Lion Finance Group PLC

Welcome everybody to Bank of Georgia Group PLC's second quarter and the first half of 2020 Financial Results Conference call. My name is Natia Kalandari-Svili. I'm Head of Investor Relations at Bank of Georgia and today I'll be moderating the call. Please be advised that the call is being recorded. Today our call will be organized in two parts. During the first part, Archil Gajiciladze, Bank of Georgia's CEO, will be presenting financial results for the second quarter. And during the second part, you'll be able to ask questions. Now I'll hand over to Artil. Artil, please go ahead.

Thank you, Natia. Welcome everybody to our first half earnings call. Perhaps I would like to touch on high level what is going on in terms of our COVID-19 impact on the country and overall on the bank and then nation, few of the facts on the results. So in terms of the global pandemic, as you all know, it has affected everybody quite significantly and had a significant impact on Georgia as well. But I have to say that the Georgian government has handled this pandemic extremely Um, uh, well, um, they, they've started with a lockdown early on with, uh, with flights with China being banned by end of February. And then later on, um, uh, have taken, um, measures, uh, in terms of the travel and then limiting some of the. some of the movement and so forth. So with that, it did have a significant impact on the economy, especially April was a lockdown month and that in our numbers, we saw significant reduction of the economic activity. But because the government has taken early actions, it was able to reopen the economy early on and really the The amount of infected as well as the deceased numbers are extremely low and we are one of the countries, probably in top 20 countries in terms of the best management of this pandemic. And it continues in a similar way, although the lockdown is no longer in force. Having said that, the international travel remains rather limited. and therefore we don't expect much international tourists for the end of the year. The government has taken significant actions in terms of supporting the economy. The comprehensive list is included in our presentation, is offered there, and I'm ready to answer any questions on that side. What I can say is that as a result of this early lockdown and the recovery that we have been seeing, and the opening of the economy earlier than some of the other countries in the region, as well as actions taken by the government in terms of the economic package that has been put in place, as well as the National Bank's swift movement in terms of reducing the capital requirements and providing Georgian lottery to the Georgian economies through the banks. all of that has resulted in a pretty rapid recovery. And that recovery is a bit faster than we expected, although it's not the full recovery yet. So in terms of macroeconomic environment, what we are seeing is that the April, as mentioned, has been a low point of the economic activity. Although May and June we have seen a significant recovery in terms of the economic activity. So some of the metrics that we are looking at are the VAT turnover that is published by the Minister of Finance, as well as the payments that we see in our network and our net fee and commission. income business that led fee and commission as well, which shows an economic activity. And in all of those, we have seen a significant recovery from the low point of in the fee business, minus 48% in April, but minus 10% in June and similar type of recoveries have happened in the VAT turnover as well and the GDP numbers as well. In July, these numbers in terms of the economic activity are not yet published by the Ministry of Finance, but we expect and what we are seeing on our business, we expect further improvement in July versus June. and that should remain for the rest of the year. What we have seen also is that tourism, as we mentioned, international tourism is limited, although the second most important source of foreign currency, which is remittances, have held up remarkably well. In fact, June year-on-year was up 17%, And July number, which was just published, is up 20%, which is remarkable. In fact, July numbers are all-time high for the remittances, and that is definitely supporting the overall economy as well as the currency. And talking of currency, in the second quarter, we saw appreciation by 7% of lottery versus U.S. dollar. And that was partly due to the strong remittances, but also supported by the National Bank of Georgia, which interfered in a number of times to reduce the perception of risk that the local market had in terms of the currency. Now, I would like to touch on a number of points in terms of the Bank of Georgia specifically. The balance sheet has remained very strong, broadly stable for the second quarter. We saw a slight reduction in terms of nominal terms, but that was predominantly due to the strengthening of LARI. When you take that out, you're looking at a flat long book in the second quarter. In terms of the operating income, we saw some reduction in net and interest income, net interest income, as well as net fee and commission income. But on a six-month basis, it's probably stable. What's interesting is that our net fee and commission declined significantly in April. more than the overall market. The reason for that is that a significant part of our franchise, the branches, which are express branches, and some of them are present at the entrances of Metro Station, about 60 of those. Given the full lockdown, the transport was fully closed, including those branches. And the other express branches that we had outside also were not meant, but only the electronic part with the ATMs and the express pay terminals were available. So we could say that half of our branches, roughly speaking, or half of our capacity was shut down in April. The good news there is that after opening it up, we had a strong comeback and we are seeing it in may and june as as i mentioned already but also july and and current trading is is reflective of that uh strong comeback vis-a-vis our our retail presence there um in terms of the um operating expenses uh we were uh for the half year we were up by uh by 10.9 percent uh and for the second quarter we were up by six point uh seven percent The increase is predominantly due to the investments that we have kept in the IT as well as somewhat in marketing as well. But more importantly, some of the cost cutting and optimization measures that we have taken in the second quarter will be fully reflected in the third and fourth quarter. So all in all, that will result roughly to flat cost structure on the operating expense side for the year. So let me reiterate that one. So what we are seeing for first half, we are seeing the operating expenses increasing by 10.9%. For the full year, we are expecting roughly flat cost structure vis-a-vis the last year. So you'll see some of the cost saving coming in into the third and fourth quarter. In terms of the net interest margin, we saw a significant reduction. That significant reduction was basically due to what some call a perfect storm, basically. I will list some of the things that have affected it. On one side, we saw large costs increasing significantly in the beginning of the lockdown period. That has been normalized since. And we are net borrowers of Lari from the National Bank. At the same time, US LIBOR dropping significantly is a negative for us because we are the net savers of US dollars and we get less interest income on mandatory reserves. That's there to stay problem. High liquidity, we were running extremely high liquidity for the quarter. Um, and that was partly due to, uh, two things. One is that, uh, we had to re, uh, we repaid, uh, a 500 million lottery, uh, bond on the 1st of June. And the second is, is the conservative approach. So as we, uh, we are entering and in fact, experiencing or going through uncertain times, we chose to, to run higher liquidity than otherwise we would. So those two combined meant that, uh, what you saw by the end of june uh the lcr ratio uh running at 135 percent is is really uh the the um the lower point throughout the quarter we were actually running uh much higher liquidity throughout the quarter including the repayment of 500 million larry bond and last but not least uh is that whenever there's less lending, less lending activity, there's less turnover in the consumer and shorter-term loans, and that means less net interest margin as some of the fees that are spread over the life of the period do not get amortized earlier than the reminder of the loan. So all of this combined makes that our net interest margin For the second quarter was 4.2, which was quite low. We are currently running at 30 basis points higher than that. In fact, a little bit higher than that. So four and a half or a little higher than that. And we expect that to increase further a bit early to say, but 20 plus basis points probably going closer to the end of the year. On that side, in terms of the quality of the loan book, we saw that our NPL ratios increased from 2.1% to 2.7%, and that decreased the coverage ratios, but the coverage ratios were artificially increased because we saw large provisioning that we made in the first quarter of this year, but the MPLs have not been fully reflected yet by the end of the first quarter since you saw that natural development. Basically, there'll probably be some uptick further on, on the retail side, and that remains to be seen how that will develop. All in all, when we reviewed and some of the processes ongoing in terms of the corporate credit, in terms of the SME and solo, all of these portfolios are demonstrating stronger than expected credit quality. On the retail side, the work is ongoing and a lot will be shown closer to the end of the year. But so far, there are some encouraging signs. So all in all, I would say that we are adequately provisioned so that ECL provision that we put in place in the first quarter seems to be well covering the expected losses so far. A lot will probably also depend on the next year and how tourism comes back next year, which we expect to kick in from the end of spring, beginning of summer. Regardless of how COVID develops, there will probably be some comeback in tourism. If we overcome COVID-19 stronger, then obviously there will be a strong rebound in tourists. we are basically expecting some comeback of tourists from the spring of next year. So all in all, I would, yes, on a couple other points. So we are running the capital ratios. There were a lot of questions in the first quarter, partly due to the strengthening of Lari and partly due to the internal capital generation. Quarter one moved from 8.3 to 9.9. And other ratios are strong as well, 12.7 and 17.4. So total capital ratios and the core tier one and tier one ratios are all strong. And unless there's significant changes that happen in the environment, we expect that to continue in terms of internal generation, building up the capital that we need. So the quarter ended with the return on equity of 21.8%, which is closer to our normal levels, although I have to say that it was partly due to our operating income being less than our normal times, but our cost... cost of risk compensating that, again due to the fact that we have provisioned adequately in the first quarter of this year. Going forward, we see increased concentration on our digitalization. Our quarter has demonstrated that we had even further increase of the ratio of number of mobile transactions, uh, nominally increasing, but as a ratio of total increasing, uh, even more dramatically. We have been, uh, named by the global finance, uh, just, uh, global finance magazine just one week ago is the best consumer digital bank, um, in Georgia. Um, overall we are, um, also the, the independent third party, uh, market research have, have reconfirmed our, uh, most trusted, um, uh, bank. in Georgia in June and we are also the leading retail depositor in the country. All in all, 96% of our transactions are digital. It used to be 93% about a year ago. We are investing a lot in terms of digital capability and we intend to maintain our cutting cutting edge on that side to maintain the technological development and further at all times. So with that, I will end the first part and open up for the questions. Just one last note is that the strategic objectives and the guidance of 20 plus percent return on equity and 15% loan growth medium term remains intact. And I think we believe that with the worst being over, we will very soon, if not already, come back to these targets. So with that, I would like to open for questions. Natia, could you please?

Thank you, Archil. Now we can move to Q&A session. Those participants who are connected via webinar can use the raise hand feature at the bottom of the screen to ask question. And those who are connected via phone, you can press star nine to ask question. We already have one question from the phone. Please introduce yourself and ask the question.