Lion Finance Group PLC

Welcome, everybody, to Bank of Georgia Group PLC's second quarter and the first half of 2021 Financial Results Conference call. My name is Natia Galanderishvili. I'm Head of Investor Relations at Bank of Georgia, and today I'll be moderating the call. Please be advised that today's call is being reported. Our call today will be organized in two parts. During the first part, our Chilgachi Chiladze, Bank of Georgia's CEO, will be presenting financial results overview for the second quarter. and during the second half, you'll be able to ask questions as part of Q&A session. With that, I'll hand over to Archil. Archil, please go ahead.

Hello and welcome to our second quarter call and half-year results call as well. I will be going through a presentation this time, and we will go through a few slides on macro, then a few slides of our operating performance Stoyan Bumbalov – UKRI BAS, versus our strategy and then we'll discuss some of the numbers and after that we'll go into Q amp a. Stoyan Bumbalov – UKRI BAS, So we start in fact with with the pandemic, because that is. Stoyan Bumbalov – UKRI BAS, Something that is on our minds and the whole world is looking at it, and in fact we are experiencing a significant wave on in. similar to the way that we experience at the end of the year, with one difference though, that although the numbers are as high, the vaccine availability is good. And in fact, our citizens have a choice of getting vaccinated with Pfizer or different types of vaccines. And the vaccination pickup is significant. And if it continues this way, and this has been over the last couple of weeks, in fact, we should have about half of our adult population vaccinated by the end of September. 46%, in fact, at least one dose. And then by the end of the year, the government is targeting 60 plus percent vaccination rate, which should be achievable. So while we are going through this and there are some limitations, in fact, so restaurants are closing at 11 p.m. instead of midnight. There's two weeks of public transportation limitations. There are some limitations, but the government is committed not to close the economy down as the vaccines are widely available. And there are some some rules to work with it. In terms of the economic rebound, we have really been seeing a significant rebound versus the 2020. But given the fact that 2020 was a difficult year in the low base, we also are competing the numbers to 2019. And as you can see on the slide here, the GDP growth was 12.7% in first half of the year, which was mostly in fact in the, or all of it in the second half of that half, so the second quarter, versus 2019 for the half year period, that was up by 5.7%. And that is reflected in many other things that will follow after that. So this is predominantly driven by good numbers in remittances as well as other things, but remittances have stayed strong throughout of 2020. And also 21 has surprised as well, as you can see the monthly numbers are very impressive. I mean, the current numbers versus last year, but also versus 2019, the numbers are up by 30 to 40%. in US dollar terms that is so this is a significant growth. Exports have also overcome the 2019 level and are growing strongly in July numbers that came in also the exports were up by 20%. And versus last year, it's up by 40 or so. imports have picked up from last year, but versus 2019, they're flattish, with June number being slightly up. overall basically the trade deficit this is closer to 2019 levels uh and the tourists started to pick up significantly and we measure it as a percentage in terms of the uh in terms of the income that the country is getting versus uh versus the 2019 level which was a peak um and it's a month by month uh trajectory but july was a very encouraging number where where 51 the estimates by the stats bureau was that uh geostat was that um it's about 50 of uh of the income that we we got two years ago in july that will be somewhat affected short term by kovit but uh but the trajectory is a pretty fast recovery which is very encouraging in fact um georgia is experiencing a relatively high inflation similar to a lot of international peers and there's an inflation wave georgia has it slightly higher than some of the other other countries in the region but that to curb the inflation the national bank has raised the refinancing rate three times now over the last few months, up to 10%, which is very high for Georgian reality. But there was definitely a welcome news to curb the inflation, which is running at 11.9%. That has caused some strengthening of Georgian Lari, an appreciation which we were expecting, in fact, because Georgian Lari was oversold over the last few years. consistently when you look at the real effective exchange rate. So that is also welcome news. The gross international reserves are at their peak levels over the last few quarters at close to $4 billion. And National Bank has not really been selling the reserves because large has been strengthening and did not require any intervention. Alongside all the positives that I described, a lot of international players, including the IMF and World Bank and then locally the National Bank of Georgia, have all upgraded the forecasts for 2021 real economic growth that we are expecting. As a reminder, it used to be around 5%, so let's say 4% to 5.5% for most of the predictors, and the IMF have upgraded that to 7.7%. but the National Bank of Georgia is more positive with 8.5%, and Algonquin Taggart agrees with National Bank and has our prediction slightly higher at 8.6%. And let us remind you that our expectation was 7% earlier on, which seemed much more positive than most of the people expected. And that 8.6% takes into account the current risks, and we believe there's some upside there as well. And let's see how that all unfolds. Now, a few words on the operational performance alongside our strategy. So we, as a bank, we can, in terms of the overview, we are two-thirds retail bank, basically one-third corporate bank. And retail is comprising of our mass retail franchise, as well as our premium retail, which is Solo and MSME. Our payment business is living on the market, and we have more than 50% acquiring business in our POS terminals when you measure it by all the payments done in the POS terminals in Georgia. We have 8.5 million transactions going per month through our mobile app, and through all the transactions that we have, more than 96% are done digitally. And in terms of the strength of our retail banking franchise, we have good deposit market share around 40%, 38% market chain in terms of the loans to individuals. And we are ranked as the most trusted and top of mind bank in Georgia with consistent good growth in our MPS numbers. And I'll dive into it later on. And we are doing it all by and at the same time focused on profitability with 20 plus percent guidance that we provide and I'll cover that. This is just a reminder of what our strategy is focused on mobile app payments and loyalty is strengthened by customers, especially employee empowerment that drive and strong franchise. All of this is being done as we are delivering very good profitability. So a few words on some of the measures according to our strategy, or at least some of the things that we are describing here are our focus. So how are we doing on our strategic initiatives? We have in the mobile bank and iBank active users, we have grown by 19.3% during the year. And what's more important is that people are using our mobile bank more actively. So the current users are using it even more. So that's why the number of transactions have grown, have gone up by 84% year over year. 40% of our active users are using our application on a daily basis, which gives you an idea of a very strong engagement that our customers have with our digital channel. Um, so we had a 61% uptake in the overall number of transactions, uh, excluding POS transactions that is, uh, from the last year, but that kind of overestimates the overall picture because last year we had a, uh, strong break, uh, lockdown and, and the number of transactions was lower. Uh, but when you compare it to, let's say two years ago is up by 20%. But what's more important is that during two years ago, our. in terms of the split, how our number of transactions was, we had about 20% of our transactions being done via mobile phone. And currently, as the denominator has grown, but also disproportionate growth has been happening with our mobile transactions. So it's 46% now of the total transactions. And when you look at it, it went from 9.5 million to 26.3 million And this really highlights the stress and dynamic development of that channel, which we believe, and the whole market believes, is the channel of the future, in fact. So what happens next in our mobile channel is that we are expecting a significant uptake in offloading, and there have been different types of initiatives happening. They are currently the offloading rate is still around in low 20s, but the nominal number has been going up as the economy rebounded. And we expect that number to go up from the low 20s to mid 30s over the next 12 months. As more and more people get comfortable using different banking products, not just transfers and bill splits and the likes. through on our mobile. And one example here is our remittances. As you know, remittances is a very important part of the Georgian economy. There are a lot of Georgians working outside of Georgia sending money to their families. And until recently, in fact, all of the cashing in of that remittance was happening in the branches. So you had to go to the branch to deposit that money. on your bank account or cash it out. And when we introduced the digital way of doing it, and you might say, why was it complicated? Because there are a lot of different intermediaries, Western Union and the likes that are enrolled in, so doing an integration is what I'm referring to. So over the last one and a half years, it has gone from basically all physical to about 44% in the second quarter of 2021 being digital. And as we speak, end of July numbers came in, it's more than 50% now. And that is happening while we're gaining market share in overall remittances from about 32% to 35% over the last, let's say, one and a half years. I think shows some strengths on dynamic of development of the types of things that we're doing. Also important in terms of the payments, although the different types of payments is our POS and merchant payment franchise. There we have about 50% market, 51% in numbers and 49% in terms of the volume of market share. And as you can see, the growth there is significant and we expect those numbers to grow significantly going in the future as well. So year on year, we grew by around 72% and in terms of the volume by about 90%. And those numbers we believe will continue, and our position there is very strong. In terms of the mobile bank, but now we're talking about the business, the business pickup is significant. The large corporates have been digital for a long period of time. SMEs have been mixed, and micro has been more physical. And that trend is becoming more and more digital, and there also, I think, Radek Machan, Investment is is very good, and the first quarter we launched a mobile business back has seen a lot of pickups, especially on the on the micro business users. Radek Machan, So you can see that the number of users of our mobile and Internet back in business side has grown by 28.9% and number of transactions going by almost 40%. Roozbeh Gharakhloo, All of this is being done by us, focusing on customer satisfaction rigorously on many different things measuring on channel. Roozbeh Gharakhloo, Product what people are happy about what they're not happy about it's all summed up in one number, which is nps but there's a lot happening behind it, and, as you can see, over the last let's say few years. We have seen our MPS numbers growing on a very good trend, in fact, from 27% to a peak of last quarter, which was 49. We had a slight dip, and that dip was when we asked our customers, were predominantly coming from a growing interest rate, coming from the refi increase, because there was several times done in a short period of time, but that is temporary. uh what what people are uh paying a lot of attention to is is is the comfort of uh that they are experiencing in each and every channel as well as there's the easiness of of uh product usage uh we've also started to to use salesforce uh that we announced last year in fact and and the effects of that uh will will be visible in the quarters to come A lot of things are backed by our very strong data capability, which is getting stronger. In fact, we had all of our middle management go through an online training done by US schools, in fact. And more and more models will be used in every day to save costs as well as sell better. Rene Valladares- So now few words I hope that was not too long, so a few words on our numbers that we've delivered. Rene Valladares- Our revenue numbers were based on almost 40% growth year on year and 10.3% growth quarter over quarter. versus first quarter. Something that made me very happy, in fact, was that our net fee and commission numbers year over year was up by 73.9%. And our Q over Q was 17.6%. And when you look into it, what's driving it, one of the strongest drivers was our retail net fee and commission income, which was up by 99%. Arieh Iserles- Other parts of the business also performed very well in fact corporate has done very well, but that is something to note that our retail Commission income has basically doubled year over year. Arieh Iserles- In terms of. Arieh Iserles- cost of risk. Arieh Iserles- We have benefited from very good macro environment with the economy rebounding very strongly from the low start. Obviously, that has resulted in a low cost of risk, and we have benefited from some recoveries in corporate banking. Overall, there was negative cost of risk that contributed to our very, very strong profitability. Our profitability, in fact, for the quarter was 29.4% return on equity, reaching 202 million lari, which was all-time high. And just in this quarter, in fact, we delivered about one pound of profit per share, which, versus our stock price, gives you an idea how significant the profitability was. Now, obviously, that profitability, we have had some help from the strong economy and some recoveries, but when you look at the And we are in your pre provision numbers they they are strong as well, so 29% is definitely our return on equity is not an arm and we don't expect to produce them. But 20 plus percentage is what we have been guiding and we are looking at sustained levels of that profitability our. Capital ratios have gone up very strongly in first half of the year, reaching quarter one of 12.5% with a minimum requirement without using any buffer studies of 11.1. And liquidity is strong, well above the 100% minimum requirement and 124.5. So more specifically, last year we had a significant charge in the first quarter of last year. upfront charge, which was slightly unusual versus some of the European peers. Let's say they've not done that, but in Georgia, we had an upfront charge of 400 million Lari expected loss for the full cycle. And since then we have delivered 20 plus return on equity on each and every quarter. Our operating income, we described it, as I already mentioned, was up 40% and 10% quarter over the last quarter. And as I said, the non-interest income had an even stronger performance, which is very good. Also, something that was, I think, an achievement of our team was that we had a stronger net interest income going up by 50 basis points over the last year and 20 basis points over the last quarter. Our cost income ratio was 36.4%. just significantly down versus the last year, which was a bit of a one-off at 43.9%, but 36.4% was in second quarter and for the first half of the year was 35.9%. So we are guiding a midterm guidance of 35%, which should be achievable over the next few years. We had our costs growing at 15.8%. which is slightly high, but at the same time, when you have a significant uptick in the economic activity, you have much stronger revenue growth, and that also has some effect on our costs. But overall, I think our net operating income has grown significantly. In terms of cost of credit, as you can see from 2017 onwards, our cost of credit was reducing consistently as we were coming out of the 2015-16 crisis, oil crisis, as well as entering into a more conservative regulatory environment. 2020 obviously was reflective of the COVID charge. This year, 0.1% first half of the year cost of risk is not sustainable. We are guiding about 1 to 1.2% into the medium term, but obviously this year we are experiencing very good recoveries. Our NPL ratio improved slightly to 3.5%, and coverage ratio is 73. With the collateral discount, we are looking at 122% coverage, which we believe is a very good reflection of the strength of our coverage. In terms of low portfolio growth, in fact, we had a very healthy growth. As the economy rebounded, we saw good demand coming from the micro and SME as well as consumer. That is reflected in the growth that we have seen here. On the nominal basis, that was 4.2%. And when you look at the cost and currency basis, that was 7.2% from the start of the year. on an annual basis that 17.4 and constant currency, which is usually what we are focused on is 13.7. In terms of deposits, the state largely flat with this year growing by in constant currency basis by almost 2%. And what we have seen is that in 2020, we had a significant, very significant growth in deposits growing from 10 billion to 14 billion in Larry, as you can see. And that has largely stayed flat this year because as the economy opened up, people started to spend all the money that they've saved. But we are still having a very strong coverage in terms of net loans to customer funds and the development financial institutions, which is very stable long-term lending. is all very healthy levels. Now a few words on capital. Last year, as the National Bank guided us to provision for the full cycle, it also released the buffers to whether the crisis, COVID crisis, or rather the economic crisis caused by it. Those buffers are still available and some banks are using it, but we're no longer using it from the beginning of the first, second quarter. And as you can see, our ratios are 12.5 and 14.4, as well as 19.1, well above the minimum requirements, which is 11.1, 13.4, and 17.7. Those are without the buffers, as I said. So when we look at it, the Basel III capital requirements are fully loading by the end of December 23, and those are the numbers to expect given the current buffers required for our bank. Those numbers are annually reviewed, but our current expectation is this. And as you can see, we had in the first half of the year a very strong buildup of our Radek Machan, Capital starting with quarter one of 10.4 and going to 12 and a half, while funding. Radek Machan, very, very healthy girls, so that that was good and we believe that this is why we are going into a new environment where we will be focused on dividends. Radek Machan, quite a bit in terms of something to to keep in mind is also that our national bank requirements are more strict than the IRS. And as we are moving to IFRS, it's good to remember that there's difference of around 2.5% on a core tier one level, which IFRS accounts would see. So if you looked through IFRS glasses, you would see not 12.5% in fact of core tier one, but 15%. So that is good to keep in mind and underlines the strength of our capital. So in terms of our strategic initiatives, we have been delivering more than 20% over the many, many years. But last year, which was 13% return on equity. And the growth numbers were also above our 15% guidance. Now, that number we have lowered to 10% going forward. And medium term, we expect our loan growth to be around 10%. This year, as we said in the previous discussions, we may expect a slightly higher given the high economic growth and the inflation in the environment and the economic rebound, but medium term is 10% is what we expect. The current dividend payout ratio range is 25 to 40%, although that will be formally reviewed on the next board meeting. And we'll be communicating to you with dividends remaining is very important part of our return to shareholders. Some buybacks may be in the cards as well, but they will be formally reviewed and approved and communicated to the shareholders after the September board meeting. So with this, we are announcing an interim dividend of 70 million on the back of our first half, very strong profitability numbers. And going forward, we will see what we do on a full year. So with that, thank you very much for listening. And I will open up for Q&A now, which is a very exciting part, usually, of every call that we have.

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