tenor deposits. We also saw a strong growth in foreign currency deposits, which accounted for 44% of total deposit growth in the year. In addition, we witnessed strong growth in the retail segments of our business. Our savings deposits increased by approximately 21%. This comes in as the sixth consecutive year of double-digit growth in savings. Savings deposits now account for 22.5% of banks due to deposits. On the asset side, retail loans grew 43% to approximately NGN 54 billion. And this was driven by our digital lending products, which we do in partnership with fintechs. As at December 2019, we had disbursed over 70,000 micro loans on our flagship digital lending product called Fidelity FastLoan, and we do this in partnership with Migo. Regulatory ratios now. Our regulatory ratios have remained above the required thresholds, with capital adequacy ratio coming in at 18.3% and liquidity ratio at 35%. I will now be speaking to some futuristic issues. And to do this, we tried -- by the way, by work information, we marked our balance sheet for 2019 at NGN 364.7 million. But what we then did was to model the same 2019 audited financials using the current adjusted exchange rate of NGN 380. We are just trying to see how that will impact our capital adequacy ratio. So when we used that model, our capital adequacy ratio came in at 17.95%. Now this implies that every NGN 5 adjustment in the exchange rate, the negative impact on our capital adequacy ratio will just be 0.1%. That's how we did that test, okay? We have also modeled the impact of the exchange rate adjustment and other scenarios on our various risk asset sectors. The last time we had a significant exchange rate adjustment, we had an oil and gas upstream book of over $500 million, and I'm talking 2015. Today, that book is down to $365 million, and 75% of our exposures in the upstream sector, they have short-term hedges at an average oil price of $50. Now the key pressure points for an exchange rate adjustment for us will be the oil-and-gas services, transport, general commerce, manufacturing sectors, and that's why we have a higher cost-of-risk guidance for 2020. We have increased our risk guidance to -- cost of risk of guidance to 1.5%. Finally, due to the expected pass-through effect of COVID-19 and the lower oil prices in the macro economy, we've had to sit down and look at our numbers and expectations for this year. So we obviously expect 2020 to be a softer year for business. Therefore, our guidance for financial year is reflective of this with an estimated 15% decline in profitability. So we're looking at 15% decline in profitability this year when compared with the 2019 financials that we are presenting today. We also expect lower ROE of 11.3%, down from 13.3% in the current year. So that's -- those are the highlights. We've tried to speak to some of the issues we know are burning issues. But then I'll hand over to Gbolahan to take us through a detailed presentation. We'll take questions thereafter. Thank you.

Thank you, Nnamdi. I'll just start from Slide 4, which just shows an overview of the bank. Total assets about NGN 2.1 trillion, 3,000 staff, 5.3 million accounts, 2.5 million mobile customers, still about 250 branches, 15 board members, 8 nonexecutives, 7 executives and a 9-member executive management team. On Slide 5, it just shows an overview of our retail and digital banking business. Strong growth in accounts. Acquisition came in at 17% for 2019. We acquired over 800,000 customers. Saving deposits was up 21%. We saw a strong uptick in the retail loan book to 43% and it's been declining for the past 3 years. Mobile and Internet banking customers increased by 31%. And then debit card customers grew by 11%. So in all, 47% of the customers are now enrolled on our mobile and Internet banking products. 82% of customer transactions are done using electronic banking channels, and digital banking is now 31% of fee-based income. I'll go to Slide 9, which speaks on the key performance highlights. Nnamdi has spoken about most of them, but cost of risk is down to 0.1%, actually negative because of the net write-back we had. The NPL ratio using Stage 3 loans is 3.3%. Coverage ratio is up to 169.1%. But when we look at the coverage of the various stages for Stage 3 loans, we now have a coverage of about 60%. And then FCY loan book is about 41% of the total loan book. Our capital adequacy is 18.3%. We're only recognizing 40% of our local currency bond. Tier 1 capital adequacy is at 15.5%. Liquidity ratio is at 35%. Gross loans-to-funding ratio is at 68%. We've never been debited for any short fall in lending from an LDR perspective. Total equity is NGN 234 billion. So I'm now on Slide 10. I'm just looking at the key drivers of earnings for the year. Gross earnings was up 14% largely driven by the 15.8% growth in interest income. And foreign-based income accounted for almost 85% of total earnings. Noninterest income was up NGN 1.6 billion to NGN 33.2 billion. Double-digit growth on credit-related fees, trade income, account maintenance fees and digital banking income. NIM was up to 6.2% from 5.8%. We guided for 6% to 6.5% over on our guidance in that. Operating income was up 15.6% to NGN 112 billion, and then PBT was up to NGN 13.4 billion. Nnamdi's spoken about a growth in customer deposits by 25%. So total deposits is now NGN 1.2 trillion, 17% growth in local currency deposits. Out of that growth in local currency deposits, savings deposits contributed about 35% of that, and then 60% growth in foreign-currency deposit. So right now, foreign-currency deposits inching towards NGN 300 billion, about NGN 288 billion, and they account for almost 24% of total deposits. From a loan growth perspective, we achieved a 2.6% during the year. In the fourth quarter, you'll see massive growth in the public sector loan book. We've had significant paydowns on that already in quarter 1. About 15% of that book has already been paid down. And local currency growth was 32%, and then foreign currency was 33%. Nonperforming loans declined 3.3% -- to 3.3% for the year. Obviously, a lot of that was driven by the loan write-offs of NGN 12.3 billion. Nnamdi has mentioned the key factors that contributed to that and then also the growth in the loan book. Slide 12 basically just shows the figures, year-on-year figures. You see strong growth in most of the line. FX income was down NGN 6.1 billion, about 48% decline over the year, but that was offset by strong growth in the other income line. So net interest income up 13.2%, fee income up 2.2%, operating income up 10.2%, leading to a 21% growth in profitability. If you look at the quarter-on-quarter numbers, you see that from quarter 2, profit has averaged about NGN 7.5 billion on a quarterly basis. If you go to Slide 14, it just shows the balance sheet. Like Nnamdi said, the balance sheet is marked at NGN 364.7 for the 2019 financial year. So when we model the adjustment at NGN 380, it's technically an adjustment of just about 4% because we're marketing at NGN 364.7. You see strong growth on most of the balance sheet line, loan book. And in assets, not a lot of growth, obviously, because of the additional LDR movements over the year. And then you also see cash reserve is up 37.6%. Our average cash reserve is actually about 36%. If you go to Slide 15, it shows the breakdown of gross earnings. We see strong growth in other income from NGN 6 billion to NGN 12 billion. That was driven by asset disposal gains of NGN 2.5 billion and NGN 1.2 billion growth in dividend income on permissible investment. Slide 16 shows NIM analysis. It's moved from 6% 9 months to 6.2%. A slight drop in the average lending rate between average yield on assets between 9 months and full year. But on a year-on-year basis, you see yield on earning assets moving from 12.8% to 13.6%, and then funding cost was relatively flat, 6.2% to 6.3%. So on a year-on-year basis, you see NIM moving from 5.8% to 6.2%. Next slide shows the OpEx management of the key cost drivers, which were NDIC and AMCON technology and advert cost. Now I'll go to Slide 19, which is an analysis of the funding cost, funding bit of the balance sheet. And then you see strong growth in all the deposit lines both quarter-on-quarter and on a year-on-year basis. And so if you go to Slide 20, we show a further breakdown. You see customer deposits up 25%, and then you see the graph. So demand deposits of 56% of total deposits. Time, 21%, and then savings deposits is 22.5%. And it's just due to the contribution. Local currency deposits almost NGN 800 billion to NGN 966 billion year-on-year. And then foreign currency, about NGN 180 billion to NGN 288 billion. Now we go to Slide 21, just an analysis of the retail banking book. You see it's moved from NGN 310 billion in 2018 to NGN 358 million in 2019. A percentage contribution to low-cost deposits, as always, we went around 38% to 37%. And there, you see the contribution to total deposits or savings deposits, it's averaged 22%, 23% over the last 5 quarters. And then retail assets have moved up. It was below 4% of the total loan book. It's gone to 4.6%, and we're driving some growth in that area. Slide 22 is just an analysis of the liquid assets book. And you see it's quite diversified, 2.6% of total assets by placement, 8.6% in treasury bills and 5.1% in bonds. So we've tried to manage the duration of that book. Slide 23 shows the breakdown of the loan book. You look at strong growth in most of the loan segments, but obviously, real estate has been quite challenged. It was down 12.7%. And then Slide 24 just shows a further breakdown of the loan book. And if you look at Q3 and Q4, you see NGN 1.1 trillion to NGN 1.178 trillion. I see the bulk of the growth for Q3 and Q4 coming from the government sector, which moved by about NGN 40 billion over the period. And like we said, that book is already down 15% in quarter 1. If you go to Slide 25, it just shows the key sectors driving the loan book, manufacturing, transport government, downstream, 66% of the loan growth. And then we had loan write-offs of 12.3%. So Slide 26 shows the breakdown of the loan book according to the stages. 75% of the loans are in Stage 1, about 22% in Stage 2 and then about 3.3% in Stage 3. The coverage for Stage 2 loans is about 7.5%, and then coverage for Stage 3 loans is about 61%. So it's gone up from the previous period. And then Slide 27 just shows a further breakdown of the NPL and the NPL coverage ratio. Obviously, it's dropped sharply between Q3 and Q4 because of the write-offs. But the main pressure points are still the oil and gas downstream and transport sectors. Those 2 are about 53% of the NPL book. Slide 28 just shows a break -- further breakdown of the NPL in 2018, 2019, and then it shows the NPL ratio for each of the sectors, obviously, the highest sectors now, downstream is still high at about 26%. Education was high, but all the other one are now in single-digit apart from downstream. Slide 30 speaks to capital adequacy. And so it's now at 18.3%. Regulatory adjustment dropped because of increased capitalization of profit, which boosted our single obligor limit. Without that, regulatory adjustment would be on 19.2%. But it's at 18.3% post all adjustment and Tier 1 CAR is now at 15.5%. Over the next 12 months, we expect if we do not, we issue the bond, then the capital impact of this existing bond will no longer be reflected from a capital perspective. Slide 31 shows the breakdown from each of the business units. You see corporate and investment banking, which is our corporate and treasury business, about 33% of profits. The Lagos business, about 28%; the north, about 14%; and then the south, about 25%. So well-diversified profit coming from each of the business segment. And then from a funding perspective, a lot of the funding basically coming from all the commercial and retail businesses. And then the loan split is -- the chunk of it comes from corporate investment banking, Lagos and South West are 28%; and then the south business are 21%. So we now go to our guidance for the year, which is on Slide 33. First, we look at what we guided for 2019. Out of the 10 -- out of the 9 indices, we fell short from a cost-to-income ratio perspective and a total dividend perspective. So dividend payout was less than 30%, but I think shareholders are still happy from 11 kobo to 20 kobo. And when you look at the target for the year, reflective of what Nnamdi has spoken about, we expect a softer year model of about a 15% decline in profitability for the year, which basically brings ROE to 11.3%. There are some headwinds we have to face. One of them is the reduction in the interest rates on interventional fund loans from 9% to 5%. Obviously, there's also an adjustment from a funding perspective, but on a net-yield perspective, it is negative for us. You also have businesses slowing down because of the COVID-19 issues. As some of you might have read, largest airline in the country just suspended operations today for the next 23 days, and we're going to see a lot more from a business perspective simply because of safety concerns. So I'll stop here. Thank you for listening. We'll take your questions now.

[Operator Instructions] Our first question is from Muyiwa Oni.

I just wanted to follow up on the impact of the crisis. What the global pandemic and the current progression and how that's affecting your business. I know you already mentioned you're modeling a 15% reduction in earnings, but I just wanted to understand where the pressure points will come from. So you already talked about -- suppose the oil price position and your oil and gas exposure, but just want some more color on where -- what business lines were beyond higher loan loss provisions, where do you expect interest income to reduce or where do you expect fee income as well to decline? And then secondly, I wanted to understand, particularly from the oil and gas side as well, the size of your oil and gas exposure that has that short hedge? So is it 100% of the over $300 million loan or -- so I want to understand what position and then also the duration as well of the hedge and then what size of your oil and gas exposure is restructured? So I just wanted to also see if you will be going to the Central Bank for the forbearance that has been offered to banks to restructure some of their exposure. I'll pause now for your response.

Okay. Thank you, Muyiwa. I'll start from the last question. So if you look at the oil and gas exposure, like Nnamdi said, when we started, the book now is about $365 million, and we're talking about the upstream oil and gas book. About 75% of that book is hedged. It's hedged at an average oil price of $50. The short-term hedges and all the hedges will have run-off by the end of the financial year. So for the oil and gas book, it was 75%, $365 million book, 75% hedged. Average hedge, $50. And that's why we said they're short-term hedges. Typically, we do 6 months hedges for each of the obligors there. In terms of what bit of the business will be affected, obviously, we've been in a lower interest rate regime, so we expect lending rates to be softer. We've already seen that, and that's why we model of a lower NIM this year, 5.5% to 6%, even though funding costs are also there. We expect transaction on banking income to be down for 3 reasons: #1, you've seen the revised bank charges that CBN came out with at the end of the financial year. So in terms of fee income on digital, that would be lower. We think that can be offset actually with increased enrollment on the channels, but things like trade will be down. From a trade book perspective, with this COVID-19, there will obviously be significantly lower importation. Lower volumes of LC is issued because the countries where the imports are coming from are also under lockdown. So if you look at our revenue lines, we had double-digit income from the trade business. We'll expect that to slow down significantly. If you look at loan growth for this year, last year, it was 32%. We're guiding for something about 1/4 of that this year in terms of the growth perspective. So we also expect that to be lower. If you also look at the transactional banking business, if you look at something like the aviation business, I think we bank airlines that do about 35% of the business. 1% has just had to shut down operations today for almost a month for safety concerns. So we see a lot of risk crystalizing in a few of the sectors. In terms of going to the Central Bank for forbearance, I think these are early days. We're still modeling the impact on each of the sectors, but we'll see as it goes. By the time we're giving our Q1 conference call at the end of April, I think we'll be able to give more color on that. So what we've modeled is what we can see and making some forward-looking projections, and then that's how we came down with a 15% decline in the PBT numbers. Thank you.

If I may ask a follow-on just on the oil and gas exposure. Can you share the breakeven production for your -- the oil and gas business if you're [ willing ] to?

So it's not one obligor. Yes, I think in that book, you're talking about 6 or 7 obligors.

Sure, sure. So maybe like an average or something.

What I'll tell you is at $30, $25, I mean, all bets are off, yes.

The next question is from Jerry of CardinalStone.

I just want to ask, and I think as a follow up to the last question. In the midst of what we're seeing, commentary, do you think at any point there would be some regulatory easing by the Central Bank for banks, just to ensure that the [ uses ] of the systems have been in the last year and this year lots of headwinds coming from the regulators. What do you think at any point, especially with ongoing conversations at any point, can you comment, please? And secondly, I would like to know what your next preparation is going to be? And thirdly, the potential health risk we're seeing in this sector right now as a result of the disruption in COVID-19 and the oil price shocks. Do you think that the [indiscernible] implementation of Basel III for banks just to ensure that [indiscernible] traded any time soon? Those are my questions for now.

Thank you. I'll start with the net open position. It's roughly about $300 million, and that's the net open position. It's roughly about $300 million. And now in terms of regulatory easing, I think if you look at the communicate that was issued after the meeting on Saturday, the Central Bank issue, I think there's already a window that has been opened in terms of moratorium for facilities, in terms of restructuring of facilities, it need be and all that. So I think there's already a window that has been opened, and I think there's been a very fast reaction from the regulators. I think Nnamdi will comment on that.

Yes. In addition to what Gbolahan has said, this is a crisis period, which I think the Central Bank and the banks are even better prepared for based on what happened in 2016. You can see how swiftly the Central Bank rallied banks. So this time, it's more collaborative action. So when they talk about regulatory easing and stuff like that, it's collective. Some of these facilities are syndicated, some bilateral. So whatever it is, the frequency of meetings and discussions would definitely help in that direction. So let's just stand on what the CBN has so far released because one thing I can assure you is that there is greater collaboration in handling this situation this time around. Thank you.

Do you have any further questions, Jerry? Sorry, we can't hear you.

Yes. On Basel III. There was a question on Basel III.

Sorry, can you repeat the question on Basel III again?

So I was talking about strengthening the resilience of the sector, and we know the risk that comes with that in Basel. The CBN has previously said that, I think, possible implementation of that. So I was wondering if all of this is we've seen the potential risk to banks and capital positions if at any point [indiscernible] coming from the [ fillers ] we get.

Well, we've not got any [ fillers ] yet. We've not got any [ fillers ] yet. Thank you.

Okay. Your operations and the disruption we're seeing to society right now. How does it really affect your business? I only get the sense of, for example, you said you expect some decline in transaction income. And in my mind, I'm thinking that because there might be recessionary movement, new activities, a lot of your customers want to switch to alternative channels. Are you not expecting to see at least an improvement in that -- on that front? And also, how will it affect your costs, if in-branch activities are limited to the barest minimum? Would that not see any -- at least be positive for costs operationally?

So you're right. So it's a case of a factory -- when you have a factory that is set up to produce goods and then the fixed cost of the factory is running, and the variable cost of the factory is not running. But guess what, when that variable cost of that factory is not running, that factory is not selling anything. So the factory is there out operating at 100% capacity and selling goods at NGN 100 and the cost of production is NGN 70, then having a cost of -- a fixed cost of production of NGN 15, but you're not selling anything. So yes, we expect an increase in customers using alternate channels. Even from a safety perspective, we'll also encourage our customers to use alternate channels. But when you look at the general economy itself -- so I just give an example. If an airline has to shut down, the ticket sales of the airline, the people who depend on the airline for moving cargo business, people who are importing goods into the country, so yes, you have a lot more people using the digital channels, but that's a lot more on the retail and individual perspective. In terms of the corporates and SMEs, if you look at a lot of what people are doing now, a lot of people are working remotely. So it might be easy to work remotely for a service business. Whatever business -- I need to manufacture. You can't manufacture remotely from your house. So there's a lot of impact from a business perspective. If you look at the government perspective, just because the oil prices are down, you look at the fact that was shared this month, it's already down about 10% compared to the previous month. And we've not even yet had the full impact of the lower oil prices. So it has a pass-through effect into the whole economy. Thank you.

[Operator Instructions] We have a follow-up question from Muyiwa.

Just want to understand what type of customer growth you're modeling into your forecast. So suppose for the last 2 years, it's been growing slightly above 15%. So I want to see what you expect this year? And then also, your cost-to-income ratio, I think you're guiding 70% this year. I'm just wondering what -- so one, where do you see cost-to-income ratio certainly in the medium term? And I think what levers do you think you have to move it there? And then thirdly, your micro loans, you highlighted that you, I think, disbursed about 70,000 micro loans, right? So if you could share the size of that micro loan.

So the micro loans, the average size of that book in terms of ticket size moves from 10,000 to less than 120,000. Take the average ticket size, you won't get more than 35,000. In terms of CIR, medium term, we've always guided for about 50%, 55% over the next 3 years. This year, we're guiding for 70%.

Yes. Customer growth.

Okay. Customer growth. Last year was about 800,000 customers. This year, we're looking at 60%, 75% of that number. So we are modeling for 500,000 to 600,000, and that's because there's still a lot of in-branch customer growth because of BVN requirements. So we hope we don't have a scenario where there's a long sit at home and lockdown order because that has an impact on customer growth. Thank you.

Our next question is from Aderonke Akinsola of Chapel Hill Denham.

So I have 2 quick questions. My first question is, what is the contribution of the interventional loans to your total loan book? And then my second question is considering that the macro environment will be soft this year because of the global pandemic. Where do you expect -- or what sectors do you expect to drive loan growth this year? Or what type would you be comfortable lending to this year?

Okay. Thank you. So if you look at our presentation and you go to Slide 14, Slide 14 actually has our on-lending facilities. So total on-lending facilities we have as a bank is about NGN 250 billion. So it's on Slide 14. You see it on part of the balance sheet line. So it's about NGN 250 billion. That's total on-lending facilities. But not all those are direct CBN intervention funds. So it's about 21% of the total portfolio. In terms of those that are directly from CBN, it's about NGN 150 billion. So it's about 60% of that directly from the Central Bank. And if you model that over our total loan book, you will get about 13%. Now in terms of the sectors we still seek to drive loan growth. So there's still opportunities. There's still opportunities in the retail sector. Also remember that part of that loan growth you are seeing is that we've also included currency adjustment for the FCY loan portfolio portion. So part of that adjustment for the FCY loan portfolio portion is about a 4% adjustment on that FCY loan portfolio portion, which, if you annualize it over the entire loan book, comes to about 2%. So in terms of organic growth of that loan book, you're actually looking at about 3% to 5%. Thank you.

We've got a follow-up question from Jerry of CardinalStone.

Yes. So just a follow-up question. I'd like to find out about your funding costs. Yes, it's been a bit sticky. And last year -- the last 2 quarters of last year, we did see moderation on the unit environment. So what's really, really keeping at that levels? And where do you see stretching that in 2020?

Okay. So if you look at the funding cost, yes, over Q1 to Q3 last year, it averaged 6.6% in Q1, 6.6% in Q2, 6.7% in Q3, but it dropped by 40 basis points to 6.3% at the end of the financial year. So obviously, we've seen some decline in that. But if you look at our total deposit book, and then you have to look at the sensitivity of that deposit book to interest rate movements. So even though funding costs have been coming down in the environment and savings interest rates have not come down because it's tied to NPC. That's almost 25% of our total deposit base. So when you look at what piece of that deposit base is sensitive to interest rate movement is less than 25%. So what I'm basically saying... [Audio Gap]

Ladies and gentlemen, please just stay on the line. We will have the main speakers back shortly. Their line has just disconnected. Ladies and gentlemen, we've been rejoined by our presenters. You can go ahead, sir.

Okay. Let me just take the last question again. I'm sorry, we're disconnected. So in terms of -- speaking to our funding costs, if you look at the presentation and you look at Slide 19, which looks at our funding base analysis, and you look at the total funding base and you back out equity. So total funding base is NGN 1.9 trillion, when you back out equity, the total funding base is NGN 1.7 trillion. Now out of that, about NGN 258 billion is time deposits. So only 15% of that funding base is directly sensitive to interest rate movements. We've got a lot of debt issued, we've got savings deposits. They are not affected by what is happening in the local economy. We've got a lot of money in current accounts. They're not affected with what is happening in local economy. So you would expect the fact that funding costs are down in Nigeria, maybe 800 basis points or 40% for it to have a direct correlation on our funding cost because that's not actually the structural of our balance sheet. But we're seeing a reduction. And I think what's more positive for us is that we are holding up on the average yield on earning assets and still improving our NIM over the period.

Yes. So where do you see -- how -- maybe an expectation of where you think is [indiscernible] this year.

So modeling both. We've modeled for both together and NIM. And so from a NIM perspective, we expect NIM to set about 5.5% to 6%.

[Operator Instructions] We have a question from Gbolahan Ologunro of CSL Stockbrokers.

Thank you for that well-detailed explanation on your financial performance for 2019. So just a little clarification. During the course of your presentation, I think you mentioned that for every NGN 5 adjustments in the exchange rates, it will lead to 1% decline in capital adequacy ratio. So just to confirm that. Then my first question is during the course of the presentation, you mentioned you're going to provide further insights on the modification loss on the financial assets of NGN 4.7 billion. So kindly provide more insights on that. Then my next question is, how do you intend to play in the fixed income space given the current dynamics in the markets with exchange rate pressures and, of course, the outbreak of COVID-19 that has raised global operation to risk?

Okay. Thank you. I'll start with the first one. So we said for every NGN 5 adjustment, it's 0.1%. It's not 1%. It was 1%, so it's 0.1%. Now for the modification loss. So we explained that in our H1 call. I'll just take it again. We have an asset, and the cash flows for that asset had to be calibrated. Because the cash flows for the asset has to be calibrated, there was a modification on that financial asset. So what happened is that we took a modification loss. We have made an impairment charge on that asset. So we took a modification loss, and then we wrote back the impairment charge that we had made. So when you look at the recovery line in [court], part of what is included there is over NGN 4 billion, which is the provision we had initially made. So what happened is that we wrote back the impairment, and then we took a modification loss. Net-net, between both of them was about NGN 500 million thereabout, we took a modification on that. So it was just on one particular asset. I hope that clarifies that.

Yes. Yes. Okay. So this asset, I mean, question, which sector is it related to?

Which sector is this asset related, it's in the construction sector.

Construction. Okay, okay. And the question on your playbook in the fixed income markets, that sounds more like your trading book. Are there intent to navigate through the current uncertainties in the markets on interest rates movements?

I mean -- so you see volatility always presents opportunities, yes? But even within the opportunities presented from a market risk perspective, we trade within the trading units that have been set. There're opportunities both from a foreign fixed income perspective and a local fixed income perspective. If you look at the yields of where the Nigerian corporate eurobonds are, you see some opportunity there. The question is, is it a falling knife? Do you want to put it on your AFS book? Do you want to put it on your trading book? Do you want to put it on your held-to-maturity book? I think we've got a good risk management perspective, which allows us to trade effectively whilst still minimizing the risk in terms of the portfolio you have, the margin calls that have to be made and all that. So we'll just -- we'll trade within that framework. Thank you.

Yes. Just a different question entirely. We understand that it appears the CBN sort of debits banks based on liquidity that those banks are with the debits bank. So what's your take on this in terms of the CBN just making -- setting debits on liquidity of banks without providing adequate explanation on what those debits are meant for?

Well, thank you for that question. Obviously, a lot of speculations out there. I think as you know, CBN is actively engaged in monetary policy management plan. We, as an institution, cannot start speculating on what they do or what they don't do. If we have any issues, we engage the CBN directly. So I would like to leave it at that.

The next question is from Victor Umoh of Ecobank.

Okay. I kind of got disconnected, while a lady was asking about the CBN interventional funds. While that's a note in your -- and you said you have the -- your loan book comprises of CBN interventional hold up to NGN 150 billion for 2019. Am I correct?

Yes, Please.

Okay. For 2020 now, seeing with all this global crisis, where do you foresee -- what percentage of your loan book do you see the CBN interventional funds taking a big chunk of? And which sector of the economy do you think would take this huge chunk? That's it.

Okay. So I'm explaining to you how I said total interventional funds are NGN 250 billion, which is about 21% of the loan book. And CBN intervention funds are about NGN 150 billion, which is about 13% of the loan book. Now in guiding for the year, we've guided for a total loan book for the entire year. Total loan book we've guided for is 5% to 7.5%. And if you consider the fact that over 40% of our risk assets are in foreign currency, if you just mark it with the adjustment that has been done, which is about a 4% adjustment, so there's already a currency adjustment in that guidance we have given of about 2%. So we're left with 3% to 5% loan book. Now I'm not going to sit here and tell you that out of that 3% to 5%, we are targeting 2%, for example, from CBN interventional funds because they're intervening in the economy as the need arises in specific sectors. If the sectors that interventions are coming in meet our risk acceptance criteria, we have customers who play in that sector, obviously, we'll do it because we've played very well in that sector. I hope that answers your question.

All right. But you didn't answer the part where I said your -- in terms of amount, I know you had NGN 150 billion now, and CBN's intervention go on very well. This intervention go on very well. So -- and the public are trying to change to this because of -- they think this is another means of getting lower interest fundings from the bank. So do you see institutions whereby you might get over -- if we can get an idea of overbooked -- do you see an overbooking?

Overbook for us?

Yes. Because I'm sure you have a lot of business -- like to the point where your reach becomes so much.

Okay. Maybe I should help here. We don't just take interventional funds because they are available. Our risk acceptance criteria are very clear on what we can do. So what we actually do, we have set these facilities as if we're funding them with our liquidity because, ultimately, the risk rests on the bank. So we don't just go out and access interventional funds because they exist. Like I said, it goes through -- each request goes through normal risk asset criteria. And the rule of thumb is if you can't do it yourself, don't do it through the interventional fund because at the end of day, the risk is on you. The only difference is that we're not using our liquidity to fund those transactions. So the issue of being overbooked by your definition cannot arise because, I mean, we have our eyes on the overall health of the loan book. Thank you.

[Operator Instructions] Our next question is a follow-up from Jerry of CardinalStone.

I just want, I guess, just a bit of clarity. In your expectation of a 15% decline in performance this year, does it -- did you factor in -- did you model in the potential FX and remuneration gains that you expect to see due to devaluation around [indiscernible]? So what exchange rate did you use and -- in your modeling just to value your books?

We don't in different scenarios, but I think now we're sticking with NGN 380.

So if we're sticking with NGN 380, that means that operationally performance is likely to be weaker apart from the FX and [ exponential ] gains.

Definitely. Performance is likely to be weak operationally just because of what is happening in the operating environment and the lower oil prices.

[Operator Instructions] We have a question from Tunde Abidoye of FBNQuest.

Just one question. Please, what's your net loan dollar position?

$300 million, Tunde.

[Operator Instructions] Sir, it would appear we have no further questions in the queue. Sorry, sir. We actually do have a question that just came in. It is from Adesoji Solanke of Ren Cap.

Apology, I joined a little bit late. I was just going to ask a little bit about your oil and gas loan book. You've probably spoken about this already. But if we just had some color around if you do have hedges in place, if so, what portion of your upstream book is covered by hedges and for how long? And as we do see oil prices stay low for longer, how do you think this -- let's assume we have $25 all through next year, for example. What sort of implications should we be thinking about in terms of the impact for your provisioning and asset quality numbers going into this year and end of next year?

Okay. Thank you, Soji. So the upstream book is about $365 million. About 75% of that book has short-term hedges. The average price of the hedge is about $50. All the hedges run off before the end of the year. If we have the oil price at $25 over a prolonged period, I think the only positive thing is that the companies have a strong problem with that. So we'll be looking at restructuring and coming out of those facilities, depending on where the prices stay. It could be anywhere within 18 months to 36 months, depending on where the prices stay.

Okay. Then the second -- yes. Then the second of my question was just around that, how the loan growth you've had running into this economic downturn? So I get all the explanations you've had around the likelihood of the impacts on the operations and earnings. But if you just give us some sort of general views about the nature of the loan growth you've had about the last couple of years. Is the spending rapid? So if you just help us understand better, what's driven that loan growth and how you think you're positioned in terms of the quality of that loan book today and looking ahead.

Okay. So if you look at the loan growth, there's some chunk of it that has been driven from the interventional funds, especially in the manufacturing sector. There's some in the public sector. A lot of the public sector ones are also driven by intervention funds. And there's some bids in the oil and gas services sector. And then in the transportation sector, we have [indiscernible] financing business. Now we've modeled with higher cost of risk this year of about 1.5%, and that's taken into consideration some of the risk factors we see in terms of the currency adjustment and some people on the general commerce book might have to take a hit in terms of repaying the loans they have from a short-term trade finance perspective. Generally just looking at the economic environment and the slowdown in economic activity. So we've already modeled a higher cost of risk of 1.5% this year to cushion that. But I think one of the positives also, even though we take a negative hit from it, if you look at the interventional funds, those are not the CBN, they're going to have a lower finance cost this year because the interest rates have been reduced from 9% to 5%, which is quite positive for the obligors from a loan repayment perspective, while it's negative for us from a revenue perspective, which is part of what we've modeled into our numbers to arrive at a 15% decline in profitability. Thank you.

We have no further questions in the queue.

Thank you very much for participating in this call today. We like to inform you that we are taking all precautionary measures considering the COVID-19 pandemic that everybody is experiencing now. And that immediately led us to take certain actions like activate our business continuity plan -- I mean contingency planning as well as have about 60% of our staff working remotely. We've got our electronic channels maybe an up just in case everybody is in total lockdown. So business continues using those alternative channels. On that note, thank you for participating despite these challenging times. And please stay safe like we're trying to do out here. Thank you.

Thank you very much, sir. Ladies and gentlemen, that then concludes this conference call, and you may now disconnect your lines.