Fidelity Bank Plc (FIDELITYBK) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Fidelity Bank H1 2021 Earnings Call. [Operator Instructions] Please also note that this event is being recorded. I would now like to turn the conference over to Nneka Onyeali-Ikpe. Please go ahead.

Thank you and welcome to Fidelity H1 2021 Earnings Call. I want to apologize for the late -- the delay was due to technical issues. My name is Nneka Onyeali-Ikpe, the Managing Director of Fidelity Bank Plc. With me on this call are members of my executive team namely, Kevin Ugwuoke, the Chief Risk Officer; Kenneth Opara, Executive Director of Lagos & South West; Victor Abejegah, the CFO; Boye Ogunmolade, our Chief Compliance Officer; [ Stanley Amuchie ], Technical Consultant to the bank; Akintoye Babalola, the Treasurer; Adetunji Mustafa, Division Head Strategy and Transformation; and Samuel Obioha, Head of Investor Relations. We uploaded the investor presentation on our website a couple of days ago, and we hope you had time to review the numbers. Nevertheless, I will give a general overview of our operating environment and our financial performance in the review period. Thereafter, we will take your questions. Our outlook for Nigeria is positive. The average oil price in the review period was above $65, while average crude oil production increased from 1.56 million barrels per day in H2 2020 to approximately 1.62 million barrels per day in the last 6 months. The IMF revised the Nigeria GDP growth forecast upwards to 2.5% from its earlier projection of 1.5%, citing stronger economic recovery as the COVID-19 vaccine rollout increases. This forecast was validated by the 5.01% GDP growth in Q2 2021. The economic performance recorded in Q2 anchored on a strong growth in the trade, agriculture, information and communication technology, pharmaceuticals and real sectors. We expect that the growth trajectory in the non-oil sector of the economy to continue in the medium to long term. Moreover, there is increased focus by the government on solving the security challenges of the country. Headline inflation has also been trending downwards since the end of Q1 from the height of 18.17% in March to 17.38% in July 2021. This came with several schemes launched by the federal government the real sector of the economy. The most important regulatory activity in the review period was the introduction of the framework for the introduction of the eNaira. Although the regulators are still fine-tuning the final details before the launch of the initiative, without a doubt, the eNaira will disrupt the payment system as we have it today. It will also threaten a few income lines in our e-banking books. Nevertheless, the bank that wins is the one that can adopt and innovate. We have a few aces up our sleeves of things that we would unravel in the coming days. The Petroleum Industry Act is also a very important piece of legislation. There are countless opportunities for banks as the Act has opened up the most lucrative economic sector of the country to date. The restructuring of the NNPC as a profit-making organization, the setup of the commissions to regulate petroleum businesses, the 3% grant for the host communities are key opportunity areas for DMBs and other stakeholders in the oil and gas value chain. I will now speak to our H1 2021 performance. We closed the period with a PBT growth of 72.4% rising to NGN 20 billion from NGN 12 billion in H1 2020. In absolute numbers, our PBT grew by about NGN 9 billion on the back of a very strong growth in noninterest revenue, which grew with -- by 27.8% as well as a 9.8% decline in operating expenses. The key drivers of the noninterest revenue include: account maintenance charges which increased by 50.6%; digital banking income recorded 49.4% growth; trade income grew by 33.7%, while other activity-based income grew by 20%. On our net income -- net interest income, which increased by 4.1% to NGN 50.3 billion. This was on account of the 1.7% growth in total interest income, which was complemented by a 1.2% decline in our total interest expense. However, interest income on liquid assets dropped by NGN 9.6 billion for 2 reasons. Firstly, the average yield on investment securities was low within the period of the review. Secondly, we dropped our total investment securities by NGN 52 billion between December 2020 and June 2021 to optimize our balance sheet and moderate the impact of low yields on our earnings. This led to a drop of average yields on earning assets, which translated to a drop in net interest margin to 5.3% from 6.4% in H1 2020. However, we maintained a low cost of funds which averaged 3.2% H1 2021 from 4.3% H1 2020, despite a 15.3% expansion in interest-bearing liabilities. It is interesting to note that, although the average cost of deposits have remained low at 2.7%, interest on deposits are ticking up with the gradual recovery of business activities and market yield. On the asset side, our balance sheet -- of our balance sheet, we reprice our risk assets to reflect current market realities. But as you're aware -- as you are well aware, it is easier for customers to push for an increase in deposit rate than to accept, afford adjustment in lending rates. Our operating revenue increased by 10.2% to NGN 70.2 billion, while operating expense dropped by 9.8% to NGN 42.2 billion, driven by the benefits of our cost optimization initiatives as well as the benefits of selective remote banking, which has also crossed our general office expenses. Key cost lines dropped by NGN 7.2 billion cumulatively, which translated to a drop -- a decline in our cost-to-income ratio to 64.8% from 65.1% in 2020 full year, and we are within our full year guidance of below 65%. Net loans and advances grew by 15.8% to NGN 1.5 trillion with 4 key sectors responsible for over 70% of the absolute growth. The sectors include construction sector, which grew by 70.5%, oil & gas services, which grew by 59%; transport grew by 25.7%, while public sector grew by 17.3%. However, the actual growth of our total loan book was 14.7%, while the impact of exchange rate adjustments accounted for 1.1% growth in the loan book. Overall asset quality improved with the NPL ratio this I mean the Stage 3 loans dropping from 3.8% in 2020 financial year to 2.8% in 2021, while cost of risk declined from 1.4% to 0.03%. Total customer deposits increased by 16.5% to approximately NGN 1.9 trillion compared to NGN 1.7 trillion in December '20. This translated to an absolute growth of NGN 281 billion. Saving deposits grew by 3.2% to NGN 437 billion from NGN 424 billion in December 2020. During the period, we witnessed some pressure on savings growth due to the rising yields in the market. However, we have consistently maintained a healthy deposit mix. Our low-cost deposits grew by 13.5%, and was responsible for 75.5% of the absolute growth of our total customer deposits. We also saw a strong growth in our FCY deposits by over 20% from $745 million to $894 million as we continue to deepen our drive in the Diaspora banking space and the expenses of our business segments. Foreign currency deposits now represent 18.5% of our total customer deposits from 17.5% in December 2020. We have continued to gain traction in retail banking as we now have 55.1% of our customers enrolled on the mobile banking platform and 89.3% of our customer-induced transactions done on our digital platforms. Our NIP transactions increased by 90% during the period with Fidelity Bank controlling about 5% of the market. Our regulatory ratios have stood above the required threshold for our capital adequacy ratio at 18.8% from 18.2% in December 2020, while our liquidity ratio remained high at 33.3% above the minimum requirement ratio of 30%. I want to thank you all for listening. And I will now take questions. Thank you.

[Operator Instructions] Our first question is from Douye Mac-Yoroki of Renaissance Capital.

My name is Douye from Renaissance Capital. I just have a number of questions. You released quite strong numbers. I just wanted to take a deep dive. So my first question really would be on your outlook for cost of risk and NPLs for the rest of the year. After we saw that significant plunge in first half impairments compared on a year-on-year basis. I'd just like to know what the outlook here is? And if you could provide some upside and downside risks that also would be helpful. Then also what percentage of your book is still under moratorium? And how are these faring? The third question would be updates on your airline exposure, if you could share some of those with us? Then moving on to your margins. We've seen a significant decline in margins across the banking industry, but Fidelity seems to be holding up quite well. How do you see this -- how do you view the interest rate environment? And how do you see this evolving into the second half of the year and also next year? And just on the back of margins, how much does Fidelity have in special bills? And what -- how much do you also have in CRR, what is your effective CRR as at first half of the year '21? And then also, what is the average yield on your T-bill portfolio and other portfolios as well, if we could get an idea of what is really driving the margins, that would be great. I have a few questions, but I would let these ones run, and I'll come back with them as well.

Okay. Thank you, Douye. Thank you very much for your question. Okay. Fine. We recognize that the improving business -- we recognize that the improving business environment and the resulting impact on the quality of our risk assets, that's why we moderated our impairment for this year because our expectation is that the cost of risk should come down in 2021 compared to 2020, but we are always quick to revise our guidance downwards. What we realized is that, we noticed that the economy has picked up quite quickly. And the -- is be much better than we anticipated during the COVID period. So our cost of risk for H1 is 0.03%. And we have guided for 1.1% to -- we had guided for 1% to 1.1% for full year. You can find this information on Slide 28 of the presentation. So like I said, it's the environment that's improving. We've seen the traction in businesses opening up. We've seen good turnovers from our customers. So we're confident that, we don't have to make this amount of provision in the year. Then secondly, on the nonperforming loans, we don't see any specific issues on our books at the systemic level. We don't -- the economy has opened up, our business activities are gradually returning to pre-COVID year. Hence, the asset quality has improved significantly. And then naturally, as the economy gets improved -- improves, it will improve. Our NPL ratio right now is at 2.8% from 3.8% of 2020. So we expect it to remain this low for the rest of the year. We don't have any anxieties. Can I go to your next question?

Yes. Just on these questions, I asked, 2 questions on what percentage of your book is still under moratorium? And also updates on airline exposures, if you could share some of those.

Okay. Yes. On this one, we restructured that [ 2% ] of our loan books and [ 65% ] of our loans are funded by intervention funds.

Okay. So you restructured 32% in 2020. Are those all still under the restructured program? Or I'm just trying to get an idea of what's happening.

Yes. What's happening is that -- some customers -- I would have them -- let me just give a brief expansion, and I have my CRO speak to that specifically. Some customers have requested to start to pay their interest and they looked at -- I mean, they're no doubt, would be for you anyway, from -- because of the cash flow that they've seen and the recovery, they're back to come back to full activity of repaying loans as and when due. Some have remained under the portfolio still, I mean, on the restructuring, still. So like I said, the -- it's driven by the customers' activity. Some feel what the [ status ] with the forbearances, that some of the customers have come back and pay -- taking their prepayments of when due. But I'll have the CRO speak to this. Kevin?

Thank you very much, Nneka. Douye, thank you for the question. As the MD said, at the start of the pandemic, we restructured about 32% of our loan book. Now this 32%, 65% of them responded with intervention funds, and that includes bail out loans and state government and to selected sectors, manufacturing and so on. Now the balance of 35% we funded from our liquidity. Now as these things are improving, we expect that those loans that got on forbearance will start repaying and things will normalize. So at this point in time, the entire risk assets that we funded with intervention funds, they are still enjoying some moratorium. They're called by the Central Bank, give an extension to that moratorium of about 1 year. So majority of our customers who are owned by the intervention schemes took advantage of that. And they're still enjoying some form of forbearance either for principal or for both principal and interest. At this point, just for those that we funded with our own position, just about 10% of them are still enjoying moratorium on principal or any other form of concession. So we see that generally, the economy is picking up. And the forbearance -- those enjoying forbearance have seen an even in that and we expect that to continue to be the trend as things improve. Now topic -- please, on the airline exposure...

Yes. The airline exposure -- our airline exposures are all performing. As you are well aware, we are the collecting bank for the 2 major airlines in Nigeria. And both airlines control more than 35% of the local air traffic in Nigeria. The industry is gradually returning to normalcy with the resumption of air travels all over the world. So we're seeing -- the portfolio is performing optimally.

Then the next question is from Jerry Nnebue of CardinalStone..

Congrats on the impressive results. I have a few questions. Firstly, on the issue of costs, yes, we saw the moderation in [ whole text ] one particular about -- lower account charges or banking resolution costs that you recorded, and I want to believe that, that relates account charges. Can you just give some explanation as to why we saw a moderation in that line item, given that, typically, it's a function of your asset size. And if I can -- somewhat I can see in your numbers and there was a considerable growth in assets. So if you could just give some explanations around that number. And secondly, on overall cost performance for the period, how sustainable is this? What should we be thinking about your cost line up going forward, given what we've seen almost 10% decline in the first half of the year? My next question is on your funding. So can you just give me a sense of what the funding environment is like for you? Because they cannot [ accept ] deposits, I see that, that's accounted for the -- for most of the growth in your deposit book, term deposits. So can you give an indication of what's on the fund environment is like for you and what we should expect going forward? And then thirdly, you have said that almost 25% of your loan book are funded by intervention. So what the impacts of the [ severance ] lower rates from 9% to 5% on your loan book, overall in interest income impact...

Okay. Just to cover the last statement you made. What I said or maybe what I meant to say was that, 65% of the restructured loans are funded by the interventional funds, not 65% of our loan book. we have 32% of our loan book restructured and 65% of those restructured funds, I mean, loan with intervention funds.

Okay. So how much, just for overall loan book funded by the intervention funds? And can you give a sense of the interest income impact, opportunity costs, given severance with guidance?

The CRO will take that question on the volume.

Okay. Thank you for the question. The question is, what is -- what percentage of our loan book is funded from intervention funds, right? Yes, that's about 15% overall, 15% max funded from intervention funds -- the way of the impact of the forbearance on that segment, the P&L impact was somewhere in the neighborhood of between NGN 10 billion and NGN 12 billion.

Jerry, does that answer your questions?

Okay. That does. Just give me a color on the AMCON charge, I think we asked...

The AMCON charge -- we've taken 75% of AMCON charge. So Stanley, you can take on that.

Okay. So normally, ordinarily, would have taken the full -- half year. But what has happened this year is very special. AMCON, they're still trying to include on the new AMCON act, solvency effect. So normally, would take the full as per as your -- being -- given the advice from Central Bank to take in that factors. But that has not happened yet, but we're don't very prudent enough to start doing what would be to take 25%. That's why you're seeing. So 25% in the second half, we're going to take the balance. And hopefully, whatever happens at anytime, we'll get that better price, we'll take it in this last part of year. So that's why you see that growth -- we're seeing there.

Okay. And on funding total deposits?

On funded, again, yes, you questioned that we had some growth from term deposits. We are doing a lot internally here. We've noted that ourselves. Want to grow from the low cost end of the market. We're doing a lot from ecosystem of deposit liability reduction. We're doing a lot of key deposit schemes, continues on very key corporate into the books. And when we are doing this through reference, most of the distributors or suppliers, these are people that will leave some deposits at a very low cost because it moves from the account that of the corporate. So that's a very key what we're doing. We're also doing other structures who are good -- put in place to make sure that we're able to mobilize at the end of the market. We'll talk about the agency. The agency banking that's one key area we are also pushing very hard. We believe that all these put together will help us to increase our liabilities from the low-cost end of the market. And that will help more than in play and or the sustainability play that will helps.

The next question is from Tunde Abidoye of FBNQuest Merchant Bank.

This is Tunde Abidoye. Congratulations on your results. I have a few questions. The first question I have is on your interest expense. When you look at it on a Q2 stand-alone basis, it was elevated for the second quarter. Can you just provide some color on the key drivers? And how you intend to moderate this going forward? How should we be thinking about this going forward on a quarterly basis? Secondly, your net interest margin, collection at about 5.3% behind guidance of about fixed 6.5%. And that indicates that you're thinking that -- you'll see some improvements going forward. Can you give us some color, the kind of tailwinds that you expect to see? And are there intent to meet that going forward. Then on your trading book. You recorded a loss of almost NGN 5 billion. Can you elaborate on the drivers? And how you see this turning around? Then on asset quality, we've seen some improvements in your NPLs. But when you look at specific segments like agriculture, education, finance, I mean it wasn't on a year-on-year basis. Would like to know the drivers behind this? And what kind of trends you're seeing with respect to debt service? Also, when I look at your loans and advances to corporate and organizations, we see that there's a sizable movement from Stage 1 versus Stage 2. Is this an indication that some assets are worsening in terms of asset quality. Just like some clarity about that. Also would like to find out what your effective CRR is? And how much you have in special bills? That's all.

Okay. Thank you. So I'll start with the easier ones, I guess. Okay. Our special bills, we have NGN 135 billion in special bills, and our effective CRR is 35%. And then to speak to the -- to what you mentioned about our interest expense going up. Everybody knows that we witnessed a rising in yields within the period under review. We noticed that even the treasury bills, 364 day treasury bills moved from [ 0.77% ] in January to 7% -- 7.2% in June. We also noted, we also know that [ government ] bills traded for -- is now trading for 10.10%. That's against 5% much earlier in the year. Same thing for the long end of the fixed income. We traded for 12.8% -- which traded at 6.2% in January. It's now at 12.8%. So naturally, the risk followed the trend. So that's what explains the reason why our interest expense was higher. But as you can see, this was a little moderated in terms of the impact on our business because we ensured that, now that we knew that there was a situation and problem, we had to do a lot in terms of raising local deposits to moderate the tenor funds that were coming in. So that's -- all of that is the reason why we are able to maintain our NIM. Of course, the NIM went down, but is expected, like I said, with all the issues around the rising yields that inflow into all of that. There is -- as long as we have a drop in the average yields of earning assets, there's know-how that it should not affect your net interest margin. So that's -- that would be my answer to that. But the Treasurer, can speak to that more or Victor.

Thank you, MD. I think in addition to the lower yield environment that brought down the net interest margin of the bank. We also took -- carried out very strategic initiatives when we saw that the yields in the fixed income securities were on the downside. We had to reallocate resources and switch some of the false key liquid assets funds into risk asset, a more profit yielding assets to be able to optimize our balance sheet. And you can see the reflection, the pickup in the interest income line, which compares -- see that's what the drop you are seeing in the new anchor of it and... [Technical Difficulty]

Hello?

Hello, can everybody hear me?

Yes, ma'am, we can hear you. We seem to be having a problem with the feed from that room. Ladies and gentlemen, just please stay on line. Hello, Samuel, can you hear us now?

Yes. We can hear you. What happened?

I'm not sure, sir. Your sound just went silent.

[ Victor ] [indiscernible] went silent, while you were speaking.

Okay. Thank you so much. I was trying offer explanations, why we had a drop in the [ yield ] -- like the MD, rightly said, because the low interest yield environment that accounted for it. What we did also was on the volume side, we took a very strategic initiative when we [ destroy ] that the in low interest environment would have felt the drop in the NIM. We had to switch, reallocate resources from the liquid assets to a more profitable earning assets, which is a risk asset. And from the P&L, you will see that we added -- in the interest income or risk assets that compensated for the drop. We have to do that to optimize our balance sheet, and that was the best to do at that period.

So the last question will be on the movement of the loans from Stage 1 to Stage 2, and I'll have the CRO take that question.

Thank you very much, Nneka. As you rightly -- as you noted, we -- overall, there was improvement in our NPL and that's reflected likely of the general improvements in the macro economy as we recover from COVID -- from impact of COVID. So that -- you see that moderating our NPL ratio from 3.8% to 20%. But we have as such half year. Now you're right. You saw a specific interest NIM in agriculture. I want to reassure you that, that's not a general trend is actually from one customer that had the flu infestation on their poultry fund. And that's adversely impacted the ability to repeat. So that's something that we have taken adequate provisions on impairments on. We also do have collateral supporting that exposure. So we feel we are on some -- on good grounds as far as overall recovery is concerned on that particular exposure. So it's not a color, is not a trend, has not shown any trend in that sector. Overall, I would say that the sector has seen growth. And we have had carefully managed increase in our exposure to the [ hybrid ] sector.

Our next question is a follow-up from Douye from Renaissance Capital.

Yes. I don't feel that my questions were adequately answered. But I mean, thankfully, a number of them were asked by all the participants. I'll just go ahead with a few other questions that I had. Could you give an idea of your [ long ] USD position as at first half of 2021? Also, does Fidelity have any swaps? And how big would that position be? Thirdly, I'd like to have an idea of what the average yield on the T-bill portfolio was as at first half of 2021? And also, if you could share some of your views on how you see the interest rate environment evolving really into the rest of the year and next year? On strategy, we've seen, it's been 1 year since the implementation of your new strategy. Could we get some updates on how the bank is performing to reach some of those goals? Then lastly, would be on the digital strategy of Fidelity Bank. We've seen quite a lot of buzz around digital strategies from other banking peers. So we'd like to have an idea of how Fidelity is -- or if Fidelity is looking to also play into this? And also, if you could share some of your -- if you could share some of your plans as regards to digital strategy, that would be great. On the back of that, how does Fidelity view the threats from fintechs?

Okay. Thank you very much, Douye. The -- our long position is 3 -- were long in dollars by $305 million, by $305 million. So that's our position. Currently, our foreign assets is over $2.1 billion, with foreign currency liabilities at about [ $1.8 billion ], which translates to a net open position of $3 million or $5 million. You asked if we had swaps? No, we don't have swaps. Any subsidy, CBN. And you also asked -- I think I forgot some of the earlier questions. My view of the interest rate environment. Look, I answered to the other gentlemen, I think I said that at the start of 2021, since the start of 2021, we have seen rise in yields in government securities, both on the debt and the money market instruments and also the aggregate market. So I remember mentioning that the 364-day treasury bills now trade at 7.2% from 1.5% in January, and the [ OMO ] bills now trade at 10.1% from 5.7% at the close of January. Under the fixed income space, the long end of the call now trades at 13.5%, up from 8.75% in January. So we expect that the market yield will moderate. We believe that with the $8 billion to $9 billion from the reserves, the market is not expecting pressure from government on domestic borrowing. I also realize that there's also been a launch of the NGN 15 trillion infrastructure fund in October, which we feel will slightly outside the outlook in the remaining months. So we believe that the rates are going to moderate and that's -- and with the government on the FX side, with the government NGN 3 billion, that's coming, I think the funds -- the special funds they come from IMF as well as the euro bond that the government wants to raise. So I also believe that there will be some reasonable stability on the FX side. Maybe the treasurer can add some more to this. Akin?

Okay. Thanks very much. I think in terms of -- you rightly said it's very complete. Our provision on the market progress is, as regard where yield is going, I think that did not seal that which we don't rely on -- infrastructure that we order that. But given the -- about 8 to 9 accretive fund into the reserve is likely to relief or put some less pressure on the domestic borrowing so to speak. Now you also asked questions on the average yield on our treasury bills. Average yield on the treasury bills is about 6.75%. That's where we are.

Okay. So there was also another question on the digital strategies. In Fidelity, we believe in the testimony of our customers. There's a lot of both, yes, but rather that our customers speak for us, and it is a delivery strategy. So because we always keep our word. And to this extent, if you remember, our IV digital assistance was -- which was the best in the industry based on the recently conducted survey by KPMG. The voice of the client confirmed that we are validated well, that we are best in the market on that space. And then we also will dedicate relentlessly to ensuring that the customers get good value. And -- of course, we have engaged the services of some of the big consultants to also take us to the next level to review of our dilution and [indiscernible]. We've achieved so much because like you can see on the income coming in from the digital space has increased considerably. So we are on cost and then we are -- of course, you continue to innovate or view that. So we're on top of it. Remind me of the next question that you asked. I already gave you the question on the loan position And then on the interest rate regime and on our strategy. Okay, you asked me another question about our 7 pillars of our transformation and our journey to Tier 1, where we are on it? I can tell you categorically that we made a lot of success. As you're well aware, our 7 pillars are basically on brand refresh. We're still putting together our brand -- the brand strategy, the brand that we're coming up with, and that will then -- that will take us towards the end of the year. On the workforce transformation, we've done always what we plan to do for the year, and we're progressing with it. On the digitization, like I said, we've implemented or what we want to do now, and then the new strategies are still -- we're still working on them. And then on the -- so basically from the numbers that you can see, you can see that everything that we've planned to do this year, we are on course on all of them. And the beauty of this is that our -- on our guidance and what we guided the market for -- we are -- the only item that we're behind on is the one on the NIM. All our guidance, we are working with -- were doing very well on them. We are on course on all of the guidance because we guided the market for PBT of NGN 35 billion for full year -- and [ 120.6 ] for half year. We guided the market for 10% to 15% on the loans on 15.8% now. On deposits, we guided for between 15% and 20% for full year and we grew by 16.5%. On the NIM, like I said, is the only one that we're behind on. On our cost-to-income ratio, we guided the market for below 65%, we are at 64.8% and still working. On the ROE, we guided the market for 12.2%. We have achieved 14.2%. Cost of risk we have achieved [ 0.03% ] as against the guidance of 1% to 1.2%. On the NPL ratio, we've done a good job around 2.8% well below market -- well below the guidance from the regulators. And then -- so we will meet all the expectations of the market on our journey to Tier 1.

The next question is from Konstantin Rozantsev of JPMorgan.

I had a few questions I wanted to ask. The first one, could you please share some color about the quality of you see across the banking sector in Nigeria more broadly. So which segments and sectors are at risk, it's particular risk at this stage? And I guess as a subset to that question, the recent years we have seen a recovery in credit growth across the sector more broadly? How do you assess how have risks been managed alongside these increase in growth? And has it -- have it resulted in increase in risks in some particular segments of loan portfolios of the banks? The second question, could you please comment on the current setup of the central banks' forbearance with respect to recognition of provisions for the restructured loans. So does the Central Bank I believe at the onset of the pandemic the Central Bank allow banks to restructure loans and it did not request them to recognize the appropriate provisions for these initiatives. So what's the status of this forbearance measure now? And what's the stance of the Central Bank with respect to requiring banks to set up appropriate provisions? The third question I would have is on the upstream oil loans. I understand that following the prior oil price crash in 2014 and '15, there's been quite a lot of restructurings in this segment that took place. So could you comment on the status of those restructured plans? Have those borrowers exited the restructurings already or not yet? And generally speaking, could you please comment on what oil price level, which caused this borders to be under stress? So if oil prices go below that level, you would see more pressure on these borrowers. And lastly, there are lot of question I would ask on the net interest margin. You might have mentioned this already, but could you please again reconfirm. Do you see that net interest margins have bottomed across the sector already? And should our expectation be that we should expect recovery in NIMs across the sector?

Okay. Fine. I'll start with the easier ones naturally. So the -- you've asked the question about the sectors of the market of the quality of risk assets and which sectors are at risk. So my way of answering that question will be to start with the ones -- the top performing sectors in Nigeria. And then, of course, the ones that are having issues that, of course, we need not that -- it's an issue to that extent, but you need a little bit more attention on it. What we have seen is that we have seen top-performing growth in trade. We have seen in manufacturing. We have seen in construction. We have seen in transportation. We are seen in agri and in trade, okay? And then we have seen that the constructing GDP sectors are oil and gas, the public admin, what I mean like public sector and then financial and insurance. And so that will be my answer to that. And then, while the quality of risk we have seen, like we said earlier on, the Nigerian economy is recovering in real terms quite quickly. And we have not seen -- from our customers, -- the only problem that we see is the issue of the nonavailability of the FX. But even at that, we're trying to -- we are trying to mitigate that by ensuring that we deepen our relationships with our diaspora customers who influence money to the country. We have seen a significant growth in the -- so that aside from putting pressure on the government sorting of the FX, we're also doing a lot on the export desk. Our exports NSPs and inflows of exports have tripled in the last 1 year. So that's an area that we're focusing on to help us service our customers. But I would like the CRO to deepen this discussion with the areas of the upstream loans and the questions on the restructured loans and the partnerships of the Central Bank.

Thank you very much, Nneka. Okay. With regards to the upstream sector, where we went through a further restructuring during COVID, pricing of those loans were restructured on account of the pandemic. Where are we now in terms of the restructure? Have they all come out of the restructure? The answer is, no. They've not all come out with the restructure. They're still going through it. But the progress is, I think, is -- certainly looking positive going by the global recovery that we see in the global economy as well as management's economy. So that's where we saw demand for that particular sector. So we see that -- most likely, they will be able to come out of the restructure in the near term. What price level -- okay, today, the price of crude is upward of $70 per barrel. Where we see a stress will be anything below [ $30 ] per barrel. But of course, we know it's a function of both how much was it reduced from the ground and then to sell. So far production has been satisfactory. We're at about 1.6 trillion barrels per day production level, which is good for Nigeria. And at current prices at [indiscernible] and prices above $30 per barrel, that's the breakeven. That's the point where it will be difficult for them to come out of it. So right now, we are costing well in that regard. Now on forbearance, yes, the Central Bank forbearance is still in place. And you're right, they did not -- okay, they did not ask banks to take provisions on those loans that they give forbearance on. That stance has not changed. But what you've seen is that, as the economy is improving, a lot of the borrowers that we get forbearance through, they are coming out of that need for forbearance by generating enough cash flows to meet the obligations. Now we see do have some that are -- but the outlook is that, that will also improve. Now we can't say it's going to be only 100%, we still have COVID variants around and stuff like that. But overall, the regulatory stance is supportive, and there is no requirement right now to take any provision on the loans that we've granted forbearances too.

Okay. Thank you very much. I would like to -- I would like our Chief Digital Officer, [ Larry ] to speak to the -- because we missed out the question on FinTechs and the impact of fintechs in our business. I think it was from Rozantsev. So Larry will speak to the digitization process and the FinTech and impact of FinTech on our business.

Thank you very much, Nneka. Hope I'm coming across loud and clear. With regards to FinTechs, at Fidelity, we don't necessarily see them as competition in that sense. So we not see them as a cannibalizing influence. We present a unique opportunity for us to collaborate and co-create. To the extent that the entire digitization drive is predicated on being able to bring services to customers in a more personalized way. We have deployed an API strategy that allows us to integrate very seamlessly with other providers that can deliver value to our customers. So to the extent that we find FinTechs whose services are complementary to our core services, and we're able to leverage that to bring value to our customers, we're more than willing to entertain that. At the end of the day, what is critical to our digitization drive is the ability to bring value to our customers that's uncommon, to make them at the point of relevance. And been able to been able to bring to them services that are not readily available, which if we have to spend time developing ourselves, we just take us a bit more time. So we see them more as partners in scale and partners in service, and we're open to collaborating with them wherever and however is possible. With regards to Fidelity's core digital transformation agenda, it's an agenda that began over the last 2, 2.5 years, and we have deployed cost technology to enable us to bring mobile-first strategies to customers. It enables us to promote self-serve, which is what we have done. And right now, we have invested very heavily in customer experience such that we can leverage data and analytics to understand where our customers are going to preempt what the emerging needs and meet the customers at the point of their relevance. I think these are the pillars that defines one, our digital strategy and two, our outlook on FinTechs.

Okay. I remember the question from JPMorgan that wanted us to speak to the NIM again. Like I said earlier on, our net interest margin came down to 5.3% from 6.4% in H1 2020 because of the drop in average yields on the earning assets. We surpassed the decline on our average cost in fund -- cost in -- our funding cost. I would like Stanley to speak more to that and then -- clarity on that.

Okay. Thank you very much. I think the speaker actually made a very clear comment about what is happening in the industry. If you look at all the banks, obviously, you will see that drop in NIMs in most of the banks that are seeing their numbers. And what happened was just like, at the beginning of the year, rates went down and before immediately, it was a quick peak that we saw. And people have gone into certain transactions and they were not trying to come out at certain levels. So now everybody is aware of what has happened. People are taking positions on how to improve the spread, which is the key thing here, given out -- banks like us, Fidelity Bank, all were doing, franchisees, how to price those assets properly and better. And also on the liability side, how to generate the deposits at a very minimal cost to us, it gives us spread. And as we do that, we are seeing that the NIMs was happened to be more on improvement than anything. So in the next half year, by the second half of the year, we're open to be able to come within our guidance on NIMs and even improve. So that's partly the kind of outlook we need to give on that.

Our last question is from Tunde Ogunleye of SBG Securities.

These are some clarifying questions. You mentioned that you don't have subcontract, but when I look at your [ total ] asset. I noticed that there was an increase from NGN 7 billion in 2020 to NGN 50 billion as of H1. And most of these are mostly attributable to total subcontracts. Probably, you could just shed more light or as regards the nature of subcontracts? My next set of question is on your asset quality. In your presentation, you mentioned that there was a marginal drop in lending rate. When I look at your interest income on loans and advances, it was up 16% year-on-year. Probably if you just give -- probably just give -- guidance as one loans of that group in loans and advances. And the second question is on your Stage 2 loan. I noticed that there was a pressure on your Stage 2 loans. At what point do we start seeing those Stage 2 loans move towards Stage 3. Probably, if you just give a guidance in that regard. And then most of the pressure point is coming from individuals and the corporate customers. And on the general question, I just asked you general questions. The first is on your agency banking. You've earlier mentioned in Q1 that you are launching in this space and so far you have over 15,000 agents. I would like to know if these agents were developed in-house or more of a partnership risk to prior agent network? And then the next question is on tax expense. I noticed there was an increase -- there was a quarterly increase in your tax expense, probably, if you just shed more light on what makes one increase in this type expense. And the final question for me is, the tax exemption of government securities, which is expected through much at the end of the year. How should we be looking at your tax rate towards next year? And then probably do you think there is going to be an extension as regards to tax exemptions? That will be it for me.

Okay. Thank you very much. I'll have -- let the Treasurer take the question on swap and Larry take the question on agency banking because I know we're collaborating with swap agents.

On the swap contracts, yes, the question was asked, but I think that question perhaps wasn't quite specific. What the [ NDC ] will mention is that we do not have a swap with the Central Bank, not that we do not have swap contracts with [indiscernible] in the market. If people are seeing their expense by 125 means swap contract that is not with 2 counterparties in the market and was fully disclosed in our financials. So I think it was just the specificity of the question, that means post [indiscernible] we didn't have. Just with the...

So [ Larry ], you want to speak to the agency banking -- as our efforts are increasing footprint in that.

Yes, ma'am. Thank you very much. With regards to agency banking, Fidelity bank considers banking at the bottom of the pyramid to be essential to our drive not only from a financial inclusion point of view, but also from a digital inclusion point of view. We have stepped back to review our propositions. We have improved our banking platforms. We have improved our propositions. We have improved actually how we engage. So yes, we did begin with an agency network of about 14,000. But right now, we are plugging into super distributors and other acquisition points which we would not be very specific about for obvious reasons. But we do believe that our ability to acquire agents would be linked very strongly to being able to create value -- being able to create value to people at that level of society, not just from a service delivery point of view, but also from an income point of view. So it is 3-pronged: One, we'll be doing direct reequipment with our own staff and one-on-one interactions; two, we will be working with other super agents; and three, we will be exploring other collaborations, which would enable us to gain scale a whole lot quicker. So yes, so that's the answer on agency banking. I will leave the floor now.

Okay. The question on Stage 2 loans. I'm aware, and I know that every effort is being made to work in our loans from Stage 2 loans back to Stage 1, and not in the opposite direction. But however, I would have -- I mean, our NPL ratio speaks to this directly, but I'll have the CRO discuss this deeper.

Thank you very much, MD. The increase in our Stage 2 loans has been -- all of results of decrease in our Stage 3 loans. We actually -- with the improvement in the economy, we've seen some of our Stage 3 loans meet the requirement to move back to Stage 2. And so that's why you've seen that -- if you look at the change from quarter -- from year-end 2020 to where we are today, you find that 3 loans has come down to about NGN 45 billion from NGN 56 thereabout billion full year 2020. Now we have a very -- we have a focus, attention on migrations in staging. And whenever there's a change in staging, we -- an adverse change in staging -- it still picks it up, and we start investigating. So that's continuous efforts to see that loans do not go from Stage 1 to Stage 2, or that loans go from Stage 2 back to Stage 1, or 3 to 2 as an ongoing effort. So in summary, the increase you've seen is Stage 2 is actually more a reflection of improvements in the loan portfolio from Stage 3 moving to Stage 2. And hopefully, we'll keep those loans, monitor them, virtually identify to see that they also move flow back to [indiscernible]

Okay. There was another question on the -- there was another question on tax expense. We are aware of the expiration of our tax exempt by government sector, that I will have the CFO speak to this.

Thank you, MD. The best answer is spot on, about the expiration of the tax exemption on government securities in the banking, and it is true. Most banks have enjoyed this in the last 10 years. It's going to end by the end of this year. What I must tell you, preparedness is the game in banking. We are aware of this and we are so prepared. If you check your local cities on deferred tax asset, we have about NGN 27.3 billion underlying. And when you average the fast tax assets, the tax law allows you to elect, add up to bookies or to leave it on the future bids for use for utilization. We have elected to keep it to take care of this type of circumstances. The essence of keeping it and booking at a future date is to provide enough buffer for future tax stock. And this is exactly what we have done. But I must let you know that, several engagements are ongoing, and those groups are already focusing to government to see how it can be a standard. If it is not extended, we will make use of that deferred tax assets to ameliorate the impact in our books because that is what it is intended to do.

Tunde, has that answered all your questions?

Yes. Just a few questions on the group and the interest income. And in the interest income on loans and advances the 16% growth year-on-year, responding for that.

Sorry, can you hear me now?

Yes.

Can you hear me now? The group income is as a result of the increase in our loan book. If you notice we have the increase of [ 16% ] on our loan book.

We have a follow-up question from Jerry of CardinalStone.

I just want to confirm, when giving your outlook for interest rates, you did mention something about [ Infraco ]. I didn't quite get what you're trying to explain. Could you please explain, especially that again?

Infraco...

Infraco. Yes, infrastructure from that deferment is trying to influence which should come up very soon?

Yes. Because the government loans are normally all the intervention funds are normally a single digit. And I'm sure this is going to come in at single digit. So this will, of course, reduce the cost of cost -- cost to -- for the project to moderate because the interest rates for our commercial lending has gone up significantly. It's anywhere between 2020 period now. So -- anything coming from the government is a welcome development. And the Treasurer can speak to this as well.

Thanks very much. Yes, you are right to say that the infrastructure bond is coming on board. It's [indiscernible] said they fixed October for the launch. Yes, we know that this will come in tranches. Expectedly, market, think perhaps we will have a single-digit debut. Depending on the conditions in the market, it will have the double digits in terms of the yield that will be pure NIM. But I think the market is expectant of that, and we are already pricing the team. So we just feel it's important to just put back in perspective in sharing our view on the interest rates.

The next question is also a follow-up from Douye at Renaissance Capital.

Just piggyback in on the agency banking question. Could we get a split of what is in partnerships and what is on Fidelity? If we could get a sort of split, that would be great. I know you mentioned you don't want to give exact numbers, but if we get a split, that would be great.

Okay. So I think in very high level, I will say that direct recruitment would make up of about 30%. The super agents will probably make up about another 40% and the strategic alliances would account for the rest. But I want to qualify that by saying that with the aggregators, you get larger numbers. But in direct efforts, you get deeper relationships. So it's actually a question of how fast we grow. So if they start off at the same time, you probably would get more going through your aggregators, you get better quality relationships through what you recruit directly. So starting, you probably end up with 30% and 40%. Therefore, it goes towards other strategic partnerships. I would want to not go into too much detail about. But as we might sure, we would find out the numbers would reverse with a lot more being by our direct recruitment efforts. Hope that answers.

So if I could just hone in a bit on that. Do you have medium-term targets of how much Fidelity is looking to have as direct in terms of the split I mean?

Yes. So I'm not quite sure that we're going to go into how much we intend to do by direct, but I'll just say that there are opportunities out there. I mean we have other players who have grown through 100,000. We have players who have grown 300,000. So we are going to peddle this to the max. I think in the first -- that's what we're trying to grow the total book to about 100,000. But we will not stop at anything to become the leader in market space. I think I can say that comfortably without delving too much into what the splits will be by acquisition channel, if we can respect that.

We have no further questions in the queue. Nneka, do you have any closing comments. Madam, we have no further questions in the queue, do you have any closing comments?

Okay, fine. Sorry, I was not -- I didn't hear you. Okay. I want to thank you all for coming to our -- attending our earnings call. I want to assure you that we'll continue to do our best. We'll continue to do the best that we can. Make sure [indiscernible] number with the regulatory foundries and then we thank you for a good meeting.

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