Lion Finance Group PLC

Welcome, everybody, to Bank of Georgia Group PLC's earnings call. Thank you all for joining. Today, we release and are presenting the group's consolidated financial results for the second quarter and the first half of 2024. As always, I'm joined on this call by the group's CEO, Archil Katsuchiladze. And we'll start, as always, again, with the presentation, and then we'll move on to the Q&A session. For your information, this call is being recorded. And with that, I'll hand over to Archil.

Thank you for being on the call. We are seeing the numbers that are usual numbers, pretty high, which is surprising given the fact that we are at the last decade of August, which basically means that you should be on vacation. So I hope you did get a little bit of rest and vacation. And with that, let me dive into the numbers and look at also the numbers that we have, which are pretty decent. So we have return on equity of 28% with cost income of 35.6, which is in combination of a media bank. On a standalone basis, we are just shy of 30% for the Georgian operation. Profit, net profit consolidated is 430 million, although ECL chart, which is related to the acquisition and does not reflect the run rate. If you add that, you get 480 million live, which is more or less what we're looking at in terms of the profitability. So based on that and pretty strong capital numbers, uh we the board uh recommended uh dividend per share of 338 which is about 95 pounds but it will be determined the exchange rate will be determined determined in september and the buyback of 77 million lobby with the current prices should be around half a million shares. So with that, let me have a quick review of the macro economies of two countries, Georgia and Armenia. The format is slightly changed because this is the first time that we are presenting on the income statement side the consolidated company. So hence the macro as well. We are presenting both countries. Both countries are doing very well. In fact, Georgia has delivered 9.5% second quarter real growth, which is extraordinary. And we've upgraded the expectation for 2024 to 5% for next year, which, as we can see from the 2021, which was slightly below as a result of the lower base in 2020, but then 2022 was 11%, 7.5% last year and expected 7% this year. Armenia, in a similar way, had very strong numbers as well. Second quarter, 6.4%. Real growth and expected quarter full year is 6% and 5.3% next year. We have seen the inflation coming down. As you can see, CPI, the latest number is 1.8% in Georgia and 1.4% in Armenia. And the financing rates have come down from 11% down to 18% in case of Georgia and 7.75% in case of Armenia. So very similar trends in both geographies and very similar economies in many ways. As you can see, because of very strong economic growth in both countries, we have seen mid-teens and high-teens wage inflation in nominal terms and in real terms pretty high as well, in Georgia as well as in Armenia. This is relevant as we discussed the cost inflation that we have seen in this quarter. So we see that as the inflation, CPI inflation comes down, also the bridge inflation is coming down. Real still remains high in the case of Georgia of about 13%. Having said that, I think the trend is downwards, and we should see it coming down to high single digit or low double digit. In Armenia, it's already about 5.4%. Also, what we would like to present here in both cases, I mean, in Georgia, is the main source of external sector inflows and outflows, which trend-wise, we are seeing very decent numbers. This is not the full current account balance, but current account balance are usually published a little bit with delay, so we'll be presenting those in the appendices of the larger presentation, but In terms of seeing how the exports as well as the net transfers and what it's doing, it's a good indication to present this. Also, something that has become a bigger and bigger part over the last few years of the hard currency inflows is the services. And on the last page, as you can see, we have presented tourism there. But on this page, you can see that the other parts, especially transport and IT, have become bigger contributors overall to the economy. IT, for example, in 2023, in case of Georgia, you can see that it's about $890 million of export revenues that are generated in Armenia is even more, although Armenia itself is about 20% smaller in terms of the population and the economy, but the IT is a larger part of the economy. As well as when we see the other, also there the education, especially the university education, is becoming a bigger part of the economy in Georgia as well as in Armenia. So I think the trends here are decent and flat and increasing in some cases. We have seen Armenian drum getting stronger by 4.1% from the beginning of the year, while Lari has stabilized, so it devalued slightly in May as we had some demonstrations and some volatility in the currency, but it came back to 2.7 per one U.S. dollar. So from the beginning of the year, it's flat. And as you can see, the real effective exchange rate over the last 10 years has been flattish to appreciating in case of Georgia, slightly more so in case of Armenia, although in both countries, we are seeing good inflows and credit on appreciation. which is something that we have seen now, especially in July. We have seen it strengthen it to 0.68, but then the national banks started to buy it as well lately in end of July and beginning of August. So we are seeing good numbers in terms of the gross reserves and net reserves. The first quarter decreased, slight decrease, was a result of the repayment of some of the foreign debt, as well as we bought some in the first quarter, some hard currency to pay for the acquisition, as well as then in the second quarter, National Bank intervened to support Lari because of the volatility, but then he has started to buy back in July and August. In Armenia as well, we have pretty strong numbers. So from historic perspective, the growth as well as net reserves are pretty strong. On the fiscal side and the government debt side, we see that Georgia is below 40%. Armenia is about 50%. And fiscal balance also, in the case of Georgia, is 2.5%. Currently running at that rate, although it's... We are ahead of the budget in terms of the revenue collection there. In Armenia, the fiscal balance is planned slightly more in terms of the deficit because of very ambitious projects in the infrastructure, especially on the roadside, which is very encouraging and very good for the country medium to long term. As you can see on the banking sector, the growth is pretty healthy around, in case of Georgia, 17.8%, and 19% in case of Armenia. De-dollarization is at very good levels, down from mid-65s about eight, nine years ago, down to 45 and 33. Armenia performing even better on this, and Georgia has stabilized at about 45%, and the quality of loans in the whole sector is pretty healthy in both cases. Here, we would like to underline that Georgia has has a gap in terms of the long-term trend of banking assets to GDP. I think we would be at very healthy levels between 70 and 80. We're at 65 right now, so there's more to grow there. But in case of Armenia, it's even more so. as you can see banking debt to gdp is 53 12 points behind georgia which represents more potential for growth in armenia now few few things about uh the uh about the the numbers uh about the strategic um direction and then uh then we'll go to the to the uh revenue and uh expansion numbers So we are developing our retail and our application for the legal entities. We have added three new languages to our internal app, which is Armenian, Azeri, and Turkish. Azeri and Turkish are obviously very close to each other. About 70% of words are similar, but still very different language. So basically we added these three languages because they are minorities. in Georgia, which Armenian and Azeri specifically, which I think will enjoy our services even more in their own languages because some of them have difficulty in Georgian or English. So that should allow us to basically cover better some of the minorities in the country. um in terms of the number of clients our growth is still impressive although our overall penetration in terms of the coverage of the population is still pretty good but overall numbers are growing at 11.8 as you can see in terms of digital usage is growing by 20 so uh one point uh 1 million 469 uh million users um and in terms of daily users it's it's more than 700 000 as you can see and it's growing so engagement is growing even more than the usage and you're just growing overall um better than the overall client numbers on the legal side as well we have seen 20% more users of our digital channels, be it the internet application for the legal entities or the mobile application. And in terms of the monthly active users, we have 26% growth. So that means the higher proportion of overall clients are using our digital channels. We've seen We've seen more and more of our retail sales being done through digital channels. As you know, a few years ago, we were looking at the ratio of transactions being done digitally. So now almost all transactions in 99.2% are done in non-branches, about 70% done. In digital channels, about 28% in ATMs and self-service, and also that combined is 99.2%. So 0.8% are down in the branches, and that number is decreasing even further. But what we are concentrating on right now is selling more products. in digitally and that number used to be in meetings a couple years ago as you can see and we have achieved 57 in terms of retail so that that's increasing in a very healthy way um and specifically in terms of loans uh retail loans about 80 percent of all uh all sales are are done uh from digitally um mortgages are predominantly still still issued uh full branches at least part of the process um in terms of the acquiring business payments acquiring is a very strong franchise that we have and uh and the strong growth is continued there with 35 increasing volumes um year-on-year and uh quarter over quarter is there's some seasonality there but 17 so year-on-year is 35 percent market share is very strong 56.8 percent up by percentage points year-on-year On the issuing side, so that's number of people using our cards actively, so monthly active users of our card usage in terms of number of people, not number of cards, is up by 18.7%, also a very good increase. So in terms of the franchise strength and growth, very good numbers there. um something that makes me very happy um is our nps number so you remember five six years ago we started focusing on this uh and have managed to increase it from the lowest of 27 in fact six years ago to 71 and 71 is a new historic high which i would like to thank all uh bank of georgia stuff for um focusing on this religiously and basically increasing the quote where it's 70%. 70% is very high showing for any universal bank. That may or may not be sustainable. We'll be happy between 60 and 70. So we don't aim to go above 100. but rather keep it at these levels. I highlight that because at some point, cost-wise, it becomes too expensive to further grow it. But 60 to 70 is a very healthy level of showing for any universal buy-in. In Armenia, as you can see, the growth rates for individual clients are very good. The number of clients have grown by 13.4% and digital users by 43%. and daily users by 55 so here as well you can see that 57 of of customers are now active users of the mouth of the application and there's plenty of upside here so there's plenty of upside in overall the retail customers monthly active users of the services so we expect that a lot of growth will come here but it will take time because there's more product development and more uh overall uh user experience improvements and other things that that will be introduced over time and and the teams are working uh together uh and this will take time but i think there's plenty of upside here now in terms of the numbers um the second quota numbers include uh ameriabank and therefore some of the growth numbers are basically uh very high so i'll talk about the group but i'll also talk about the georgia operations so that you can see what uh like for like comparison as well so it's not lost in the overall big numbers so the revenue is up by 42 percent year on year uh but in terms of georgia financial services um it's up by 4.8 4.8 percent now here What's important to say is that the interest is up by 14.8% from 382 to 438. So the core interest is up. But also then some of the other fee and commission income numbers, which are core numbers, have grown significantly as well so net fee and commission numbers are up by 37 so 88 to 120 so you remember a few slides ago i discussed the acquiring business and how the volumes were drawn at 35 and so forth that's the main driver uh net uh effects revenue has come from 88 to 99 So that's about 12% growth. And the only decrease that we see is in other income, which predominantly was based on the gain on the real estate sale that we had one year ago in the second quarter of 2023. So if you excluded that, you would have 17% increase in the non-interest income, which is very strong. Although the non-interest income seems like 10% reduction and the overall revenue number is only 4.8%, the core components of it have grown in a very healthy manner, so we are quite happy about it. In terms of consolidation, you can see the big numbers as well. I'm not going to dwell on that. In terms of expenses as well, those are also big numbers with 88% and 52%. Here as well, although Georgia numbers have grown as well with 20 plus percent here, we would still, in terms of the cost income basis, we would still be shy of 30%, and in combination, we are at 35 here. um so costs and and containment of cost growth is is one of the focus areas we basically have experienced this situation where the business has grown significantly over the last three years And we've done a little bit of a catch-up of building the infrastructure as well as the people and staffing to make sure that the services are delivered at a high quality. So we've seen some staff growth, but also the staff wage inflation has been significant. Having said that, I think we are seeing the trending down, as I explained in the macro section. And we should have, we should be close, by the end of the year, we should be close to the long-term ratios, which should probably be high single-digit or low double-digit. So that should be in line with our business goals. In terms of the loan portfolio, growth was 64% again and 56 here. But if you look at the Georgian side, it was 23%. Constant currency was 19.6. So very strong growth. We are very happy with it. Quarterly growth was also good. Now on the Armenian side, year on year, when you look at it, it was 36. But in terms of the constant currency was 26.6%. So a very strong growth day as well. Plus Armenian drama got stronger versus Lari dollar. So that caused the Lari translated number to be even higher. So on the deposit side as well, we are seeing very strong growth in both geographies. So very good growth, partly reflecting strong growth in the economy, in both economies, but also leading franchises in both cases. So net interest margin 6.3, almost flat, which in Georgian case was decreased slightly as a result of the tier one 300 million dollar that we raised in the beginning of the quarter and we repaid the old one at the end of the quarter so there's some negative carry about 10 basis points we should uh help us in the third quarter and going forward um and then in armenian case it was slightly more so it balanced it out at around six point uh six point three percent uh in terms of cost of risk We have an ECL charge, which when you do the acquisition, those of you that have spent a lot of time understanding some of the complicated IFRS rules will know that when you do the acquisition of financial institution, the fair value of the loan book is added as if you issued that loan fresh, although there's some charges of stage three loans already has deducted in the fair value. And then you apply the ECR to the whole portfolio, which in this case is about 73 basis points for all of Armenian loans. uh book although we've not seen any deterioration there at all uh or whatever was was separate so basically if we didn't have that ecl chart our cost of risk would be um 0.4 percent uh although you're seeing the numbers at 1.1 percent um and half year would be uh similar as well here uh the uh mpl coverage slightly reduced but no major movement there either and uh we we disclose separately the two uh separately because consolidation is also affected by ecl so i think it's it makes more sense to look at it separately uh at least next three quarters and then it somehow benefits it down um so profit as well uh we saw that it's up by 11 year on year uh but uh if you included the sale charge that i've discussed quite a bit now uh it would be 480 which is um comfortably higher than the run rate of 450 that I mentioned on a previous call. So, you know, 28% return on equity, but if you added the ECL, it would be a 31. So 28 is a pretty good number, but 31 is reflective of the, more of the core of what we are looking at. So in both cases, both numbers are pretty good. So the capital ratios are strong in Georgia and in Armenia as well, especially on core tier one. And basically, as I mentioned on the previous quarter result and during the acquisition, although Armenia is highly profitable, we expect that profitability to be deployed to finance high growth in Armenia. And here as well, because we have higher ratios and buffers for the Kortia one, you see that there's capacity to add Tier 1 or Tier 2 instruments and further finance growth in Armenia. Georgia numbers are also very high, but given the elections and the volatility in the region, I think it's good to have high buffers. Liquidity is high and we like it that way. And probably at some point close to the end of the year, we may look at slightly reducing it. um all of this basically means that dividend announcement um was 3.38 which 10 growth on last year and very comfortable for our numbers uh and buyback of 73 percent again this is uh uh four half year uh only and then second half year we'll we'll do in spring of next year uh you can see that the numbers over the last uh three and a half years have been reducing of shares outstanding um that's a result of of our buybacks that we've started three years ago as a part of the capital repatriation so the number of shares are decreasing so i will stop here and open the flow for your questions

If you'd like to ask questions, please use the raise hand feature in Zoom as well as the Q&A chat if you prefer to type your questions. And we have the first question from Robert Sage, Fuel Hunt.