Zenith Bank Plc (ZENITHBANK) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Zenith Bank Group H1 2021 Financial Results Conference Call. [Operator Instructions] Please note that this call is being recorded. I'd now like to turn the conference over to Ebenezer Onyeagwu. Please go ahead.

Good afternoon, ladies and gentlemen. My name is Ebenezer Onyeagwu, the Group Managing Director and Chief Executive of Zenith Bank. It's my pleasure to welcome you to this call where we'll be doing light and more light to the performance of the group for half year ended June 2021. Before we go on, I would like to introduce my colleagues who are also on the call with me. I have Dennis Olisa, Executive Director; Tope Fasoranti, Executive Director; Henry Oroh, Executive Director; Umar Shuaib, Executive Director; Felix Egbon [indiscernible]; Mukhtar Adam, our CFO; Eugene Ewubor, Investor and Analysts Manager. We also have Michael who is also here. First and foremost, it's important for us to give you a bit of context regarding the events in the market that will help you analyze and appreciate the performance for the period under review. Within the period, the MPC had 4 meetings, i.e., January, March, May and June, and we take the pillar or the monetary parameters were left unchanged. Monetary policy rates remained at 11.5% with asymmetric corridor of plus 100 basis point or minus 100 basis points around the MPR. Cash reserve requirement ratio remained at 27.5%, while liquidity ratio continues to be maintained at 30%. Additionally, within the pillar, we've seen a slight improvement on growth in GDP, with GDP for second quarter printing our 2 points. GDP grew by 2.01% in Q2, which is a point out to the fact that the recovery process is beginning to gain traction. However, it's important to know that the growth we see or improvement in the GDP is being likely driven by nonoil sector, which includes trade, [indiscernible], transports and grid and manufacturing. With respect to inflation, we've also observed in the last 2 months, inflation trending downwards, inflation are peaked at about 18.7%. As at the end of July, printed us of 10.38%. Oil price has remained relatively stable with a marginal improvement moving from $64.6 per barrel in Q1 to $71.9 per barrel in Q2. Nigerian foreign reserves as of 19th of August 2021 stood at $34.8 billion. Then we've also observed so it's important to note some key initiatives that have also defined the banking sector or continue to define the banking sector. There is the expected commencement of the foreclosed Central Bank of Nigeria digital currency initiative. The expected date of commencement is October 1, 2021. There is a stoppage of sales of foreign exchange to BDCs as CBN note concerns around the leakages and shortcoming with selling BDC through the selling foreign exchange to the BDCs. So now with the new regulation, [indiscernible] are now being wholly administered by deposit money banks. We've also seen the commencement of the road infrastructure as credits, which is also beginning to gain traction. And there's also expected commencement of the NGN 1.5 trillion infraco company that has been floated by Central Bank of Nigeria and the African Finance Corporation. These initiatives are expected to drive incremental business volume especially in the consortium subsector. We've also observed and seen significant improvements in the power sector as the "willing buyer, willing seller" initiative of the power reform has brought about improvement in the cash flow of the distribution companies and by sanctions, improvement in the payments for power supply to the distribution companies. Another important point to note is the signing of the Petroleum Industry Act. This is expected to bring a bit of respite to the host communities with respect to the activities of the oil sector. The important point to mention is that it [ constitutes ] a lot of [indiscernible] incentives that is special to drive the development of our gas business. And we believe that it actually lead to the improvement and growth in the gas business. And this is also to come with the unbundling of the NNPC to become -- to be run as a commercial entity. So we also see improvements in business volume expected to come from the commencement of the NLNG Train 7 project, which is a project that is in several billions of dollars. Then the contracts have -- several contracts have been awarded for the rehabilitation of refineries. We believe that this development will help improve the business environment in the country. The COVID is still very much with us. The Delta variant is there, and it's also important to note that another round of vaccination program has been on, and we expect that as long as this vaccination program has been intensively applied that the rate of recovery and the spread -- or the rate of business recovery and reduction in the spread of COVID should be experienced in the market. On the whole for the period under review, we recorded a 2.57% growth in profit before tax moving from NGN 114.1 billion to NGN 107 billion. This is coming on the back of very strong liquidity and capital buffers. Our capital adequacy ratio currently stands at 22%. While liquidity ratio stands at a whopping 70%, clearly fine assets of the minimum expected liquidity ratio of 30%. So I'll leave this to CFO to further unpack the figures behind our performance. And hopefully, we'll be able to throw more light as we take your questions as we move along. Thank you very much. Mukhtar?

Thank you very much, MD, CEO. Good afternoon, ladies and gentlemen. Thank you for attending the conference call. As the MD has mentioned, we -- our performance for half year 2021 shows a very promising end of year 2021. Our PBT increased by 3% from NGN 114 billion to NGN 117 billion within the period. The growth in PBT is largely due to growth in our noninterest income and significant drop in our interest expense. Our PAT increased by 2% from NGN 104 billion to NGN 106 billion. You would also realize in our half year results that our gross earnings was flat year-on-year, largely due to the yield environment, which saw interest income dropping. So interest and similar income dropped from NGN 217 million to NGN 204 billion within the period. This is largely due to the low-yield environment. As a bank, we responded to the drop in interest income by repositioning our funding sources, our deposit mobilization strategy and our treasury management to ensure that the drop in interest expense far outweighs the drop in interest income. So within the period, interest income dropped by NGN 13 billion, while interest expense dropped by NGN 15.5 billion. Therefore, we ended up with a positive net interest income growth. The drop in interest expense has helped our cost of funds to drop to 1.3% from 2.2% last year. The result also shows the impairment charge during the period decreased by NGN 4.1 billion, a 17% decrease largely due to the improvement in the operating and yielding environment when compared to the highly tensed COVID environment of 2020. Noninterest income is a very major growth for us within the period. Overall, noninterest income grew by 9% from NGN 116 million to NGN 127 billion. But the interesting aspect of the growth in net interest income is the growth of our fees and electronic products, which indicates that strength of Zenith Bank within the retail space and the benefits of our continuous investment in the digital channels as well as technology. This is very important if you look at the top line. The top line shows a flat growth, no growth, very flat. But if you analyze the top line in the growth in our noninterest income, you would realize a very impressive revenue-based diversification, which is very, very critical for us as a bank. Our OpEx increased by 10%, largely due to inflationary pressure. Inflation averages around 17%, but we managed to carefully ensure that our OpEx does not grow as fast as inflation. You also noted that about half of our operating expense are related to regulatory charge, AMCON, NDIC, okay? Our cost-to-income ratio within the period was 56%. But this has to be looked at within the context of half year. By the time we closed the full year where we do not have to charge for AMCON, we will see cost-to-income ratio moderating to below 50%. And return on assets and return on equity also dropped, we closed return on asset and return on equity. Return on equity was 18.8% from 21%. Return on assets also dropped by 2.5%, largely due to the following: one, the yield environment that affected the interest income; second, growth in our capital base. We have a very strong and robust capital base, which is very necessary when you consider the volatile global operating environment and a relatively more volatile local operating environment. So our capital base is a strength for us, although it mutes the growth in our return on equity. The growth in the size of our assets also affected the return on assets but that is not something to worry about. By the time we finish the year-end, we are going to level these parameter as well. Our earnings per share grew to 3.3% -- up to 3.38% from 3.07%. So you can see that despite the challenging global operating environment, we have demonstrated resilience by reorganizing our balance sheet, our cost heads, our income heads to come out with a growth in our bottom line, which we are going to continue in the second half of the year. I need not mention so much about the balance sheet of Zenith Bank, which is clear that is a very strong balance sheet, very robust balance sheet and highly liquid balance sheet. If you look at the customer deposits, has grown by 8% year-on-year. Interest expense has dropped. So that is to show you the depth of our banking knowledge in managing our balance sheet. We also want to note that our NPL ratio has been very stable at 4.5%. The liquidity ratio is almost 70%. So this shows us with a very strong formidable and liquid balance sheet, very strong capital base, the group, Zenith Group, is in a very, very good position to continue our forward march to deliver excellent results to our shareholders and other stakeholders. So we are looking forward to an interesting 2021 financial year-end. Thank you very much.

Okay. Thank you very much our, CFO. So we can now take your questions and comments.

[Operator Instructions] The first question comes from Damilola Olupona from Chapel Hill Denham.

I would like to ask the following questions. One, I noticed that on a year-on-year basis, the impairment charge was low. But however, impairment charges jumped more than threefold in Q2 2021. I don't know -- I would like you to expatiate further on that? And secondly, as well, the CFO mentioned that interest expense was low. Yes, it was low on a half year basis, but also quarter-on-quarter as well. We saw jumping interest expense. Can you just provide context around that? And finally, my last question would be around your restructured loans. I see here that more than 60% of your FCY loans have been restructured. And the [ lump of it ] comes from the oil and gas books. Can you just provide context as to how the restructuring is going? Are we going to see any -- are we going to see -- I mean, just provide context on how the restructuring is going. And what the -- how to look for your loan book is as well in the oil and gas space? Is there a possibility that we see deterioration in that space? And what's the time line in terms of CBN's moratorium guide? What's the time line for that? Did you buy a 1-year period? And that will be my questions for now.

Okay. Thank you very much, Damilola. I think I'll start from the last question. Your concern is on the restructured loan, the FCY, the fact that about 60% of that is from the oil and gas sector, and that is correct because if you look at the exposure we have in FCY loan, you -- I've mentioned them into 2 main buckets. You have the oil and gas loans because strictly in line with the regulation, we only create exposures for dollar loans for all the companies that have the capacity to generate dollar cash flow. That's one. The second bid that you see are trade related. The trade related are not restructured because the bulk of our exposure in FCY are in foreign currency, that is why you see that a significant part of which is now 60% of fees is what you see in the oil and gas sector. And let me say that the oil and gas sector in Nigeria, the challenge we have is not about production capability, it's more around the fact that we have we've been depending on very decaying and old infrastructure to have adequate production from the various well to the terminals. The most prominent one is the Nembe Creek Trunk Line, which is as old as the discovery of oil and gas in the country. That's about how many years is what do I mean, so that particular pipeline has been totally vandalized. So as a result, the operators are not able to -- even when they produce, they start in production. So what you see is that most of the operators we have, everybody is focusing on building alternative pipeline. So we expect that towards the end of the year, there will be commissioning of -- a number of them will be commissioning alternative pipeline so that they can easily and very confidently [ evacuate ] their production. So once we have that, we think normalcy will return to that sector. Secondly, the signing of the Petroleum Industry Act is supposed to bring also respite in terms of the engagement of the stakeholders with the host communities. So we have said that respite or return, we also expect that with all that happening, these are positive sentiment that should boost production in that [ sector ]. So do we expect a deceleration? The answer is no. We don't expect deceleration. Maybe uniquely to Zenith -- uniquely to Zenith in the sense that the portfolio we have in the oil and gas space, these are all brownfield assets with very prolific results and proven results. And even before the shut-in occurred, we had all of them producing a very remarkable and comfortable level to guarantee effective cash flow to Zenith. So once we deal with the issue of the pipeline, we will say that 95% of the challenge we have in that sector as it relates to our books will be [indiscernible]. If you talk about the low impairment charge, I think I'll get the CFO to expatiate on that. But let me say that 2020 and 2021 are 2 uniquely different years. In 2020, the outbreak of the COVID, there were a lot of concern. Nobody at this time last year, we have no idea of when vaccine will be ready. And as a result, we have to take in line with our very conservative and prudent approach to treatment of loan, we have to ensure that we increase our impairment charge. But with the vaccination program coming in and the normalcy returning, we don't see anyone who have also seen businesses the way they recover. We've seen that the impacts of the COVID is not as severe as we thought it. As a result, we have to now review the kind of impairment charge we took last year. So what we've done is conservatively in line with our normal production guideline to risk minimization and control. So Mukhtar will throw more light on that. Low interest expense, quarter-on-quarter jump. Yes, quarter-on-quarter jump, you will see, if you look at that quarter-on-quarter jump, you are going to see that it is related to maybe a bit of the purchase bonds. And let me say that it's important to appreciate the fact that 75% of our deposits is computed in the CASA base, the current account and savings and these are low costs. And overall, which year-on-year, cost of loan were 2%, but as at end of this June -- as of June 2020, our cost of loan was 2%. But as at end of June this year, our cost of loan has trended down to 1.3%, that's a remarkable saving. So what you see there is just a line item, which is not related to the entire portfolio. The focus remains savings and current account drive. And what is pushing that savings and current account [indiscernible] especially to continue, yes, as we get deeper and bigger in the retail and digital space. We think we're in a position to create a lot more deposits. And this deposit with the level of service we provide with our ability to deal with chargeback and complaints and dispense of much faster than the industry in the digital space, we stand the chance of having a lot more sign on and of scale with respect to the growth in our retail deposits. So I'll leave Mukhtar to address if there's other sense I haven't addressed, the CFO can address this. Mukhtar?

Okay. Thank you, MD. And I think you've addressed -- what I will add is, normally, you shouldn't expect quarter-on-quarter, including expect a straight line amount of impairment charge. So what we are reporting as impairment is based on IFRS. And when you look at IFRS, you do forward looking of a lot of macroeconomic variables. So at any point in time, the projection of the macros at that particular point in time can significantly affect the impairment charge that you are taking. So we have seen that in the first quarter, there was really a lot of hope of recovery. Somewhere in the second quarter, we started hearing the Delta variants. We started hearing -- whatever. So those are the things, the projections are on macros can change at any point in time. And for us, we have to respond and use the appropriate and the latest available macro projections to determine our impairment charge. So what we have done is in line with the latest available macros, projections using our model to determine their impairment. So going forward, don't expect a straight line charge on impairment, it could fluctuate depending on the environment and the projections.

Okay. Next question?

I just want to check, Damilola, does that answer all your questions?

Yes, it does for now.

The next question comes from Ronak Gadhia from EFG Hermes.

2 or 3 questions. Firstly, just a follow-up on the provisions question that Mukhtar just answered. We get that the provisioning levels could change depending on the macroeconomic projections. However, if I look at disclosures provided by the bank, it seems a large amount of provisioning went into Stage 2 provisions. So your Stage 2 provisions on a quarter-on-quarter basis seems to have increased. And it is my understanding, that is largely driven by specific deterioration in loans rather than its macroeconomic factors. So maybe you could just maybe explain that discrepancy? The second question was on your growth outlook. If I look at it on a year-on-year basis, loan growth seems to be quite tepid. So if you could just maybe talk about what we should expect through the rest of the year? And maybe going into '22 as well, assuming the macro environment doesn't change significantly either positively or negatively from where we are at current levels? And then the third question, I guess, is a bit more broadly. I guess, very early days with regards to the eNaira and digital currency. But it would be nice to hear your thoughts on what the disruptive impact of this currency could be? Could we see a big proportion of deposits leaving the system at the same time? Could we also see a big proportion of transactions moving to an alternative platform, which is what ideally could happen given how these currencies are being structured?

Okay. Thank You very much. The eNaira, like you said, that is early days. The engagements are on, especially what you see that is going to be running on the blockchain technology, which will be anchored directly by the Central Bank. And it also involves the creation of e-wallets. It's basically doing -- having a digital currency, more like you operating is still part of the core of digital banking. So you now have your wallets created in digital format, which is still have and controlled are managed by the Central Bank running on the blockchain technology. The engagements are on. We are involving all the stakeholders. I will have a couple of meetings and the stakeholders involved are the telcos, the merchants, the fintechs, the deposit money bonds, the microfinance bank, especially that this also have to deepen the payment system and also accelerate the financial inclusion agenda of the Central Bank. And there are also concerns and discussions around the security framework that will be involved. So all that is being put together, hopefully, between now and the commencement dates, if that date is serious. But we expect a lot to happen and the market will be updated as events unfold. Growth outlook. First is to say that Zenith comes with very strong ethos. We come with strong ethos and discipline. And what I have seen occupying the role and the seat of the CEO is defending those ethos and discipline on culture, leads to the creation and building of new competencies and capabilities. So just by doing what we are -- just by upholding the legacy and the culture of the institution, increase in an enormity of efficiency, it creates a new vista, it opens up creativity in us. So even if the market remains where it is, what we know is that the response will be that we have to continue to be creative. And this creativity will focus more on building efficiency in our operations. And we believe that the more efficiency will bleed into our operation, making use of digital technologies, the greater the savings will be. And once we have that savings, it will help us to improve our bottom line. But in terms of -- speaking to key issues in the environment, one thing is certain. The fact that, one, the vaccine [indiscernible] on now. We've just received another set of vaccination and the vaccine and the process is ongoing. The more people we have vaccinated, the better it is for everyone and the more confidence you create in the system for activities and markets to thrive. Two, we'll see an improvement coming from FMCGs. [indiscernible], this country is a country of 200 million people. 200 million people means 200 million mouths to feed, 200 million people to clothe, 200 million people to provide medical facilities for, 200 million to provide utility services for. How do you define the market? The market is defined by number. So that tells you that Nigeria remains a big market. For as long as we are not in a lockdown, we expect that change will pick up or cautiously, too. We are not optimistic that the banks will return to the economy within the next 2 quarters. What we think the steady growth to continue and the sentiment that leads us to that is the fact that will stand the GDP improvement, even though it's tepid. We've also seen inflation receding. And we've also seen new incentive being driven by the Central Bank to improve the flows of foreign reserve into the economy. The federal government is about to launch a Eurobond program, which is especially to raise between $3 billion to $6 billion. That will help improve our foreign reserves, and by extension, improve what we have, the availability of dollars to meet our trade transactions. So in a way, we will say that, for as long as we continue to be who we are, that Zenith defending the brand, I think we'll find the opportunity to scale. Second, the other point is in digital and retail banking, the audacity and intensity with which we are pursuing it, I don't see anything stopping us from growing in that space. Macro, digital and retail banking income, year-on-year, we grew by 91%. That is no mean achievement and it didn't come out of nothing. It came from deliberate, comprehensive focus and strategy and execution to grow that space. And we see that if you look at number of accounts of open, look at number of the volume of transactions going through our channels and you also look at number of agents we have onboarded, so it gives you an indication of the growth trajectory that we are currently having and which we expect to sustain in our retail banking company. These are macro -- this is a tough environment. It's quite tough. We agree with that, but we just realized that being who we are, defending our NIM and our legacy puts us in that situation where we keep finding opportunities to build capabilities that are proprietary to us. Stage 2 provision, Mukhtar, you want to speak to that?

Okay. Thank you, Ronak, for the question. Yes, you are right, the impairment charge for the Stage 2 increased. But you also have to look at the increase, not necessarily because of further deterioration. So as I explained earlier, when you have the same role, the same customer is in Stage 2. The same business, when the macros don't look favorable, then they expect that cash flow from that customer would also not look favorable. So therefore, your model will tell you how much you can recover from that customer is lower than how you projected previously. So the difference means you have to take higher impairment charge. In the same way, when the macro starts looking up and it is not pointing to that direction that the customer is in a better position to generate more cash flows due to increase in business activity, the economy is opening and everything, then your projected cash flows from the customer that you used to recover the loan will improve. That means your recoverable amount to be higher. So therefore, your impairment charge has to be lower than you projected. So that is the way that even Stage 2 loans are affected by macros and projections and other things. It does not mean additional loans have come in or it does not mean a further deterioration. Thank you very much.

If I could just ask one more follow-up question. The MD mentioned the increase in volumes on electronic banking transactions and the increased disclosures in this segment are appreciated, and it's quite remarkable to see the growth on a year-on-year basis. However, when I compare your numbers that you published, and I appreciate this might not be like-for-like or apples-to-apples. But if I look at the numbers that Zenith is publishing, for example, in USSD, in the first 6 months, Zenith did about 250 million transaction. And that seems a lot lower than what some of the other -- some of the other peer banks are doing in the industry. So could you just talk about why Zenith numbers are so much lower? And what steps the bank are taking to close that gap?

Okay. Thank you very much. I think what needs to appreciate will be the channels. We don't compete at the same level on the same channel. So if you look at the channel, you look at our Internet banking and mobile banking, you're going to notice especially mobile bank and significant growth in volume. So if you go by that, you won't get the number. And beside us, the USSD volume, bear in mind that we got into retail much later than -- that's why it's gone ahead of us. If you watch the growth rates, if you do -- in terms of absolute number, the [indiscernible], you are going to get something different. If you also look at the agency banking and to the number, I think if we look at the number in terms of number of agents and the transaction volume, when we -- we ended last year, I think we were like #6, but at the last -- yes, at about September, were like #6, but by end of last year, we're #3. And we've said that hopefully before the end of this year, we should change position upwards anyway. So it's about this segment where you play is also about what is driving your own volume. So the USSD is an ideal opportunity to scale the opportunities to scale, the opportunities to scale up. We are happy at what we see the volume. We see growing a lot more from the mobile banking but these are areas or what -- another way to look at it is if you compare our numbers to that, the indication of that gives us is, look, we have substantial room here in terms of growth.

Okay. Thank you. If you look for that in the presentation on Page 33, it's very continued growth across the channels on Internet banking, mobile banking and USSD and agency banking. And let me say that what drives the income and transactions on channels, it's basically our customer onboarding. And that's one area we have focus on. We have -- we continue to leverage on technology to expand our footprint in respect of onboarding of customers. Last, for us year 2021, we increased our customer base by about 66%. We added about 2.5 million customers -- retail customers in just 6 months. I will tell you that this will drive all the channel transactions because as we open account, we'll enroll them on the channels on [indiscernible] and enroll them on them, on mobile and on other channels. That will drive the transactions. We drive the usage of these channels, will drive the card usage, and this all drives the income [indiscernible] product. So we are confident that these numbers will continue to go up relative to competition. Thank you.

The next question comes from Jerry Nnebue from CardinalStone.

So I do have a follow-up question, again, still on your e-banking business, but especially in light before with what the previous caller asked with respect to eNaira. Now I understand that this is a critical aspect of your strategy in the last couple of years, deepening [indiscernible]. But what we hear constantly in -- especially with -- as far as it concerns transaction costs, likelihood that is going to come as 0 transaction costs. So to what extent do you think that could cannibalize on the strategy you already have, how did impact the business going forward? Like you said before, it's still early days, but are you thinking about that today, the concern on that front? Secondly, I would like you to give what your [indiscernible] is, what the yield environment, seeing how [indiscernible] income in the first half of the year?

Okay. So I invite Tope to take on the question.

Okay. On the first, yes, transaction costs because of the eNaira bill, because we know that the [indiscernible] will deliver some fees on the margins will be 0. But nevertheless, it's still early days of the eNaira. The launch is still about a month away. And don't forget that the first launch on eNaira will focus on Tier 2 and Tier 3 when it comes to wallet creation. The Tier 1 is not yet finalized. A lot of the transactions you see, the income we see come from Tier 1. So yes, there will be some bid-on transaction -- we've seen reduction there. But overall, we've always been innovative and creative to find a way to mitigate this gaps. Recall that 2 years ago, Central Bank reduced the fee on electronic banking across both -- and you can see the rest ones from this bank by increasing volume. So basically, volume increases the way forward. We don't see our transaction moving to the eNaira. Yes, one we move, but it's still early days.

Yes, let me add for that. In terms of the eNaira, let's bear in mind that we live in an environment where digital literacy is very high. So if -- I mean, digital literacy is low, sorry. So what we see even in terms of the onboarding, you are not going to see so much -- we don't see so much happening immediately. And the eNaira, too, is going to come, which is so unique challenges. But however, should it begin to impact cost, it would not be the first time will come across our situation. Two years ago, Central Bank came at reduced transactional fees on different retail electronic product by an average of about 50%, 60%. Again, like Tope mentioned, the focus of the eNaira is not the high-value transaction, but the basic account, which one accounts. There is a limit of what you can do there. You can -- if you want to buy maybe an electronic item worth NGN 4,000, you can't do that with eNaira based on the limits of the transaction. So it's just -- the way we see the eNaira is something that we work over time. And until such a time when we build up scale in terms of dealing with the downside part of this year, cyber issues and cybercrimes and where we would have tested the technologies in that, yes, the blockchain is working and is [ vetted ]. I think it will still take a long time before you see substantial volume passing through there. The yield environment, yes, see, what is the outlook? I think it was same whatever it is that the market present. One thing we know is that nobody is ever promised a better tomorrow. The only thing we can do is navigate and adapt to whatever we see the market presents. We have no crystal ball looking and tell you what need the environment would be. All we'll do is that whichever the rest only goes, will play the market. So we see a situation where the yield environment is at risk for that. We know that it's a challenge for us to push around the cost. So our response will just be whatever the market presents, we will play it.

[Operator Instructions] The next question comes from Ope Ani from Coronation Asset Management.

So the last conversation that we had in -- this sometime in Q2, you mentioned that you have started repricing loans at the end of Q1. So the pass-through of this reflected in interest income for the Q2 numbers? Or are we likely to see some improvement in Q3? And then my next question is -- congrats on the reduction in cost of funds, quite laudable. So going forward, what is your view on spreads for H2? And my final question is on loan growth. So you've guided to about 10% loan growth this year, but that has been quite [indiscernible] just 2.5%. So what should we expect for H2, more aggression or should our expectations be much lower?

Okay. Thank you very much. Dennis will take on the first question. And the second one, I think we lost you, you were -- it wasn't that's audible. Then the third one is on the loan growth, where we are changing our guidance. We are still in risk. We still have another [indiscernible] to go, and we don't think there's any need to change our guidance. Dennis?

Thank you very much. On the pricing of loans, the truth is that we play this market like the MD had said repeatedly. Don't forget that as an institution, we've always drawn our strength from the large corporates. If you are dealing with the large corporate space, most of them are not a price taker. But to some extent, we are beginning to see improvements in our -- in caution in the retail space. That space again presents a different dimension as well as the dynamics as far as pricing is concern. But please be rest assured as the bank, whatever assets you give to us, we'll make sure that you get sufficient returns at the end of the year. Thank you.

Okay. Do you want to go through the second question because we didn't quite get that.

The second question was what is your view on spreads for H2?

Spread?

Yes, outlook on spreads for the bank.

Spread on what?

Your interest rates?

Oh spread on the interest rates. Okay. That's basically looking at it in terms of our net interest income, net interest margin. If you look at where it is now, again, it's coming back to the question you asked about where do we see the outlook in terms of the yield environment. You see, whatever it is, what is most important to us is efficiency? So it depends on what call we have to answer. Do we not in attempt to see that we increase the needs, begin to prove very, I mean, loan quality, we will not. If keeping the NIMs very tight and very -- I mean, now if a very narrow margin makes us sustain the low quality, that's the option we'll go for. So it's emerging business. Whatever it is, we will ensure that we don't make a loss. But we don't also compromise the loan book. We don't know what will happen tomorrow. We don't know what reforms now is expected from government. If tomorrow, we face an environment where all of a sudden we see improved flows and supply into the market, the story will change completely. The story will change completely, the loan book is going to grow. So there are so many factors that will determine that. You have to look at the availability of foreigners and you also have to consider, yes, the hawkish -- the current hawkish approach of the regulators in managing CRR. So these are concerning factors that would not allow you to really exercise the kind of pricing you exercise. So in the midst of all that, we will navigate and ensure that we maintain a decent margin.

The next question comes from Shaheen Bharwani from Frontaura Capital.

It's actually Nick Padgett with Frontaura. I have 2 questions on foreign exchange. The first is what rate do you translate your dollar assets to for balance sheet-reporting purposes? And then my second question is on the FX backlog. And to be clear, I'm just asking about for equity investors, not for fixed income investors or for importers or other trade. So I guess I'm really asking any views you have on the outlook and to set the table really the FX window for equity investors slam shut in March of 2020. And very little, if any, dollars have flown to this group, which comprise, obviously, the people on this call, since then. So while we appreciate things like your steady stream of dividends, really, they'll just go into Q, and that will be the fourth dividend in a row that just sits there and we're unable to repatriate that money back to our home countries. So that's my question on do you see -- I recognize reserves will likely go above $40 billion with the Eurobond and with the SDR allocation. But I'm just, I guess, doubtful if any of that money is ever going to go to the long-suffering equity investors? And I wonder even if the bank might consider that is Zenith might consider doing something for its shareholders as a way to actually get dollars from the dividends that you so generously pay.

Okay. Thank you very much, Shaheen. The second question, the CFO will answer the question with respect to rate of translation of our balance sheet. On the -- the availability -- the FX backlog, all we know is that CBN has been consistently selling money to the FPIs, where the equity investors fall into, Nick, okay? CBN has been selling ForEx to them. And we are not in a position to confirm the volume of sales into the market. But we know that consistently, they've been selling. That's the feedback we have there. When the Eurobonds come in and possibly the SDR, we can't confirm if the SDR is in. The aspect, if you ask me, what is the expectation? The expectation is that there will be incremental allocation because the ports is now fuller than what it used to be before. So with that be incremental allocation to clear the [indiscernible] and the backlog, my guess would be yes. But in work quantum and how long will it take, we are not able to tell. So Mukhtar, you want to answer on the rate of translation of balance sheet?

Okay. Thank you. Thank you very much. The closing rates now we use for the balance sheet as at June 30, 2021 was [ 410 ]. I believe that is what the whole banking industry or the more markets will use is a standard rate that we use, and we have disclosed these facts in the financial statements. Within the period, the average rate was 407, but the closing was at 410. So if you have a financial statement, you can check Page 112, the very last paragraph there, we have explained the details there. Thank you.

With regard to the Q, I'm just -- I guess I'm providing the feedback that while I know the Central Bank allocates dollars, none of that money is going to equity investors. It's going to fixed income investors, but it is not going to equity investors. And I think I'd probably speak on behalf of everyone on this call. We know this because we have money sitting in the Q that sat there since March of 2020. And we're using the largest custodian in Nigeria who's sub-custodian for the largest custodian in the world. So it's not like we're outside of mainstream in our experience. We have the most mainstream experience, and none of that money is flowing to equity investors. That's just the feedback I wanted to leave you with.

Okay. Thank you for that. That's noted.

I would just like to check with Ebenezer. Sir, due to time, are we able to take any questions or can we conclude, sir?

If there are more questions, we can take maybe 1 or 2.

The next question comes from [ Abdul Aziz Bakari ] from Mainstreet Capital.

So you talked about the global cost of funds and your expectations, so I would like to ask you, consider fintech [indiscernible] to increase your customer mix?

I think -- to understand the context of what you think are those and where the pool of funds are sitting, a fintech is not a bank. Therefore, fintech are not whole deposits. If fintech holding deposit is holding it in the books of the bank, either you are working as -- they are settlement bank or you are working, holding the wallet account for those who operate wallet accounts. So whatever it is they have, it is with the bank. So if this is a bank, they are not competing with you. If the flow will be going through them, but it flows go through the deposit money banks who have the settlement platform for their transaction. [indiscernible] distraction or a threat to us, you can't say, instead of you dealing with the -- if you have the wallet account of, say, fintech, instead of you having the individual accounts of the wallet holder sitting with you, the individual wallet accounts are sitting with your fintech, but in aggregate with the bank. So if you have a fintech that has NGN 1 billion and they are consolidated wallet account belonging to different wallet holders, that money is sitting with the bank, not with any fintech. So more or less, that's the concept we see that when it comes to fintech, it's a two-pronged approach for us. We are competing. We are collaborating. It depends on what side the perspective that has been presented to us.

[Operator Instructions] The next question is from Abdulrauf Bello from WSTC Financial.

Yes. Okay. So my question is on the retail banking of the group. So we all know that Zenith Bank is very strong on corporate lending at all. And based on what is on Slide 1, I could say that of all the segments, the retail banking seems to be the only segment that gained as of H1. So I just want to get a sense of what retail banking is, what is the classification of retail banking in your perspective? Just want to get [indiscernible]

Okay. Tope or Henry will answer that.

Okay. Thank you. Yes. Retail for us is a very major strategy going forward. Yes, we started that as a corporate bank. But we've always said that we have replicated or we are replicating the same leadership, the same strategy that we did on the corporate and the retail, where we expect to grow to be a leading retail bank in the industry. What are we doing? A lot is being done. Number one is, like I said before, customer onboarding, where growing our customer base. We have a lot of channels that we use on board customers from the obvious of the USSD to the Web, wallets, the agency banking, Internet banking. And of recent, we are adding more solutions. We are adding, I mean, using technology to drive these processes. WhatsApp banking was the new addition. We had it just about a week ago. Now you can open account through the WhatsApp. Then this good resolution is a major way that is helping us. We are very strong in that agency banking is good, for example, is efficiently done. Now we have our virtual assistant. We just launched that, the ZiVA. That's going to engage customers and resolve their issues even without having to call our very direct. So you can see that we are coming up with various solutions. Even on agency banking, we have grown tremendously with agents now at about 65,000 from where started from. The transactions have doubled. If you look at the income from agency in the presentation, it's increased by 50%. In addition, the MD has mentioned the fintech collaboration and driving that retail processes, all -- everything that revolves around individuals and capturing their businesses, their payments, the transactions, their lifestyle, we are there. We are also coming out with different value propositions, campaigns, promotions. These are areas they don't use before. But we are there now because we understand that's what the market wants, the costs across the students, the work class, the retail loans of selling to the large corporate customers. And the sky is the limits. We can assure you that we'll continue to do better. Even wallets also, where using wallet adoption for those that are not financially included, because without BVN, you can open accounts wallets. That is also driving our retail penetration. So that's what we're doing. I can assure you that the numbers will continue to grow. As you can see, contribution of retail segment to gross revenue to PBT, all increased significantly in the last -- in the presentation for the half year. So thank you very much.

Henry?

All right. Thank you, MD. Just also to add because Tope has quite extensively explained this how we're scaling on the retail. Part of your question was classification, what is our classification for retail and all that. But I'd like to tell you that whatever we are doing on retail, we are doing as much in the other space in the corporates. I [indiscernible] other costs to the balance sheet, it was to the P&L. So beyond the channels, ATM, USSD, agency banking, POS, Internet banking, and the mobile platforms that we have, let me say, in addition to all this, we have the global pay. We have the corporate Internet banking, which are very robust channels to support our corporate business. So we have not let the corporates aside, as a matter of fact, we are using retail to create channels to support the corporates. So the growth you see in the retail as smart growth, you should also expect to see in the corporate moving forward. Thank you.

All Right. Thank you very much. Just be rest assured that it's a case of us using our corporate to flank our retail initiative.

The final question that we can take is from Toyosi Oni from Renaissance Capital.

I have a few questions. So I hope you're going to [indiscernible] you spare me a bit more time to run through my questions. As I had indicated on the call much earlier. So the first question I have is on asset quality. And it's just, I guess, following up on some of the questions that have been asked earlier in relation to IFRS 9. So your Stage 3 loans actually increased 26% year-to-date. I just wanted to ask what was driving that because that's the classification. So I just wanted to ask away from the macro drivers, which specific loans went bad during the period? The next set of questions I have is on your trading gains. So in December 2020, you reported swap contracts of about NGN 440 billion. In the June report that was recently published, this number doesn't come up again. And I just wanted to ask if this was the case, shouldn't there be a reversal of some sort of the revaluation gains that were booked on that NGN 440 billion in swaps last year? Again, in the reports, we see that the table that shows your currency categorization do not have information. So if we compute this mannerly on my numbers, you might have different numbers. I've got a short position of NGN 236 billion, which represents about 500 -- a short position of $574 million. I just wanted to ask how we could please reconcile this to the NGN 12 billion in revaluation gains that you booked in this reporting quarter? And then just going forward, how do you see your derivative of revolving yields are declining forward rates are also weakening. What happens when the swaps expire? I think you've got about NGN 66 billion of that on your balance sheet? And then just on your treasury bills held at fair value [indiscernible], you've got an amount of NGN 725 billion. How much of this is mark-to-market? The next set of questions I have is on your net -- your noninterest revenue. So you've got other operating income. You've got about dividend income from subsidiaries, which was NGN 16.4 billion. I just wanted to get a sense of which subsidiary this came from? And on that line also, there was a 1.5x year-on-year jump in your account maintenance fees. I understand that you onboarded a lot of customers in this period versus that period, but it's quite a significant jump. And seeing the slowdown in transactional activities, I mean, there's recovery, but it's not been that significant. Why was there such a jump on that line? My next question is on your tax rate. The tax rate was 5% in your second quarter. I just wanted to see what drove this? And then just looking forward, the tax holidays that the [ FG ] puts on treasury instruments are expiring soon. If these are not renewed, what's going to be your effective tax rate in 2022? Then my last set of questions is on your digital strategy, which you've actually spoken very extensively about. On your transactional fees, especially on agency banking, we've seen a huge decline in take rates giving the -- and by take rates, I mean the fee you charge your merchant discount rate, that fee that you charge on the agency banking. I just wanted to ask, we've seen a lot of competition in that space from both fintechs and telcos, and these rates have been a -- it's almost [indiscernible] risk to 0. How do you see that evolving? And then how many digitally active customers do you have? And how do you define a digitally active customer? And I really hope my questions will be answered.

Toyosi, to start, which we didn't hear you until towards the end. And it looks like you asked like about 50 questions in all, and out of which we could only hear you asked about why does it jump in account maintenance. Asking me why there's a jump in account maintenance, you are asking me why I go better. I should get better by improvement in that comment, just growth in business. That's what it is on treasury bill. If a decision is taken, it's an industrial position. Whatever the government contracts -- it doesn't apply to Zenith's loan. All of us, we're aggressive as an industry. Digital strategy, I can't comment [indiscernible] tell you what my strategies are. All I would tell you is we are driving the digital campaign with a lot of intensity. And you can see how that is resonating in the figures. I don't know if my colleague speaks to the other questions because -- subsidiary. Okay. Dividend from subsidiaries, Mukhtar. For those who have the other questions...

Perhaps the banking competition of ours.

Okay. Let's, Mukhtar [indiscernible] and others and answer the other questions.

Okay. Thank you very much, Toyosi, for your questions. One, you asked about the asset quality on Stage 2 loans, what caused the additional impairment charge. I think we've explained that it's not because of deterioration in the loans, it's because we have to project based on the macros and other parameters, the expected cash flows from the customers as parameters and operating environment are changing the expected cash flows, our recoverable amount in the model reduces. Therefore, you have to provide more. The other way around, if the cash flow is increasing based on your forecast, which is also driven by the macros and other parameters, then you have to take less. So if you see us taking less impairment, that is what is driving the sales, taking more impairment, that is what is driving it. That's number one. Number two, you made mention of trading gains which has always been a strength for us. I don't know if you have had time to look at our notes on the trading gains. That's where I think -- you also made mention of our derivative books, we didn't show this strong position. I'm not too sure you looked at the Page 110 of the financial statements, which we have clearly mentioned we have a swap position with counterparties, phenomenal amount of NGN 1.6 billion, and that is NGN 682 billion. The NGN 682 billion is receivable in treasury bills, which we have as part of our treasury bills assets, and we have to swap that with $1.6 billion on maturity. So on maturity of these assets, we returned a naira assets in the form of treasury bills to their various counterparties, and we get a dollar assets. We get a dollar cash from the various counterparty of NGN $1.6 billion. Then if you look at that note very well, the standard IFRS, what it requires you to do in that note is to show how we are managing our FX exposure. So what we have presented there is to say, this is our asset in various currencies. And this is the liability that is generating the asset, and this is what we are managing. So I don't think there is any disclosure that is missing from that within the period. And then when you go back to the derivative books, you will see that the operating environment, i.e., the yield environment has also affected the derivative moves in terms of the valuation and in terms of the income. So you don't see a significant jump in those line of income within the period. If you check that very well. I can refer you to the notes on Page 146. Note 11, you will see the various derivative books. In all, we have a derivative instruments, swaps and other things totaling about NGN 3 billion, which you will also see as we have appropriately disclosed them in our financial statements. So if you check Page 151, you would also see that disclosure on debt. Noninterest revenue dividend from subsidiaries. Within the period, we have received dividend from Zenith Ghana and dividend from Zenith Bank U.K. We have also received dividend from Zenith Pension. These are the 3 subsidiaries that have given us dividend within the period. You also mentioned of effective tax rates, when the regulation changes? You and I, we are not very sure whether the regulation is going to change, although the expiry date is end of the year, we want to see government's budget proposal and the finance act that they will come up with. But if you look at our tax reconciliation for the various notes on part, you would realize that we have utilized deferred tax assets. We have utilized deferred tax asset that is almost NGN 25 billion. Those assets that can easily come in during the time that all these dispensations will cease to help us manage our effective tax rate. That has been a strategy that we have adopted from day 1, very long-term tax management strategy that once the dispensation ends, it is going to come handy for us to manage our effective tax rate. So far, those are the questions that I have been able to hear. Thank you very much.

All right.

Due to time that is all that we can take. Ebenezer, can I hand back to you for closing comments?

Okay. So thank you very much, ladies and gentlemen, for the opportunity for us to throw more light into our performance and also give you insights on how we will possibly close the year. I can assure you that we will continue to ride the storms we see in that markets, and we will ensure that we keep interrogating the market to find opportunities and we have to keep rethinking and reimagining our business model in order for us to position ourselves for continued growth and very -- and offer differential and competitive advantage in the market. We believe strongly that how the COVID vaccination campaign to see will help global economy to recover effectively and for the business to come back to normalcy. But whatever it is, be rest assure that we'll continue to drive opportunities we see in very specific niche markets, niche advantages. And we still believe that the retail banking, the digital banking will continue to be an area that we will continue to scale. We are making the right investment to upscale our digital and electronic and ICT platform to give us the enterprise architecture that is required to support our massive retail and digital campaign. So all said, we expect that by the end of the year, we should be able to post a decently respectable figure, and we don't think there's any need for us to review any of our guidance downwards. All we see is that the guidance we see, wherever we are with the guidance, no matter how far we are from the guidance, it defines -- it is also defined the required run rates expected of us to close the year effectively. So we thank you very much, and urge everyone to continue to stay safe and be healthy. Thank you.

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