Zenith Bank Plc (ZENITHBANK) Earnings Call Transcript & Summary

Hello and welcome to the Zenith Bank H1 2020 Conference Call. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I'm pleased to present Mr. Ebenezer Onyeagwu, Group CEO of Zenith Bank. Mr. Ebenezer, please go ahead with your meeting.

Thank you very much. Good afternoon, ladies and gentlemen. It is my pleasure to welcome all of you to this conference call, where we'll be able to throw more light regarding our H1 2020 performance. Before we go ahead, I'd like to introduce my colleagues, who are on this call with me. I have Ms. Temitope Fasoranti, Executive Director; Dennis Olisa, Executive Director; Henry Oroh, Executive Director; Felix Egbon, our Chief Risk Officer; Mukhtar Adam, our CFO; and Taiye Ayandibu, our Investor Relations Manager. Once again, it's my pleasure to welcome us to this conference call. The pandemic is still ravaging. The world continues to battle to see how to overcome the pandemic. And in Nigeria, as at yesterday, number of reported cases stood at 55,456. There's tracked cases, about 43,000; number of deaths, 1,067. It's also interesting to say that Nigeria has moved into the third phase of the easing off of the lockdown with the airline -- commencement of the flights, the regular and several commercial flights in and out of the country. However, the most important to remind the fact that there is no vaccine yet. So about one thing is certain, the direction of travel is that of uncertainty, that of pressure, that of contraction. But the more worrisome fact is that the duration of travel is unknown. Because the duration of travel is unknown, we cannot have the kind of code we fit. Whether, obviously, from what you see, it's not a U call. We can't tell if this is a W call or it's an L call. But it's the expectation of everyone that very soon, hopefully, before the end of the year, that a vaccine will be found. What we've seen so far is that the assumption on which the projections and projects for 2020 assets have been clearly vanquished by the pandemic. Nobody saw this coming. Nobody planned for this, and we are all in the process where we found ourselves having to contend with the pandemic and riding the storms occasioned by the pandemic. One of the very fundamental fallout of the pandemic is that, globally, economies are contracting somehow going into recession. We've also seen the global stock market taking very huge, as Shanghai, Shenzhen stock market and S&P 500 that recorded a growth of about -- year-to-date growth of about 16.4% and 6%, respectively. However, this growth has been driven largely by the tech and e-commerce companies. So with same brands rising and remaining dominant even in the COVID era, simply because of the fact that they are relying on these type of technologies. So accordingly, for us, in Zenith, we are also deploying a lot of our resources to build competencies and ensure that we deploy a reasonable level of digital competencies and capabilities in our business. One thing is certain for Zenith. The gold concern impact assessment of COVID or not is near. We continue to maintain very strong profiles, very strong liquidity and capital profiles. Therefore, we are in a position to continue to reward ourselves as we continue to post respectable results. In terms of the key issues in the environment, we've seen very recently CBN reducing interest rates on savings deposits from 3.75% to 1.75%. This is expected to impact favorably on the cost of fund between now and end of the year. There is commencement of the sale of foreign assets to the Bureau De Change. It has also seen rates moderating slightly. CBN recently came up with the definition agreement for imports. The other -- the real reason behind this is to promote transparency, and also ensure that we check-mate the process of capital flights that may have been occasional with the system that issued this before. Federal government has also taken a bold step of removing foreign subsidy. Electricity tariff has also been, in a way, partially deregulated. And we've also seen the results on our flight, commercial flight in and out of the country. We expect that these initiatives will help the economy to wake up very quickly. It will post commercial activities, and we also see us getting to the point where we can begin to talk of effective recovery post the pandemic. We have presented the highlights of our report in the documents we have shared to everyone on the call. What our expectation is that as we go through the session, we'll have enough time to take to do the Q&A. So I'd like to, once again, invite us to this session. And what we'll do very quickly is to go through the Q&A., so that we'll have enough time to go to take your questions. But I'd like to assure you that Zenith is very, very effectively positioned to continue to ride the storms. We have taken initiatives to ensure that asset quality is maintained. We've also ensured that our market share is effectively different than anyone improved at this time. So I thank you, ladies and gentlemen, and welcome to the call once again.

[Operator Instructions] Our first question comes from Jerry Nnebue from CardinalStone.

Also, congrats our results. I just have a number of questions really. So the first question I have is regarding your fee income and expense line. So I understand that, yes, Q2 was kind of weak in terms of activities, and also the impact of bankers tariff, which was negative on your fee income. But that is not the same kind of story on seeing the fee expense line because I saw that robust 17.4%. So if you could give us some kind of clarity regarding the fee expense line, what happened, where it drove us, then that will be helpful. Secondly, on AMCON levy. So I understand that, yes, by H1, you expected to take the full year charge. But what happens for asset growth between H2? So what do you do? Do you push it out over to the following year or we stick to the numbers you already have as at H1? The third question is regarding your statistics. I'd like to know what the number is for H1. And the fourth question is on credit. So how much loans were restructured, especially as a result of the funding? So I can see how about 17.8% as at H1. But that's not different from what we saw in Q1 about 17.4%. So is it that you're already proactive before the CBN measures came out in terms of [indiscernible] and your customers. Well, if there are any other issues that happened during the period, that would be helpful. And finally, if you can speak to your oil and gas portfolio. So I knew that upstream oil and gas grew in H1 despite what we're seeing. So if you can speak to that. And also, I saw the growth of the oil and gas NPL, so about 14% of NPL compared to about 30 something percent at that. So if you can speak to that, that would be helpful as well.

Okay. Thank you very much. I think I'll take on the expense line right away. If you look at the expense line we have in terms of idea overhead, the statutory levy, which comprise mainly AMCON charge and NPL, as you know, they constitute 46% of our overhead -- operational overhead. But if you are looking at the comprehensive overhead, you have 28%. Unfortunately, for us, we have no control about that. Maybe one way to control it is to look at our size growth. We have a business to run. We have a size to maintain. We have our liquidity buffers that we must maintain. Therefore, what will continue to drive is what we consider to be optimal in order to keep us relevant and maintain our strategic focus with respect to how we face our business. I think that deals with AMCON levy. On CRR, the effective CRL, I think I'll leave the CFO to answer that. And in terms of the fee income, Temitope Fasoranti will answer the person of fee income. Oil and gas growth -- in oil and gas loan, the oil and gas loan is basically in -- they are foreign currency denominated. And what you see as we grow to the translation effect of the adjustment in the currency. So as it were, in absolute number, we have not increased in terms of exposure to oil and gas loan. The same equally applies what we'll have in the NPL, in oil and gas is the product. We decided to be prudent. As we fund the growth, what we need was the legacy items will have already the PMS importation that are now being repaved from promise mood. We decided to go on the path of prudence to make full provision for them. So that as we get the promissory note dematerialized will come reclassified. So effectively, we don't -- it's not editorial. We could have let them where they were, but we say that in the light of the COVID, we anticipate we are looking at it further. That will be delayed in the release of the promissory note. As a result, we decided to make sure that we get full provision for that. So I'll leave Temitope to speak on the fee income, then CFO to take on the CRR.

Okay. Thank you, sir. Okay. Thanks for your question. For the drop in the fees on electronic products, let's recluse as a major reason, of course, is the revised guide to some charges. It plays a major role in 3 ways. The first is in NIP fees that's reduced. We know that CBN reduced the fees on [ Atlas Mara ] to a 3-tier structure. In the first structure of [ Mara ] $0 to $5 transaction, we have about 34% of our NIP transactions on top of it. That reduced effectively the fee by 89% of that risk book. At the second of NGN 25 from NGN 50, that's NGN 5,000 to NGN 50,000. Thus, 47% of our transactions are in that bucket that we reduced our fees by 56%. Of course, the top bucket is deficit. Secondly is the ATM fees. We're one of the reallotted there. We lost about 46% of our income line there. Because of the reduction of ATM remote loss reductions from NGN 65 to NGN 500. We call these cash fees. You know that whilst the drop in cash fees from NGN 50 monthly to NGN 50 quarterly, just dropped it from NGN 600 annually to NGN 200 annually. And of course, we also know that the travel restrictions have reduced a lot of travels. Of course, a lot of earnings from such transaction has come down, too. In addition, also, international spend have also been dropped because of FX situations from $36,000 to about $5,000 for us, and also in most other banks so that plays a very key role in this massive drop that you can see in the fee income on the products.

Okay. Thank you, Temitope. So now I invite the CFO to take on the question of CRR.

Okay. Thank you very much for your questions. The CRR, we all know the various CRR regimes that we have gone through. Other point, it was -- part of the CRR was driven by loan-to-deposit ratio. But that happened early up until March. Within the period, we have seen a lot of increase in CRR debits that are more or less at the discretion of their abilities, okay? So at the end of June, our CRR was around NGN 1.5 trillion. You will see it in our financial statement on Page 162. That's the total CRR. If you compare that with our total deposits, naira deposits, you have about 47% effective CRR as at June. So that's where we are on CRR. Thank you.

Okay. Thank you, Mukhtar. May I invite the Risk Officer, Felix Egbon, to speak on the restructured loan?

Good afternoon. For the restructured facilities, as at June, we have commenced a review of the government and the transaction loans begin to treat them as was advised by regulation. That has growth, say, to date about 2.75% of our loans restructured in that sector. We do not assess significant contribution from [ assets ] except oil and gas. Most of all, our oil and gas ha syndication loan satisfactions. Our discussions are still ongoing with regards to those loans. The big part for us, we notice that it will be higher than about 3% to 5%, where they are concluded.

Our next question comes from Soji Solanke from Renaissance Capital.

This is Soji Solanke from Renaissance Capital, and I have a couple of questions. The first question is, could you perhaps just tell me your thoughts around the AMCON levy? My understanding is it could potentially be reduced to 10 basis points of assets. Is this now in force? And if not, what are the chances of it being implemented? My second question is around, how do you calculate your coverage ratio at 832%? Because when I look at your numbers, as at half year, you still have very little on regulatory risk reserves. So your coverage numbers are calculated actually by around 84%. Yes. So correct me where I'm wrong. My third and final question is your Stage 2 book has actually tripled year-to-date. So could you perhaps spend some time talking about, what are the major loans you have in Stage 2? What sort of issues are they having? And how do you think about the adequacy of your coverage ratio for you Stage 2 book?

Okay. Thank you very much for these questions. The AMCON one is indeed very interesting. We will be happy to have a regime where the levies now peg at about 10% of total assets. Because if you look at P&L, what we paid this year is about NGN 30 billion. So if you imagine the burden on us. Our expectation will be that as we start getting close to the terminate of the AMCON -- that's AMCON. Whether there is a renewal of the channel or not, our expectation is to see this transition that will bring about a reduction in terms of the spend or not. The second part, even though you didn't raise that, closely related to that is on NDIC payment. Now the CFO just mentioned what a CRR is. The position we have will continue to advocate on in the Bankers' Committee is that forms held in CRR can be classified as safe unsecured, therefore, do not require any insurance policy. But to date, the provision of the art is so that you pay AMCON premium on your total naira deposit. So if part of my naira deposit is held securely unsafe, in the Central Bank, you can think of in the country. With the Central Bank, when should I pay a premium? So we expect advocacy from everyone to see that, yes, it makes sense for us to see a dispensation, where not AMCON levy is reduced, not on the total asset of a bank, maybe a percentage. And also the NDIC premium, the portion of your CRR health in CBN is excluded from payment of premium. If that happens, we'll be quite pleased with this. So unfortunately, it's not we can have control at to what will happen. But if you are asking our expectation, these are things that we'll certainly be very positive about. In terms of the coverage ratio, I will leave the CFO to speak to that as well as the Stage 2 bucket.

Okay. Thank you very much.. You asked about the coverage ratio. The coverage ratio is your total impairment that you have on your balance sheet, which is NGN 174 billion if you look at on Page 165 of the financials. And then you compare that with our NPL. Our NPL is NGN 132 billion. So if you do the math, you will have the coverage ratio that we have. That's number one. You have to be very careful not to until the Stage 3 loan is the NPL. We have disclosed the NPL separately, and we have disclosed the Stage 3 loan separately. So if you do that math, then you are going to have that. Because of that, you will not expect to have a regulatory risk reserve because our total ECL provision is higher than our data anchored provision. So you take note of that. Then you are talking of Stage 2 loans. Why have Stage 2 loans grown? That's very interesting. You know that Stage 2 loan is in between Stage 1 and Stage 3. What moves a loan from Stage 1 to Stage 2 is when they increase risk on either our industry, the operating environment or a customer. And you and I know that within this COVID era, with all that is happening in the world, there is increased risk even if not for any specific customer, for the overall operating environment and for specific industries. So that will naturally make you migrate some of the loans from Stage 1 to Stage 2. Not only that, it would also -- even the loans that are in Stage 1. If you do your forward-looking data very well, because the ECL is forward-looking, you will know that the percentage provision for each of the stages have to be higher than normal. So that's what has increased the amount in Stage 2. So they have moved from Stage 1. And their coverage is reasonably well for us. We have -- the coverage for Stage 2 is above 10%, and the coverage from stage 1 has increased from 1% or below 1% to 3% just for us to account for the elevated risk environment we are facing. Thank you.

Okay. Thank you, Mukhtar. Let me further add here that as we rest towards the end of the year, we expect improvements in terms of NPL and impairment as well. This is because part of what we have, the new NPLs we added for half year, as we speak, the ones related to the PMS import will receive and dematerialize the promissory notes. And by the time we apply the credits, these items will be declassified. There's also a company involved in the transport sector, where, because of the COVID, we took a very, very prudent measure to go and to provide for it. But as we speak now, or they accumulated and positive obligation on the account that made them to be classified has been cleared. So by the time we take all that into consideration, we are going to have close to NGN 13 billion in NPL being declassified. So when we put all this into consideration, and given the fact that we don't expect for a deterioration in terms of asset quality, we expect improvement in terms of the coverage ratio, and also to post a more stronger NPL ratio by the end of the year. Can we take the next question?

So just -- so on your point about the AMCON levy, so when is the actual, I guess, technical termination big by law for AMCON? And just still on the adequacy of provisioning. So it's good to know that you can have a bunch of big loans that will potentially get reclassified as, I guess, Stage 2 or Stage 1. But Mukhtar's point about the 10% coverage for Stage 2, I don't -- how do you get this -- is this for the bank? Because our group, the coverage is 3%, and it's down from 9% in December So I'm just wondering how -- what numbers you are quoting.

Okay. Thank you very much. For AMCON, it will be very good and helpful for the industry. We can get a lot more advocacy on what applies as the channel of AMCON comes to an end. As a matter of fact, you will recall that the turnover is for 10 years. And that 10 years, Zenith will be running out by end of next year. So what happens subsequently is now within the hands of the care industry. But we -- if it's renewed, and it comes with a review of the dynamics of the payment of the levy, it will be very interesting for as long as it's not so onerous and burdensome on brands. If you look at an institution like that, given our size, if you look -- we pay by share size. But if you look at the amount of loan, taking over from more AMCON, if you aggregate the levies we pay, we'll more than recover that. So you're not aware, we are happy to suspend the end of -- we don't mind doing that, but we appreciate -- going forward, if it's done in such a manner that it doesn't remain a heavy body. 28 -- NGN 30 billion in this dispensation to pay one year is a lot. It is a lot. So on the issue of the coverage, I think Mukhtar will throw more light on this regarding the quota analysis and review you want to see.

Okay. Thank you. So the recoveries for the group, Stage 1 is 3%, Stage 2 is 3%, and Stage 3 is 50%.

[Operator Instructions] Our next question comes from Gadhia from EFG Hermes.

This is Ronak Gadhia from EFG Hermes. My question really is just around your trading income. Could you provide a bit of granularity on that line item? Specifically, could you just break it down in terms of how much of that is realized? How much of it is unrealized? What's coming from the swaps? And what's coming from just the generic investment securities portfolio? And also, as a sort of a related question to that, we can see what the gross income for this line item is. Could the management just highlight what the net impact -- net profit from this is once you take into consideration the various borrowings that the bank has to take in order to generate that income? And finally, just on that, could you manage to speak towards the sustainability of this line item maybe in the second half of this year and going into 2021?

Okay. Thank you very much. Before I will get the CFO to speak, I'll throw more light on it. I think one thing we need to let the investors and the analysts know is that Zenith has a very profound treasury management. And without sounding too modest, I think I'll say we're one of the best in the market. And we read the market. We have strong profile. And within this period, we've seen a lot of volatility. These markets of treasures trade on volatility. So that is part of what we do. The skills we have there, they are quite strong and quite sophisticated. And as a result, we are able to really play the market. So I'll leave the CFO to throw more light in terms of how the numbers are growing and the sustainability as we rest toward the end of the year.

Thank you very much for the question. Okay. So you are asking about the trading income. If you look at Page 149, you would have a disclosure of a trading gain. First, you have the averages, which is a loss of 13.5%; treasury bills and trading income, profit of NGN 65.6 billion; bonds and trading income, profits of NGN 5.2 billion; interest income on trading bonds, you have NGN 1.4 billion, totaling NGN 54 billion -- sorry, NGN 58.8 billion for the group. You asked whether this is -- which part of it is realized and unrealized? You have to know that for a trading book, there is no distinction between realized and unrealized because you value the trading book at any point in time. You can talk about realized and unrealized when you are looking at the banking book. So a trading book, you do a valuation. So that is the value of the trading book and the profit coming from the trading book as at June 2020. The following day, you do evaluation. If any of them has gone up or down, you adjust. So if I have to choose between whether it is -- which part of it is realized or unrealized, everything is realized, because that is the true value. That is how much you can sell. You can realize from that instrument on that day, 30th June 2020. That -- and then sustainability of their trading book. We have been administrating gains for more than 5 years now, and it has been consistent. Yes, the amount and the quantum has been fluctuating. So trading derivative and swaps on our products, financial products that have been there for decades. Points have been trading on these companies have been trading on each, and it's not going to go away. If -- we have a very good treasury, and we know how to read the market. And once we read the market, then we have their resources to play properly. We are able to make the necessary gain. So we will sustain it as much as the environment and the market conditions allow us to safely play in that market and make our gains. That's what I want to say on that.

Okay. Last -- sorry, just as a couple of follow-ups on that. So you said the trading bills income is -- it could be realized. It could be unrealized. How -- sorry. On that basis, if the yields were to reverse suddenly tomorrow or over the next few months, is there a possibility that this yield, this trading income gain could quite easily reverse to the same extent? And regarding your derivatives, could you just maybe give some breakdown in terms of what percentage -- how much do you have in swaps? How much do you in forwards? And what would happen to that portfolio if there was a devaluation of the naira? Would we see a similar loss to what we're seeing -- what we said in the first half? And lastly, I guess, the sustainability question, like you rightly mentioned, in derivatives, swaps, they have been here for a while, but if you look at Zenith, it's really only increased since, I think, 2016, 2017. Before that, it was much, much less. So I guess the question there is, what's really different in the last 3 years that Zenith was doing, that Zenith wasn't doing before and that therefore allows the bank to sustain trading it from these levels?

Okay. Thank you very much. I'll let Mukhtar, the CFO, to speak on this. But one thing is certain, market is never static. And even when we see one opportunity in the market, in a way, if you really close off a new opportunity or a new segment or a new niche, we don't see market as a [indiscernible] kind of arrangement. So whatever it is that we see in the market, we read it and follow the trend. Yes, if there is a reversal in terms of fee, what happens? We have to look at in totality, look at the narratives around whatever is driving the trend in the market. Once we really can understand, then we know how to make the investment to cushion whatever variability we expect in terms of our returns. So is -- that's where the skew is coming. So as a result, at the end of the day, we are able to even our certain volatility that will normally come up in the course of trading. So I'll leave the CFO to throw more lights on the additions you raise.

Okay. Thank you. If you -- the breakdown, if you look at Page 154, we have shown the nominal amount of sold and swap contracts. We have also showed the nominal of features. But to say, what's the size of our swap book? Our swap book is around NGN 1.5 billion, as I talked thereabout. That's that. Then if you are talking of reversing the trading deals income, so you are talking of valuation, you don't want reverse. When you are valuing filing, you are valuing based on parameters. One of the parameters is exchange rate, interest rates and the trend and what you are forecasting. So there are so many things that go into doing a valuation, where you now have the new value. Then what are you going to take adjustment of whether downwards will be determined. So it's not just you wake up tomorrow and then you have to reverse income. So if the market is going differently, that's what your traders will read. If they read the market very well, which they are doing very, very well, they will know when to sell off something to avoid taking loss. And once they do that, you will not get to the point that you are going to reverse a lot of significant part of the gains of income. Thank you.

All right. Thank you very much. Can we take the next question?

Our next question comes from Timothy Wambu from Absa.

I just a few questions. On your oil and gas loan book, I believe you mentioned that this was largely due to the FX movement. So I just wanted to get a sense of is this in the upstream and this in the downstream? But also, you see the very negative value [ point a bit ], you can even see prices plunge. How is it that you manage to present the soaring of the quality in that book and only attributing increasing NPLs to the FX movement? The next question is on, we see that you want to extract some implementing process of your loans. I just want to understand where are they sitting. Are they still in test in Stage 1? Or is it in Stage 2? And I think this was asked earlier. Still Stage 2 loans increased by quite some point in time. And when I look at the growth in credit impairments, it's only up by about -- with impairment only went up by about 24% year-on-year. So we see your loans -- the Stage 2 loan increase, and I'm assuming that means that you have to, obviously, work with the lifetime losses as opposed to talking about losses. So I'm just questioning why the interest in your cost of risk is not that significant given you've seen that significant jump in the Stage 2 loans? And then just on your -- the effective tax rate, just to get a sense of what is your particular full year.

Okay. Thank you very much for those questions. I'll invite Henry Oroh to take on the question on the oil and gas loan group; the risk office -- our Chief Risk Officer, Felix Egbon, who will speak on the restructured loan. On the effective tax, the CFO will take that. Henry, over to you.

Thank you so much, Ebe. Thank you for that question. For the oil and gas loans, a lot of the forecast exposure are in the areas of the upstream sector. And that is where a lot of your loans sits. And the issue about how we are able to add to prices in the -- for crude prices, and the fact that a lot of those companies in oil and gas upstream sector, they have hedges in place. And most of them, 8, 9, 10,, almost 12-months hedges, and they are renewable before maturity. So with those hedges, we are able to mitigate the risk that happens when there's a downward swing in the price of crude. And like Ebe said, we are also very optimistic that some swings don't go so low as to create a systemic problem in the industry. But from our reservation of how that -- this sector has paid so far, and from what we do with the counterparties in the upstream sector, we are very confident that the hedges that we have put in place with the [indiscernible] sufficiently mitigates against some on a specific drop in oil prices. So to answer your questions, a lot of the exposure in the forecast exposure in the oil and gas are in the upstream sector. But like I said, they are significantly mitigated by hedges.

Okay. Thank you, Henry. So Felix Egbon will take on the...

Yes. Sticking to your question on the restructure around sustainability to oil and gas. If you recall, oil and gas are the restructures on Zenith bank, the second restructure based on the issues that have risen at that time. And if you will understand, this delta we're taking at AMCON, you'll recall that cells were taken to ensure that there were hedges in place. There are debit arrangements that allow capture. So performance based on that has been monitored all through this period. Now the impact you have is what most work with us, which is the impact as related to Stage 2, the leases that were well from an increased risk environment, which is what we have shown quite some of these presentations that we have before due to more of this Stage 2. Mukhtar has spoken to that before about what is happening within the environment. Like I also mentioned earlier, negotiations are ongoing as per -- among the syndicates on what it seems will be the appropriate restructuring that we should do. And these discussions have not been concluded, but we do expect a significant impact on our restructured position. So we are waiting there.

Okay. Thank you, Felix. So Mukhtar, you can talk on effective tax.

Okay. So effective tax rate, you're very right. The effective tax rates have gone down because the new Finance Act is being implemented. And under the new Finance Act, we don't pay tax -- we are not paying tax strictly based on dividend provision. So if that is the case, then you -- gives you some room to reduce your dividend tax by setting expense that you use to generate those income. So the exempt income, you don't just exempt them straight. You are allowed to fix some direct or indirect cost to reduce them. So with what is happening with the Finance Act, our effective tax rate is going to remain lower than what we have known last year. However, we are -- beginning of the period, we guided 12% for the year. Half year effective tax rate was 9%. We are leaving the guidance at 12% because there are a lot of areas, gray areas in the implementation of the act that have been clarified as we are moving on. So we have left our guidance at 12.5%, but I'm not very sure we will keep that 12.5%. You are asking for why cost of risk or impairment increase. Yes, cost of risk, NGN 1.8 million. We guided NGN 1 million, and impairment has increased by 76%. So if I would be composite for you, first, you will know that there is exchange rate movement. So all the loans that are dollar loans, if you are making 2% impairment charge on that loan, that same 2% impairment charge, that the naira amount is going to be high. So that is number one. Number two, we have discussed the elevated risk environment. Whether a loan is bad or is not bad, the impairments you need for that particular loan is going to be higher than what we did last year. And other cost, our level of alertness on risk, everybody has increased, whether it is health risk or otherwise. So that is what is happening. That's number two. Number three, there are specific loans that have migrated from Stage 1 to Stage 2 and from Stage 2 to Stage 3. Those have also attracted higher impairment charge. But if we put all these things together, is NGN 1.8 million cost of risk too high for this risk environment? I say no. I say it is more reflective of this environment that we are operating. And as we move into the second half of the year, and all these restrictions are being removed, and businesses are coming back to normal, we are going to see our cost of risk coming down. So we have guided 2% cost of risk for the end of the year. Thank you.

Thank you, Mukhtar. And...

Yes, sorry, I listened, but, actually, I thought that, that was quite low. And I was also mentioning the fact that item increasing in the Stage 2 loans. Yes, it's true that impairments have grown by both about 76%. So that cost of risk probably looks a bit low. So the question is, despite this huge movement to Stage 2 loans that you have seen, the [indiscernible] lifetime credit losses as opposed to 12 months. And of course, the interest would have been much higher. So I think that's what our strength will lead to as opposed to being low.

Unfortunately, we are not...

The impairment should be higher.

Okay. Your line...

Sorry. I would say that we've seen the Stage 2 loans increase by quite some quantum. And to -- our understanding is that normally more of -- most of Stage 2, you know how to call you last time credit losses. And the question I'm asking you, my expectation is that we must see a matter increase in the cost of risk than what we've seen better.

Okay. So I think if I heard you correctly, you talked about the fund at Stage 2 loan increase. Yes. What you have is -- like the CFO mentioned, we are in an environment where the risk level is elevated. We don't want to live in denial by not recognizing it. We decided to do the part of prudent to recognize that, yes, especially assets in the oil and gas sector that are vulnerable. We have to bring them into Stage 2. But hopefully, as the economy recovers, and we see the price of food rally, we should be able to -- I mean going forward, as the cash flows are coming, we'll be able to declassify them. It's essentially the risk management's initiative that we have is in line with our conservative approach to risk management. We could have left them where they are, but we felt we needed to put ourselves on the -- get ourselves to start looking at them very critically. I mean we're saying the valuing the price of crude in the last 4 to 5 weeks. But certainly, in the last few days, we've seen a slump, well, same prices, difference. As a result of the fund, there is the reported cases of second wave of the coronavirus pandemic in certain parts of the world. So like we said, we live in a moment of uncertainty. We don't really know what will happen, but we continue to be positive and not be pessimistic. But in that same space, it's important for us to recognize that, yes, these are the ones that are likely. And then just to see that we keep -- we need to keep a close eye on. Not that it's a retail as it were. For some of them, we are falling back on the forbearance given by the Central Bank was to restructure. We haven't done anything outside that. And for most of them, repayment is up to date. And the important thing is that all these assets we have in the oil and gas space, in the last few years, we haven't added any new asset. And the ones we have are all brownfield assets. You don't have any developmental or new appraisal assets or exploratory assets. We are doing -- these are brownfield provision assets. And like Henry mentioned, for some of them, there are hedges in place, albeit return may not be not long for obvious reasons, but at least we'll have like a rolling program that ensures that before the expiration of the existing work, we get something in place. And we have to understand that based on the price deck, we can guarantee and assure ourselves of that minimum debt service obligation.

Okay. I think if -- you are trying to say that growth in cost of risk is not proportional to the increase in the Stage 2 loans. If that is your question, yes, it's not a stretch line. When you are making provision, when you are looking at impairments, you have to look at a lot of things, including the collateral valuation of the collateral and other mitigants. So if you have very good collateral, remember, it's not going to stay free. So you're not a hard color yet. So chance is that you have very good collateral, and the collateral values are good. So even though the entire loan has moved to Stage 3, you may not have significant increase in the required impairment based on the ECL model. Thank you.

All right. Thank you very much, Timothy.

Our next question comes from Wale and from Sigma Pensions.

Okay. My first question is on your derivative losses. Can you sort of talk through, what is driving those losses? I see that NGN 13 billion this year, NGN 13 billion last year. What -- can you just sort of explain what drove those losses? The currency, the interest rates? What exactly is driving those losses? My second question is on your electronic products. I see your pens from that line is down. Can you sort of provide color or commentary on what exactly is going on there? Is it that you saw lower volumes or maybe most of the transactions? If you recall bankers tariff revisions, what exactly is going on there? Thirdly is, what's your effective lending rate or your average lending rates as at the end of H1? And by how much has this dropped from where you were last year, basis points? Then I think, also, it's on your Stage 2. What is driving the increase? So which sectors are driving the higher migration into Stage 2, into your -- Stage 2 loans given the increases we've seen? What exactly is driving that? Yes. And that will be all for me.

Okay. Thank you very much. I think I'll start from effective lending. It's difficult for me to give you an answer on my effective lending. So I have my [indiscernible] in different segments. And the risk profile for them, they are quite different. So I don't have an average lending rate, but I price my update -- is a one-on-one price. So -- and again, the conditions are not -- is not killing our relationship. Therefore, it's difficult for me to tell you this is my average lending rates. Or just be rest assured that our lending rates reflects the matters effectively. We are competitive. Therefore, whatever the market details, that's how the price asset, depending on the segment and who is involved. Market, we deal with -- if you look at the loan book, 80% of it is the top end of the market. So if we are at the top end of the market, one of the things we need to do is we have to be competitive with pricing. So that will give you an indication of what the pricing -- the kind of pricing model we'll maintain. Electronic products, Temitope already answered that, but we can explain it again. There's nothing strange happening. Instead what we have in the electronics space is an interesting story. But that interesting story, the full impact is not being seen because of the huge impact of the regulated downward review of the relative fees and commission. And if you look at the fees and commission, the main revenue pool there is on the NIP. And if you look at the NIP 2, the key drivers for all that is the last year, where we have almost. There's some 5% downward reduction in the fees. We also have a situation where average tax renewal fees, the monthly card renewal fees is now reduced quarterly. So quarterly now like another set -- yes, it was a reasonable percentage drop. So -- but if you compare what you have dropped in our electronic banking fees, which is about -- I think about 40% thereabouts, so -- 40% to 60%. So if you look at it compared to the average drop in terms of the guide to bank charges, you will see that average drop in terms of bank-to-bank charges, one we'll factor in everything, will give you about 70%. So if we assist, it means, in effect, by reason of the growth that we have, the intensity of our drive in that space, we've been able to cushion it. And we are also confident that as we close the year, we are going to see that we'll continue to float that graph by the share reason -- by the share of product. Our volumes are growing. Intensity and velocity of our transactional industry is also growing. So on Stage 3, I think we talked about the Stage 3 loan. That's Stage 2. We are just being through that. We are just recognizing the fact that the environment you have prepared in last year is not the same today. We live in moments where your today and your tomorrow is now dramatically different from the past. So if that's the case, well, we don't know what is getting off. There is no percent. And look at the way it is. In some locations, in some geographies of the world, where we thought the pandemic is under control, will still be return of the second wave. These are extreme and uncertain times. The price of food, like I said earlier, it rallied to $45, $46. But as we speak now, price of food is struggling between $38 and $40. Even though commercial flights have resumed in and out of Nigeria, but is not at that optimal level, so there are quite a lot of moving parts that we don't even know is -- like I said, we don't know the duration of travel. Therefore, we have to announce setback and be prudent to recognize that, should there be a strange situation, these are the sectors that will be impacted. That's simply what we've done. And as we move on, even for some of them, we added essentially the downstream oil and gas pay as well. We have the legacy loans. Those who did the importation of PMS, where government is now settling by H1. So promissory notes, what we did at the time of the audit was that because we haven't received the promissory notes, we decided to put all of them in Stage 2. We moved them away. We could have kept on asking, "Wait a minute. We already have promissory note, but we want to be prudent." Now after the audit, you have seen the release of some promissory notes. The release of the promissory notes will now be classified. So I think we are quite impressed with the way. It's not a sign of deterioration, but one of the sign of prudence and caution and extreme and very conservative risk management approach to business. That's who we are. That's who we are. We tend to push ourselves. Our standards in terms of what we do is usually approved industry benchmark. Go and check in all situations. Our standards are above industry benchmark, which is what you've seen us display here. So going forward, hopefully, as we close the year, you will see -- you are going to see a restructure of some of these items showing a stronger performance. So that tomorrow, even if they get it to retail, we are not finding. We say, "Yes. We saw it coming up, the kind of insights we like to provide with respect to the staging of the loans." On the derivative losses, I think these are normal mark-to-market strategies, but the CFO will speak more to that.

Okay. Thank you. So you are asking why we keep having derivative losses. So when we book a short transactions, the naira lag of the swap is sitting in treasury use. So you have the income coming through treasury income. So if you look at Page 149 of our financials, you see that we have marked all of them together, derivative loss, and then you have treasury illustrated income. So as the swap is pulling to par, then you have it's coming to a lost. And then the gain on the treasury bills trading, which is the opposite, also moves off. So they are always compensating. So if you are saying that consistently, you've been seeing derivative losses, you'd also be consistently seeing treasury bills trading income that is moving almost at the same -- the opposite direction of the swap losses. Thank you.

Our next question comes from Muyiwa Oni from SBG Securities.

Congratulations on the results. My name is Muyiwa Oni. I have a few questions. The first is to elaborate on the hedging product you have in place for your oil and gas book. So if you could share this size of the hedge. So relative to the size of the book, what percentage is hedged? And then also if you could share price level and also maturity. I know you give a range on the maturity, but if you could also share the price level. I think, secondly, on your presentation pack on Page 16, you talked about part of the drivers of the lower interest rate and lower yield on your assets. And you talked about rebalancing of interest-generating assets. So I think if you could elaborate on what you mean by rebalancing as well, that will be helpful. Thirdly, your customer growth numbers have been quite strong. I think it's currently about 84%. So your new customer is about 84% of your total 2019 additional customers. If you could share drivers of that growth. So has it been driven by AGS banking? And then also profile of the customers as well, that would be help. And then the fourth question I have is stress on the competitive landscape on what some of your peers are doing. Just wanted to get the sense of your views on as an institution exploring other nonbanking financial services as an opportunity to expand and grow revenues. Those are my questions.

Okay. Thank you very much, Muyiwa. The first question on the hedging product price levels, first is we don't have a swift line hedge instrument for all the assets. These are priced differently. But what we have that is unique to all of them is that in terms of the volume, we try to hedge the volume that we know is relative at the price level that can guarantee loan sales. That's what we have. And there are different sophistication that come depending on who the obligor is. Well, since some cases, we have some outport travel, where -- I mean in terms of travel, where the cell improves. And on the other side, they go and buy a call, just because they want to be sure that, yes, in defend that there is a pickup in price, they don't completely lose out. So it depends. In some cases, we'll send that out to have just simply sold the food because they just want to cover the downside, which is what we've seen in most of them. Everybody is concerned about protecting the downside. But for us, the important thing is the overriding objective for us is loan sales. So if you give us a model that guarantees it, we are fine. If we decide now to say yes, I want to -- after doing that, I want to -- you are concerned about subsequent run. You don't want to lose that. That's where -- that's going to buy a colleague -- I mean in return to do that. We haven't seen much of that. Yes, we saw that happen before, but it is just a few months. The trend we've seen is essentially selling food. That's what the [ vision is ]. Price levels, different. It depends on who is involved. In terms of volume level, it's dependent upon what we anticipate, depending on the price that we're sticking with benchmark against what we expect will be. Apart from loan service, we'll have to make provision for your strategy, your process and partnership agreement and hedge agreement. Once we have it, the coverage for us to get that with the debt service, we are fine, which may be a little margin that will enable you continue to run the business. Customer growth driver. Zenith is a growth position, and we will not stop growing. What we see is that we are considered to be let and chancing to the retail space. And anything we do, we give it our biggest minds. We have announced our presence in the resi space. And what you can see, yes, part of the growth you see there is the intensity of our retail drive. It's difficult for me to give you the numbers, but just know that in all segments, we are growing. In all segments, even the retail, we are growing. And the growth is also being powered by the massive digital deployment we are doing. If you look at our OpEx, you are going to see that IT expense is high. IT expense is high because of the market deployment that we have in IT technology. Like I said in my opening remarks, Shenzhen SE is doing well. What's driving Shenzhen SE? You -- Alibaba. You talk about S&P 500. You talk of the tech companies. So e-commerce is going -- I mean digital technology and e-commerce will drive -- will continue to drive competitiveness going forward. And we are not missing word about it. We are committing to that massively. So what is really driving the growth we have in our business is our risk side deployment. We've moved across -- we've moved from the conversion asset growth saying we have platforms. Now we are the state where we are infusing machine learning and AI into a different platform. We are not late. We are also mining data with our miner data that can enable us to exclusively communicate and send the right communication to different customers. We don't need to send generic information. We can tell our customer, join me, by just mining your data. So these areas that we are leveraging and we're seeing a quantum leap. And we have said that to continue. I mean that speaks to a competitive landscape. We are never scared to compete. We've got to where we are by competing. If you remember, Zenith was just 30 years. There are other institutions much older than us. So which means at the time we sat there, we're at the bottom of the pyramid. But today, we are where we are by competing. And the competition is not just -- the completion is also internal. You see, you have a system that is very competitive where it won't -- there's a healthy competition to outdo each other, and there's an enormous award for outstanding performance. So we come from that culture. That's part of our DNA. If anybody tries to stop it, the system will not even allow you to stop it. Therefore, in terms of competition, it depends on what the market at present we will compete. Are we looking at maybe some corporate actions? We've always mentioned that it all depends on what we see. If we find something that is disciplined, if we find content that fits into our culture, if we find something that aligns with our strategic intent, who will be trusted. We are not going to be carried away by material resource. If we are on agreeing terms, we want to do it. We will do it because it makes sense, and it makes money. So we'll just maybe do, but just to be rest assured that we are quite open. We are dynamic. We are nimble. We are looking at things as they evolve. And if there is a need for us to make a move on anything, we'll make a move. And finally, it's strategically important, that relevant, we will respond accordingly. We talked about [indiscernible] on assets and rebalancing of interest, CFO will throw more light on it.

Okay. Thank you, Muyiwa. So if you look at the same page, you are making reference to the Slide 16, we have shown the breakdown of our income. Loans and advances, NGN 128 million from NGN 115 million grew by 12%. Income from treasury has dropped by 46%. Income from government and other bonds grew by 20%. So -- and then placement -- okay. So that's what we mean by rebalancing. We all know the treasury bills rates are not being very, very good. So we need to move to higher-yielding areas. If you look at our balance sheet, you realize that investment in securities increased on the balance sheet. Loans and advances increased. And if you look at the breakdown on the -- of the income from each of these lines, they have all increased. Our balance sheet, if you look at it, again, you will see that treasury bills have dropped. So the income from treasury bills, again, have dropped. That's what we mean by rebalancing.

Well, put in another context, what you see reflects the current legal requirement. So it's not anything different from what the market situation is. So I will take the next question.

Our next question comes from Ebele Ejiofor from Benin Bank Nigeria. Okay. We'll move on to the next participant. Next participant is Soji Solanke from Renaissance Capital.

Yes. I just have a few -- it's Soji. I just have a few follow-up questions. So the first one is for your treasury bills portfolio, can you perhaps set them up? What's split between trading, EFS and health maturity? And what is the policy around movement across categories? My second question is also around the trading book. So if I've got you correctly, any gain you have from valuations is unrealized, and we'll cycle out if the treasury builds mature, except you sell them, which basically means, in this environment, your NIMs should take a hit once you've sold, but their crude interest must drop off. So help me understand what happens when these bills mature or you sell them and realize gains, both reinvest at lower rates. So just help me understand what was happening there. My third question is, if you can just take a step back on stage 2 loans. As at half year, what are the key factors that make up what you have in Stage 2? Then my last 2 questions. You have something called electronic card receivables, which increased from NGN 42 billion to NGN 83.5 billion at a group level. So if I'm not mistaken, the card transactions are already paid for by the customer in naira. So what will clear the receivable? So what exactly are these receivables in the first place? And then my final question is, what FX rates have you used to revalue your book for the FX revaluation gains you've reported?

Okay. Thank you very much, Soji. I'll take on the issue of the Stage 2 loan. I said it -- I mean let me repeat what I said that what we decided to do was to recognize the product. The risk profile you value is elevated. And after the pandemic affects Nigeria, one of the sectors that is hurt is oil and gas. So I mean we have setups like entertainment, tourism and hospitality. But transport, we don't have a cushion in terms of tourism, education and hospitality. So we look at the oil and gas space and recognize that, yes, if things get worse, this will be the toll that will be heavily impacted. So as a result, what we have there is -- the increase you have in this, they are largely driven by those oil and gas assets that we process there. Again, we also have some of the negative PMS import transaction of 2016, 2017 time, but the federal government is now settling with promissory notes. As at a half year audit we, decided that the production will be less prudent in Stage 2. As we receive the promissory note, we declassified that. And as we speak now, for some of them, we'll receive these promissory notes. We just want them dematerialized. So going forward, we are going to see a declassification by the time we do the full year. That explains the Stage 2. Treasury bills, the ATM and the trading book, I think Mukhtar has spoken to it. I will get him to go through that again. I'm referring to the numbers in the audited financial. The same thing goes for the electronic card receivables. These are essentially transit items, which Mukhtar will also throw more light on. Then FX rates, Mukhtar will take that as well.

So the average rate that we use as an OpEx as of June, it was 3.86%. That's number one. Number two, you are talking of gain on revaluation that will be realized and unrealized. So your trading book, you don't do accrual on the trading book. The trading book of your combined today and sell it today. You buy your treasury bills and today you sell it tomorrow, you buy new ones. So it's a complete trading book. At this point, you are getting, you buy everything. The fair value is what you bring into your groups. And when you are disposing it off, your cost of disposal is the fair value that is sitting in the book minus what the proceeds or the consideration you have received. So there is -- the trading book is not wrong on an accrual basis, right? It just is on valuation basis. That's number two. The third one, you mentioned T-Bills portfolio, AFS HDM. Classification into AFS HDM is based on old IFRS 9. The new IFRS 9 that we are using, there is no classification for AFS this year. It's trading or non-trading. Once you designate them as trading, you fair value. If you designate them as held to maturity, you will carry them at amortized cost. So it's either you are doing fair value or you are doing amortized cost. So you ask movements or what conditions would you move between classes. The standard shows clearly how you have moved from one class to another. It's not based on number of days or volume. It's purely based on your business model. It's driven by your business model at the time that you are guessing what is the business model that you are running? Our business model is we have a banking book and we have a trading book. The trading items are sitting in the trading book. What is sitting in the banking book? We have some that we are holding. What we have needs for liquidity, you can always sell to meet your liquidity, which the standard also permits and allows, okay? That's that. I've mentioned, with electronic card receivables, the amount is high because of the high volume of transaction. And if you see the work from other parties, either other banks or fintechs or all of them. But if you go to Page 174 of the financial, you would also see payables relating to some of those transactions. So you have one that we call electronic card payable and other payable. So if you look at it net-net, we have payables and we have receivables. That reflects the huge volume of digital or electronic transactions within the system, and is also reflected share of our business within that space. Thank you.

All right. Thank you very much. I will take on the next question.

[Operator Instructions] Our next question comes from Jerry Nnebue from CardinalStone.

I just have a couple of follow-up questions. The first one is on your fee. So I understand the movements or the costing for the decline in fee income across the board. Volatility expense is increasing. So I'm not seeing that in correlation. It's just not the same story. Share expense increased about 74%. So what's happening in there? Out of the vision, the same-store, that have impacts us, so that would've declined during the period. So what's happening there? The second is speaking to hedges and protections for credit. Do you employ CDSs and credit deposits? If you do, have there been any benefits for you during the period? Those are my questions.

Okay. Let me get Dennis to answer that question.

Thank you very much. On the issue of the increase in our electronic fees, I just want to draw your attention to the fact that some of these fees have international components, which means that they are foreign-exchange based. So we do a lot of transaction using Mastercard as well as Visa card. These are -- sometimes they are cross-border transactions, and the fees are normally taken in dollar. So if there is a devaluation in currency, it does give you an exacerbation in the absolute amount when you translate that in naira.

All right. Thank you. Next question, please.

There appears to be no further questions, so I'll hand back to the speakers for any other remarks.

Okay. Thank you very much, ladies and gentlemen. It's been a pleasure to have the opportunity to explain to you the dynamics of the business and how Zenith Bank is weathering the storm. We'd like to say that the outlook still remains actually uncertain, but, however, we are in an environment where, as it were, we've seen people, the steady shock that recent the pandemic is now being replaced with a lot more caution and optimism. And we are riding on these opportunists in to ensure as we will -- businesses are open. Zenith Bank will continue to adhere to the protocol of the head authorities. We'll continue to amend social distancing, and we'll continue to ensure that we protect the health and safety of staff, which is our most precious asset. And we'll also ensure that assets into the premises, we'll continue to regulate it in line with the guidance of the health authorities. So going towards the close of the year, we have said that we'll continue to adhere to our very strict risk management principles. We don't anticipate that there will be a deterioration in the risk assets. So far, this is transition we've enjoyed that CBN provided, we haven't seen any substantive situation with respect to how the loan book is standing. There has not been any defect. There have not been any deforms. Now we'll continue to accelerate our business model with our electronic and digital deployment. We have been deliberate about it. We are also comprehensive and to ensure that every aspect of our operations are covered. So we expect to have an acceleration in this agile environment to cruise and end the year on a good note. So that as said, the key guidance for the year, we think, we'll achieve it. It's going to be hard, no doubt. It's going to be difficult, but we are staying true to our virtue of hard work and focus and determination to ensure that, yes, we achieved the guidance that we have earlier advised to the market. We also ensure that we reward shareholders, shareholders who have continued to be efficient, investors who are present and believe in us and continue to entrust their investments and their resources in us. We'll ensure that, yes, even with the pandemic that they are not left empty-handed. We will reward them, which informed the decision for the Board approving a dividend of 30 cobo. So -- per share. So we are definitely certain that we'll be able to contend with whatever situation we face in the market because Zenith as an institutional, one thing we have is that we do a lot of planning. We do a lot of thinking. And as a result, we build different scenarios. We get even to the stage of baseline paranoid. And to that extent, we are able to build different scenarios that were networks to adjust and respond to whatever the market presents. So I thank you very much, and look forward to a very impressive year end. We'll continue to urge everyone, ensure you wear masks while in public. Make sure social distancing. Make sure you wash your hands regularly. Because, together, we can only compete in fighting the pandemic. Even if there's no vaccine, let's help to contain the spread. Thank you very much, and God bless you, and continue to keep safe.

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