Fidelity Bank Plc (FIDELITYBK) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Fidelity Bank Q1 2021 Earnings Call. [Operator Instructions] Please note that this call is being recorded. I'd now like to turn the conference over to Nneka Onyeali-Ikpe. Please go ahead.

Good day, everybody. My name is Nneka Onyeali-Ikpe. It is my pleasure to welcome you to Fidelity Bank Q1 2021 Earnings Call. We uploaded the IR presentation to our website 2 days ago. I hope you had time to review this. Nevertheless, I will give a general overview of our performance in the review year, and then take your questions. There are very few changes on the macro front since our last earnings call. We still face the same headwinds that have played out in the last -- in the past months, namely high inflation, general insecurity and low accretion to the external results. However, on a positive note, the IMF revised its 2021 GDP growth forecast for Nigeria to 2.5% from the earlier projection of 1.5%, citing stronger economic recovery as the count of COVID-19 vaccines increased. Another good news for the economy is the relative stability in the oil prices compared to the last year's oil prices, which hovered between $60 per barrel and $65 per barrel in the review period. I will now speak to our Q1 numbers. Although we have seen risk inch up from 2020 year-end level, our yields in the earning assets reduced to 9.4% in Q1 2021. In the same period, our cost of funds declined from 3.6% to 2.5%. The cumulative effect of this was that our net interest margin remained constant at 6.3%. The drop in average funding costs resulted in our balance sheet managed -- from our balance sheet management efforts. Firstly, we grew our CASA by NGN 70 billion and released NGN 19 billion for our most -- of our most expensive purchase bonds. This increased the volume of low-cost deposits from 77% in December 2020 to 78.8% in the review period. In addition, we refinanced our 7-year NGN 30 billion Tier 2 bonds issued in 2015 at 15% per annum with a cheaper [Technical Difficulty]

[Operator Instructions]

Okay. We apologize for this technical glitch. So I'll start from -- I'll start again from our Q1 numbers. Although we have seen rates inch up from 2020 year-to-year level, our yield on the earning assets reduced to 9.4% in Q1 2021. In the same period, our cost of funds declined from 3.6% to 2.5%. The cumulative effect was that our net interest margin remained constant at 6.3%. The drop in average funding cost resulted in our balance sheet -- from our balance sheet management efforts. Fastly, we grew our CASA by NGN 70 billion and released NGN 19 billion of our most expensive purchase bonds. This increased volume of our low-cost deposits from 73% in December to 78.8% in the review period. In addition, we refinanced our 7-year NGN 30 billion Tier 2 bonds issued in 2015 at 15% per annum with a cheaper 10-year NGN 41.2 billion Tier 2 bond priced at 8.5%. This moderated our average borrowing cost by 61 basis points to 4.5%. The activities I have just mentioned caused our interest expense to reduce by 26.2% from NGN 19.3 billion in Q1 2020 to NGN 14.3 billion in the reporting period. On the other side of the balance sheet, despite a 3.7% increase in our earning assets, interest income reduced by 2% from NGN 43.9 billion to NGN 43 billion. This is because the market conditions did not allow us to replace a matured security with instruments of much lower yield -- with commensurate yields. Nevertheless, we will continue to optimize our loan pricing. Overall, our net interest income increased by [Technical Difficulty]

[Operator Instructions]

On the other side of the balance sheet, despite a 3.7% increase in earning assets, interest income reduced by 2% from NGN 43.9 billion to NGN 43 billion. This is because the market conditions did not allow us to replace a few matured securities with instruments of the commensurate yield. Nevertheless, we will continue to optimize our loan pricing. Overall, our net interest income increased by 17.1% to close at NGN 28.8 billion. Noninterest revenue increased by 66.7% to close at NGN 12.1 billion from NGN 7.2 billion in the previous period. While FX income increased by NGN 3.9 billion and digital income grew by NGN 0.6 billion, we also took a mark-to-market loss of about NGN 4.6 billion. The mark-to-market loss was due to increasing market rates, which translated to a decline in the price and value of our government securities. Total OpEx grew by 6.2%, much lower than inflation rate of 18%, from NGN 21.6 billion in Q1 2020 to NGN 23.0 billion in the reporting period. The major driver of the increase in our OpEx was a NGN 4.3 billion growth in regulatory costs. Cost-to-income ratio increased slightly from 65.1% to 66.8%, but we expect to meet our CIR guidance of less than 65% for full year. We expect our OpEx to come down in H1 since we will no longer take additional AMCON charge in H2 in line with the IFRIC 21 Levies. We closed the period with a PBT of NGN 10.1 billion, which translated to a growth of 53.9% compared to the preceding period. We are on track to meet our PBT guidance of NGN 35.2 billion for full year 2021. Our deposits decreased by 3.1% from NGN 1.9 trillion full year 2020 to NGN 1.7 trillion in the review period. This was driven by a 6.2% growth in demand deposits, while our service deposits increased by 4.1%. Our low-cost funds accounted for 78.8% of the total deposits in the review period. And our service deposits accounted for 25.2% of the total deposits. Net loans and advances increased by 7.6% to close at NGN 1.42 trillion. However, if you back out the devaluation impact of 0.8%, the real growth was 6.8%. Less than 40% of our loan books are foreign currency denominated. Our NPL ratio, Stage 3 loans, came in at 3.6% from 3.8% of 2020 full year. This was due to a 7.3% growth in the gross loan book to NGN 1.5 trillion. Our regulatory ratios remain above the required threshold, with our capital adequacy ratio at 18.4%, and our liquidity ratio at 33.9%. Thank you very much, and we will be happy to take questions now.

[Operator Instructions] The first question comes from Tunde Abidoye from FBNQuest Merchant Bank.

I have a couple of questions. The first one is on your cost of risk. Your cost of risk is 0.4% and is tracking below your guidance of 1% to 1.2%. I'm thinking, should we expect the cost of risk to increase in subsequent quarters given that your guidance is unchanged? Secondly, I'd like to have some color on your NPOs, with specific reference to the transport, agricultural and those classified as others. Also, can you disclose what is contained in that segment classified as others? Thirdly, the expectation was that your C-A-R -- your CAR would have run-up to close to 20% in Q1, following your Tier 2 bond raise. I know that your equity dropped a bit because of the fair value adjustment that you have to take, and you also had [indiscernible] credit risk. Can you provide some color on just around your CAR? And also, do you have any capital raising plans in view? Lastly, can you tell us what Fidelity is doing with respect to agency banking? And how large your agency banking network is at this point? I'll hold on -- I'll pause on the other questions for now.

If you recall, in 2020 full year, we proactively increased our loan loss provision in view of the impact of COVID-19 on our customers in select sectors. This led to a very high cost of risk of 4.4%. And since the beginning of the year, we have witnessed increased economic activity across all sectors, namely general commerce, [indiscernible] construction and works. And this, we think, has translated to a higher asset quality. And [indiscernible] will remain low and probably a bit lower than our guidance by the end of the year. We will be quick to review our guidance downwards -- we will not be quick to review our guidance downwards. We just want to debate all indications and with the way the market is opening up, we think that this 2020 will be better than -- 2021 will be better than 2020. I can have the CRO speak more to this.

[ As the MD has said ], we are expecting to see improvements driven by what we've seen in the economy -- the rebound we've seen in the economy. So we're optimistic that, that improvement will reflect in the cost of risk that we will see in the second half of the year. We are still, of course, guided by the guidance that we gave and that will continue to still guide the final position at the end of the period. Thank you. Now I think you have some questions on the NPL distribution for some sectors; transport, agriculture and others. Okay. Now in the transport sector, the NPLs we have there are some legacy loans that we had to some transport logistics companies. These are loans that we've fully provided for, and we're basically at the stage of working out solutions to those loans. So that's the bulk of the NPL we have in the transport sector. In the agricultural sector, it's an exposure to just 1 main customer. And we have taken about 99% impairments on that particular exposure. In others -- what we have in others is an exposure to a company that is into water treatments, and that they had some rough patch. But right now, we are basically bringing in some additional equities to revitalize this sector -- or this company. And it's in public -- that's all what we have in the public -- it's a public water company. And we believe that in the upcoming period, the efforts to bring in additional equity and revive that company will bear fruits in that company. But so far, we've taken about 90% impairment on this particular exposure.

Okay. If you look at our capital, total qualifying capital is about NGN 281 billion. If you add back the $18.8 billion that affected the AFS reserves, we are taking it to about NGN 299 billion, and that we're not taking the capital to about 20% -- 19.6%. So you're right when you said and we expected it to get there. But for that, I've just mentioned AFS. But if you also look at Q1, the loan growth was pretty strong. So loan growth was about NGN 100 billion. And due to that loan growth, we had about a NGN 200 billion addition to our credit risk. We also have some of the customers utilizing the credit balances they have in their account to bid for FX.

Thank you very much. Can I ask a few more questions?

[Technical Difficulty], right?

Yes, I have another question.

[Technical Difficulty] at the moment. We are executing plans to grow our existing network to 100,000 in the next 12 months. We are currently implementing [indiscernible] being used by a couple of competition, but not very well in this space, and the proposed solution will give us a competitive edge to offer more value-added services and optimize our system uptime. We hope to achieve our target of 100,000 agents by -- in the next 12 months.

If I may ask another question. Basically, with respect to your electronic banking transactions. I can see that you show a lot of transaction volumes, but it will also be nice to see the value numbers. Yes. And also, just for you to provide some color on what you're doing in that space, particularly with the fintechs? And also, I'll just like your view on the open banking framework in Nigeria?

For your question on the transaction volumes, we are at 5% of industry and the NFP volume for the industry is about NGN 60 trillion and NGN 1.5 trillion on the POS, and I'll let the executive director and CIO to speak to this.

[Technical Difficulty] from a partnership perspective -- from an open pricing perspective, we've been partnering a lot with the fintechs. And we have partnerships with them for airline solutions and a couple of other things. First, we think the open margin is positive. We're one of the first people to sign up with the [Technical Difficulty]. So we think it's positive. We are not going to do everything in loan. In some instances, we will compete, and in some instances, we will collaborate. But from a collaboration perspective, I think we've been working very well with the fintechs over the past 3, 4 years. And we've actually set up a team that now focuses basically on partnerships and ecosystem. We had a new CDO, the last time we were speaking. He's coming on April 1. So we think we're on the right track. We've got a new CIO also in place, and all these are just to drive aspirations in the digital banking space. The CDO will just say a few comments. Gbolahan, over to you.

Just picking up from where [ my MD has ] stopped, with regards to open banking. We are launching a very robust strategy right now that's based on our API managers, which would allow us to integrate seamlessly with third-party providers. We are going to have strong customer experience and customer service at the core of our strategy. And the general belief here is that we will come up with a sustainable advantage based on the ability to bring differentiated products to market very quickly. Our efforts to bring -- to build very sticky relationships with our customers that will prove to be very profitable to us into the future.

The next question comes from Tunde Ogunleye from SBG Securities.

Just a quick question on the operating expense. I noticed there was a growth year-on-year and quarter-on-quarter. And then also looking at -- and the monetization costs were the banking resolution costs, which moved from NGN 2.9 billion to NGN 6.7 billion in Q1 2021. And then considering the growth in your assets, [ has it been that ] significant to rise for the growth in banking and banking resolution costs? I don't know, probably you could share more light as to the -- as regard to the jump from the NGN 2.9 billion to NGN 6.7 billion? That's the first question. To the second question, you guided 15% to 20% for your deposit growth guidance. And then looking at the increase in rate, what should we be expecting in terms of your funding cost? And then the third question is on the fair value loss. So are we -- you said that the increase in rates led -- on domestic securities led to this -- NGN 4. 6 billion. So we're expecting that to expand for that through the rest of the year? And then on the next question, which is the loans to individuals -- to lend higher loans to individual. I noticed that on Stage 2 loans, there was an increase from NGN 294 million in December to NGN 2.4 billion in Q1. If you could shed more light on what led to that increase in Stage 2 loans to individual? And then the next question is on -- just some clarity on the special bill instrument. If you could probably -- if you could probably enlighten on what particular line item has been classified under the interest income? That will be all for my questions.

If we -- what accounted for that increase is AMCON charge. When your deposits increase, your AMCON charge will increase -- the percentage of the deposits. So this is because of the deposit growth that we experienced in Q1. So it's basically the regulatory charge that's responsible for that increase. The second question was...

I'm sorry. Can you repeat?

Sorry?

On regulatory charge, what percentage of the deposit? [Technical Difficulty]

Sorry, this is the operator. May I just ask, if you could please repeat your response to Tunde's question because we couldn't hear you clearly.

Okay. So for AMCON, it's 0.5% of total assets. Just given the growth in our total assets last year, driven by the deposits and loan growth. So the total AMCON cost was moving from about NGN 12 billion last year to over NGN 15 billion this year. For deposits, it's based on the rating of the bank for NDIC, and so for us, it's about 0.7% of total deposits. That's what we pay as NDIC premium. So the total assets include [indiscernible].

Sorry, this is the operator. If you don't mind just continuing, we weren't able to hear you for a second.

Okay. So on the fair value loss, so we have securities -- we have in our trading book. If you look at our December position, you'll see that we had instruments in our trading. And then by the time you look at our Q1 numbers, you'll see that there was almost absolutely nothing in the trading books. So when we saw interest rates going up, we disposed of the assets in the trading book. By the time we've disposed of those assets, from a mark-to-market perspective, we already had a loss of about NGN 4.6 billion on those instruments. Now for instruments or in the available for sale book, that's what led to the NGN 18.8 billion mark-to-market losses. So basically, it's a case of interest rates arising. The prices of those securities, when you compare December to March, was lower. So that's what led to the NGN 18.8 billion. Now why do we have those securities on the available for sale book? We have those securities there. Some of them are also from managing our liquidity. If you look at our numbers for last year, full year last year, we had mark-to-market gains on those available for sale securities of almost NGN 20 billion. So when the interest rates were going down, we rode the curve. We made about NGN 20 billion. Obviously, this year, interest rates have increased, we have lost a bit on that. But last year, we made about NGN 20 billion on that.

Tunde, does that answer all of your questions?

With the increase in them from FY '20 from NGN 295 million to NGN 2.4 billion, maybe they could just -- maybe management could just shed more light on that?

On which -- sorry, on which particular line, please?

NPL.

Okay. So -- oh, so for individuals, the increase in the NPL for individuals -- is it increase in the NPL or increase in Stage 2 book?

Increase in Stage 2 loans, [ mainly for ] Stage 2 loans, there was a movement from NGN 294 million to NGN 2.4 billion in Q1.

Okay. So the CRO will take that.

Our individual loans are structured loans tied to repayment sources. So we have domiciliation of salaries and are convenient to clean up any exposure. So the increase in Stage 2 loans that you saw there was basically a result of a delay in those payments coming in. Now it is not unusual, and you find that usually, these payments come in and clean up those exposures. So that's basically the reason for that increase. We're not worried about it because these are temporary -- usually temporary delays that get cleaned up very -- within a short time. Thank you.

Sorry, just a final question. Sorry, I noted an increase in your mandatory deposits with CBN that was 14.4% year to date -- sorry, I noted an increase in your mandatory deposits with CBN, which is 14.4% year-to-date. So I was looking -- I looked at your loan to deposit and then loan to total funding [indiscernible] regulatory guidelines, so probably you could just shed more light as regard to what led to the increase of mandatory deposits?

My name is Akintoye Babalola. Yes, in terms of the mandatory deposits, yes, Central Bank credited banks sometimes on the 10th of December, and sometimes when the 91 days mature on the 1st of March. They rolled it over and even had it a week after. But that hasn't stopped the regulatory charge, particularly with the [indiscernible] you have the retail auction. So we've been having charges coming from there. I think year-to-date is about NGN 83.5 billion will be charged. So if you had NGN 115 billion plus NGN 20 billion that was given in addition, that was NGN 135 billion. And you the refis out -- I mean the NGN 83.5 billion out, then you can see the real impact. And you can see why we have that increase on the mandatory charges -- or the regulatory charge.

[Technical Difficulty]

Okay. Let me just explain a bit on the special bill. Just like I said, when I was explaining the [indiscernible] the yield that it was issued to banks was 0.5. And when it matured on the 1st of March, and it was rolled over for another 91 days, they still retain the 0.5 on it. So I don't actually know what you want us to really explain in terms of where the income goes. But it's just a yield of 0.5 that the CBN allocated those funds to banks. I don't know if this clears the question.

Thank you so much. So what I'm looking at is if I look at your interest income straight down [indiscernible]?

[Technical Difficulty]

Sorry, ma'am, This is the operator. If you don't mind just repeating what you said?

[Technical Difficulty]

Tunde, if you don't mind repeating your question?

On the funding cost, you guided 10% to 15% deposit growth. So given the fact that the interest rate has been rising, like what should we be expecting in terms of how it will impact your funding cost?

Sorry, ma'am, were you able to hear his question?

[Technical Difficulty]

Okay. I said you guided 10% to 15% deposit growth and considering the fact that interest rate has been rising. So what should we be looking at in terms of your funding cost for FY '21?

[Technical Difficulty] guidance because no doubt, the rising yields represent a challenge for deposit growth and could mean offering higher interest rates for our customers to ensure their deposits are continued to made with Fidelity. However, if you check our history, we have grown our deposits year-on-year minimum 30%. And as I said, last year, we grew our deposit by almost 50%. So we think that what we have guided is the -- easy for us to achieve despite the challenges. However, we have expanded our services to ensure that the loyalty of our customers have strengthened and sustained. And like we said earlier on, we have been -- we recruited a new CIO and a new CDO to ensure that we move to the next phase of our digital transformation and innovation, and all of this is targeted at ensuring that we open our game in our retail claim. So with all of this, we think we're going to be able to sustain that deposit growth projection, and we will be able to achieve it. And moreover, if you noticed, 25% of our deposits are in the service account. And the service accounts are benchmarked against the NPL. So that will help us to keep our cost of funding reasonably low. The mix -- our mix is very good. We're very proud of it. Our mix is almost 80-20. So with that, we think we'll be able to, in between all of these efforts, maintain our NIM and our low cost of funding.

The next question comes from Jerry Nnebue from CardinalStone.

Congrats on the strong numbers. And I have a few questions. So my follow-up to what have been asked previously. First and foremost on the OCI loss, especially the fair value asset loss that was recorded there. I also assume that it's not realized. So is there any concern that at some point in the year, it is going to be realized [indiscernible] P&L? So is there any concerns that we'll probably see a weaker performance, given raising rates and that could cause to potentially affect dividend? That's one. And secondly, I want to speak [indiscernible] decline during the quarter. And looking once again in the industry, it appears there's been some sort of [indiscernible] on liquidity. Banks have been aggressive [indiscernible]. I also see that [indiscernible] borrowings increased during the quarter. So can you just speak to liquidity, what are you seeing and if there are any concerns there? [indiscernible] significantly higher in the last few days. So if you can speak to that, then that would also be helpful. For the interest income, we can see interest from loans has been a bit stable apart from investment securities. While you have noted that some of the assets [indiscernible] yields, but it is not really the case [indiscernible] in anticipation of higher yields on some of these assets. So you can [indiscernible] the argument that risks were lower. However, you also reported mark-to-market losses because risks are higher. Just need some more clarity on that front. I think those are all the questions I have.

[Technical Difficulty] OCI loss, no, it's not likely to be realized, but I will have the CFO speak to it.

[Technical Difficulty] those fair value losses for this when they are matured and at that point you would recognize them. It goes to PBT line. But let me let you know that all we are doing now, we are -- at this stage, we are lining our portfolio in the fixed income securities to ensure that we minimize this losses and pushing more to HTM, held-to-maturities. And this, obviously, will play out well.

Thank you very much. Just a question on [Technical Difficulty] it's deliberate and it's strategic because we try to optimize our balance. If you go to our loan growth, you see that we grew our loan in the last quarter by NGN 100 billion, and exceeded by some 7% in terms of percentage growth. So we needed to -- with the yields dropping, we needed to move to a higher income. We needed to ensure that we get higher income from using our loan book. [indiscernible]

Just in addition to what [ the MD has ] said, like you noted, yes, the LR reduced. If you look at 2020 figure, you will also see that at the start of [indiscernible] special bill, what the CBN said is that it is credible. And what it means is that you can actually leverage your [indiscernible] to have much income. This repeats for 2020 financial year, and the strategy was still continued this year. Just as it has been said, NGN 100 billion was credited in the loan side as one of the outlets and, of course, the CRR was still being debited, just like somebody has on this call that our regulatory deposits tends to increase by the 3.5%, to also went to that. So all these have a way of especially impacting the LR. But I think the major thing is just to make sure that the strategy we run around our loan creation is what actually caused that decline. But we are very mindful of it, and it's just a delivery strategy.

Jerry, does that answer your questions? Do you have any further questions?

Yes, on the interest income.

[Technical Difficulty]

Sorry, sir. Were you able to hear Jerry's question with regard to the interest income?

No [Technical Difficulty].

Jerry, if you could please repeat your question?

Yes. I said I wanted to know what drove down the [Technical Difficulty] interest income lower, especially on the investment securities for OCI assets? You had attributed [indiscernible] but then again, we also know that yours have been rising. [indiscernible] So what really -- did you go short on some assets [indiscernible] to become higher eventually? I just want to know.

Hi, this is the operator. I just wanted to confirm if you were able to hear Jerry's question?

[Technical Difficulty] when rates were very low. If you look at the interest income, we're now adding on those securities. It's pretty low compared to 12 months ago. However, from a reinvestment risk perspective, we're still at the short end of the call. We've tried to stay on short end of the call, not for all classes of assets. And when the CFO was speaking, he was speaking that the assets are available for sale books. If you look at the assets, therefore, some of them have got a longer duration. And that's one of the reasons why he was saying that will not be realized. So it's a reinvestment risk that crystallized, but we expect that when those securities mature, I will now need to reinvest them this year and will now be locked into higher asset yields. And that is also one of the reasons why, for the most expensive of the time deposits, from a strategic perspective, you see decline also in the time deposit. Because when we saw that the yields -- the investment yields on those assets were lower, then we also have to optimize from a funding cost perspective.

[Operator Instructions] Nneka, we have no further questions in the queue. Do you have any closing comments before we conclude.

Thank you for participating today on this call. Over the years, Fidelity has reported strong growth across [indiscernible], and we will continue to strive to maintain this trajectory. I look forward to meeting you in person as the situation allow -- as soon as situation allows it. If you require any further information, please reach out to our investment -- Investor Relations team. I'm sure their number is on the web. Thank you very much, and God bless you. Thank you.

Thank you very much, ma'am. Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.