Bank Of Ga Group Plc Ord

Hello everyone and welcome to Bank of Georgia Group PLC's third quarter results conference call. My name is Nina Arshakouni and I'm head of investor relations and I'll moderate today's call. So we'll start with the presentation and Group CEO Archil Gachichiladze will discuss the results and the key developments of the quarter and then we'll open the floor to questions.

Now I'm handing over to Archil and he will take it from there.

actually you are on mute so that you know and we can hear you yeah okay with hands being on mute probably not right so uh hello um thank you for for joining the call uh we will uh I'll cover a number of different things and then probably move to the presentation we had a very strong quota regardless of very challenging regional regional situation, geopolitical war ongoing in Ukraine. Nevertheless, I think Georgia is going through very positive economic trends and that is reflected on the bank. And we've done slightly better in terms of not just the economy, but overall, I think our profitability numbers are very good and the franchise has done very well.

Let me share the presentation. And I will try to cover it quickly. There you go.

So our profit is 290 million, which is a record for a quarter. It's up by 56% year on year. Return on equity was 32.4, which I think is a record as well. Cost income is 30.6, which is record low. NPS is all-time high, which is also record of 60, which brings me the most joy, quite frankly. out of all of these numbers. And the monthly active users, our mobile and internet bank has gone up more than 1 million, which was almost an unachievable number one year ago. So 31% year-on-year growth. So overall, I think this represents very strong numbers in terms of profitability, cost control, as well as the franchise strength, as you can see in NPS and monthly active user growth. Now, a few words on the economy. As I mentioned, the economy is, Georgian economy is doing very well. Nine months numbers were 10.2%, real growth. And that is on top of last year, 10.4. We raised the expectation for the full year to 10.2 again as well, as well because of nine months, 10.2. And all the numbers are very strong. They are driven by strong export growth, strong remittances, tourist full recovery. We use comparison to 2019 number, which was pre-COVID and was a record tourist inflow number. So we use that in dollar terms as a comparison. And we have achieved more than that, although in numbers, there's still a lot of upsides for next year. Next year, we expect, so as I said, for the full year, the expectation is that the growth will continue at the same pace. But after more than 10% growth for two years next year, then some global slowdown, we expect 4.8% growth. Still, we see a lot of growth tourism and as well as large projects starting because of Georgia becoming very important corridor given the current geopolitical developments. On the monetary side, inflation remains a challenge, although as you can see over the last few months, let's say there's a trend downwards and the last showing was 10.6%, still high, much higher than the 3%. target, and that is the reason why the National Bank is maintaining tight monetary policy with 11% refinancing rate, which has been there, and we don't expect that number to come down for next quarter and probably somewhere from spring, we should see that number decreasing gradually. Also, the National Bank has A few months ago, limited the maximum length of consumer loan and made the payment to income ratio stricter, thus limiting the availability of consumer loans to slow down the expansion of money. Lari, as a result of all the regional trends, Lari has strengthened from the beginning of the year by 9.5%, which is very nice. And that is happening while the national reserves are at all-time high, above $4 billion. And the National Bank has been buying US dollars since the military conflict or the war that started every month after March, basically. And nevertheless, Lari is getting stronger and stronger. At the same time, what we are seeing is that dollarization on the bank asset side, on the loan side, is at historic low at 45%. So the measures that National Bank have introduced in terms of basically dollar loans, subsidizing Lari loans, basically, but asking for more capital on dollar loans than Lari, that is working and working very well. So I think it's definitely less of an issue, if at all. What we are seeing is that loan to legal entities that SMEs and corporates Year-on-year growth has dropped to 8.5%, largely due to uncertainties, as well as much higher cost of borrowing in U.S. dollars. And households have continued to borrow, mainly on the consumer side and some mortgages. You can see that as the economy, the real growth is at more than 10%, and inflation is more than 10%. So nominal growth is 20, and in dollar terms, there's some appreciation of lottery. Basically, there's a major deleveraging going on in the country. So as you can see, banking sector loans to, banking loan to GDP basically has come down to 62%, which is, you know, pre-pandemic level, basically, as well as the national debt is also expected, public debt is expected to hit below 40%, which is pre-pandemic level as well. So that, I don't think many countries can say that, countries without natural resources, that is, that, you know, we are experiencing a rapid deleveraging of And also, I don't have it here, but the fiscal discipline is there. They updated the budget to a budget deficit of 3.2 from the original 4.2 this year. But probably we expect the actual performance to be at around 3% budget deficit, which is already quite an improvement after the COVID expansionary period. So a few words about BankNow. You do remember that our strategy is to be best in mobile payments and loyalty and do it through focusing on customer satisfaction, employee empowerment and the strength of franchise and good data capabilities while doing it all profitably. This is important because we want to remain relevant to our customers on a daily basis. So we pay a lot of attention to that and I think we've been delivering quite well there. So those are some of the numbers as a result of our focus. So this middle line here shows the monthly active users, the digital monthly active users, and I mentioned it already, we are up by 31% year on year. And also what is interesting and and I think quite notable, is that our monthly active user, which includes digital as well, non-digital total, is at more than 1.5 million, is 18.7% higher versus last year. In October, we added another 50,000, which is incredible number. So I think more and more people are using Bank of Georgia services. There's some double users, obviously, there with... with other bank users also using Bank of Georgia. Also, there's still plenty of cash economy in the country, and more and more people are using our services, which makes us quite happy. There's plenty of upselling opportunities on these customers, and that is good. Also, daily active users to monthly active users, though tomorrow is 45%, year-on-year is up by 4%, which more and more people are using it on a daily basis. So what this means basically is that 450,000 people on a daily basis use our services every day, 450, almost half a million people. 65% of our total customers are digital right now, but also this includes some people that are digital, but also are using non-digital other channels. So there's plenty of opportunity to also offload our services to digital channels there. In terms of number of transactions, we are growing and 96.7% is done in non-branch transactions and an increasing proportion, which is almost 56% now, is done through our mobile and internet bank, mainly it's mobile. Our product offloading is 34%, and we would like to increase that further. There are certain products where it's 70%, other products that are 20%. So we would like to increase that, and there will be a lot of focus there on that front. In terms of monthly active users on our business digital channels, it's up by 34.7%. And a Q over Q is up by 11.8. Its number of transactions through those channels are up by 40%. This is very important channel and we would like to have more and more capabilities added to it. And we are rolling out different products and services for our legal entities, including on mobile app for businesses. In acquiring business, our franchise is growing. Our market share is up by 7.6% year on year, which is an incredible number, and we like to see that. So 48.8% in all acquiring in Georgia is done through our acquiring services. In physical costs, we have a larger market share at 54%, but I think we should look at combined version. And the volume is up by 45% year on year. This one is the one that I think I love to look at. Net promoter score going up from last quarter of 52 to 60%. And that is an incredible result of a lot of work by the team, by the whole team that is of Bank of Georgia delivering products. services, listening to our customers, incorporating their feedback in our product development and services. And all of this have resulted in 60% net promoter score. Again, that is done by third party and it's done with random citizens. So it's not testing our customers. It's basically everybody on the street or phone. And it's a high number for any universal bank. Now, in terms of results, you have seen it, so I'm not going to dwell on it. Operating income up by 51% for nine months, up by 43.7%. Profit 219 million, which equates to roughly two pounds per share in one quarter of net profit. Cost of risk at 1%, which is more normalized level where we are. And deposit growth has been very strong. And I'll cover that. Capital growth and capital buffers are at all-time high with around 2% buffers at all levels. And share of non-interest income, which we monitor closely, is also record at 44%. That may come down a little bit. uh after uh normalization but still aside and the rest of the numbers I think we've covered um liquidity is at uh an incredible high level uh and uh deposit franchise is uh very strong uh we have always been quite strong but I think it's becoming more and more important uh viewing the um given the place in the cycle. So we are going into a high interest rate environment and deposit franchises, and it's more and more important, especially in emerging markets. So operating income, I think we mentioned 51% up, nine months, 43% up. Net non-interest income is up year-on-year 121%. That is, as you can see, a big increase is in effects, but also net fee and commission income has increased quite well, which is very nice. Net other income, by the way, we had a negative effect of bond buyback that we implemented in the third quarter as well of roughly 7 million Lari, and that's why we have a very low number here in terms of net other income. Operating expenses were up, year-on-year was 25.7%. As you know, we are in a, inflationary environment. So we have experienced high cost increase. Luckily, that is still way below our revenue numbers. As you can see, cost to income ratio has come down to 30.6%, which is historic low and 32.5 for nine months. Loan portfolio growth, we look at the constant currency basis because that's what really represents the business activity. And there we are at 12.9% year on year. As you remember, we guide around 10% growth. And now we're slightly higher than that. And we probably expect to be slightly higher next year as well. Deposit grew incredible 40% on a nominal terms that was 29%. Basically, there's been a lot of liquidity that came in. Some of it, about a quarter of that growth is coming from the non-resident Russians, but three quarters are from the residents. That three quarters could probably have benefited from the capital flows into the country because when migrants come in, they buy apartments and they spend money in shops and so forth. So all of that money kind of comes in from residents, but overall capital flows have benefited quite a bit from recent trends. In terms of net interest margin, we have kept it flat this quarter versus last quarter. We increased the investment in, in the tradable securities in and treasuries and so forth, which have much lower NIM. So as you can see on the balance sheet, basically all the growth in nominal terms in interest bearing assets have been in treasuries, which have much lower NIM, but still are creative. If that increase did not happen, it would be probably 20 to 30 pips higher. We expect next quarter, next quarter to a slight increase, probably more than 20, 30 basis points, but broadly stable, slightly higher. Basically, that's the expectation. Loan yields, you can see cost of client deposits is flattish, but also we should see a slight uptick there in the future. Cost of risk, as I mentioned, it's a more normalized level of 1%. We are seeing the NPLs coming down slightly, and the NPL coverage roughly same at 90%. Profit, we mentioned already, up by 56%. Year-on-year, for 9 months, up by 53%. Return, we covered already, so I will not dwell here. So this is also very good that all of this is done while maintaining very strong buffers above the minimum requirement. And they are quite well above the minimum requirements of fully loading expected ratios, which will be in one year's time in December, 2023. Just a reminder that if we were reporting in IFRS, our ratios would be higher by 2 to 2.3%, which we will be showing probably from next year because National Bank is working. And I think if all banks are ready, then we should start reporting. National Bank as well as IFRS standards from next year. So you will be kind of National Bank old standard and National Bank new standard, which will be under IFRS rules. And you'll see both of these numbers and even higher capital ratios. Liquidity is very high. And as you can see, the loan demand is not as much as the depositing flows, which is a good thing, but we'll be deploying that liquidity in liquid instruments or loans, depending on the demand. So this is the summary slide. Basically, we are delivering well above our midterm guidance of 20 plus percent return on equity, above the loan book growth of 10%. And we think we'll be above both of this, all else being equal, that is, for next year. and capital distribution of 30 to 50%. We've done interim dividend and share buyback, where the first part of last year share buyback, 73 million is done. And right now, 40 million share buyback will be going on. It's only a small part of that foresee that is done. I think 30 plus will be used for buyback. So I think I'll stop here. It's a record quarter by all measures. And I'm happy to answer your questions.

So we'll be taking the questions and you can type your questions in the Q&A chat or use the raise hand feature here. Or if you're calling from phone, just press SAR 9 and we'll see your hand in Zoom. And we have actually the first question from

I think James Hamilton.

Thank you and congratulations on a great set of results. I'm sure all the UK banks will be getting 32% ROEs in Q3. I'm interested in the FX, obviously a fantastic result. And what I'm interested in is if you could talk a little bit about where the inflows into LARI are coming from, where they're going to. what the sort of outlook is for the LARI and FX revenues. If we get to a point where some of the sort of migration unwinds, maybe there's a resolution in Ukraine at some point and how you sort of feel about where FX revenues are and where the LARI is relative to what you would maybe expect in a more normal environment.

Hi, James. So in terms of FX, it's anybody's guess, but I think I would say that the current income, about one-third is probably extraordinary and at some point will go away. But so far, we are seeing good activity there still. Slight decrease in facts around the peak, but still good numbers. And in terms of Lottie, we are seeing not only like a temporary inflow of people coming in and doing something here, but we are seeing tens of thousands of people setting up their businesses here, working from here for their IT customers worldwide, buying apartments and so forth. So it's, you know, part of it is temporary, but part is not. Also, what's interesting is that when you... when you look at what has happened, regardless of the resolution, which we would all like to see sooner rather than later, I think taking off sanctions from Russia will take some time. And Iran is sanctioned heavily, and Russia is now heavily sanctioned. Central Asian countries, transportation route for them, basically the South Caucasian corridor, is becoming more and more important, and for the West as well, for Europe, for the West. So I think a lot of different projects are being discussed right now in logistics, on railways, in energy corridor ports. There's so many big projects being revived at an unprecedented speed that I think this, Yes, there's some downside that some people may live, but some upsides that we are seeing is incredible. So I think there will be developments, but I think Georgia is becoming more and more important for quite a large region as a corridor. And that corridor is not just for goods, but for services, There are companies that are being set up, regional international offices being set up for the region in Georgia that covers, let's say, not only Caucasus, but some Central Asian countries. So those are some of the trends that we are seeing. So that 10% increase in real growth that you are seeing against a challenging environment in the world in most places, is a result of these large movements that are happening. And those large movements, I don't think they'll disappear, regardless of, let's say, several dozen thousand Russians going back.

Okay, thank you. May I have a second?

On capital, I mean, clearly CET1 ratio 14.8 is great. It's very, very strong. And you have significant surplus there. Is there a hard ceiling that you have in terms of where you'd think you've seen shareholders' best interests not to see the CET1 ratio rise above, or are you happy for it to continue to move higher ad infinitum?

Yeah.

Throughout our history, we've demonstrated that we are careful with capital and we distribute it to our shareholders other than the COVID year. And that's what we intend to do. But right now, although we are in a very, very profitable time, at the same time, it's a very volatile time. So there's still a conflict not too far from where we are. And I would like to keep slightly higher buffers until we see that those uncertainties coming down. Having said that, there's plenty to distribute and we will be distributing in the future. in dividends as well as share buybacks. And as we said, 30% to 50% payout ratio will be respected. And given the high numbers that you're seeing, those will happen. And if there's more capital, there could be extraordinary distribution as well.

But basically, we'll be careful with Capcom. Okay, thank you.

Thank you, James. And now we'll have the next question from Ronak.

Thank you for the presentation and taking my questions. I guess my first question could just be maybe a sort of a follow-up on James. You talked about the effects spreading income and how sustainable that may be in the medium term. Could you also talk a bit about the same fees and commissioning? We've seen a pretty strong growth for a while now. How much of that could be due to exceptional transaction volumes and how does that play out?

I would say it's not an exact science. I would say 90 plus percent is sustainable.

And then 90 will grow. So I don't see it decreasing substantially. Obviously, the overall macro situation I faxed it, but it's not like we're, you know, it's not like, yeah.

I mean, most of it is sustainable, 90 plus.

Okay, understood. The second question, I guess, is on your margins. We've seen an year-on-year improvement. which is positive, but there's a bit of a contrast now compared to, you know, what your competitor is reporting. Would you maybe just touch on your thoughts on what's causing the difference between your numbers and theirs? Why are we seeing a persistent upper trend there, whereas yours are sort of flatlined?

Yeah. I would not be the best person to ask about their margin. we can talk about hours and expectation of slight increase over the next quarter or two. I would just note that we are talking about consolidating numbers and they, you know, they have other things to consolidate and we have other things to consolidate. On the national MBG numbers, we don't see such a big diversion.

Okay. So you think this is just because of maybe from an IRS perspective at the group level?

I would not be the best person to ask about their numbers. So please refer to them. We can talk about our numbers. And our numbers will see a slight increase in MBG as well as IFRS reporting over the fourth quarter and the next one. Okay.

And just as a sort of, again, following up on that theme of, you know, exceptional growth, something that you highlighted, you've had very strong deposit growth, a lot of liquidity coming in. A lot of that has gone into government securities. How do you manage your balance sheet or how do you think you're managing your balance sheet over the next six months? Do you think some of that liquidity could reverse and then we start to see slightly more normalized balance sheet or how should we see that progressing?

Certainly. We wouldn't like to see such high liquidity and we want to deploy it. So it will be deployed in profitable ways, basically. And if not, then we'll decrease the rates and push some money out. But right now, I think it's a good problem to have given where the rest of the emerging markets are.

Are you seeing loan appetite pick up? In the third quarter, it had moderated a bit because of regulatory reasons and whatnot, but is that starting to turn around?

Some seasonal activity, fall usually is pretty good, but I wouldn't say that the loan demand is picking up in a major way. We see slightly more activity on the corporate side, But these people are still kind of not too aggressive. Also, what you see is that dollar loans are becoming, even for the best corporates, are double digit now. And lorries are also expensive given the high refinancing rate. So, you know, national banks are doing everything globally as well as locally for people to slow down borrowing. And it's working. Same in Georgia. Plus, you have this regional instability. The economy's growth is so strong that there are plenty of opportunities. Companies are having very high profitability recently. There's some business activity happening, but will it be a huge boom of borrowing? I don't see it.

Not at these rates. Understood. Thank you.

Thank you, Rona.

We have two questions in the Q&A chat. So one is about buybacks. Is there a valuation level at which the company feels that buybacks will no longer be a prudent use of the bank's capital?

That's the first question.

We are nowhere close to it, Stephen. Steve, sorry. So right now, I think we are grossly undervalued. I mean, we're trading at three, three and a half times P, even at these levels of capital. So probably, I mean, finance theory tells us that it shouldn't matter as much, but right now, do we think that we are undervalued? I think we are grossly undervalued. Johan Muller, Congratulations on another great quarter. Thank you. Why did the risk-weighted assets go up so much in Q3? Some of it is, we can ask our CFO to join if that is easy. Would that be possible? Yes. Some of it is something to do with investments in securities, right?

Suhan Gwalior, CFO, will answer. Also, CRO is on standby at any point. I don't know. Yeah, he's joining. Okay, finally joined.

Yeah, thank you, Neem. The main reason for the increase is we keep minimum reserves for the deposits in foreign currency. in national bank on increased deposits in foreign currency. And these reserves are weighted 100%. And this was the main reason for risk weighting asset growth.

So it's maybe obvious, but basically, when we deposit 25% or more, 25 mainly, of our US dollar and euro deposits with national bank, those are treated as 100% risk-weighted assets because it's not in the same currency as the national bank, as the printing machine.

So they're considered quite risky. And this is just one hidden capital pocket. There are many. There's plenty of capital in the system.

Rona has his hand up, but I think he just forgot. Or should I? Oh, no, he doesn't have the hand up anymore.

All right. Let me wait for about 30 seconds. And if there are no more questions, that would be it. But please, if you have questions... Well, if there are no more questions, then I would like to say thank you for your attention. It's very volatile times, but having said that, I think the economy, Georgia as well as Bank of Georgia, is doing much better than we expected in the beginning of the year when this war started. It looks like there are some downsides as well as some upsides, but I would say that the upsides are very significant. based on the fact that Georgia is becoming more and more important for a larger region as a transport corridor and almost, I wouldn't say exclusive, but almost, let's say, the main corridor for a very large region. And that is important in terms of energy safety for Europe. And I think all of that is translating into very significant projects being discussed for the South Caucasian region. In rail, in energy, gas, in oil, some of this will take time. Ports, there are energy projects in Georgia being revived at an unprecedented speed. So there will be medium-term positive things happening for sure. negative may happen as well, but those things are quite good. And I think we as a franchise are getting stronger. So these two things combined, I think means that Bank of Georgia should benefit disproportionately well given that our franchise is getting stronger and also the country is doing very well. So that's what we are looking forward to and we will continue focusing on our task and what our customers want, making sure our employees are empowered and motivated to deliver good results. So thank you very much. Bye-bye.

Thank you. Bye. Take care.