Fidelity Bank Plc (FIDELITYBK) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Fidelity Bank First Half of 2023 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to hand the conference over to the CEO of Fidelity Bank; Nneka Onyeali-Ikpe. Please go ahead, ma'am.

Good day. My name is Nneka Onyeali-Ikpe. It is my great pleasure today to welcome you to the Fidelity Bank H1 2023 Earnings Call. On the call with me today are the following executives and principal officers of the bank: Kevin Ugwuoke, Executive Director, Chief Risk Officer; Pamela Shodipo, Executive Director, South Directorate; Ken Opara, Executive Director, Lagos and Southwest Directorate; Stanley Amuchie, Executive Director, Chief Operations and Information Officer; Victor Abejegah, Chief Financial Officer; Abolore Solebo, Head of Corporate Banking Business; Akintoye Babalola, the Treasurer; Adetunji Mustafa, the Divisional Head Strategy, Innovation and Business Transformation; and Sam Obioha, Head Investor Relations. Our Investor Relations presentation was uploaded on our website yesterday. I hope you have had time to read it. My assignment this afternoon will be to speak to the facts and figures, the facts behind the figures and to answer your questions. On the macro, the domestic economy is facing the same headwinds, namely high inflation, low level capital importation, fx scarcity, a depleted external reserve, which we've always known. Though the GDP is trending upwards, both at a reducing rate this time around. Nevertheless, our expectations are that the ongoing monetary and fiscal reforms will rejuvenate the economy. The strategic objectives of Fidelity Bank are, to improve the net interest margin, to increase noninterest revenue, to reduce cost to serve and keep the cost-to-income ratio within acceptable levels. We also hope to optimize the balance sheet by expanding our earnings base. We also wish to continuously enhance our brand equity and our corporate social responsibility. I will now speak specifically to each of these imperatives. Number one, we improved our net interest margin by achieving an optimal risk asset pricing, while at the same time, reducing our cost of funds and increasing our volume of low cost liabilities. Total deposits increased from 23% -- increased by 23% from NGN 2.6 trillion in December 2022, to NGN 3.2 trillion in the reporting period. A breakdown of the deposit numbers shows that we increased current account deposits by NGN 587 billion, savings by NGN 125 billion and reduced tenant fund by NGN 114 billion. Low cost bonds account for 90.3% of our total deposits up from 83.6% in December 2022 full year. Our forecast will continue to be to leverage our low-cost liabilities to drive balance sheet growth. Our cost of funds to reduce from 4.6% to 4.5% -- from 4.5% in December 2022, to increase -- to reduce from 12.6% to 4.5% in 2022 December. This was achieved in spite of the consistent increase in the monetary policy. The growth in interest income resulted from a higher yield environment. The yield on earning assets increased from 12.2% in December 2022, to 12.7% in the current year. Overall, our net interest margin closed at 7.2% in the review period OpEx 6.3% in December 2022. We improved our noninterest revenue by driving fee-based income and increasing the level of our customer transactions. Slide 8 of the IR presentation speaks to the increased volume of customer transactions across our network. The increased volume of transactions led to a rise in the activity income. Noninterest revenue, excluding gains on financial instruments, rose by 209%, from NGN 18.6 billion in H1 of 2022, to NGN 57.4 billion in the reporting period. There was this double-digit growth in our digital income maintenance, account maintenance charges, trade income and credit-related fee income. The breakdown of our noninterest revenue is shown on Slide 14 of the IR presentation. We also keep our cost-to-income ratio within acceptable limits. Year-on-year, our operating expense increased by NGN 22.5 billion from NGN 60 billion in H1 of 2022, to NGN 84.6 billion in the reporting period. The key expense drivers were regulatory costs and staff costs. These 2 lines account for 54% of the total increase in OpEx. We closed the period with a cost-to-income ratio of 48%, mainly due to the increase in our income numbers. We also optimized our balance sheet by increasing the ratio of earning [indiscernible] compared to the nonearning assets. Our total assets increased by NGN 1.1 trillion. 67% or NGN 730 billion of the growth in balance sheet was invested in earning assets. Rich assets grew by 25%, however, the real [indiscernible] was 4%, while 21% was because of valuation impact. Continuous optimization of the balance sheet is responsible for low idle assets, i.e., the cash balances, buildup of livestock of stable and low-cost deposits and replacement of expensive purchase liabilities with low-cost deposits. Finally, I would like to assure our extended stakeholders that we will continue to sustain this trajectory. I'm happy to inform you as well that we have concluded the acquisition of Union Bank U.K. The new name has now been changed to Fidelity Bank U.K. As part of the strategy to increase our earnings base, we will continue to expand locally and internationally. We'll also increase our capital base by raising additional equity through a combination of price issue and public offers very soon. We will continue to sustain our culture of increasing shareholders' value through the yearly payment of dividends on the investment with the bank. This year, we are paying an interim dividend of 25 kobo. Thank you for your support. We will take our questions. Thank you.

[Operator Instructions] Our first question comes from Adebayo of CardinalStone.

Very impressive numbers. So I have just a few questions. And one of them are little bit answered, maybe give you an update on the U.K. acquisition, which is pretty remarkable. So far, are you considering any other significant continental expansion after this -- I mean, going forward, just to know where your heading around -- potential continental business is -- what other countries are you pretty much looking at? Also, what is your target [ collateral ] contribution in terms of revenue and PBT over the next 5 years? Then my third question is also on the recently published guidelines from the CBN, capitalizing and FX gains and the single obligor limit growth paths on your capital adequacy competition. What's to be expected from that? [indiscernible] you have experience with shareholders' gains, what does this say from dividend payments? Should we expect demands consider according to you [indiscernible] which that's pretty much [indiscernible] already. Also on CRR funds, has the bank recorded any material reforms from CBN, what's the update on this? Seeing that you have a significant LDR above the regulatory limits. And then also what's driving the significant movements in the oil and gas NPLs? And yes, those banks have any of the -- any kind of Eurobond exposures. What's the outlook on that? And that'll be all my questions.

Okay. Thank you very much for those brilliant questions. On the first question, if I remember, is on the U.K. acquisition. Yes. Like I said earlier on, we have completed the acquisition of Union Bank London -- Union Bank U.K. and the [indiscernible] operation on change of name has been issued through Fidelity Bank by the company house which is an equivalent of a CS in Nigeria. The next phase for us will be to focus on how to return the Fidelity Bank U.K. to sustainable growth and long-term profitability, underpinned by effective risk management practices and strong corporate governance. Your second question was on the continental expansion. Yes, we plan to expand into select-African countries in the medium to long term. Our aspiration is to do 2 to 5 African countries in the next 3 years. Our approach, of course, will continue to be cautious and will be value driven, and the conditions always have to be right for us to make that decision. So that's for the first set of questions. The second question, if I remember, is what our target is in terms of revenue contribution of the Pan-African contribution. For us, we want our subsidiaries to contribute 10%, 15% of the group's PBT. And as time goes on, we expect that it will increase over time to anywhere between 30% to 50% on the long term. So it's an area of focus for us, expansion -- international expansion. Then the third question, if I remember, was that the Central Bank published guidelines, which only came out yesterday, on capitalizing FX gains and the impact on our CRR competition. My understanding from that guideline is that banks will treat FX revaluation gains as non-distributable income. The idea is for you to add as buffer against FX volatility. And as it is, it does not have any impact on our CRR competition. And you also asked if it would affect our dividend payout, which we already announced the 25 kobo, no, it would not. It will not affect our dividend payout, neither will it affect our guidance for '25 to 40%. We will pay the 25% already announced, because the revaluation gains, were already constitution before the Central Bank, the adjusted FX valuation gains was already taken into consideration before the Central Bank approved dividend. So that was already taken care of. So our 25 kobo, we will be. And the next question was then on CRO refund. Yes, there hasn't been a new refund of CRR lately, however we have witnessed [indiscernible] in line with our growth in our deposit liabilities. No response to this, because the [indiscernible] in our deposits earlier on. But we have witnessed additional changes on that. However, the metrics are now clear and I've been applied for every good period accordingly. Your other question, if I remember, was on oil and gas NPLs and the significant movement in oil and gas. Two things played out here. The oil and gas NPL increased because of the narrative valuation naturally. But however, we have 1 oil and gas services assets that has deteriorated during the last review. However, we have proactively commenced the provisioning for it while making remediation efforts.

Adebayo?

Yes. So I also asked about any Ghana Eurobond exposures, right? And just to listen, yes, so you mentioned already that your organic growth [indiscernible] 4% versus the historical trend of 25%. So is this a hint of a possible slowdown in credit creation. And what are the chances of better credit ratio in the second half of this year?

Yes. The Ghana exposure, Ghana exposure is $6.9 million. And we're only exposed to the Ghana Eurobond, the government bond, not through the private sale funds. And our investment is fair valued daily. And any results, and if I mentioned, will be recognized immediately. We have so far recognized about 50% of impairment on this and the amount is passed to other comprehensive income. There is no formal communication on the final position from the Ghana government about -- so the discussions are ongoing, I imagine. There was a question on CAR...

Sorry, it was on loan creation.

Loan creation. Okay. Yes, we have -- it is a deliberate strategy for us to grow our loans in hedge to cautiously because of the challenging business environment. Our focus will be on growing fee-based income through electronic banking income through trade, and of course, improving on our NIM players. Our NIM players have shown a lot of strength, and brought a lot of strength and then for us. So we continue to play on the NIM side, which means we'll continue to drive our low-cost deposits, impressively our savings, and we'll continue to improve our platforms to ensure that we bring -- we ran in all value chain businesses to increase our local deposits.

The next question comes from James Ola-Adisa of Chapel Hill Denham.

Can you hear me?

We can hear you, sir. Please go ahead.

Yes. We can hear you.

All right. Thank you very much for the opportunity. Congrats on your results. I just have a couple of questions. First of all, I wanted to know if you've done any sensitivity analysis around your capital adequacy ratio and at exchange rates levels of around NGN 900 [indiscernible], what does your AR look like? I also wanted to know that if you strip out the impact of the revaluation -- devaluation or your loans and what does your core loan growth look like? And also, I would like to know what [indiscernible] CASA mix looks like, and what you're doing to improve it? And finally, what is your outlook for interest and its impact on yield on assets?

Let me start on the low hanging fruit. The core loan growth -- is then on real growth, that 21% came from the revaluation and devaluation. So all -- the loan growth of 25%, 4% of it is from the real growth and the other 21% is from the revaluation -- the devaluation, sorry. Sensitivity analysis on CAR at 900%, will be taken by the CRO of the bank. Kevin, please?

Thanks a lot for that question. Yes, we have sensitized at 900%. As you know, there are both upsides and downsides to evaluation. On the upside, we'll get accretion to revenues and through shareholder funds. On the downside, risk-weighted assets increased significantly. So based on the sensitization we have done, we will still be above the regulatory minimum of 15%, albeit, just above that, just about around that. So we still remain comfortable at 900. Of course, we will be on 900, we'll start having some challenges with that. But at 900 we will still do. Right now, it's at about 760. So we still have some room to get to 900% hopefully. So that's -- I hope that answers the question.

James, does that conclude your question?

No, it doesn't. I asked a third question around CASA mix and what the company is doing to improve it, as well as define that, just some color around what the LDR ratio is against the CBN guidance of 65% if you are well above it or you are comfortable with where you are?

Okay. Let me just attempt to answer that. The CASA mix is around [ 90.03 ] of deposits. So we've grown it from working throughout year-end 2022, from about 86% to 90.3% now. This was done, of course, from all our effort towards generating low-cost funds and that's what [indiscernible] mentioned earlier, that we need to continue to play the NIM hit. So that's what is done consistently and we keep doing that going forward. Okay. For the LDR -- okay, yes, LDR of course, the CBN regulation is 65 -- around 69 currently. And therefore, we're very, very well above that limit. So [indiscernible] even to tighten more than even the sale of [indiscernible]. So the timing that since we didn't do it in the market lately has been around the LDR play, and we are very, very comfortable to pull the limit of the [indiscernible].

Your other question was around the outlook for the yield in 2023. Between January and July of the [indiscernible], the March policy has reviewed of what like 4x, from 16.5% to 18.75%. The increase was targeting the rise in headline inflation, foreign exchange pressure on the Naira. We believe that these factors that led this exchange and inflationary pressures are not about -- will change but not as quickly as we expect. So since these factors will still be there. We believe the yields will remain at current levels. And to assure that we don't -- we are not caught out, we're strategically positioned in our trade at the short end of the yield cost -- stood at, we will ensure that we optimize our returns. So that would be my view on that for -- as outlook for 2023 -- for the rest of the year.

The next question comes from Ayodeji Dawodu of BancTrust & Co.

Just a few questions around asset quality. I just want to just ask about the Stage 2 loans, particularly around 3 or 4 major sectors, oil and gas, upstream power and transports. Could you just give us a little bit of information on what's going on there? It seems as though there's going to increase in those sectors, particularly on the transport side of things. And if you can give an update, if possible, on the ITO restructuring as well? My second question would be around the higher interest rate environment or yield environment that will be your -- we appear to be entering. How are you positioning to mitigate potential mark-to-market losses on your investment securities? Those are my 2 questions, please.

Thank you very much. The increase in Stage 2 loans, 3 sectors are responsible for 88% of the increase in this Stage 2 Loan, namely, like you said, oil and gas, power and transport. However, the good news is that most of this increase was the impact of Naira devaluation, but I can have the CRO, speak a little bit more detail into that.

Thank you very much, Andy. Basically, it's -- the growth you've seen is a result of devaluation. The bulk of our exposures in the oil and gas upstream Stage 2 is foreign currency. Likewise, we have significant foreign policy in transport. And then in the past sector, we have some foreign currency and the rest local currency. So the growth you've seen in the aggregate Stage 2 loan book has likely been from currency devaluation. By way of outlook, we remain positive on those sectors. You asked about ITO. So I'll get my colleagues to speak on ITO specifically [indiscernible] for us. And then on the past sector, you can see for yourself that a lot of reforms have happened there and the outlook is quite positive. So those are the main Stage 2 loans. I'll just call on my colleague to -- okay, I'll pass on to the MD and then to discuss further on ITO.

Thank you very much. ITO has always come up in our IR calls, but we're happy to announce that we have very positive news this time around. Production has started. That said, the restructuring has almost closed out. So I'll have to hand over oil and gas and speak more details into this. [indiscernible].

Thank you very much, Andy. So -- we are [indiscernible] done in the ITO transaction and the restructure, as you've requested to know about, is led by the CEO, given the size of this facility. So there's been significant progress on 2 fronts. One is in the restructure and the second is the commencement of production. I'm happy to announce to you that production has commenced. We're currently at 38,000 barrels a day, gradually ramping up 95,000 barrels that we are [indiscernible] to. This will put in hands of the company revenues around about $80 million every month. So the commencement of production and the financial of the model that will fit into the restructure are 2 samples to significant progress on the ITO loan. So we're expecting that within the next 45 to 60 days, we wrap up this structure whilst revenues will start to come in. So the loan thereafter move from Stage 2 to Stage 1.

Just a follow-up question, you say at the end of 60 days, it could be back to Stage 1?

So at the end of 60 days will conclude the restructure. They will not begin the process of moving to Stage 1.

Okay. Interesting. Could you mind providing maybe a little more detail on the amount of provisioning made on the ITO exposure?

Okay. So the -- if the regulator has made us take a 14% provisioning to date. So that's what we've done so far and it's been watch listed by the regulator. And with this significant progress that I've described, we work with the regulator to take it back to this stage of that provisioning.

The next question comes from Arambada Oluwaseun of FBNQuest.

Please confirm if you can hear me?

We can hear you very well. Thank you.

So my first question will be one that jumps out at me, and that's in your operating expense. I saw that technology costs increased, I think, by over 800%. Could you just shed more light on what's happening there? I think some of the other questions I had are answered, the questions, since Ghana exposures and all of that. But another question I want to clarity on is, how are you performing in relation to the CBN single obligor limits. I think the limit is about 20% of shareholders' funds. So I just want to know how you are performing in relation to that. I would also appreciate if you could give me the updated numbers for your net loan years position. The next question would be around the FX revaluation gains. But I don't know if at this time, there is clarity on how it's going to be treated because there's many banks, they recognize this in their P&L, are we expecting it to be moved to OCI? Or maybe should we be expecting some form of statement, I don't know. But I appreciate comments around that. But I think my last question on loan growth has been answered. But just one more question on that would be, since year-to-date, you've done about 4% growth organically. Do you cementing your 10% to 15% loan growth guidance for the year? That will be all from me.

Thank you very much for those questions, and thank you for calling in. On the OpEx one, we all know what's happening in technology. Technology expense has lessened [indiscernible] in foreign currency, and with the Naira devaluation, the cost ballooned. The cost went up significantly. So it's totally out of our control. Within the period, we also upgraded our trade solution and our digital banking to do the big items in technology. So those account for that significant movement in that. And of course, we also know what's happening with cybersecurity. So we're forever changing and upgrading and the patching, I know what it is that's going on its cybersecurity space. So every day, there's a new defense to a new -- something new to help with the challenge that is so big. So that's the reason for that increase in the -- on that particular line. Then you asked questions about -- other question was on the CBN [indiscernible]. Yes, we have for all the accounts -- all our customers that were affected by the devaluation that through them into the single -- above a single obligor. And if you read through the guidance that came out yesterday, we've also been asked to apply for anyone that's been affected by the devaluation. We have the -- the straight answer here would be that we have all the [indiscernible] that we need for anything above -- any of the customers that are booked in globally or so we don't have a problem on this particular one. Then you also asked a question about our net loan position. Our net loan position today is at $183 million. That's where we are. And I think there was another question on FX revaluation gains and the treatment. Yes, I mean, this is very new. So the -- regularly, the FX revaluation is treated along the IFRS guidelines. However, with the new guidelines of yesterday, we believe that they expect us to treat it -- began as nondistributable eCom. So that is how -- that's my understanding of the guidelines of yesterday, but we're waiting for further guidance. Thank you. I think there was also another question on loan growth. Yes, we'll still maintain our loan growth guidance, but we think will stay at the lower end, the lower end -- last -- because we guided for 10% to 15%, we think that we will be anywhere about 10% for this year. Thank you.

[Operator Instructions] Our next question comes from Emilio [ Ono ] of Bloomberg.

I want to ask where is Fidelity Bank now with Central Bank, in daily I was settling my charge -- forward obligations. And what is the regulation around that area now? Did you get me? Hello? Can you hear me, madam?

Emilio we can hear you. Please remain online.

Okay. I'm asking, where is Fidelity Bank now with the Central Bank on settling my chart foreign currency forward obligations. And what is the regulation around that now?

Yes, [indiscernible] not any formal communication from the Central Bank on this. Nevertheless, we have no doubt that Central Bank will be able to meet its obligations.

Emilio, does that conclude your questions?

Yes. I'm done.

The next question comes from Muyiwa Oni of SBG Securities.

And thank you for taking my questions and congratulations on your results. And I just have a few questions, a few a bit broad. So I think the first is maybe slightly follow-up on the last question, but more your view generally on the FX market and the outlook on that. So where -- how do you see the FX market evolving over the next couple of months? And secondly, on the rate environment as well, your views on that and how you expect that to affect your NIMs? And thirdly, a more specific question, what -- where is the size of your special bills? What's the -- your special bills exposure? Those are my questions.

Our special bills portfolio is about NGN 87 billion. As of today, that's coming from the [ tech ] question. Did you hear me? I said...

Is it 87 or 27, sorry?

[indiscernible] billion. Yes, you wanted to know our views on the FX rates as we get closer to the year. And yes, transition from a controlled market, to my view, transit from a controlled market to a more liberalized market would naturally break some volatility in the FX currency rates, which we've seen already. And we can see that the market is passing through this phase already. In the spot market, the rates are reasonably stabilized with a restraint on the [indiscernible], we'll be closing at about USD [ 750 ]. The [ para ] market, however, has dropped significantly in the last 2 weeks, to about [ USD 900, ] [ USD 923 ], for dollar. So obviously, we're still in the sellers markets, so expect the gradual recovery of -- we expect, however, that the gradual recovery of the oil prices, the recent decrease in production and the reduction of the oil tech, as well as the increased focus on not oil exports, will improve the FX supply as we get the cause of the year and heading into 2024. So we have also seen mutual interest from foreign portfolio investors especially with the recent increase in the treasury bills treats. So key [indiscernible] well, have made around the cumulative backlog of on net asset liabilities. And all of this and with the monetary and physical policy discipline that we have witnessed will [indiscernible] the Naira value in the months to come. So we think that -- we are positive that the outlook is positive, and will be stable as we close the year and that extend into 2024.

A follow up if you. I think I just wanted to clarify the special bill size. So is it NGN 27 billion or NGN 87 billion? I didn't get the number correctly.

8-7. NGN 87 billion.

Okay. Then just a follow-up on your comments on the FX market. Do you -- can you share some of the key decisions we made on the resolution on the accumulated FX backlog. So you talked about key decisions we made, if there's anything you can share?

Not at this moment because we don't have the formal anything from -- we don't have a formal communication from the Central Bank yet.

Okay. And then on the interest rate environment and the implication of the NIMs, I expect that to affect that.

Like we said earlier on, we have a significant improvement in our NIM, which moved 6.3%, 7.2%. And these were achieved by optimal risk price asset pricing, while at the same time, our funding cost was kept very low by increasing the volume of our low-cost deposits, and from 84% to 90%, as we mentioned earlier on. So if we continue to work with this, we believe that we'll be able to sustain our NIM -- our gains on our NIM. And then like I said earlier, we expect the yield to remain the same for the rest of the year. And our focus is -- will always continue to be on the low-cost deposits. [indiscernible] to the end of the year because the situations have practically the same. And so we will continue to clear the NIM gain, which is to say on the low-cost deposit side and to continue to increase our savings deposits and reduce our tenant funds to ensure that our cost of funds remains -- we continue to progressively reduce our cost of funds.

It appears we have no further questions in the question queue. I will now hand back for closing remarks.

Thank you very much. Thank you very much for attending this call. I want to thank all of you for attending this call. Over the years, Fidelity has built a resilient and sustainable balance sheet by -- through different economic cycles from our scenario planning, I can assure you that regardless of the headwinds in the domestic economy, we will deliver on the guidance we promised at the beginning of the year. I want to see this opportunity to invite all of you to the Fidelity International Trade and Creativity Connect, FITCC, which will take place on October 24 and 25 of this year at the Georgia Brown Convention Center, Houston, in Texas, the U.S.A. And I want to thank you very much and to -- for calling in today. Thank you very much, and have a great day.

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