Lion Finance Group PLC

Hello, everyone, and welcome to Bank of Georgia Group PLC's first quarter of 2022 Financial Results Conference call. My name is Nini Arshagoni, and I'm Head of Investor Relations at Bank of Georgia, and I'll be moderating today's call. We'll start with a brief overview of macroeconomic developments and the group's performance, and this will be presented by the CEO, Arshil Kachichiladze, and then we'll move to Q&A. Please be aware that this call is being recorded, and I'm handing over to Arshil now.

So on Georgian macroeconomic developments, it was a pretty good quarter. We had 14.4% growth in the first quarter, which was driven by good growth in exports and remittances have stayed up regardless of a relative drop in reduction in March, obviously, given the regional situation. issues and the war in Russia and Ukraine. So the tourist numbers have gone up and have registered 68% of the 2019 number, which was peak on the record in terms of tourist revenues. So all in all, it was regardless of the regional problems that we are all facing the first quarter was a very good one, economically speaking, partly due to the low base last year. But regardless, I think overall, the performance has been good. Now, in terms of the tragedy that is happening in in our neighborhood also has economic impact. And the economic impact on one side is basically those are the different types of impact that we have from Russia and from Ukraine. So we import different types of commodities mainly from Russia and export some commodities, some rare export and some agricultural goods as well as to Ukraine. So here are the numbers. So if we skip imports and go to export side. So together, the two countries represent four point nine percent of exports for Georgia and four point nine percent of Georgia's GDP is exported to these two countries. About half of that, slightly more than half is Georgia originated exports. The rest is The rest is either re-export or commodities that we export to these countries, which can be exported elsewhere. Remittances used to be, Russia used to represent 50% and now it's significantly less. So in combination, Russia represents about 2.2% and Ukraine 0.5%. And in terms of tourism, you can see that it's 1.7% combined, these two countries. So all in all, the impact is significant, but then there are some other impact that is on the positive side, including the logistical corridor, Azerbaijani-Georgian logistical corridor becoming much more relevant for the whole region because Kazakhstan and Turkmenistan and other countries can no longer export effectively through Russia or are facing different kind of challenges, logistical challenges. So they're trying to put more and more goods through the South Caucasian corridor. And that has resulted in some positive impact on the Georgian economy, as well as some IT specialists also relocated to the region, including to Armenia and Georgia and Turkey. So in total, when the war started, we thought our initial projection was that we expected that growth to decrease to 3% for the country. But later on, we upgraded that to 4.5%. So the current expectation is that the country's economy will grow 4.5% in 2022, more or less in line with the longer-term trend of around 5%. Inflation, though, remains a challenge like in the rest of the world, but here it lives slightly higher. So end of March, the inflation CPI registered 11.8%, which was down from 13.7%. which is high by historic, I mean, we have a target rate of 3%. So that has caused the National Bank to raise the refinancing rate a number of times. And the latest one was in March and it was raised to 11%. So we believe that the National Bank's reaction in terms of the rate hike was timely. And we believe that the inflation will start to come down. A lot depends on the global commodity prices, obviously. But nevertheless, probably inflation will remain in high single digits. It can be around between 8% and 9% on average for 2022, which represents a challenge, obviously. In terms of the currency stability, I think Georgia... Lari has demonstrated a very good performance. Since the beginning of the year, it has been stable, slightly appreciated, as you can see, 1.3%. So although the appreciation has been short of the Armenian drama appreciation of around 7%, it was still pretty decent performance. And as you can see from the real effective exchange rate trend here, it is in line from the longer-term trend of stable. stable, let's say, currency vis-a-vis the trading partners. It was, in fact, last year it was grossly oversold and we have seen some of the appreciation that has happened. Right now it is around 100 or longer term trend where it used to be. One other thing that a lot of people overlook is that the dollarization rate in the banking sector right now is a historic low of 50%. And probably can come down further given some of the incentives that the National Bank has created. And these incentives are working and have created basically a more expensive dollar financing for our borrowers. And that more expensive borrowing is subsidizing, so to say, lottery borrowing. So additional capital requirements are required from banks for any additional 1% of dollarization of the books. And that is a price incentive to digitalize the book further. So I think as the inflation comes down, as the refinancing rates comes down and the life normalizes, I think we will see more of that incentive working in real life and doing its job. And also what we can see is that the NPL ratio is one of the lowest in the region. And you may remember that over the last few years, we have seen Georgian banking sector risk, overall risk being reduced significantly due to strict regulation and more capital requirements overall. So I think that's something to keep in mind alongside good profitability. So a few words on the strategy, as you know, retail banking and corporate are two main directions. In retail, we report mass retail, premium retail, and MSME. That in combination is about two thirds of our business and our book as well. In payments, we are more than 50% in acquiring business in the country. Our mobile app is doing well and is the leading financial mobile app in the country. 97% of all transactions are done outside of the branch in digital channels. We have a strong retail market share. We are most trusted bank and top of mind bank and have a NPS of 54, which is significantly up versus few years ago of 27. And we are delivering more than 20% return on equity and intend to do so in the foreseeable future. So what we target in our main strategy is to make sure that we are leaders in daily banking, in mobile app and payments and loyalty. And how we do it is having a very strong franchise. That's why we highlight the top of my bank and most trusted bank made by our customers. And we do... a lot by focusing rigorously on the customer satisfaction and employee empowerment and deploy a lot of different data models and focus on profitability. So on some of those measures on that strategy side, before we get to the revenue numbers and profitability, so you can see that we have continued increasing our mobile users and mobile NIBIC users have gone up, the monthly active users have gone up to close to 900, 892,000, which is up 22% year on year. And one additional measure that we are introducing is share of monthly active users, the digital monthly active users to total users. So something which we thought was not possible, in fact, was significantly increase our monthly active users within the country. And year on year, we have added more than 10%. So overall monthly active users, we have about one and a half million, of which around 900,000 are using our mobile and internet bank. In terms of transactions in the mobile bank, we are up by almost 60% year-on-year, so that is continuing, let's say. That growth, obviously, there's this seasonal component where Q over Q is flat, but that is understandable because fourth quarter is much more active. And one other measure which we also are quite happy about is daily active users to monthly active users, which is almost 45, 44.6% for any financial app is a very good characteristic. In terms of the total number of transactions, it's up by 36% in our channels and mobile and internet bank and primarily it's mobile has become 53%, which is highest it has ever been in the total number of transactions. And we intend to keep that number going up. In fact, we saw our French transactions going up by 10%, which showed unprecedented activity overall in the country. And that was partly due to reflecting the economic growth. But that's why we are pushing a lot the offloading of not only transactions, but now also some of the products that we are selling through our electronic channels so that we can grow this business and scale it up based on digital primarily. So on that note, the product offloading ratio has gone up one year ago from 19% to 35%. In fact, we promised you to take it up to at least 36% by the second quarter, and let's see if we should be able to provide that. And this is obviously very important, and there's plenty of upside here to sell more and more of the products through digital channels. In terms of our business mobile bank and business internet bank, our users have demonstrated the healthy growth. We've gone up to 43,000 in terms of active users and number of transactions is up by 56% year on year. And there's an uptick in transaction offloading as well, close to 98%. In terms of our leadership in payments business, Here the volume of payment business is up by 85% year on year. And we still think that there's plenty of growth left in this part of the business. Obviously here there's complex number of many different products that we are rolling out to make life easier for our merchants, including instant instant reflection on their accounts of the payment, to say it otherwise. So when a customer pays in a shop or a restaurant, the amount will be reflected on the merchant's account instantaneously, and that will be rolled out very soon. It's very, very important to our merchants. They used to have to wait for three days. Now they're waiting for 24 hours, but it will be instant. I think there will be a big positive for our merchants. On the net promoter score, which reflects our focus on the customer satisfaction, a few years ago it used to be a low point of 27%. Now it's about 54%, down from 54.6%, so more or less it's flat. which reflects our focus on customer satisfaction. It's a primary strategy for us to serve our customers and make sure they're happy. So what does happy customer bring us is very good profitability of 30% return on equity, net profit up by 73%, Revenue up by 30% and even Q over Q, which is not very often that it happens that the first quarter number is higher than the fourth quarter, given the fourth quarter is a very active one. But we had a 4.4% growth in revenue. Cost of risk was 0.8, closer to our normal levels. Cost to income was 35%, in fact, slightly higher. improved from last year, first quarter. It's low seasonally, but still it was good to see improvement there. Loan growth was 11.6%, but 19% on a constant currency basis. And deposits was also up by about 10.6% on a year-on-year constant currency basis. We had strong capital, 13.7% core tier one above 11.8, which is our minimum requirement and a liquidity well above the minimum requirement. So in slightly more on detail side, so basically we had revenue growing by 30%, 30.3%, which is a... we were happy with that growth as well as on a Q over Q of 4.4%. So we have non-interest income representing 31% of our total revenue. In terms of the non-interest income itself, we had a growth of 36% year on year and the core revenue grew even more where the other income we had close to zero this quarter. We had a very, very strong growth and performance in FX, obviously given the very high volatility in the environment, especially in March. So in terms of operating expenses, we had a significant growth there as well of 28.9%. It is a high inflationary environment and we are facing inflationary pressures, but luckily enough, our revenue growth we have kept higher than the cost growth. So that has resulted in a cost income of 35%, which is our medium-term guidance. Loan portfolio we did mention already grew 11.6%, but the cost and currency growth was high at 19%. Deposits grew also 3.7% and 10.6% on a constant currency basis. In terms of dollarization, we are at 54%, which is the lowest historically. And as I described, I expect that number to come down further. The NIM was stable at 5.3%. And you see the decomposition of NIM where we had a slight growth in loan yield, and we had... We had also cost of funds and cost of deposits growing slightly. That was due to the refinancing rate obviously going up. Cost of credit risk, as I said, was 0.8%, which was closer to our normal level. And in terms of liquidity, in terms of the, sorry, NPL, we were flattish at 2.2 and a half percent. Then our coverage ratios increased here slightly. Profitability, as I described, was not just 73% up, and return on equity was also pretty nice, above 30%. That was done on a strong capital basis of core tier one of 13.7, almost 2% above the minimum requirement, and tier one at 15.4, which was, you see the minimum requirements here. as well as the total capital being slightly more than 2% above the minimum requirements. And what's also worth noting is that as the Basel III requirements are fully loaded, we expect December 23 is the date when the ratios will be fully loaded and you see our expectations of what capital requirements would be assuming some of the things to be constant. So we should be above those requirements even with today's numbers. In terms of the numbers that you are seeing, obviously they are based on the local standards. And as the local standards moves to IFRS, you should see higher capital requirements. The regulator has said that they'll probably introduce some buffers where this additional capital that you will see will be absorbed. So you shouldn't expect release of capital. But I think one thing is important to keep that when you are comparing these numbers in IFRS terms to other banks, you should probably add another 2%. So instead of 13.7, you should be probably thinking closer to 16% core tier one ratio. And that is nice as well. Liquidity, we did mention, we are above the minimum requirement and comfortable with that. All in all, I think just to summarize, basically we are, performing well above the promises that we have made of more than 20% return on equity delivering in this case more than 30%. We are growing on a constant currency basis year on year at 19%. We have in fact made an interim dividend last year after skipping one year during COVID times. and we intend to pay the rest of it, bringing the payout ratio for dividends to 25%. And we will observe the regional environment before we say anything about the buybacks. So that's in short, and I will move to the Q&A. So Nini, Please, let's move to the more interesting part.

So if you're using Zoom application, you can either raise hand or send us your questions in the Q&A chat. And if you're calling in, please press star nine and raise hand. And I'll be waiting for the first question. The first question is from Rona Gadiam.