Lion Finance Group PLC

Welcome, everybody, to Bank of Georgia Group PLC's third quarter and the first nine months of 2021 Financial Results Conference call. My name is Natia Kalendarishvili. I'm Head of Investor Relations at Bank of Georgia, and today I'll be moderating the call. Please be advised that this call is being recorded. Our session will be organized in two parts. During the first part, Bank of Georgia's CEO, Archil Gashi-Chiladze, will be presenting financial results overview. And during the second part, he will be able to ask questions as part of Q&A session. With that, I'll hand it over to Archil.

Thank you, Natia. Welcome to third quarter investor call, where we will summarize the results, which you may have seen already, and then we'll open it up for Q&A. As you may have already seen, the third quarter results were very positive in every way you can look at it. And I'm very glad to report very strong quarter, third quarter, and it's historic high in many different measures. So we would start with the fact that we have delivered a very strong growth in our payments business, where in acquiring business, POS acquiring business, our number of transactions have grown by 45% almost and volume by 70%. In our mobile business, transactions, mobile phone transactions, mobile bank transactions. In fact, the volumes up by 69% and the volumes on the number of payments up by almost 70% and volume is up by 105%. And we remain as a top of mind bank and most trusted bank in the country. With all of this, I would also highlight the fact that the net promoter score has grown, and the most recent one was 47%, from recent dip to 43%, so that's back to the positive trend. And our employee MPS is also slightly up to 61%, to all-time high. And we measured the engagement there as well, and all of this is up. So why I underline this is because I believe that all of these measures represent the overall strength of the franchise that then results in the numbers and the numbers you have already seen. In terms of the numbers, you have seen net interest margin growing to 5% from the previous quarter 4.8 and year on year also 30 basis points up. And also you have seen net interest income growing by 19.2%. We have seen particularly impressive growth of net fee and commission income year on year of 37%, 37.2% and Q over Q of 9.2%. We also had a pretty strong net FX gain up by 73.9%. and back to the roughly 30 plus million lottery where we used to be and slightly more in fact in third quarter. And we had other income also kind of flattish and overall, all of this resulted in our revenue growing by 25.8% on an annual basis, 3.8% Q over Q. Well, we had... slightly less growth in expenses, but still on the high side of 24.7%. And all of this resulted of pre-costal risk growth of 26.4%, which is impressive, I guess, by any measure. And what's nice is that basically all the lines of revenue have grown, which are sustainable growth. which is the net interest income, which is net fee and commission income, predominantly coming from the acquiring business strength, as well as the FX fee income. And overall, this has all resulted in a pretty strong delivery in the numbers. So in terms of the quality of our book, we also had significant improvement in the NPL ratio coming down to 2.6%. And that was mainly due to the fact that we had seen our retail clients paying consistently since their payment holiday expired. It has been more than six months that they've paid consistently and more and more people have been reclassified as normal loans from stage two loans to stage one. And that has basically resulted in our NPL ratios in retail dropping significantly. And at the same time as that happens, our coverage ratio increasing to a very healthy level of 90 plus percent. So and with the adjusted discounted value of collateral, it's more than 140, basically, 140%. And two other things to highlight as well was that with a very good growth in the third quarter in terms of the loans issued on a constant currency basis, it was 6.5%, on nominal basis was 5.3%, uh on an annual basis it was 14.3 and on a constant currency basis was 17.7 that was due to the fact that we had slight strengthening of the currency and on top um on top we had uh regardless of such a strong growth in the quarter at the same time we had uh pretty good capital ratios um With all of this, and I think there was an overview, we can in fact dive into the presentation, but I will try to not bore you too much with it and go very quickly through it. Couple words on COVID. So basically we are experiencing a pretty high number of COVID cases, like some of the European countries. But at the same time, somehow the country got used to this very high cases. Unfortunately, the number of vaccinated is not very high. It's 33%. Single dose vaccination is 37. So we are heading towards, let's say, 40, mid 40s maybe by the end of the year. But it would be short of the 60% target that the government had by the end of the year. Having said that, I think something very positive was that the government announced so-called green passport acceptance from the 1st of December. So in public spaces, in restaurants and so forth, only the vaccinated will be allowed. So I think that will provide a significant motivation for a lot of people to get vaccinated. And let's see what the pickup will be later on. There was also an announcement that the government would provide a 200 Lari payment for the elderly, 60 plus years old, whoever was not vaccinated and will get vaccinated. And that has apparently caused also some enthusiasm, especially in the regions, which is also helpful. So let's see how positive that will be and how significant. In terms of the economic growth, we have been surprised number of times, and we have updated just recently from 9.5% to 10.5%, the overall expectation for the full year. And we have provided here the comparison not only to 2020, which itself was quite a volatile year and had reflected some of the base effect, especially in the second quarter, but also versus 2019, and that's also telling kind of to highlight how the growth was happening versus a pretty high 2019 level. In terms of where the growth is coming from, as you can see, not only the remittances have been very strong and it has provided a pretty good growth to the economy, but also the regional demand, which is reflected in the exports has been pretty good as well. In terms of the tourist revenue, we last few months, we've seen that it has achieved about 50% of 2019 level, which by itself was a peak. But next year, we hope to get back to close to 2019 level to about 75 to 80% of it. And I think there's some upside there as well. We'll see how that goes. In terms of the National reserves, we are at the all time high of 4.1 billion, which is up year by year, year over year of 8.3. Inflation is still running high at 12.8%. Although it's worth noting that the core inflation is 6.2, which is still high. The target rate is 3% and national bank and ourselves as well, We predict that they will come down in the mid of 2022 to slightly higher than the target rate, but closer to the target rate over the next few quarters. In terms of the refinancing rate, it has been raised a couple of times and it's running at 10%, which is relatively high for the Georgian reality. And we hope that will be enough for the inflation to be to come back to the target rate over the next few quarters. In terms of the economic growth, we expect 5%, although the state just issued a budget for 2022 and they expect close to 6% growth next year. So let's see how the next year will play out. I think there's significant upsides on the tourist side. and let's hope that they can play out well for us. In terms of the franchise, I would like to highlight one more time that we are leader in payments in the country, representing about one in every two transactions in the country, in fact. And we have a mobile application that is the leading financial application in the country. 96% of all the payments that happen and transactions happen through digital channels. We represent 40% of all the deposits of individuals and almost 40% of loans on the retail side and most trusted bank and top of mind bank, as I said. We do all of this by, and at the same time, we are delivering 20 plus percent return on equity And we have been doing it consistently other than one quarter, which was last year, first quarter, when we provisioned upfront for the full expected cycle for COVID, which we all remember. In terms of the strategy, how we define our strategy is that we focus on leadership in mobile application, in payments and loyalty. And we define that as the core things with which we We make sure that our retail clients are attached to our franchise and we do it through making religious focus on our customer satisfaction, employee empowerment, as well as developing data-driven decision making and focusing on the strengths of the franchise. And all of this is done by focusing on profitability. And while we make sure that we have the leadership in all of this, then we can offer different products that the customers require and provide profitability to our stakeholders, to our shareholders as well. Now, something that I mentioned a couple of times already is our mobile bank strength and their Again, we have resumed the growth of our number of active users, and that has grown by 4.5% last quarter, and that was very good to see. And in terms of the number of transactions, it has grown by 65%. And when you look at it on a two-year basis, let's say here, if you notice, The number of transactions overall, let's say over two-year period, has gone from 48.8 to 61.7. And last year, growth was 18.8% of the overall transactions. But when you see the mobile transactions, it has gone from 10.8 million, which was 22% of overall transactions, to about 30%. 0.2 million, which is almost half of all the transactions. And that basically shows you the major transformation that is happening over the last couple of years. And it has been happening over the last, let's say two, three years in terms of how people do banking and how people do their daily banking and transactions and so forth. And there, I think that's why we underline the leadership in this. And that's why we think it's very significant to have that trend. And we'll be focusing on that going forward as well. Now the next step there, and we mentioned it previous few quarters as well, was our ability to sell more and more products through our digital channels. And we started it with about 20%. So last couple of quarters we had started from 21 and we were targeting 36% over the next 12 to 18 months. And I'm glad to report that we are well on the way to reaching the target and currently delivering 31% in terms of the offloading rate. And that has been helped significantly with our redesign of our consumer credit, which is going very well as well. Similar kind of trends you can see in the number of received remittances, where we also have done a number of integration with different providers of payment services, cross-border payment services, and they are fully integrated now in our mobile bank. And through providing number, you can get directly to your Bank of Georgia account and you don't need to do extra steps there. basically resulted in almost every second payment done through that automated way. And it's more comfortable for our clients and our number of, or the percentage of the market share of the receiving side has also grown to 35%. There, I think other than banks, also the micro, microcredit organizations also are competing in that side. I think it's important for us because for us, it provides a lot of information for the receiving side as well as sending side where we can provide additional products and services to these customers. In terms of payments, and I mentioned it in the beginning of the presentation, something that makes us I'm pretty happy is the number of transactions growing by about 45% year over year. And in terms of the volume growing by 70%. And Q over Q is also quite significant. As you can see, it's 15% and 25% to round up the numbers, which is significant. And that this franchise is very important to us and we'll be adding additional capabilities on that side and we are working and next year we'll be rolling out a number of different initiatives on this side. Also something that is important is our business mobile bank customers, which is becoming more and more popular with our micro customers or micro business customers. There also we had the 8.7% Q over Q growth in terms of number of users to 45,000. Here we believe that there's still a lot of upside there because a lot of our micro borrowers or small business borrowers are still using cash and they're still using our branches. And we believe there's a significant upside in terms of next, let's say, next upside in terms of offloading from the branches as well as providing more services. I believe it's here and we are developing our products here quite actively. The customer satisfaction score, which is internal score that we measure. So it's difficult to compare to anything else other than our own measure in the past. We started about a year ago with 40% and have last quarter was 62 or 64%. And now it's increased to 73. We like to see it closer to 90. And that's what we are getting to. And that's how we measure what customers are acquiring and how comfortable they find our different channels. With NPS, as I mentioned also in the beginning of our conference call, we have increased it back to the, returned it to the positive trend. This deep of 43% where a lot of unhappy customers with their interest payment becoming higher because of the, because of the refinancing rate going up. But overall, I think we are paying a lot of attention to the satisfaction of our customers. And overall, the trend is very positive over the last few years, and you see it vividly here. In terms of the employee engagement also, it's a slight improvement from the previous measure. And what makes us quite happy is that another measure is the employee engagement, which also was slightly below the high-performing organization benchmark developed by the Conferi and we have improved it there as well, which provides an environment where the innovation flourishes and new product rollout becomes faster and overall it serves us all well. I think on all of these numbers we have already focused and we have delivered consistently more than 20% return on equity since our first quarter last year when the upfront provisioning was done for the expected full cycle impact. The operating income year on year has grown by 25.8% and for the nine months is about the same. the non-interest income growth was quite significant, in fact, and was very nice in terms of 44.7%. When you look at the net fee and commission income, that was up by 37%, 37.2. The overall number was that. Something to highlight here is that the net interest income growth These two quarters here to be feared, the fourth quarter 2020 and the first quarter 2021 were relatively low in terms of the activity and that does impact the NIM as well. There was slight pickup in activity in the first quarter of 2021 and then improvement in 2022. And then now we are seeing an increase in NIM which is predominantly deployment of liquidity that we have highlighted that there was an upside there. So I think that is pretty healthy overall for the business. Cost income wise, I think we are committed to a medium term guidance of 35%. We had a positive operating Joe, slightly positive, but still, which is very nice to have, especially in the inflationary environment that we are seeing. today, but we are committed to this target and we will deliver it in the medium term. With the cost of risk, I think we already mentioned and the 2.6% NPL ratio is a significant improvement and we hope that we can see further improvements of this ratio. And here you can see that pre-pandemic all time low for us was 2.1% MPL ratio. And I hope that we can soon beat this and a lot will depend on the economy, obviously, and the strength of the Georgian economy, which has surprised us well over the year, how it has been performing. Loan portfolio growth, as I mentioned, was very healthy, including on a quarterly basis. Deposit portfolio, in fact, on the retail side has been fine. And on the corporate side, we've managed the liquidity through the corporate side. So overall liquidity was healthy and we are okay with that. In terms of, and here you can see the liquidity levels, And in terms of the capital ratios, we are well above the capital ratios. Let's say the courtier one is 11% and we are at 12.8%. And let me highlight one thing here that we have paid out the dividends and that is reflected here because it was already committed in the third quarter and the commitment is directly deducted from it. as well as we've grown more than we were expected to grow or budgeted to grow. So regardless of higher than expected growth and dividend payout, I think the capital ratios are still very strong and this is how we like to see it. Here you can see the contribution overall, let's say. of how the profitability, how strong the profitability provides capital buildup because overall our strong profitability provides a very strong capital formation internally. And it's more than enough, not only to finance the business growth, but also to provide the dividends. And this is what we have seen here. And we provide some measures of what we can expect in case devaluation happens. And as you can see, we have very healthy margins there for us to continue growing. We have highlighted a number of times that our capital stress does not fully represent the IFRS numbers. And if we were counting in IFRS, we believe that we would have higher, even higher capital ratios by at least 200 basis points, if not more. That basically sums it up for us. We think that we had a pretty very positive quarter. reflected not only in numbers, but also in the underlying strength of the franchise, be it with the number of digital customers, number of payments, number of payments in POS terminals or mobile application, increase in margin, increase of portfolio higher than expected, as well as profitability and revenue lines in each and every site. With that, I would like to open it up for Q&A.

Just a reminder, those of you who are joining via webinar, you can use the raise hand button at the bottom of the screen to ask a question. And those of you who are connected via phone, you can press star nine to ask the question. And please don't forget to introduce and unmute yourself before asking a question. First question comes from Ilan Stermer. Ilan, please.