KCB Group PLC (KCB) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the KCB Group Q1 2020 financial performance update. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the conference over to David Kitheka. Please go ahead, sir.

Thank you so much. Good day, everyone. Welcome to KCB's updates on the quarter 1 performance. We shared the details with you last week. I'm sure you've done quite a bit of discussion and analysis of the same. As we begin, I will just begin introducing who is on the call. We have Joshua Oigara, our group CEO. We have Lawrence Kiambi, our group CFO. We have Apollo Ong'ara, our Director Credits, and we have Shalin Gudka, who is our Director of Treasury. At this point, I will hand over to Joshua Oigara, who will just give us some opening remarks. Joshua, over to you.

Thank you very much, David, and good afternoon, and good morning for those joining us on the call. We have shared our quarter 1 earlier last week -- midnight last week. I mean I would say that obviously, the environment we find not just that our businesses, but just our own market has completely been changed because of the crisis that we are all monitoring very closely. And I know there will be time to take some questions on that. But our past quarter result did not have a significant impact yet on the crisis that we saw, although we continue to see, as we said in our presentation, lower transaction volume, particularly affecting our NFI, generated a number of charges for mobile money transfers, by transfer until end of June. And in terms of asset growth and loan disbursement, we see some areas of weakness in a number of sectors. We've announced that during the call as well. Customers looking for rescheduling their loan repayments, looking at their own moratorium and restructure, we're making several provisions as well during the period. And that from a business impact, we see more of it pronounced in the second quarter. The work we have done from -- to focus more on protecting our own resources, our own employees' wellness, focusing strongly about our -- strengthening our liquidity management, aligning our actions on portfolios at different sectors that are affected separately or differently as well, looking at our migration of loans and overall performance in the quarter, enhancing our transaction on the digital channels that we continue to have for the last few years and finally, enhancing the level of compliance because a lot of regulators have issued new guidelines on COVID-19 and as we continue to work very closely with our business continuity plan. So I would say over the last 2.5 months, we've been continuously -- to reinforce our businesses to remain steady and the result, so it reflects perhaps a few weeks of impact of the crisis. If I speak specifically on the quarter, what I would say is that we continue to anticipate that this quarter coming, and the next one will be perhaps the most difficult. In Kenya, you see early stage on the crisis where we are. I agree with our regulators across the region on 5 main areas, which you may have seen before, nothing new to the Kenyan market or East Africa, waiving charges on mobile -- mobile wallets and money wallets, migrating our -- reviewing the customer proposals in terms of their restructure, their facilities, looking at cost measures to defend our margin and obviously, enhancing our governmental plan dealing with crisis. So I'll -- it's definitely happening. In terms of our branches, where customers still do come, we have invested in a lot of activities, social distancing in our workspaces and banking halls. We've taken up all the guidelines issued, not just by the Ministry of Health, but also the World Health Organization on safe workspace. So that, I would say, has been what has started this quarter. We -- early to say when the crisis will pan out. But I must say that there's a lot of actions, both at the national level and regional level to try and limit the impact of this. More mature countries transacting the cards which we are not seeing in our market and we're, obviously, trying to go back into with our activities. Overall, that's what I will say for the first quarter. It is unprecedented but I will not go through the various slides, which we shared earlier. And I will hand over to David perhaps at this moment to go back and take some question and answers, both on the results and also on the outlook. Back to you, David.

Thank you very much, Joshua. At this point, we can go straight into the question and answer. It will be a much better use of the hour that we have. So we can begin with the questions now. Thank you.

[Operator Instructions] The first question we have is from Kishan Popat from Kestrel Capital. At this stage, we can't hear you so we will move on. We have a question from Ronak Gadhia from EFG Hermes.

And I hope you are keeping well. I have 3 questions. My first question, I guess, goes a bit back to your full year numbers. The 2019 annual report was recently published. Unlike 2018, what I've noticed, is there is a big difference between what you -- what is reported as stage 3 loans and what you classify as NPLs? So if you could just highlight or share your thoughts on why there's such a big difference between the 2 numbers? And on the back of that, if you could just share what the stage 2 loans and stage 3 loans at the end of the first quarter are? My second question is on your outlook. Obviously, it's too early to give any definitive guidance, but it would be useful if management could share the various scenarios that they're modeling out internally based on what they've seen so far? And my third question is on your fees and commission income. Obviously, we've seen very strong growth momentum last year and in the first quarter of this year as well. From what I can see, it seems to be driven by your mobile loan product KCB M-PESA. So could you just give us some guidance on what to expect in terms of volumes and maybe cost of risk from that product through the rest of the year?

Thank you, Ronak, for that question. So I will ask Lawrence to respond on the question about stage 2 and stage 3 differential from 2018 and 2019, but let me just go straight. In terms of second question you raised on the outlook, I would say it's quite early to date to say how the -- so we have a number of scenarios, but most of them are really based on various options we have from a scientific analysis from the WHO. So it's very fluid at the moment, Ronak, I mean whether we hear a comment that the cases of COVID-19 will peak in September or August or June or November, it's very hard to tell. So we're working on various scenarios, we are able to be able to contain the pandemic by June or by September or by December. So as you can see, we have a few cases as we increase the level of testing. So depending on those various scenarios, our business is impacted very differently. But I suspect that we will be in a better position when there is a mega announcement that will come in mid of June on how the government will address the issue of lockdown or curfew or business reopening, that we don't have yet an activity. So probably, I would say, in the month of June, we're maybe in a better position to share with you what is much more refined focus. Today, what we have, I just really have shared in our numbers, and the CFO could mention. I would rather that we speak about the refocus when we have clarity on opening opportunities for most of our markets when the government deemed that to be safe. We anticipate that could happen in June. But I cannot guarantee you because we have no view on what actions government will take. In mature markets, there's clarity. You may have seen in Europe and North America, but we don't have those actions yet in our market. On fees and commissions, we still anticipate to grow from last year. Last year was extremely strong. But what you've seen in the past quarter momentum is something we want to continue this year, except that the cost of risk will increase from what you have seen in the first quarter of this year, and that momentum will be sustained for the rest of the year. I'll hand over to Lawrence to respond on the first question.

Joshua, I wasn't expecting to answer questions on 2019 numbers. But Ronak, the major driver for that growth is consolidation of the acquisition of NBK. So I'm assuming you're asking the movement from KES 59 billion to KES 89 billion in stage 3 -- stage 3 loan last year...

No, no. No. The difference -- I'm asking, why is there such a big difference between what you report as stage 3 loans, I think it was KES 89 billion at the end of 2019 and I think what you report as NPLs on the CBK basis, which is, I believe, about KES 66 billion. Why is there such a big difference between the 2?

Okay. All right. Okay. That's -- the difference is one, as you know, in -- per PG guidelines, central Bank does allow us to restructure loans, and we are working on -- for restructuring processes. So that's why the figure will be lower at KES 66 billion. When it comes to reporting for IFRS 9 processes, we normally take the entire amount of facilities that have been taken as an override and take -- put that in stage 3. So that's why the vast -- that difference of about -- I think it's about KES 24 billion.

Okay. And would you be able to share what the stage 3 loans are currently?

Yes. So I'll come into that. I think we can share that after the call. David can share the details of that. We don't -- I don't have it with me at the moment. We can share that information with you.

Just one final question, while I have you on the call, Lawrence. We saw some news article last week suggesting CBR's restructure, I believe, up to 15% of the portfolio. Could you just give us a bit more information on what the type of restructuring or how these loans are restructured? And any potential impact from a P&L perspective? Would you have to take a haircut on NPV, maybe take some more provisions, reduce the effective interest rate, just trying to understand what the accounting implications of the restructuring are?

Okay. So I'll answer part of that question. That's the one that relates to the impact from an accounting point of view. And then I'll ask Apollo to guide me on the more -- how we are doing the restructuring. From an accounting point of view, there's been a lot of guidelines -- guidance given right from the International Accounting Standard Board and this is with the -- local Institute of Certified Public Accountants of Kenya has issued a guideline in terms of how do you make judgment on what is a significant increase in these. These facilities, we started restructuring them towards the end of last month, and the bulk is coming in, in May. So as Joshua mentioned, we'll see the big impact of the restructuring coming into quarter 2. From an accounting point of view, we are starting to work on the fundamentals of how do we -- how do we take these judgments in corporate forward-looking information into the PDs, probability of this sort to come up with the actual numbers that need to go into the additional provisions. So one, we definitely will see provisions going up, in the period. But it will all depend sector by sector. So the effect as well you know the forward-looking information from a macro point of view, it will take a much longer time to deal with. So that we'll sort of look at it as a case of significant increase in credit risk. There are others where you know it is a short-term hit. Soon as the economy starts opening up, you should see that the sector picking up very quickly. So the judgment of those will certainly be what we'll be working on in Q2. And then we've set up a session with our external auditors for -- later in July, to go through and find out what those assumptions are. This is all very new to -- across, obviously, all the markets and regulators are giving guidance as the situation unfolds. So it's a process of discovery, even now. But yes, we do expect that we'll have a bit of -- with that we'll have increase in the loan loss provision. So Apollo, maybe you can just give some highlights on the shape and form we applied for the restructure.

Thanks, Lawrence. On the call, I just joined. Tell me what the question was?

Not sure if you can hear me clearly because your line is a bit muffled, but I was just asking what shape or form the restructurings have taken? Is it interest moratoriums, lower effective interest rates, potentially reducing the NPV? Just trying to understand how the loans have been restructured.

Yes. Actually, the typical restructure form is solid, is 6 months at this stage.

Apollo, we lost you. So let me -- Ronak, let me take the rest of them till Apollo comes back. So very firm restructure across the sector. So the Central Bank have issued some guidelines. It's a temporary moratorium. Initially, it was intended to be 3 months for either principal today or interest repayment holidays. What we are seeing a little bit more in the industry is more customers are coming for 90 days -- sorry, 180 days, so 6 months. We are seeing few and few. Actually more than 85% of the loans are being restructured for 6 months at industry level. So this is way beyond what Central Bank had anticipated. And we haven't seen any adjustment on the net book value yet of the loan. But it is likely 6 months, some are going for principal. Some is principal and interest. I mean we're still accruing the interest with those customers who are not able to -- to be able to pay at the end. So I presume by the end of June, Ronak, when we revisited Central Bank, the initial plan of 90 days may not have been practical. And most of our loans are on the corporate side. Second category of the KES 111 billion, KES 80 billion in corporate, KES 20 billion in mortgages and around KES 5 billion is on the consumer loan. We've seen few consumer loans being restructured. It's a very standard approach across the markets in Kenya and Uganda, Rwanda and Tanzania.

The next question we have is from Danesh Ranchhod from Franklin Templeton.

I've got 4 questions. Some of them are follow-ups on what Ronak just asked. So just with regards to the restructuring, you mentioned that the bulk of the restructuring was in -- which sectors that is? Would it be the obvious sectors such as tourism and hospitality? Just give us a bit of sense of sort of it across. So that's the first question. The second question relates to fees and commission income. We've noticed that the run rate for mobile loans which has been driving fee and commission income growth was about the same in the first quarter versus the fourth quarter. And so I would have expected mobile loan fees to be roughly similar, but it looks like there was still substantial growth in the first quarter of this year on fourth quarter last year. Can you maybe just sort of share some thoughts on what's actually driving that besides mobile loans? My third question, just as to OpEx. When I look at the first quarter numbers for NBK, the OpEx looks sort of flat in fourth quarter. So it looks like most of the OpEx savings are coming from the old cases. Just help me understand how that is possible and what's driving that? And the last question just relates to some earlier guidance you have given us regards the base rate for lending interest meant to be somewhere around 13%. Does that rate come down a little bit given the sort of CBK cutting rates?

So thank you for the questions. So I will -- on the restructure for the sectors, Apollo, I'm not sure you finally got your link back. My answer is very traditional, is tourism, hospitality, horticulture, transport. Those are the ones we saw a little bit affected more and real estate. Those are the main sectors. We can get you details on what you see as the overall percentages. The fact that we thought we'll do a little bit much better or much more on the health, telecom sectors, agriculture. So we thought those are sectors we are going to do much better. But what we're seeing now after 6 to 8 weeks, we see some sectors like hospitals are actually getting affected because some of those are no longer admitting patients, are not getting clients. So they're classified by the same one that you will see in the most area of contagion sort of in hospitality, restaurants, going to transport. So those are areas that's been affected significantly. Nothing new I will say. We haven't seen much impact on the personal loans, which is a big area for our lending so far because we haven't seen a lot of bad actions taking place in our market for -- so far for the last 10 weeks. And Apollo can comment if there's any new sector. But what we see is very common everywhere in the region. In terms of fees and commissions, so quarter 1 is very closer to quarter 4 last year. We had seen weaknesses in the demand for customer loans on mobile around the mid of March. And remember, we do have a better price if you compare the same to the last year. But we see that there's going to be a reduction in the transaction volume in quarter 2 up to 50% because we see a lot of customers who borrow in that channel with difficulties of retaining and that will increase the cost of risk. So that's an area that we see. But we do anticipate that quarter 2 and quarter 3 will -- number of our TV for mobile will actually go down. So we may not achieve the full year loan disbursement for 2019 on our mobile loan, although we have a better price this year and Lawrence can add on the delta between year-on-year. On OpEx, we will -- the benefit for NBK will come much strongly this year, even at KCB level. So we have a plan to start our integration. NBK is now with full control from last year. So we haven't seen stronger benefits consolidating our activities from the 2 businesses we have, that's a program that is running. So we still intend to achieve the incremental savings this year compared to the same time last year, particularly in quarter 2 and quarter 3 and quarter 4. And lastly, on the lending rate, the rate has been valid. So the lending rate of 13% is still valid. We are doing a number of our new loans at 13%. It's true that the old loan that the CBR is doing today, and therefore, the new loans have now gone back to 11%, 11.25%. But our base rate has remained at 13%. I don't see that getting adjusted at all this year from what we see in our view. But the majority of our loans are now going to be affected by the reduction of the CBR from last year. But Lawrence, maybe, if anything else you want to add on the fees and commission?

Yes, yes, Joshua. So on the delta quarter-on-quarter, which is important to what you're asking about -- the bulk of that is we had an additional margin stake in December because of the change of the [ excise loan where the loan track ] about 20% that used to go out of tax, and that's coming in at sort of our pricing now because the loan on that has changed. So that -- we were banking on that into 2020. But obviously, there will be a trade-off because, as Joshua mentioned, volumes will go down the -- in the current environment. And we have already started seeing volume uptick on the [indiscernible] the mobile facility dropping. I didn't get the question on...

Yes. Just maybe just -- if I can, just one more question on the fees and commission. The mobile loan volumes, what do you expect -- I mean, a run rate for the balance of the year from second quarter onwards that you were doing about KES 50 billion a quarter before. Should we expect that to go sort of KES 30 billion or less? Just to some sort of idea?

Yes, yes, yes. We're looking at a 40% to 50% drop.

40% to 50% drop, Okay. So almost half. Okay.

Yes.

The question -- the question on OpEx was when I looked at the first quarter of this year compared to the fourth quarter of last year, ending December, it looks like OpEx was down roughly about 5%. And then I tried to look at NBK's OpEx, which was sort of roughly flat quarter-on-quarter. So it looks like the big sort of reduction in OpEx sort of came from the KCB Group ex NBK. So I just want to understand it. I thought much of the savings will be banked within NBK. So I just want to verify and find that all the savings being banked in the KCB Group takes NBK, but in reality it actually fall in NBK. Just trying to understand that.

Yes. So we -- yes, yes, yes, I get that. Thanks. We haven't started actualizing the savings integration of NBK as at quarter 1. So you're right, the savings will be [ streaming ] out of the traditional sources because we always run -- we always run a cost saving project. So going forward, the savings then will start dropping off from NBK. That said, part of the response to the COVID-19 issue is obviously we've gone into our OpEx and are taking out a lot of costs. So on a traditional -- in a normal year, you would have seen savings coming now mostly from the integration with NBK. But this year, because of the -- that being one of the biggest areas we're looking to optimize on. It will be a combination of both.

The next question we have is from Adesoji Solanke from Renaissance Capital.

Can you hear me? This is Soji from Renaissance Capital. Can you hear me?

Yes, please go ahead.

Okay. Sure. Okay. I have 2 or 3 questions. The first is just if I can stick on the cost issue. So I understand you dug into the cost base, as you said, but how much in terms of cost savings, when we think about KCB stand-alone, are you expecting to achieve for the year? Then the second question is, does -- there was article where Joshua was talking about capital injections into NBK. And he also said -- saying the CBK allows you to add back expected credit losses to capital. And you -- can you clarify what this means and how it works as I'm not so clear on this -- on this particular issue? Then finally, if you can just talk us to how it has affected the Board and management's thinking around opting to still pay the dividend.

Right. Joshua, shall I take them? So Soji, on the cost savings, as Joshua highlighted earlier on, that's all part of the whole focus and we'd want to give some forecast when the numbers are -- come. But we are looking right now, ballpark numbers that we are looking at is between KES 6 billion and KES 7 billion, that we can actually pull out of what we had planned for 2020, not again in 2019. So remember, we did have a plan for 2020. The second question about the Central Bank conversation. That's what in 2016, when the interest rate cut came, Central Bank did issue guidelines about -- from a capital compliance point of view. And this was to protect banks that were going to be hit by taking additional provisions that was driven by IFRS 9 that were going -- that was going to impact their capital. And by impacting their capital, it means that they would have gone beyond the requirement levels. And Central Bank gave us a 5-year moratorium for banks to build that capital back to the adequate -- correct adequacy level. So that is what I think was referred to in that article. It was something that was published -- publicized quite heavily and surprisingly we never came across that. I'm happy to get into more detail if you like. Just remind me the last question.

Yes. So no, I understand it. I think we saw what Joshua was talking about, but I mean that's clear. I perfectly understand it. The final question was just around dividends and how the Board and management decided to still go ahead to make the payment?

So on dividends, yes, we did decide to go out and pay the dividend because, one, we had already made an announcement on dividends and shareholders have acted or investors -- potential investors had acted on the information that we had issued out there. And also when we looked at our capital planning, even with the worst-case scenario model, we're still able to pay off the -- to pay dividend off and still be within the capital adequacy requirement, Soji. And then the last part is we -- if you remember, I think towards the end of last year, we did say that we wanted to optimize our capital structure by bringing in more debt into our total capital, which is something that is in the pipeline. So again, even adding -- without putting in that additional Tier 2 capital, just make our special balance a lot better, so those are the 3 main factors that drove our division.

[Operator Instructions] The next question we have is from Timothy Wambu from Absa Kenya.

My question, obviously was around the loan that you got restructured. You mentioned KES 115 billion of the loan that you got restructured. So from the way I see it do you think that this is the last it gets or do you potentially see this figure increasing? And it will be plenty of with -- looking at your customers what kind of challenges are they experiencing? And in terms of recovery, it is still going to get difficult, but give us a sense that we can make the [indiscernible] recovery or is it going to be a long dollar process that will -- it will take a long time to recover so that gives you a healthy recovery. And just lastly, if you could just talk about whether there's appetite to get on more risk. By that I mean are you likely to extend some more credit this year or anything against the -- look to do this completely. And if you could just give us the estimated cost of risk for the full life. I know it's not easy to give a sense of where it could be, but you say, it touched 2.1%. How high do you think it could get?

All right. Thank you. I don't know whether Joshua dropped off the call. So in terms of -- let me answer the question. Is it a -- is it what you think, that's a very difficult question to answer. To be honest, it all depends on how long how long this pandemic will be with us. The Ministry of Health says that -- they expect that Kenya's peak will be in August. We are just in May. So there are -- there are many other factors that come into play. From what we have right now from our book, looking at our customers, it seems like we are almost hitting the peak. So we don't expect to go a lot further than where we are from the -- now, let's see. It is not an easy question because there's too many moving parts, including what -- that we have to come across the world, again, what is the impact of wave 2. A lot of economies, they are opening up now. So there are mainly very many moving parts. Recovery of our customers. Again, this depends on the sector by sector. So we -- tourism, hospitality, that is going to take a bit longer. That's right into next year. The President announced some similar package for that covered -- partly covered tourism amongst other sectors. But we keep that as the worst-hit sector in our view. The other sectors, manufacturing, maybe hospitals, those will probably recover much faster than hospitality. So again, it's all -- some of us for 3 months, we believe 3 months was a bit too low, we probably extend it to 6. And we think 6 should be sufficient for places like manufacturing. Again, seeing the health constant, hospitality, that we are looking at a year. Risk appetite. We have reduced our risk appetite. We looked at the appetite and speaking about that, maybe Apollo is now on the call, he can sort of talk, give some more color to that. And cost of risk element, yes, we've hit 2.1. My rough estimate is this will go up because, as I said earlier on quarter 2 will bear the brunt of all the restructure activities and especially from a loan provisioning point of view. Do you want to have a number right now? No, rather it's very rough. I'd rather work, keep watching on especially how we will use managing judgments on the facilities that we restructured. A solid number that we can discuss with our external auditors. Apollo, are you back? Are you on the call?

Yes, I'm on the call. I hope, you can hear me now?

Yes, yes, we can.

Okay. Yes. Yes. I think Lawrence just put it. I think recovery will be impacted this year quite a bit. I mean the people who are already struggling pre COVID are twice as bad [indiscernible] position where they are today. So even going for auction right now is very tricky, number one. And also getting buyers at auction is quite difficult. Yes. So recoveries this year, our outlook is a reduction actually compared to last year, maybe then up to 50% here.

Maybe just a follow-up then. Can you hear me?

Yes, go ahead.

Yes.

Yes. Yes. Lawrence, just to maybe give -- I know -- could you just give us please on -- so of the KES 115 billion, you said [indiscernible] I think to give a more granular case in terms of what proportion you are offering interest relief? And what other portion are you offering a 10-year extension in terms of [indiscernible] KES 115 billion, the proportion?

Apollo?

Yes, I think we can share the granular numbers later on. But I would say, out of that, some 80% is both principal and interest holiday that we are looking at. And same amount, the way 80% of that also are getting an extension of 10, the loans by like period, yes.

The next question we have is from Kishan Popat from Kestrel Capital.

Can you hear me now?

Yes, we can.

Yes, we can.

I have a few questions. I hope you won't mind me asking them. The corporate tax rate of 30%, when is the effective date for that? That's the first question. The second question relates to the strong performance of subsidiaries. What's the outlook for these for the rest of the year? And the third question relates to the proportion of loans written off during the quarter. I believe these were under KCB Kenya, is that correct? So those are the first 3 questions. And then for Apollo, I have three more. So thank you for bearing with me. Apollo, given the KES 100 billion-plus restructured loans that have been announced, should we be using the PDs that we see in the annual report for 2019? I'm assuming, let's say, a loss given default recovery rate -- loss given default of, say, 50%, should we be looking at provisions more along the lines of KES 13 billion for the second quarter? The second question relates to the significant increase in probabilities of default for stage 2. Between your 2018 annual report and 2019 annual report, we've seen a doubling or even a quadrupling of those stage 2 PDs. Could you shed some light on that, please?

Okay. So let me just take -- corporate tax reduction from 30% to 25% the effective approach, that's when the law was passed. So that's what affected which is -- so that one, it's ideal to be annual, but we have decided to interpret this differently. In terms of subs outlook, again, this is part of the whole group conversation of impacts of the pandemic on our entire business. So we expect that we are working with the assumption that countries like Ghana and Uganda that went on a full lockdown earlier and sort of reopen -- recovery than those that did not sort of do much by way of the lockdown. So we are working as we build our models on the various scenarios of what the impact will be. What we had planned for, obviously, is thrown out of the window, that is totally outdated. And we are in the environment we find ourselves in. Proportion of loans that were written off, you're asking whether the bulk of that came from NBK or KCB? I don't know that you asked -- do you have that answer? No.

No problem.

Kishan, say that again?

I just was wondering what was the size of the write-off.

Yes. Can you...

That's okay. I'll speak to David after this call.

Yes, we'll come back to you. Your mic is on. We are hearing the other conversation. So Apollo, can you answer the other question?

The other question, just around the PDs. I think, first of all, we are expecting our selling of the PDs in this year? Yes, I think that's right. The expectation is that the PDs, looking at Q2, Q3 this year will worsen definitely based on the loss experience. Yes. But then I think it's something we are looking at just as the COVID situation unfolds and how that will impact on the provision and then ultimately the cost of risk. So it's something we are observing, and I think the numbers will be clearer towards the end of Q2, yes.

What was -- did we cover your question, Kishan?

Yes, it's -- I mean -- yes, that's okay for now.

The next question we have is a follow-up from Ronak Gadhia.

I have 2 quick follow-ups. First one, I guess is a follow-up from Danesh's question. Just as you mentioned a bit earlier that I guess the base rate is now at 13%, but your effective lending rate is 11.5%. Just trying to understand what the implications of this are? Does this mean your effective rate will be around 11.5%? Or should we see that rate gradually move up as you maybe restructure loans or roll over your loans to the slightly higher base rate at 13%? And just within that as well, I think in the first -- during the full year numbers, you had indicated that you're in the process of getting your interest charging model approved by the Central Bank. If you could just update us where that stands and when that becomes effective? And the final question is on your risk. If I look at your loan breakdown, about 37% of your loans are to the personal household segment. Could you just talk a bit about the underlying risk within that segment in the current environment?

Thank you, Ronak. So I mean, what we will do is that we see ourselves, my guess is towards the higher interest rate. Remember, earlier we said that at 13%, we don't have a problem with that with our Central Bank. I think it's when the loans are repriced as through an additional loan or top-up for the service structure or a new facility and that's why we are confident that we will move away from the 11% going up. The Central Bank is still keen to continue reducing the CBR on existing loans. So those were based on the CBR. We're also looking at ways of adopting a new reference rate for our loans. And that's -- we expect that to be in place sometime by mid of June of this year. So we expect that, that will increase. It will not reach 13%, but it should be between 11% and 13%. In terms of the structure of pricing policy that has been presented at the Central Bank, we don't have any issue with that. And then with the risk appetite on the personal loans, we -- they are fairly -- we are extremely good in terms of their performance. Most of them are structured loan programs or schemes or programs in a number of public sector and private sector. And the NPL for that has been the lowest for a very long time. We expect very little change in the portfolio. So that has been the best-performing loan book even in the current crisis, and we don't anticipate any change in that area. What has been affected? If I give you the general figures in the market. So our small businesses, our SMEs, which don't participate in the chunk of loan, have been the most affected in the market, but largely the salaried employees have largely been okay so far until today, as we speak, in terms of June. So that -- we don't see a bigger risk on that. Ronak, that's our response to your 3 questions.

And just one final one, I guess, for Apollo. You mentioned earlier that the recovery this year will be tough. It's even tough to go into the auction market, given the current environment and given the surplus. And this is not just a case, a specific issue, but across the sector, historically, we've seen the specific NPL cover has been fairly low, 40% to 50%, but the banks have been able to cover the shortfall due to collateral. In an environment where we're seeing a correction in the real estate market even before the COVID pandemic, I guess that correction will live and intensify further in this environment. So could we see portfolio NPL -- or rather specific NPL cover levels increase, given that banks may have to write down their collateral values?

Ronak, I can answer that. I think, yes, you're right. These are some of the things we love to look at because part of the IFRS 9 framework is looking at the collateral part and the valuation of the collateral. So if that significantly goes down, then it implies you've got to take an additional cover or take an additional position. So yes, you're right. But what I was trying to explain earlier on is that it's not entirely straightforward, I'll just put it because there are judgments to be made. You've got to look at the long-term impact of that valuation and bring it into the entire model of provisions.

The next question we have is from Danesh.

Just follow-up. With regards to the restructured loans that were indicated to be roughly 15% of the loan book. Can you just give us a sense of where in the sort of [Audio Gap] you say you have it towards the end of it or in the middle of it? And then the second question just relates to restructuring as well. Roughly, if you had to give a percent of loan applications that are asked to -- actually are restructuring. What is that sort of hit rate? Is it sort of 30%, 40%, 50% of loan applications restructuring?

So Danesh, are you looking at -- are you looking at overall loans that we were handling before or overall loans that we have as of the end of March in terms of the percentage for loan application restructure?

Yes, yes. So basically, the COVID restructuring if you want to call it. So any loans that have been applying for COVID restructurings, what percent of those are actually being restructured given the application rate?

So I would say, Danesh, on the restructured loans, I would assume, so we are more likely than 2/3 of that, I would say. So maybe up to 65%, 66% to 70%. June is actually the last date, and we may have some little rush, but it will not be more than 1/3. So what you're seeing is largely -- majority of the restructure has already come on board. And a lot of those -- up to 80% of those are being restructured because this is largely driven by the guideline issued by the Central Bank at 3-month, 6-month moratorium, interest moratorium. That is a guideline that has been issued by the Central Bank for all banks and for all sectors as long as there are loans which are performing by -- of March. And so there isn't that big a flexibility on that unless the customer has no chance, we are restructuring based on the guidelines of the Central Bank. After the 90 days, which ends in June, then we will revisit what happens next or the next 6 months of the year and maybe go back to the Central Bank for some guidance across all our regions. So 2/3 of the work done, and 80% of those loans have been restructured.

The last question we have is from [ Shreya Gaurav ]

Just a couple of things to follow up on some of the earlier questions. Just on the restructuring. So a bit more on how they actually happen the -- next major shift. So what I understood just now in the answer to the last question, was it any loan that was performing at the end of March or in March when the guidelines were issued, you -- they are on regular discussions. So they are performing at that time and the application for the restructuring was made, you have to give that 90-day minimum interest moratorium. I know it's only after that, that you can reconsider. Is that correct?

So not that for 80%, that's what you can add. So 80%, not all of them, obviously. So some applications are coming through, but they were not affected really by COVID. So it wasn't going to affect that issue. So those are not being considered today. But those that came in during this period, we are considering them. And most of them -- up to 80% we are approving.

And are you also getting applications or doing some automatic restructurings for clients who haven't actually run into any difficulties as a result of COVID?

No, no,no. So you have make an application, the guidelines are very clear. You must send your proposal, you have to show the weaknesses you are chasing, it must be considered. Each of these applications is looked at individual basis. And that -- so there is no automatic review or restructure of the loans being provided to date. And that has not been a concern in the industry except if you follow the media. Media is saying banks are not responding. Banks are not restructuring, but a customer needs to come to the bank, either digitally, come to the website, come to the web portal, come to the branch and make a specific case. Until that is done, we will be able to do a restructure.

Okay. And is it actually people -- loan credit, obviously, loan officers who go through the process and then decide on the restructuring that they provide? Or is it automated process? How does that work?

Apollo can add. Apollo, you have -- can you take -- add on that?

Yes. Yes, I can add on that. I think what's happening is we've made the process lighter than regular loan application. So there is independent approval of the credit. So one credit consumer loan and the application is via the branch channel, there will be a division in same day, latest next day using our workflow system, automated system centrally, yes. So it's not the loan officer or the branch, but centrally, we have decision-makers who are doing that very fast. But then the process of agreement is fairly light. It's not a big assessment at that stage. So we give up to 3 months and 6 months, maximum is what we are looking at the common holiday period we are giving at the moment. So depending on how COVID stands out again, there might be -- with 2 out of that in terms of second round restructure applications here.

Got you. And if I understood correctly, the number that we saw in Q1, basically, the NPLs and the cost of risk does not reflect restructuring, it is hardly at all. That started late March. So that's what you're saying. We will see that build up during Q2 and Q3, and that is a judgment call for you as to which ones you classify where you take positioning on the restructured loans. Is that correct?

Yes, exactly. So in Q1, I think the impact was not fully felt -- the full brunt of the impact. So in Q2, yes, but Q3 is where you will see that evolution in terms of NPL rates? Yes.

And is that a judgment call from you even during the restructuring. So if it had a 6-month holiday, you would still take some provisions if you feel that you need to -- or do you need to wait for the more solidated finish before you can start taking provisions and see things classified as NPLs?

Look, actually, the Central Bank is allowing -- and I can call it, override for that kind of restructure. So then, yes, you're right, it will be a judgment call, then we have to look at case-by-case basis and say, do we want to migrate it to or want to be ready or not. Yes. But the policy, Central Bank has said that if it was performing as of 1st March, and you are allowing this kind of restructuring, then you can override it and not let it migrate to the worst gradings for this year, yes. Okay. But then we will have a judgment call come Q2, Q3 and say, do we want to treat it as performing or as NPL.

Yes. Let me add and -- we shall do again. Lawrence can add, but we would not go by the Central Bank. Central Bank has been more conservative actually, they are more optimistic saying in the 90 days or 180 days, you carry on the loan, you don't receive the provision. In our view, we will need to increase the level of provisions because in reality, a number of the 6-month customers may actually not be able to recover their businesses. So cost of risk, as Lawrence said, so we will actually be more conservative and our level of cost provisions, especially from a cost of risk, will increase in quarter 2 and quarter 3, although the Central Bank said, you don't have to do it. Lawrence said, from an IFRS point of view, we will definitely have to increase our provisions on those loans. So that is our deliberate action based on the criteria of the customer, based on their performance, based on their behavior. So I think you will see more provisions in quarter 1, quarter 2, just to align that the customers are rather paying these loans under original schedule. So do I -- actually [indiscernible] on this call.

Yes. Okay. That's great. Understood. Two more things quickly, if I may. So the first one is, despite that, the provisions in Q1, obviously, did increase by 150%. Now I think the NPL -- you think the NPL increase was -- a large part of that was due to NBK. Is the cost of risk or the higher provisioning charge, how much of that was due to NBK and how much of that was legacy KCB?

The bulk of that was there was KCB. So we -- as I said earlier on, there are assets that we could see while limping as of quarter 1, COVID comes in, clearly a significant increase in risk. And we took an early decision to take additional provision.

Okay. All right. And the final question for me is just on the -- you have had a reduction in the CRR locally. So what are you actually able to do with that extra liquidity that you have on the balance sheet now?

Well, look, that has been a more difficult question. [Audio Gap] I would say it has not been as flexible and the amount of money we have is quite small in our overall scale of our liquidity. So I would say the impact are not significant. But across the industry, the KES 35 billion of additional CRR actually still sits in the Central Bank account until you justify that if an additional loan, a restructure you've done and then that approval is what you are able to access. It's not a very straightforward process. We have been arguing that we need to get flexibility, but we need to get approval from the regulator for every single application that we make. So I would say it's not been as easy as we had intended it to be. We haven't seen the impact of it actually in the industry so far.

Ladies and gentlemen, that's all the time we have questions for. Joshua, do you have any closing comments, sir?

Thank you very much for joining us on this call in, I would say, a much more difficult period. We will be able to monitor the situation very closely across the region through the coordination that we have through the Ministry of Health in our businesses and the industry as well. We will give you an update in the calls likely in the coming month of June. We remain cautiously optimistic around a lower resumption of activities across our market. We don't know when that will happen. And we definitely believe that in this quarter, we will be able to have some more color on our forecast for the year. But thank you very much for your questions and for joining us on the call. I want to wish you stay safe, and good afternoon and a good morning to all of you. Thank you. We can now finish our call. Thank you.

Thank you, sir. Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines.