Fidelity Bank Plc (FIDELITYBK) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Fidelity Bank 2022 FY 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, ma'am. Thank you, ma'am. You may proceed. I'd now like to turn the conference over to Nneka Onyeali-Ikpe. Please go ahead, ma'am.

Good day, everyone. My name is Nneka Onyeali-Ikpe, MD, CEO of Fidelity Bank Plc. It is my pleasure to welcome all of you to Fidelity 2022 Financial Earnings Call. On the call with me today are the following executives and principal officers of our bank: Kevin, Executive Director, Chief Risk Officer of the bank; Ken, Executive Director in charge of Lagos & South West business; Stanley, Executive Director, Chief Operations and Information Officer; Pamela, the Executive Director in charge of the South business; Victor, Chief Financial Officer; Abolore, Head of our Corporate Banking business; Akintoye, our Treasurer; Adetunji, Divisional Head in charge of Strategy, Innovation and Business Transformation; Sam, who heads our Investor Relations desk. The IR presentation was uploaded on our site yesterday. So I'll be speaking merely to the facts behind the figures. On the macro front, our operating environment in 2022 witnessed some challenges, including high inflation rates, capital flight and volatile foreign exchange, which impacted negatively on the [ overhead ] cost of most businesses. In response to these challenges, the monetary policy rate was reviewed [indiscernible] 4x, the highest in a single year since 2011. Notwithstanding, the economy was relatively robust as the real GDP grew by 3.1%. During the year, we received notable awards among colleagues, including the Best SME Bank in Nigeria by Global Banking and Finance Awards; the Best Private Bank in Nigeria by Financial Time, the Banca Marketing Awards; as well as the Platinum and Service Ambassadors Award from the Development Bank of Nigeria. We also repaid $400 million of our euro bonds that matured in October 2022. I will now speak to our 2022 financial year-end numbers. We achieved this 34.4% growth in our gross earnings from NGN 251 billion in 2021 to NGN 337 billion. This was driven largely by interest and similar income, which increased from -- increased by 45% to NGN 296 billion. Our net interest margin increased from 4.7% to 6.3%. This was achieved by optimizing yield on any assets while ensuring that our average funding costs remains relatively low. To keep our funding cost low, [indiscernible] mobilization was focused on stable and [indiscernible] funds -- low-cost funds. Total deposits increased by 27% from NGN 2 trillion in December 2022 to NGN 2.6 trillion in the reporting period. A breakdown of the deposit numbers showed that we increased current account deposits by NGN 528 billion and savings deposits by NGN 122 billion, while tenor funds was reduced by NGN 94 billion. In relative terms, our local deposits increased by 43%, while our tenor funds decreased by 18%. As our low-cost deposit now accounts for 84% of our total deposits, up from 75% in 2021 through the year. Overall, our average funding cost increased marginally from 4.2% in 2021 to 4.6% in 2022. This is in spite of the increase in the MPR from 11.5% to 16.5%. Given the high yield environment, we were able to boost our margins by improving our yield on earning assets, which increased from 11% to 12.2% while our earnings base grew by 19%. Total assets increased by 22% from NGN 3.3 trillion to NGN 4 trillion, with 67% or NGN 2.6 trillion invested in any assets. Similarly, our total foreign currency assets increased by 9% to $2.8 billion. Our total loan book grew by NGN 458 billion. However, the intervention funds and naira devaluation accounted for 21% and 13%, respectively. We have continued to leverage on our excess [ CIR ] to take advantage of the various intervention windows created by the Central Bank to fund our risk assets growth and support the real sector. These intervention funds allow qualified customers under the scheme to assess loans at concessionary rates. Nonperforming loans was constant at 2.9%, while cost of risk dropped from 0.5% to 0.3% on the [indiscernible]. Our regulatory ratios remained well above minimum thresholds, with liquidity ratio at 40% compared to the minimum requirement of 30% of capital are decreasing. At 18%, compared to the minimum requirements of our CAR remains at 18.1% compared to the minimum requirement of 15%. Overall, 2022 was a good year for us, and we achieved a profit before tax of NGN 53.7 billion. The Board of Fidelity is proposing a final dividend of 40 kobo per share, which puts the total dividend for the year at 50 kobo per share. I want to assure our esteemed stakeholders that we will sustain this performance in 2023. I will put in place [indiscernible] measures to ensure that we meet our guidance for the year. We thank you for your support. We will now take questions. Thank you.

[Operator Instructions] The first question comes from Oluwaseun Arambada from FBNQuest Merchant Bank.

Thank you for hosting this call. Please confirm you can hear me.

Yes, we can.

Okay. Great. Okay Yes. A couple of questions. The first one would be around the growth numbers we saw or the noninterest income line coming from the growth in [indiscernible]. I think that the cost crunch contributed to the spike in digital transactions in Q4. So I just want to get a sense of what kind of [ book ] numbers you're expecting to see going forward [indiscernible] environments where we don't have that kind of show. Then the second one would be on your asset quality. So looking across the breakdown NPLs across sector. I could see that there was a jump in NPL ratios for individuals and then look like construction sector and communications. I just want to know, is this due to any single obligor risk? I would appreciate if you could shed more light on NPLs in these sectors and what you expect going forward. The third one will be on how you are thinking of the macroeconomic environment in [indiscernible]. What's your assessment of the environment? And how has that informed your guidance for loan growth and expectations for loan loss provisions? And on your loan book, which sectors are you looking to increase exposure in 2023 and in which sectors you expect weakness? The last question, part of the -- would be around the completed private placement. So if you expect that the private placements [indiscernible]. So I just want to know how you intend to deploy this capital, given the economic environment. That is, will you be cautious on loan growth? Or you are looking to deploy capital [ maturities ] from securities. That will be all from me.

Thank you very much for your question. First one be the increase in our deposits in quarter 4, yes, it's the combination of both. Yes, there was a combination of -- one is coming in the deposit for the -- around the naira redesign. But also, we had a massive low-cost deposit initiative and drive, which we grew aggressively. Just to seek from the growth in our local deposits, and that translates to the increase in our deposits. So basically, it was a two-pronged approach. And then on the issue of the increase in transaction on the digital platform, yes, we witnessed a 40% growth in our adoption because of the naira redesign. And it was mentioned, we didn't really have an option, but to adopt digital solution. We catch now our billable will affect -- it will slow down. But however, all the new adopters, we expect to continue to utilize it by channels because most of have gotten used to it. And we've also provided incentives for customers to sustain the momentum. And there's a lot of push to ensure that the platforms are working very well and that the customers have the seamless and then -- experience -- a very good experience on our platform. So what we expect is that the [indiscernible] growth, probably a little moderated, but there's a lot of effort on local deposits drive as well as the digital adoption. Thank you. Then on the issue of the NPL jumps, these cases are one-off, but I'll have my CRO address them specifically.

Thank you very much, Nneka. Thank you. On the NPLs that you saw in the individuals, construction and communication sector, as [indiscernible] said, these are single obligor issues. And each of them just one obligor that defaulted and went into Stage 3. Of the 3 obligors, we expect that 1 of them will definitely be able to recover and then get it back to Stage 2 and then Stage 1. So there's -- at the end of the [indiscernible]. For the other 2 are going full blast on recovery. So we've taken all of it into our numbers, and we don't expect that to be an issue going forward. The rest of that -- of those portfolios are good. And we expect NPLs to remain sound in those sectors going forward. Thank you.

Okay. On the question of [indiscernible] for the rest of the year, yes, the election 2003 -- 2023 is an election year, and is normally a year of 2 halves. The election [ of common one ], what we are seeing is normalcy returning and business activities have gradually restored. We believe that, that has [indiscernible] and relevant appointment, and the economy will also lead to a good phase. The outlook for Nigerian economy is very positive. We expect that the election [indiscernible] speaks to the fact that there will be a [ political ] reset. This will be a market-related government that are disposed to removal of the [ fund ] subsidy, which will set the economy of NGN 100.5 trillion, and the savings to be invested in the key areas of the economy, which will create new jobs and support business growth. We've also seen that there is a stability on the production side that increase in production of the crude oil in the country with each up for 1.4 million barrels a day. And then on the upward trajectory, we've also seen that the government have put a slight effort to contain the oil [ test ] as well as the fact that the securities sit it on the country is being also given serious attention. All of this, we believe, will improve the outlook for 2023.

Mr. Arambada, I'd just like to check if that answers all of your questions?

No, that's...

Yes. Exactly. [indiscernible]

Yes, the private placement, we have completed that successfully. And then you asked us what we tend to deploy for. Of course, due to the surge that we've seen during the naira redesign and the pressure on our platform, we are going to deploy that the funds to our technology as well as our technology spend to improve our IT infrastructure in light of the cash policy, and the balance to [indiscernible] to our working capital to deploy -- to be deployed based on this value that is -- that we need to spend. But I have my ED, CIO speak to expand.

Okay. All right. Thank you very much. On that, I think what we've done there, we've raised there -- I think...

NGN 13.9 billion.

NGN 13.9 billion. And what we're trying to do, part of it is to spend on IT because we -- reason that during this [ cash-life ] policy and the implementation. So I need to improve our cost point so that our cost [indiscernible] do their businesses in the most efficient and seamless manner. So we are spending a lot on that. And the balance will be include into working capital costs, which could be based on value actually. So what [indiscernible] represents the best value for us [indiscernible]. So that's why we intend to do that investment. Thank you.

[Operator Instructions] The next question comes from [ Adebayo Adebanjo ] from CardinalStone.

If confirm that you can hear me.

We can.

All right. So just a couple of questions. So first question is please, could you speak to your upstream oil and gas and power exposure, given the significance [indiscernible] classifications, any work risks are likely from those assets. Also, [indiscernible] we see weakness in funding costs, despite significant decline in exports and deposits and the [indiscernible] of fuel bond exclusion. So what should we expect for funding costs this year? Also I want to know there will be significant growth in asset creation supported by accelerated funding. Do you expect a similarity this year as well? And then my final question would be what sort of [ conversation ] ongoing with CBN regarding the supply of redesigned currency? What is the risk of resurgence of that kind of disruption, which you saw in the first quarter of this year if post-supply persists [indiscernible]? So that's all for me.

Yes, you're right [indiscernible] covering oil and gas, upstream and [indiscernible]. And as Nneka said, I assure you the principal one that we have in the oil and gas upstream sector, as you probably will know, we are in this transaction with it or as in parties, including local banks, international banks and Shell. And at this time, there has been significant progress in finalizing the restructuring of the facility, [indiscernible] intensive negotiations between the lenders and the borrowers. In addition to that, the customer is finalizing the evaluation of their crude through alternative routes to basically monetize their crude oil production. Now these are very significant developments and point -- it point out to the fact that this one will certainly move back to Stage 1. Now at this point, all lenders are treating the loan in the same way across all the banks, and so it's Stage 2 in all the banks. On the power sector loans, we have 3 obligors responsible for the Stage 2 loans we have in that sector. What we have done is to take restructuring action in a timely manner to ensure that the loans do not deteriorate. And we've been able to further [indiscernible] the cash flows, especially with our recent implementation of service-based tariff and drive through our commencement of a contract-based market. There's also a new management team, which has a mandate to improve collections and stabilize the business operations of the companies before the assets are put up for sale. Now these have resulted in some positive impacts. Revenues have improved. Cash flow has increased by between 30% and 40% post the restructuring of these [indiscernible]. Now the club of lenders are also working with the regulators, including CBN, [ MEC and BPE ] to continue to optimize the operations of the companies and bring more value to the assets before they are sourced to capable investors. Now in terms of the impact on our books, we have already made an average of 16% [indiscernible] how we consider this level of provisions efficient at this time. And given the positive traction we've seen from the measures we've taken so far, we believe that the assets are in a better position, and we believe that we should be able to move them gradually back to Stage 1 in short order. Thank you.

Second question is why the weakness in our funding costs. Well, that's the question that I have for Victor.

What's the [indiscernible].

[indiscernible]. Okay, between the month of January and April, the monetary policy rates have been reviewed twice from 16% to 18% in 2 consecutive [ MPCs ]. And this has a directed funding impact on -- directly impacted the funding costs, especially saving depositories, which is benchmarked at 30% of NPL. And because these disputes are targeted as stemming the rise in bank headline inflation and foreign exchange pressures on the naira, we believe the inflationary pressure will still prevail and at which we said -- will still prevail as well as the issues around the Ukraine and Russia conflict has an impact on us. So this factors still prevail. So we believe that the average funding costs are yield by [ Accenture ] will continue to pick up, but we have strategically positioned our funding base to ensure that we optimize our margins.

So I think there was also question on [ restructure ] growth, we always see it in 2023 in terms of our sectors. Am I correct?

Yes, that's correct.

Okay. What we see is that there are opportunities -- significant opportunities in key sectors of the economy. And the one that we see very clearly now is on the infrastructure renewal. With the -- the new removal of railway and power from the [indiscernible] government exclusively, we see a major growth areas, major growth opportunity. We also see opportunities in manufacturing and the telecom. Telecoms at the back of the [ cash-life ] policy and [indiscernible] has considered the pandemic impact and continued. Of course, we have to see the opportunities on pharmaceutical and medical, medical supplies as well as food processing and e-commerce. So these are areas that we intend to focus and then our growth for the FY '23. However, our growth, we already guided for 10% to 15% of our loan book. Thank you.

Another question on CBN. As the CBN redesign of naira [ and CBN ]. What's the [ conversation ] between banks and CBN?

The Central Bank [ conversation ] on the redesign. Okay, fine. We have seen a lot of improvement in the cash supply as they have normalized. The queues have been [indiscernible] yet. How have we been able to onboard many customers, new customers on our various [indiscernible] platform, we do not expect to witness any disruption for the rest of the year, because we've been guided for end of the year for the -- by the Supreme Court. So what is happening now is that we are ensuring that we're all ready for the [indiscernible] at the end of the year. And then the Central Bank has continued to supply enough money that we need to then. So we do not see any reason for any disruption.

Sorry, if I [indiscernible] answer your questions. Do you have a question?

Yes. I mean, the question was really about if the deadline for the old currency is reached, we didn't see significant supply of the [ units ]. Do you see a similar disruption that happened in the first quarter again, will be having next year happen in the event a currency, the new currency supply has not improved before the deadline.

We think that the [ needs ] have sufficient time to print that what the country needs and the experience of January through March, lessons learned. So we don't expect to see this disruption again. So we have enough time for the -- for them to print as much as we need to supply. Thank you. And there's a lot of [indiscernible] right now. We don't have any -- we [indiscernible] to date. And all our cost points, all our service points have enough money to distribute, to pay out.

[ Adebayo ], are those all your questions?

Yes. Well, I mean just to finalize, just give us what are your near-term strategy compared to as you as guide investors, what should we be thinking about your strategy [indiscernible] over the course of period related to your peers? What's the -- is there any groundbreaking in your strategic initiatives that the bank is taking, which is kind of different from where everybody else is.

Well, we have -- the bank is trying to make sure that we have the footprint outside Nigeria. As you probably know, we already signed a binding agreement for the Union Bank London. This will take off in a couple of -- a few months, and that's a major breakthrough for us. And we were also in -- where the final stage of the approval with the Prudential Regulatory Authority in the U.K. On the medium to the long run, we plan to expand to key markets in Africa to [ burden ] our focus on [indiscernible] earnings. There are also several other nonbanking initiatives that we have. I will discuss as they come on. Thank you.

[Operator Instructions] The next question comes from [indiscernible] from [ Bank Trust and Co ].

Just a few questions from my side, if you don't mind. And congrats on the full year and first quarter results. I just got -- wanted to follow up on the [ ITO ] discussion and the restructuring. In terms of the restructuring, pardon me, could you provide a little bit more detail? Was it a case of you restructured the loan with longer payback period or lower oil price? Just to get a better understanding on what exactly the restructuring was centered around. On your balance sheet, could I get a rough idea as to whether the bank is net long or short foreign currency and by how much? And if so, also in relation to, and pardon me, did you enter into any foreign currency swaps with the Central Bank as well? That will be very helpful. And lastly, I mean, looking into 2023, I mean, do you see any significant risk to the bank or the banking sector going forward? And that will be all for me.

On the [ ITO ] restructuring, I have my CRO speak more to that. The restructuring is ongoing. I'll let world know how [indiscernible] for the bank in this penetration that you speak to the details.

Okay. Thank you. On [ ITO ], basically, what this structure is about is extending the repayment period. Given the fact that there hasn't been much in terms of repayments based on previous terms. So that's great. The original benchmark price for the original loan was already very low. So we don't really [indiscernible] another change in that benchmark price and the restructure of finance, [indiscernible] to expand it to convert the crude oil assets into actual cash flow, see that coming in and then extend a period of time for the repayment. As Nneka said, it's in final, final stages. And so the complete details of that restructure will only be known finally, aside -- after all parties are finally put their pens and paper as far the restructure is concerned. Thank you.

The second question, if I remember, was on our net working position. Yes, we are long on our USD net working position of about $100 million. This brings us close up to the regulatory limit and then we intend to keep it at that. Yes, we have swaps. Yes, we have swaps of $460 million with the Central Bank. [indiscernible] We'll take the last question.

Yes, sure. So my last question was really on the outlook. I mean you've taken quite well on what we can expect over the near and medium term in terms of growth. But I wanted to see what do you see as a potential risk to the bank and maybe the Nigerian banking sector over the near term? I mean there's a lot of talk of a potential change in Central Bank Governor and key regulator. Just maybe just talk to us a little bit about the risk to the outlook.

Thank you, [indiscernible]. On the risk outlook, I think I'll start from the macro. And I will say that barring any unforeseen development similar to either COVID or the Russia-Ukraine war, we expect that the economy will maintain a good path. Recently, the good projections for -- the GDP projections for Nigeria was increased from 3.0% to 3.2%. We tell too that there's this thing that things are getting better and will continue to get better. Now the risks are from that are generic. You have the usual suspects. I don't know if I should go into details. You already know them. So nothing new. We have FX. We have rising interest rates. We have technology issues, cyber-related issues, those kind of things. They are there. So those are generic. Now coming to your specific comment about the possible change in CBN, we don't have any inkling on that. So we can't really comment on that. So that's what I'll say. But as you know, generally, the Central Bank is focused on financial stability, and that's going to be a continued focus all the time, I believe. Thank you.

That does conclude our question-and-answer session. I would now like to hand over to Nneka Onyeali-Ikpe for closing remarks. Thank you very much, ma'am.

For attending this call, just to reassure you that over the years, we have built a resilient and sustainable balance sheet. I can confidently assure you that regardless of the headwinds in the domestic economy of Nigeria, we will continue to deliver, and we'll deliver on the guidance we have promised at the beginning of the year. We will meet our set targets. Thank you very much.

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