Zenith Bank Plc (ZENITHBANK) Earnings Call Transcript & Summary

Hello, and welcome to the Zenith Bank Plc Full Year 2019 Investor and Analyst Conference Call. [Operator Instructions] And just to remind you, this conference call is being recorded. Today, I'm pleased to present Mr. Ebenezer Onyeagwu, the group's CEO. Please go ahead with your meeting.

Good afternoon, ladies and gentlemen. It's my pleasure to welcome you to this conference call, and I'd like to introduce our team. I have with me on this call, Mr. Dennis Olisa, Executive Director; Dr. Temitope Fasoranti, Executive Director; Mr. Henry Oro, Executive Director; Mr. Felix Egbon, our Chief Risk Officer; Mukhtar Adam Dr., the CFO of the group, and we have Taiye Ayandibu, our Investor Relations Manager. It is my pleasure once again to welcome you to this call. And before we go into the numbers and the details and highlights of our performance, I'd like to take us through some of the key points that underpin the year 2019 and also the issues that are already beginning to trend and determine the direction of business in 2020. Global economic growth has remained very sluggish and muted. And the issue of the coronavirus is also beginning to create serious impediment for business across the globe. And throughout the year 2019, growth has been sluggish, both in local economy and in the global space. However, in Nigeria, we recorded a real GDP growth of 2.55% for Q4 2019, which is the highest we have ever recorded since the recession of 2016. The oil sector expanded by 6.36% year-on-year, contributing 7.32% to total real GDP in Q4. While the non-oil sector grew by 2.26% and this is driven largely by activities in mainly information and communication, agric, finance and insurance services as well as manufacturing. Headline inflation closed as of January at 12.13%, rising from 11.85% as of December 2019. And it's also important to say that food inflation rose by 19 basis points to [ print up ] 14.67% year-on-year as the threat of barter closure continues to weigh on food prices. Core inflation in itself advanced by 34 basis points to have a year-on-year closure at 9.33%. Our foreign reserve closed the year at $38.6 billion, down from $40.5 billion recorded as of end of October 2019. However, exchange rates remained relatively stable throughout 2019 with NIFEX rates for December 2019 closing at 363.7 against 362.6 closure for 2018. At the same way, NIFEX closed 2019 at 359.7 against 2018 closure of 358.8. In the regulatory environment, we have noticed that it's been very busy and active, and the direction of travel has led to a drop in yield in all asset classes as well as a bifurcation of trading in risk-free assets. There is also a move to encourage investors to take a longer-term perspective in the country with introduction of the 5-year OTC fixtures. In August 2019, the Central Bank introduced a loan-to-deposits ratio regime. And at that time, banks who are expected to maintain a minimum loan-to-deposit ratio of 60%, at the review period of end of September 2019. Subsequently, this was increased to 65%. And this loan-to-deposit ratio regime has continued to be applied by the Central Bank. Additionally, the CBN came up with the review of the guide to bank charges. The key points of the review is a reduction in fees and commissions on electronic products and in some of the key retail products. There is also the move by the Central Bank to introduce cashless policy, which will become a bank-wide policy from end of March 2020. It is expected that this will create a bigger boost for growth in retail business and the adoption of various electronic payment platform in the country. We've also seen this time the emergence of the new finance act, which took effect on January 2020. And part of the key points of the new finance act is that we'll see that minimum tax on dividend payments is now moving from minimum tax on dividend payment to minimum tax of 0.5 of total revenue. It is expected that for the banking industry, this will bring about a reduction in effective interest rate. For Zenith Bank in the year 2019, we were able to achieve a loan growth of 22% and a deposit growth of 15%. Our performance has been largely inspired in terms of the top line by a remarkable growth in our retail and digital business initiatives, which resulted in increases in fees and commission on retail and electronic products, from NGN 20 billion in 2018 to NGN 42 billion in 2019, which translate to a 108% growth. Our noninterest income also came in strong with a 29% growth, as 2019 figures stood at NGN 232 billion, against 2018 figure of NGN 178.9 billion. We have also remained very effective as we continue to rein in the key levers of cost. We have seen our cost-to-income ratio dropped from 49.3% to 48.8%. Cost of funds also dropped from 3.1% to 3%, while cost of risk remain moderately stable at 1.1%. So I would like to hand over to our CFO, Dr. Mukhtar Adam, to take us through the other key highlights of the performance for 2019. Mukhtar?

Good afternoon, ladies and gentlemen. Thank you for joining us on this call. So in the year 2019, we have seen a growth in our top line by 5%. And then our PBT has grown also by 5% from NGN 231.7 billion to NGN 243.3 billion. Likewise, our PAT has also grown from NGN 193 billion in 2018 to NGN 209 billion in 2019, representing 8% growth. The growth in PBT is largely attributable to our growth in top line and cost containment during the period. The growth in top line, largely driven by the growth in fees and commission income centered around the growth we have recorded consistently on the fees on electronic products, which grew from NGN 20.4 billion in 2018 to NGN 42.5 billion, representing 108% growth. Due to the low-yielding environment, we have seen interest income drop by 6%. And as a bank, we responded to the drop by repositioning our funding sources, which resulted in 2.4% drop in our cost of funds that closed at 3% from 3.1%. Impairment has also increased by NGN 5.7 billion between 2018 and 2019, largely due to the growth in our loan book. Remember that our loan book grew significantly during the period. And this drove our cost of risk to 1.07% from 0.9% in 2018. We have seen other operating expenses drop by 7% due to our continuous work on our cost optimization and efficiency within the period. Cost-to-income ratio has moderated down to 48.8% from 49.3%, which is also a very good progress. From all these, ROE remain flat. ROA increased to 3.4% from 3.35%. We also have earnings per share growing by 8% from 6.15%, and from 6.15% to 6.65% in 2019. So overall, in terms of our performance, we have seen growth of strength in the top line revenue line, while we are seeing some progress in containment of cost, which have improved our profitability during the period. Then for balance sheet, our balance sheet has grown within the 2019 financial year. Deposits grew by 15% year-on-year when compared to 2018. Our loan book grew by 22%, as a result of disbursement of new loans in different sectors of the economy during the period. The growth in the loan book, however, did not lead in deterioration in our NPL. Our NPL ratio declined by 16% from 4.98% in 2018 to 4.3% in 2019. We also closed the year with a loan-to-deposit ratio of 68.7% for the bank and 57.7% for the group. So from the balance sheet perspective, we can also see the key drivers of a business of a bank, which is a loan, the deposit are also showing significant signs of growth. So we can take this, and then we'll go through the questions and answers to address anything that we have not highlighted on. Thank you.

Okay. Thank you very much, Mukhtar. So the floor is now open for us to take questions.

[Operator Instructions] And our first question comes from the line of Tolu Alamutu of Tellimer.

I have a few questions, please. The first is on your Eurobond, which only have around NGN 107 million outstanding. Would you consider buying all of that back? Or would you maybe consider even issuing more Eurobonds based on what you're seeing in terms of dollar demand for loans? Second question is about regulation and the CBN penalty for the loan-to-deposit ratio shortfall. It looks like the penalty was NGN 79 billion at the end of last year. Can you give us some detail on whether or not that amount has changed? And also related to that, it looks like you're guiding to loan growth of just 2% for this year, can you maybe give us some more detail on why you expect such low loan growth after the performance last year? Third question is about your NPLs. It looks like there was a lot of movement in the manufacturing sector, and in communications within manufacturing, NPLs went down and communications went up. Can you maybe tell us more about the companies and the exposures there? And finally, what oil price are you using on average in your lending to that sector? And what are the assumptions currently used?

Okay. Thank you very much, Tolu. For the Eurobond, if you recall, we -- as at end of April, we had a redemption of the bond that matured, that was $0.5 billion. And in the course of the year, precisely in August, we did a tender offer and bought back about $400 million out of the $500 million we issued. So far, we don't think it's economical for us to launch another tender offer to buy back the balance. So we'll see that balance up to maturity. New issues will be determined by what opportunities we see in the market. If there is any opportunity, and we think the pricing is right, we approach the market. But so far, we've figured out where we are, we are comfortable in terms of our funding and the related costs. For regulation LDR shortfall, I'm going to leave Mukhtar to take that question and also take the guidance on the loan growth.

Okay. Thank you. The LDR shortfall, you know there is not a strict loan-to-deposit computation. So we have -- it's largely loan to fund, and all the source of funding are included. So what we have as of December is what has been taken. The CBN has guided that the next review period for the LDR is March this year. So we -- you can see that our loan book has grown significantly, and we continue to pursue that. We are not -- we are working in such a way that I'm not going to have heavy lease on the LDR -- CRR -- LDR for -- CRR from LDR, sorry. So that is what we are doing on that. We don't expect it to grow on that basis. But what has been debited in December is through that. And as we disburse more loans, the CBN review what we are doing, and sometimes, we are able to refund some of the CRR. So we'll be working towards that and see how much we can get in terms of refund. If you look at the loan growth guide that we have given, 22% growth in our loan book within this year is significant. And then you also have to note that some of the loans that are already -- we've already disbursed. A lot of them will be due for payback, pay down during this year. So you have a lot of repayments during this year and then you will recycle them. Look at our deposit growth, too, we have guided deposit growth of around 2%. So the 2 of them have to go together. If we have big opportunities to disburse more loans, of course, we will fund it by also going out to grow our deposits. So for now, that is a guide, the 2 of them are going to go together. You mentioned about NPL for movement between manufacturing and communication.

Yes. Exactly, so just in -- I think it's in one of slides in the presentation, it shows that manufacturing fell by quite a lot in terms of the amount of NPLs it accounts for. And I think communication went up.

Okay. Yes, communication went up because we have 1 major NIM in the industry that we have made full provision for, and then we have classified it as NPL appropriately. It's a single major NIM in the communication industry. So that have been classified. Then in the manufacturing, we now have opened up, we have expanded our definition of what constitute manufacturing. We have growth in key distributors of major manufacturing firms that we used to report as part of manufacturing. But that portfolio itself is growing. So we have opened it up to report it separately. So the NPL around that have also left their manufacturing. That's why you see our manufacturing NPL dropping.

Okay. Let me further state that. For the LDR, what you have there is the discussion as to what to refund to banks, is that of the Central bank. If you look at it in terms of our achievement, cumulatively, one would have expected that we should have a refund of not less than NGN 70 billion of the LDR because in December, we achieved 65%. Well, however, we are operating in such a manner that we think at the minimum, we'll be at the -- we will achieve the LDR of 65%, at least to avoid the obvious consequence of having the CRR debit being levied or not. Loan growth is a reflection of what we see in the macro space. You can grow beyond the economy in which you're operating. And beyond our economy, globally, the issue of the coronavirus is taking a major toll on business. China today remains the global hub for logistics and supply chain. If China is under attack, it's going to be -- it's going to have serious impact on, consequences on the global business. So we have to be conservative and cautious as we begin to project this guidance. And when [ China ] begin to afford, in the course of the year, and we see that there is a reason for us to review it, why not, we will do so. For now, it is just based on what we can see in -- our [ profession ] of what the growth prospect will be in the environment. And like Mukhtar mentioned for the manufacturer, it's just a simple reclassification. If you notice this slide, you'll see that while manufacturing declined, SMEs and retail increased. It's just a simple reclassification because now what -- retail is now a major focus for us, so we are keeping retail and SME on a different segment and buckets so that we can have proper understanding and appreciation of impact on business in terms of contribution to top line, contribution in terms of loan, contribution and impact in terms of NPL.

That's very helpful. Just the final question on the oil price that you now assume in your lending to that sector.

Okay. Oil price in terms of lending to the sector. First is that we haven't seen incremental growth in terms of our oil sector exposure, what we have, they are legacy transactions that we have. And what guides us beyond the oil price, the most important thing for us is that whether the exposures we have are all properly hedged. So much more important to us than the oil price is the price that I think we're going to the hedge. So what we have tried to do is to have some form of a [ production ] that protects this downside risk, it depends that you have a downward spiral movement in the price of crude. And also giving some kind of comfort and assurance and benefit, so the obligor should price begin to move upward. So we now -- we'll sell a put and subsequently, buy a call at a higher result, and that way, we're able to create -- imagine that keeps the obligor well protected. Protected against downside risk, create comfort and assurance in sharing in the event that you have an upward movement or rally in the price of crude. So that's pretty much the focus for us. So whatever the direction of the price of crude goes, we want to be sure that we're adequately protected and everything is properly ring fenced.

Our next question comes from the line of [ Dinesh Ramshed ] of Templeton.

Can you hear me? Hello? Can you hear me?

Yes. Yes. Please, go ahead.

Okay. We seem to have lost the line from [ Dinesh Ramshed ], so we'll go to our next question from the line of Gloria Fadipe of CSL. Please go ahead.

Just a few questions from me. Considering all the adjustments to fees coming in this year, do you -- can you give an insight as to how much you see fees, especially fees that [ include a drop in ] this year vis-à-vis 2019? And then can you tell us exactly what your loan-to-funding ratio is as of 9 months -- as of full year 2019? And also like to have an idea of how much average yield has dropped in your portfolio? And also how much funding costs has dropped, and what are those numbers that you like currently?

Okay. Thank you very much. So Dr. will take on the question on the adjustment and expectation on the fees and commissions.

Okay. Thank you. Let me say that we set out in 2018 to build a retail organization. I can see the result of that from the growth in -- even from the contribution of the retail segment to the gross revenue, which increased significantly from 6% to about 13%. And the GMD also refer to the growth in electronic income by 108%. How did we do this? We set out to build the retail organization and came out with the products that can excite the market. We leveraged on our corporate relationships. We came up with advanced analytics. We also started what we call digital customer onboarding. All these strategies will continue. We're going to build on them. So we don't expect our income from electronic products to drop at all, rather we're expecting to increase further. In addition, we also have a retail field force, who are driving activation across the country. So these products, we are very certain that we will see further growth in our income from electronic products.

Okay. Further to that, I think the other point to mention is that we are simply accelerated in terms of our initiative in the retail and digital space. We believe that it's a big -- environment and space is big. The potential to grow is much, it's enormous. And bearing in mind, our very strong IT and digital capability, we are introducing products, we are coming up with products and services that are aligned with the lifestyle. So I don't know [ what you believe ] in the market will be different products and services that are aligned with different segments of the market. So our -- we're making our reach total, so that we have a comprehensive group in the market. So the simple way for us is just grow volume. Once we have the volume, we'll deal with the drop in terms of absolute fees and commissions. On LDR, the CFO will take that, Mukhtar?

I would take that, okay. We achieved a ratio of 64.68% for loans to fund ratio of 31st of December...

Sorry, did you say 64%? 64%?

64.68%.

Okay.

So we had a very small shortfall for which we paid very small amount of -- that was part time.

Okay. And is this for the bank?

Oh, yes. The LDR is totally for the bank. It's not a group issue. You talked about -- you wanted to know the average yield to what extent has it dropped? Well, if you look at our [ return on ] interest margin, it dropped from 8.9% to 8.2%. That tells you a story. Conversely, cost of fund, too, hasn't really moved in the same direction, because as [ we're through ], savings has become a significant portion of our deposit. Savings rate is still at 4.03%. With the very significant amount of savings we have, you still see that our cost of fund only moderated slightly from 3.1% to 3%. That's essentially what it is.

Our next question comes from the line of [indiscernible] of Money Africa.

I have 1 question. I'd just like to know what your strategy will be going forward in light of the drop in TBs interest at the moment as from last year. So we know that quite a significant chunk of your income came from trading. So I'd just like to know, do you expect rates to remain depressed as they are at the moment? And if so, what's your strategy to mitigate this?

Okay. Dennis will take the question.

Thank you very much. We, as a bank, we have a very, very strong treasury team who are not only resilient but understand what the market actually present at any point in time. We quite agree with you that rates are trending downwards. Well, be that as it may, there are still a lot of opportunities. And for our investors, please be rest assured that we still have investments in treasury bills that are still in the works that are not yet matured. So we expect to get to drive yields for some time to come from those ones. In addition to that, the interbank market is still very strong. We'll continue to make our presence felt, both as we place our phones as well as we pick our phones whenever it becomes necessary. True that we manage that in treasury management, we're strong and we'll continue to remain strong.

Our next question comes from the line of [indiscernible] of CHT.

This is [indiscernible] from Chapel Hill. Congrats team for a great job. So there's some chat in the market around potential acquisition you're looking to make. My question is, what's that trigger? What are you looking? What would be the driver, if at all you're making that transaction? What are you looking for, is it retail? Is it customers? Because I see your shareholders’ funds at almost NGN 940 billion. And you get any bigger, I'm trying to see what is driving that potential trade, if at all is true? Then also speaking to your shareholders' fund, I mean is there ever a time when I have a big dividend payout? You've been -- it's -- the levels, I think it shows us can probably push for more and ask for more. So I'm trying to see, is there ever a time where you would pay higher than you've paying historically? And I think that number has been around in 40% range. That's my question.

Okay. Thank you very much. I think the first thing to note is that our growth aspiration hasn't changed. We've always maintained that we are a growth organization. We are desirous of growing, and we have also maintained that our growth strategy still remains organic. We'll continue to grow organically. And however, if we find anything interesting and disciplined in the market, we can consider some corporate action. So if you're asking for the trigger, it has to be disciplined, it has to bring a lot of value to us. It has to be consistent with our culture, with our style, our values. We will not do any M&A just because of the fun of it. It's not for the managerial hubris. If we are going to do it, it's going to be for strategic reasons. So it has to -- and that strategic reason has to be extremely, extremely compelling. That's the answer to that. Then dividend payout, of course, we'll continue to reward our shareholders with very outstanding dividend payment. We also believe that it is important for us to continue to beef up our award shares in terms of our shareholders' front. So that we'll be in a position to take on any opportunities and respond to shocks and just be nimble in the market to deal with any margin opportunities.

Our next question comes from the line of [ Olivier Michael ] of [ Standard Pension ].

I have a couple of questions. One is can you just expansion for how your digital acquisition strategy? And then if there are milestones or targets you are looking to achieve over the next 3 to 5 years? And my second question is around your NPL. I couldn't recompute the NPL ratio on my own, looking at your financial statements. So maybe you could point me in the right direction of how you computed your 4.3 figure. Because what I computed was slightly higher than that. My last question is around your downstream sector. So I observed that there was some growth in the percentage exposure to the downstream sector. I just wanted to get more color around why you are increasing exposure to that particular sector?

Okay. Thank you very much. Digital acquisition strategy, I'm sure you don't expect me to begin to display and communicate my digital acquisition strategy. All we can tell you is that we will be accelerating. We have the right competencies. We are building the right capabilities. We are making the right investments. We are getting the right traction and we have every inspiration to accelerate. So just be rest assured, we can't begin to share and display what the strategies are. The -- on downstream sector, what you have there, that would appear as good as simply cash back transactions. There are strictly cashback transactions, apart from the legacy transactions, against which we have promised renewals duly issued by the DMO to provide them. So we don't have what we call any elevation of de-risk exposure on our downstream. Calculation of NPL, the CFO will take you through that.

Okay. Go to Page 81 of our financial statement. I mean there are 2 financial statements. You will see our loan by sector. The various sectors, the gross loans and the NPL for each of the sectors. If you add the total NPL, you're going to have gross NPL of NGN 105 billion, and then a gross loan is NGN 2.462 billion -- sorry, it's NGN 2.462 trillion. So if you do the math, you arrive at NGN 4.2 trillion.

Our next question comes from the line of Adeleke, Emmanuel of ARM Securities.

I have a couple of questions. The first 1 is, right now, how comfortable the bank is with the growing NPL in the consumer credit sector? And the second one is, how much of a CRR are you seeking to give us as part of the CRR scheme for the manufacturing and retail sector? Then thirdly, there's talks around CBN increasing the capital base for banks. How do you see that happening? And if that should happen, how do you think it's going to affect your dividend payments? Then the fourth question is, can you give me an idea of your derivative book size as is now? And then lastly, also can you also [ shine a light on ] what sectors the launch provided, even provisions for over 2019, can you just give me highlights of the major sectors now [ if we have this ] for now?

Okay. Thank you very much. You were asking about, first, the comfort we have on our commercial SME [indiscernible], what we see there. Consumer trading. What you see there is a rate classification. If you look at the figure before that 2018, you will realize that when you are looking at the NPL for manufacturing, the figure for 2018 is much higher than what you have 2019. And 2019, if you also noted in '20, the figure for 2018, for SMEs and -- yes, SME and general commerce, you have -- consumer credit, you have 0.89%. Whereas on the manufacturing, you have 31.05%. Now we take you back to 2019, you see manufacturing coming down to 5%. And you now see consumer credit increasing to 11.99%. What we have done is to reclassify the SMEs that we put under manufacturing because we now see SMEs and retail as a new segment that we want to measure effectiveness of our performance. So everything about commerce and SME, we now appraise on a standalone bucket. Both in terms of loan side, in terms of earnings, in terms of fees and also in terms of NPL. So it's not a deterioration. Otherwise, if you also look at the absolute NPL, 2018, we closed NGN 100.5 billion. 2019, what you have is NGN 105.8 billion. So that explains what you have as NPL. So if you're asking for comfort, yes, we are certainly comfortable. Because when we take a look at the retail loan book granted in the course of 2019, and we look at maybe default or repayment that are behind, if we are to appraise it proportionately, the NPL we have in retail is less than 0.00%. I mean it is our [ first year ], especially when we expect that to arise. And these are our loan for CRR, it is not within our purview. Whatever requests we have, we send to CBN. It's at the discretion of CBN to give the approval in terms of the request they receive from banks. So we've made our request to CBN and the approvals are coming and as they come, we take them on. Then CBN increasing the capital base. We believe that we'll have the robust capital. And part of the change we see -- the question before now was about dividend payout. It was about our very strong capital base. We don't think any increase in minimum capital requirement our -- up for review will -- we don't think it will be attractive. We don't anticipate that to be a problem to us. What we'll continue to do is to reinforce and strengthen our capital at all times. The other question is the derivative book and the size. Mukhtar?

Okay. So on the size of our derivative book, if you look at Page 145 of our financial statement, the full financial statement, we've shown the nominal amount of our forward and swap contract to be NGN 729 billion. The nominal amount of our futures contract is NGN 319 billion. So that gives you NGN 1 trillion in terms of naira. That's the size of our derivative book and the details are also in that note to the financial statements, Page 145 of the financial statements.

Our next question comes from the line of Kevin Harding of Investec.

I just have 2 questions. One is, how should we think about your coverage levels for stage 1, 2 and 3 loans through the cycle? I guess with the implementation of IFRS 9, it's been -- it's changed sort of quarter-on-quarter and just trying to get a sense of how you guys see it from a long-term perspective. And then in terms of, you're guiding towards deposit growth of around 2%, I'm just trying to get a better understanding in terms of how you are going to grow your retail transactional business, given the fact that there won't be such aggressive growth in transactional deposits? And then lastly, you're guiding towards an effective tax rate of 12%, if you could just walk me through how you get to that, given that last year you guided towards 15% and you achieved largely the same this year, where you get suddenly that sort of about 3% benefit in your effective tax rate?

Okay. Thank you very much. The question on the retail growth. If you take a look at our balance sheet, you see how robust it is. It's just a question of reclassification of asset classes. Right now, when we look at what we have in the risk-free instrument, as at the end of the financial year, we closed on risk-free instrument with about NGN 1.5 trillion. So in the event that we are unable to put them in such risk-free asset pool and effectively as we end before, the option for us will be to deploy that deposit to drag the retail business. And we don't think the growth in retail business is going to [ soft ] so much of that. Yes, growth in retail business may be steady. But in terms of -- you will still need to do -- the mileage is long for you to be able to have something that is quite substantial. So we believe that as part of our treasury management skills, we'll -- like Dennis mentioned earlier, if it comes to treasury management, we have a very profound and remarkable skills, and we're -- the team is quite on top of the game and they understand the treasury play. And we -- so the guidance we've given as 2% growth on deposit, we believe is sufficient so far based on the sentiments of the market. If things change and things improve, this time last year, nobody knew that there's going to be an LDR issue. Nobody knew that you are going to be facing the level of cautionary CRR implementation. We never anticipate that there will be increase in CRR from 22.5% to 27.5%. Things change. So when things change -- right now, we are talking about coronavirus. Nobody anticipated. So all we will continue to do is we are a nimble organization, we are resilient, we are adaptive. So whatever the situation is, we will come back to the drawing table, do our modeling and be able to revise our guidance. So Mukhtar, you'll take on the tax rate. And this fixed rate recovery.

Okay. Let me start with the effective tax rate of 12%. In the introduction, the MD mentioned that the new finance act has given some kind of respite to corporate organization like banks, in terms of the basis of paying tax. Currently, we pay tax out based on our dividend amount, 30% of our dividend. But with the provisions of the new Finance Act, we are going to pay minimum tax, which is going to be 0.5% of our revenue. If you look at that, that gives you some kind of tax savings. And that would -- that is why the effective tax rate that we have guided is lower than what we have done so far. On the coverage for Stage 1, 2, 3. Now Stage 3 loans are loans once you put a loan in the Stage 3 bucket, the whole amount is in Stage 3. But how much impairment charge you have to hold on it for direct chart to P&L and the eventual coverage you have is a function of your collateral and the value of the collateral. As you see it, if you look at our Stage 3 loans, you'll see that the effective coverage on them is around 60%, 65%. So which means the valuation of the collateral gives you a cover of around 40%. And the reason is that, when are you doing valuation for the Stage 3 loans, you will have to expect some kind of long time to sell or realize the collateral because of the legal system. So you will discount that over a period of time. And we also have a guideline for head costs and the Central Bank guideline that guides you on the head costs we take on different collateral. So that affects how much collateral you are going to use as a mitigant for Stage 3 loans. Stage 2 loans have a relatively moderate effective impairment rate, which is between 25% to 30%, okay. Sometimes it's 40%, it goes up to maybe 20%, depending on what is in that bucket. Then Stage 1 loan average is 1%. It's sometimes lower than 1%. So in terms of going forward, how we expect various loans to migrate. You have CBN guidelines, how you can move along from Stage 3 to Stage 1. Even if the loan begins to perform. You have to have 3 months and provision period to watch the loan performing. But you cannot move it until it has done that 3 months in a particular stage, then you can move it. So those are the guidelines that would guide us. So if you want to know. Unless you have a major event on a major customer. It's bad or not performing before, it can move significantly or you have a cash recovery, a cash recovery of a particular loan, then it will move. So that's the guidance. I hope it's clear.

Our next question comes from the line of [ Olowimi Smith ] of FBNQuest Merchant Bank.

So I just wanted to speak in regards to your capital adequacy ratio. I could see that in 2018, it was 25%, 2019, it was 22% and then your projected for 2020 is 20%. So I wanted to find out if you -- obviously, if it goes below 20% or if it's at 20%, is there any concerns for the bank if it falls below 20%?

Okay. Significantly, the numbers we [ are posting thus ] far is obviously affected by the growth in the loan book in this period. We have grown by about NGN 400 billion to NGN 450 billion in this short period. So and as you well know, that is a significant increase now with that asset. And it's -- the number we're posting now is robust, given the kind of growth that we have -- we are seeing. We don't have any concerns as to how these numbers will grow within a year because we think that between 20% and 60%, which is our regulatory number that we're supposed to post, we have sufficient buffer to be able to withstand an additional growth. And given the guidance we have given today, a drop of 2% will be very significant for a bank like Zenith Bank. So even though we have a regulatory position at 16%, we are stating that roughly we won't go below 18% or 19% in the course of the year. So we think we'll be able to sustain it.

Okay. So even if it's -- I mean CBN should increase, what'd you call it, loan to deposit ratio, you don't foresee any issue with your capital adequacy ratio?

Well, on the issue of CBN increasing the loan to deposit ratio, I think we should also bear in mind that so many issues come into play. You have to think of implication for your liquidity ratio. So you have -- it's not like a swift traffic. We -- for Zenith, we've always are prepared by maintaining very strong and healthy buffers above all the potential -- minimum potential guidance. So as a systemically important bank, our expected minimum is 15%. At 22%, we closing, we still have ample room for growth. The profile is there for us to grow. And we don't think we are getting to that point where we say we'll be hard-pressed for capital. We don't think so. So we'll continue to maintain a healthy ratio and we don't think there's any threat to capital for us for now.

Our next question comes from the line of [ Dinesh Ramshad ] of Templeton.

I've got 2 questions. Regards the trading gains, are you able to sort of tell us from where those trading gains are coming from? So is it from the swap portfolio, the treasury management or the derivatives portfolio? That's my first question. And then the second question just relates to the cost of funds. I think you referred earlier the reason for why cost of funds actually hasn't gone down because you're sort of pushing -- sort of gaining more savings accounts, where you have to pay a minimum of 4%. Given the fact that you are sitting very low on the loan to funding ratio and there's a shortfall within the requirement is still quite big, would it make sense to try and sort of work off some of these savings accounts where they're actually not necessary in that way, you'd also sort of be doing the double job of actually getting closer to the loan to funding requirement.

Okay, the CFO will take on the question on the breakdown of our trading gains.

Okay. So if you look at our trading gains, the derivative loss in the whole trading gain is the derivative book give us a loss of NGN 7.4 billion. So if you look at Page 1, Section 9 of our financial statements, Note 11, you will see the breakdown. Treasury bills trading. So our trading activities on treasury bills is a major contributor to our trading gains, which contributed NGN 114 billion of the NGN 117 billion trading gain. Then you have trading on bonds, various bonds of various offerings, also contributing NGN 10.9 billion. So that's the major driver of our trading gain is actually the trading on treasury bills and government bonds with our derivative book coming into actually reduce the trading gain.

And let me also point out that the treasury team is quite remarkable in terms of understanding and trading on the volatilities and the spikes in the market unless there are no volatilities. So we believe that, yes, years may have compressed, but our trading activities will not, by any means, go down. We intensify our trading activities. The question on savings accounts. It was -- yes, Mukhtar will take it.

Okay. So the -- if you look at the cost of funds, you need to look at what is happening in the market now. Service accounts now have a fixed amount of interest that you have to pay on it. The other classes of deposits do not necessarily have a fixed amount. The rates have gone down, but the going down of the cost has happened in the last quarter of the financial year. So if you average everything within the financial year, you should not expect a very low cost of funds. We expect to see low cost of funds in this 2020 financial year because we started the year with some high rate in the industry. In the half year, the rate was not very low again. So it's in the Q4 that you saw risk going down significantly, but savings accounts cannot go down. For now, it's still a fixed amount for the savings. Then you also have to know that our cost of funds that you're looking is the group cost of funds. We also have some high rate in other jurisdictions that we have operations. So our operations in Ghana, the rates are also very volatile there and the deposit book is very large. So you have some high cost of funds coming from there, yes. But the key point is the drop in cost of funds will be very pronounced in 2020 financial year.

Yes. Service account is regulated, like Mukhtar mentioned. And the current regulation is at -- is set up 1/3 of the MPR. So until that is changed, we are stuck with it.

Our next question comes from the line of [indiscernible] of FBNQuest.

I just have just one question, actually. Unlike some of your peers, you still report your NPLs on a prudential basis. And on an IFRS 9 basis, your NPLs appear to be higher than the 4.3% that you reported. When do you think you would start reports in this on an IFRS 9 basis?

Okay. Thank you very much. This is a very interesting question. I don't think there's anything under IFRS 9 that is called NPL. You'll never find it in any IFRS book, and there's nowhere you'll find it. So when are we going to start reporting like that? There's no need for us to do that. The most important thing for you to ask is, have we reported all our stage 3 loans in our financial statements? Yes, the stage 3 loans that is driven by IFRS 9 principle is properly disclosed in our financial statements. What is called NPL? That is based on the prudential guidelines issued by Central Bank, okay? And they continue to give guidelines on what to call NPL. We have also disclosed that in the financial statements. So I think it is transparent enough. You have the 2. So as an analyst, you can work with any of the 2, depending on what you want to analyze. So our responsibility is to disclose everything to our readers, our shareholders, which we have done on the financial statements. The rules guiding IFRS is totally different from the prudential guideline. So and there is nothing that has come to say, let us harmonize them. Until you do that, you are using different principles and different rules, and it gives a very wrong message. So in our financial statements, we have our stage 3 loans, and we have our NPL.

Our next question comes from the line of Soji Solanke of RenCap.

This is Soji Solanke from RenCap. I have a couple of questions. My first question is, if you can just talk a bit more about how you approached new credit creation in Q4 just given the full macro backdrop? Wouldn't this be customers that you ordinarily wouldn't have lent to? I'm trying to understand what exactly you're lending to? And can you also explain how this differs across corporate SMEs and retail? My second question is with respect to the tenure of new loans that were created in 2019. The third one for now would be with respect to your -- I believe is [ at a stable ] market, just considering that the Central Bank has recently been indicating its preference not to see banks actively investing within the OMO market. So let's address those for now, and I'll come back with my few remaining questions.

Okay. Thank you very much. On the question on new credit for Q4, I think it's not enough to take new credit for Q4. If you asked about our credit, I mean the loan book, it's not about the Q4, it's about our credit [ purchase ]. We will not -- we've continued to emphasize the fact that this LDR is not a call for recklessness. Zenith will never be reckless when it comes to loan. We'll continue to do loans that are disciplined, loans where we can see ourselves in and out. We will now be stampeded to book loan because there's a regulation that will hit us by assumption of having our liquidity being constrained or impaired. No. Our ideology for loan remains choosing and picking. We will not destroy value because of LDR. We will continue to work to sustain value. So whatever the loan book, the quality remains a central focus for us. We will not, in any way, compromise it. Tenure of the loan, they vary, it depends. It depends on what transaction we funded. If it's a loan coming through the CBN discounted credit reserve lending window, you are going to find longer-term loans that stretch as far as 5 years, 7 years, 8 years, as the case may be. In the regular working capital facility, [indiscernible], you are going to find short-tenured facility of less than 1 year. Of course, not forgetting the fact that most corporates and also indigenous customer have their regular working capital facilities. OMO market. CBN did not shut down the window and save permanently. We are not aware of the regulation that CBN says you can approach OMO market. That -- we haven't heard about that. After all, we still have -- I mean we still have OMO bills in the market. So we believe volume may not be as much as what we want to be, but we don't think there is any closure for banks in assessing the OMO market.

Okay. Can I also just talk to -- just sticking with the question about loans. What is your sense about how that is split between what is working capital versus long term in nature, adjustment balance? I know earlier on when we were speaking about your 2% growth for 2020. You're thinking also if a portion of that loan book would mature during the year. So if I can just talk about what the split of the loan growth last year between what working capital and long term in nature? My second question is with respect to noninterest revenue growth, what numbers have you baked into your 2020 estimate? I don't see this in your slides. And then also, if you can give me a number, perhaps this is for Mukhtar, with respect to your effective cash reserve ratios are today? Then also, you spoke quite a bit about digital lending products you've introduced over the past year. Can you give us some examples? What are some of the ones you've noticed have gained the most traction with their clients since you started on this new initiative? Then my last 2 questions. So the first one is with respect to savings rates, there were some indications in the press that at last week's markets committee meeting, the Central Bank indicated a desire for interest rates on savings accounts to be reduced to 1%. Is this the case? What exactly is going on, on this front? And finally, this is also for Mukhtar, just with respect to FX swaps, can you tell me where do I find the number for FX swaps with the Central Bank? And where do you record the related income from these? And how much was this in 2019? I'm not sure I can find exactly where it is in your financials.

Okay. Thank you very much. I'll take on first the issue on savings. I think you [ have to define that ] we're a regulated business. Being the regulatory business, I don't draw my regulation from what is reported in the newspaper, but what is communicated by the Central Bank. So it is therefore difficult for me to begin to rely and depend on the speculation from a newspaper report and begin to implement that as a regulation. We will wait until CBN does any announcement. What we know is that right now, savings is regulated, and the regulation is 1/3 of NPL and they haven't changed. And CBN doesn't change policy on the basis of the newspapers. They communicate all the banks. The breakdown of our loan, I don't think we need to go granular. But if you want, you can look at the slide on our presentation and also look at the financials to get a sense of the breakdown of our loans in terms of advances in current accounts, in terms of long-term loans. Maybe Mukhtar, you want to add anything to that?

Okay. All right. If you want to look at the financials, I need to get a page for you, but if you go to maturity profile in our financial statements, you will see the disclosure or breakdown of the loans that are maturing within 1 year, and those that are maturing after 1 year. That will give you a sense of how we are doing in terms of the loans. So loans and advances, if you go to Page 111 of our financial statements, you will see the maturity profile of the loans and advances. I think that would be very, very helpful. Those that are maturing we in 1 month, 1 to 3 months, 3 to 6 months and so on and so forth, they're going to be a good guide. And then you were asking about our effective CRR. Again, I would also to take you to the disclosures in the financial statements that talk about our cash and balances with Central Bank and various. So if you go to Page 142 of our financial statements, you will see mandatory reserve deposits with Central Bank, okay? As of December is NGN 680 billion. And there you'll see a special cash reserve, Central Bank is NGN 80 billion, right? So those are the 2 that make up our CRR at that particular point, okay? And then we've given the breakdown of what we are and how they were computed in the notes, believe that. And then you were asking about our FX swap. Our FX swap with Central Bank, you won't see any specific client called FX swap with Central Bank. We have FX, we have swaps and other transactions with different counterparties of which Central Bank is one. And our financial statements cannot list all the counterparties for the FX swap. But the income on FX swap, as I explained earlier, the swap transactions, the derivative book itself, you had a loss of like NGN 7 billion. But the trading treasury bills -- trading bonds are the one that contributed significantly to the trading income.

Okay. So Mukhtar, so if I'm getting it correctly. So the trading -- what you call treasury build trading income, that would be income from T-Bills that are related to swaps at the Central Bank, partly. Would that be correct?

Yes. Partly, yes, sure. I mean if you do swap, you swap currency at -- a counterparty can give you naira, you give their counterparty dollar. Counterparty can give you treasury bills, you give the counterparty dollar. So that treasury bills, if you hold it at trading and you trade on it, you take advantage of the volatilities in the market, that gives you income. Yes, sure, it's part of it.

Okay. But if you held the T-Bills to maturity, the income of this treasury bill, where would you record it?

If you hold the treasury bills to maturity, that is a different thing. The income goes to interest, interest and similar income. That's a different thing.

My last question, which wasn't answered, was what level of NRR growth have you baked into your 2020 estimates? Can you also talk about some examples of digital products that you've launched which you saw gained significant traction over the last year?

Digital product that we've launched, I think I'll leave Tope to talk about that. But the most important thing you will notice is we'll build serious efficiency into all the digital platform where we are connected. And we're quite [ heavy ] when it comes to additional settlement on various platforms, and that is driving massively some reasonable level of income. So I think it's about extending our footprint likely. And then it's been an aspirational brand in the minds of the people. What we've also seen is that our foray into the retail and digital spaces was very well received by the market. So those who thought that, "Well, you needed to get to a certain level of income [ and in a ] pecking order in the society before you can have a Zenith account," now have that assurance that yes, you can open an account with Zenith with 0 balance. And it goes across the different platforms. We have like almost close to 8 to 10 channels through who you can open account. So I'll leave Tope to take you through some of that.

Yes. Thank you. In addition to what the GMD said, we have various digital channels that we launched our products from the ATM, to the web, to the mobile, USSD and so on. So beyond the branch bank, we have gone digital for customer onboarding and important to have been designed at the various customer segments. For example, look at students, we have products for them. The affluent, we have prestige products for them, elderly, women. These are products designed to meet their specific needs and that's part of the -- our strategy to drive more of this product across the channel. In addition, we are -- customer onboarding is a very key one and not just onboarding. We're also looking at adoption of our cards as accounts are opened. We also are onboarding them on our mobile applications. We're also looking at partnerships with various fintechs and telcos for us to improve our data and our retail joining.

[Operator Instructions] And our next question comes from the line of Muyiwa Oni of SBG Securities.

I have a few questions. The first is on your customer growth. I just wanted to understand what your current active customer base is right now. So if you look at your 9.6 million customers, how many of them are active? And then how do you define active customers? And then also, what kind of growth expectations you expect for that? And then secondly, on your e-banking revenues, I just wanted to understand if it's purely retail, so purely USSD and all those retail type of income. Or is there some element of transactional products or some corporate banking transactions driving that line as well? And also, I wanted to get a sense of your view on AMCON and its shelf life and when you -- if you see this levy going off anytime soon. Those are my questions.

Okay. Tope will take you through the customer growth and e-banking revenue.

Okay. On the customer growth, in 2018, our customer base grew from about 7.83 million to 9.575 million. Let me start. This is coming basically from our retail journey and the drive that we put into our retail. On the -- I think we have earlier mentioned about the impact of the retail segment on the gross revenue, growing from about 6.9% to 13%, and we expect to see this grow further in 2020.

AMCON levy, Mukhtar?

Okay. You mentioned AMCON shelf life. Well, if you ask me as a bank that are paying the premium, if we are going to end AMCON today, I'm happy because that saves me a lot of cost. But can I say whether it will terminate at the end of the 10 years or not? I cannot say now. So what are we supposed to do? We plan prudently with the fact that for now, it is the losses, it is going to terminate at so and so date. So I plan with what is on ground for now as the discussion continues. So in our -- that's why in our guidance for 2020, we have still factored in AMCON charge, right, until the termination of the whole AMCON arrangement. If it is renewed, we'll ready for it. If it is not, we'll move on with that. So we can't say it will be renewed or not, but in our 2020 guidance, we have factored that in. Does this answer your question?

Yes, it does. Can you -- sorry, you didn't answer the question on active customers. Just wanted to get a sense of how many of those 9.5-plus million customers are active. And then also...

They are all active.

On your e-banking revenue, if they're all purely retail related. Or is there some element of corporate and transactional revenues coming into that line as well?

Okay. The number of customers that [ we mentioned ] -- the number of customers that we have moving from 7.8 million in 2018 to 9.5 million in 2019 are all active customers. In terms of revenues for e-banking...

So there's no customers in delinquency?

No. There's no -- what we have here represents active customer. So dormant accounts are not included in this list. So again, for the e-banking revenue, what we have are fees accruing from the various e-channels that we have. We don't have a mixture of corporate banking revenue, maybe fees, facility fees and commission coming on that line. These are essentially fees accruing from various electronic channels.

So to help you understand that better, if you go to Note 9, Page 139, we have specifically stated then this credit-related fee is there. Okay. And then we have a line, fees on electronic products, it is that specific. So that's what it represents.

No. Sir, I get that, but you know also with your corporate customers, you do have e-channels for them as well. And I suppose there'll be fees related to transactions on those platforms. So I just wanted to understand if the NGN 40-plus billion e-banking revenues is purely retail or if it's a mix of both retail and corporate?

What you'll be seeing, if you are looking at it, will probably be the NIP. NIP fee is very negligible when you put pieces in the pool. It's not just a significant pool accruing from there. I think right now, it's been reduced to NGN 10. So if you are looking at NGN 10 per transaction, you can imagine the number is not based on volume of transaction, but it's based on number. And what you see in the retail space is that if you have a confident platform, you create higher velocity, you create -- by reason of the velocity, you are creating volume. I give you an instance. Somebody, the retail customer who want to buy airtime, NGN 200 today and you -- after buying airtime, NGN 200, you probably need to go and shop and go and buy grocery. It could be NGN 2,000. So you'll find out that on the average, the retail customer could use his card on any of your platform almost 5 times in a day. So almost 5 times, if he's using it on the POS terminal, you have fees accruing. If he's using it on the ATM, you have fees accruing. He's buying airtime, you have -- so these are the facts around that the most important thing for us is maintain very remarkable channel. If you go to the ATM, you have the issue of on us and not on us. We remain a steady positive because we end up having ATMs of other banks being used on our Zenith ATM because our ATMs are -- the off time in our ATM is almost like what you call 98%. The rate at which we deal with issues of chargeback and transaction failure is impeccable. Therefore, you see customers come in and having repeat transaction. And for every ATM card of any other bank use of my platform, I add a fee. So if I have cash steadily on my ATM, customers -- we have a situation where he's dealing with the capacity we have at each of our ATM locations. So that's essentially what you see as the key drivers of the revenue from electronic fees and commission.

[Operator Instructions] And we have no more questions on the line. So if -- I stand corrected. We do have a question from Soji Solanke of RenCap.

Can you hear me?

We can hear you.

Sorry, I was on mute. My question is for the line called treasury bills trading income on that trading gain, what portion of this NGN 114 billion is related to swaps?

Mukhtar, you want to take that?

Okay. I'm not able to tell you. It's -- your trading book has everything that you designate as trading. It's an accounting decision and classification that you make at the time that you get an instrument. We can have an exchange of treasury bills with a counterparty and decide to hold it to maturity. Everything that is sitting in the treasury bills trading depending on how we read the market, we can decide to hold everything to maturity. It's a business model and strategy. If you feel that the market is too volatile on the downside, trading will cost you a lot of loss. You hold it to maturity solely for interest and principal. You'll be collecting your interest and principal amortized cost and then you report it as interest income. But if you feel that you can play the market, you -- on your own, you can buy some treasury bills, put it as trading, and then you trade on it and make gains. So it has nothing to do with how much is coming from CBN swap or not CBN swap. It's a portfolio strategy that you say, "We need to put X amount in our trading and we need to put Y amount in our health to maturity," okay? So it has nothing to do with specific derivatives or swaps.

Okay. Maybe you can help me better. What I'm really just trying to understand at the end of the day is, so overall, you made about NGN 500 billion in revenues. So that is across interest and noninterest. What portion of the revenue number would you say is related to swap transactions? That's really what I'm trying to figure out. If you can help me with that, then we're on the same page.

I don't...

I think Mukhtar has sufficiently answered this question. We can't begin to disaggregate our various income lines going too granular. You have the trading income, NGN 114 billion. And Mukhtar has given a very elaborate illustration of how that portfolio of bucket came about. To begin to announce just one portion of fees related to your -- NGN 0.5 billion that's the swap, we don't think we have that information and we don't think we need to go to [ that as 10 ]. So just to take a look at that. The most important thing is that our counterparties are very low. They are very low. Even in this year, we have counterparties who've done some trade from transaction with some foreign banks. So it's about the clout and the reach we have in the market. It's what you are looking for in the market. These are areas where we look out for deliberate opportunities on how to contribute some of these activities. So it's something that is there, the treasury management team. They understand it. They go for it. So it's not exclusive to one counterparty, they are various. And like we also mentioned, it depends on what size it is and we do it across different currencies. It could be a swap, we're giving you dollar, you're giving us naira. It could be vice versa and in what currency. It depends on what we have at the moment. So that is what it is. And for as long as that opportunity is there, we'll continue to sharpen our skills, too. And so we optimize the benefit that we can get from it.

And we have no further questions on the line. So if I could hand back to our speaker for closing comments.

Okay. Thank you, ladies and gentlemen. All we can assure you is that Zenith remains very resilient, very creative. We'll remain very dynamic in responding to the trends in the market. We will continue to read the market. We will continue to align our business strategies in line with the reforms in government. We expect that the reforms in agric will continue. Therefore, agric will continue to be a major sector that we will look into. Currently, we are beginning to see and hear conversations around infrastructure development. We believe it's a collective responsibility of all to ensure that we are working the macros in Nigeria. So we're already discussing at the level of the Bankers' Committee on how we can develop a framework that will enable us assist in infrastructure development. Whether it's going to come by way of a PPP or by way of a leverage backed by a tax credit structure, we'll look into that. But certainly, Zenith will be taking active part in that. And then our risk appetite, we are not going to compromise. We will maintain our risk acceptance criteria. Even if the LDR is increased, we will not be stampeded into booking loans simply because we want to achieve the LDR. We'll remain different. We'll remain disciplined. And we hope to continue to attract value from our balance sheet. We believe that there's a lot more value. And even as years are compressing, it is time for us to trust our gut, trust our instinct and make sure that whatever opportunity and whatever new segment and niche markets there is to explore, we'll explore it. We assure you that we'll do all within our power to ensure that the result for 2020 remains very, very healthy and very, very attractive. Thank you very much. God bless you.

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.