Bank Of Ga Group Plc Ord

Hi and welcome all to Bank of Georgia Group PLC's first quarter of 2023 results call. My name is Nina Arshagouni. I'm head of investor relations at Bank of Georgia and I'll moderate today's call. First, we'll start with our presentation and then we'll have the Q&A session during which you will be able to ask questions by either raising your hand here or typing them in the chat or pressing star nine if you're dialing in from phone. For your information, this call is being recorded. And now I'm joined by the group CEO, Archil Kachichiladze, who will discuss the business performance as well as the macroeconomic developments.

And Archil, you can go ahead now.

Thank you very much, Nini. I will jump into the presentation. Thank you very much for joining the call. And we'll go through the presentation very quickly so that we can have a bit more time for Q&A, which is usually the most interesting part of the call. So we had a very strong performance in the first quarter of this year, which continued to a strong last year's performance. So the profit was 300 million, up 25%, return on equity of just shy of 28%, cost income 29.1. So this is the first quarter after the three quarters where return on equity was higher than cost income that it unfortunately reversed, but only slightly. And NPS of 58% with digital monthly active users up 25%. on an annual basis of 31.6% to 1.2 million, which is extraordinary given the small size of the country. Now, a few words about the macro, because that has a very big effect on us as a large player here. After two years of above 10% real economic growth, we had the first quarter, which had a real growth of 7.2%. And there's some monthly numbers, but quarterly is what really matters. It was driven by the strong external flows and overall very good performance. So you see here that there's a healthy growth in exports as well as imports, healthy growth in remittances and the tourism, which is a very important part of our country's economy. is up by 38% versus the 2019 numbers, which were the peak before COVID, obviously. But in terms of the number of tourists, we're still at 80% versus the peak. And we expect very, very strong performance this year because we're just starting the year and that we'll have some good performance results uh for the country so apologies so going forward the uh next two years the projection for this year is to 5.8 percent uh which Carlton target our uh international market subsidiary is uh projecting 5.8 and and uh next year five percent um that is an upgrade from the initial four percent and the upgrade comes from um very strong start of the year uh so macro numbers are very strong in the beginning of the year. What's even more exciting is the fact that the inflation is under 3%, so 2.7% is the last reading at the end of April, although core inflation still remains slightly elevated at 4.7%, but this is much, much lower than some of the regional comparisons, and this allows the national bank to lower the refinancing rate, which has been lowered by 50 basis points just recently, a week ago. But that I think creates more room to lower it further by another 100 basis points that we have projected by the end of the year and further after that. Lari has got a strong up by 7.6% by end of April. from the beginning of the year. This is on top of about 12% strengthening versus US dollar last year. So overall, very strong performance by regional comparables. Obviously, the external flows have been helping to generally get stronger. And this has been happening regardless of the fact that the National Bank has been buying very strongly. You can see on the right chart here, all the buying that the national bank has been doing, and the reserves are at the all-time high at around $5 billion and have built up very good buffers for bedtimes. Also on the loan growth side, it has slightly picked up on an annual basis in the constant currency terms at 13.8%, slightly shy of the nominal growth of GDP, where it has been below nominal growth of GDP over the last two and a half years, and has resulted in deleveraging, and we'll see it in the next slide. Nominal terms, it's much less, it's 3.6, that's due to strengthening of lottery, because about 40%, 44% of GDP of bank loans are in US dollar terms, which is at the historic minimum. As you can see, it has come down strongly from the 60s level over the last, let's say, seven, eight years, down to 44%. The non-performing loans is low by regional standards, and the system is reported about 1.5. This is the leveraging that I mentioned. The economy had a very strong growth and a lot of gotten stronger. The bank loans to GDP came down to 60.7%, which is at roughly 2018 levels, and that creates more room for growth going forward. And also the national debt to GDP is below 40% at the end of 2022, and is projected to further decrease towards 36% over the next three years. So that's briefly about the Magro. Now, a few words about the bank. We are FTSE 250 company, as you know, strong leader in digital banking in the country and top of mind and most trusted bank, delivering more than 20% return on equity and high standards of corporate governance and strong focus on ESG. And we'll cover some points going forward. We have about 45% of our portfolio is retail. And then we have strong SME and corporate banking, which is distributed almost equally. We are focused on mobile payments, mobile application payments and loyalty going forward. And the main focus is being relevant for our customers on a daily basis. And that's through the mobile application and through payments. And we have achieved significant progress in those. And how we achieve it is by focusing on customer satisfaction and centricity, religiously almost, focusing on our people and the culture within the organization, the strength of our brand, use data and AI in decision-making increasingly, and focusing on risk culture on all levels, first line, second line, third line. We are delivering more than 20% return on equity with distributing 30 to 50% of our net income and with a growth of 10 plus percent, which we've been beating these ratios. Going forward, I think we've discussed briefly that our mobile application is a financial super app. It's not a super app in the sense that you cannot find all kinds of things on the application, but it's a financial super app where you find most of the things from a financial point of view that you can be looking for in this application and the number of products and abilities are increasing of this application constantly and we are also monitoring the user user experience on a constant basis and modifying it to increase the satisfaction of the clients. And these are the results. Over the last 12 months, our number of retail clients have grown by almost 70%, but the digital users have grown by 31.6%. So let me say how that is possible. That is possible by increasing the number of mobile application users in total customers from 62% to 70%. So while the number of customers increased from 1.4 million to 1.7 million, roughly rounding it, the number of mobile users increased from 900,000 to 1.2 million. And more importantly, more and more people are using it on a daily basis. 47% of our users are using it on a daily basis. So when you look at and think about our financial app, more than half a million people open it on a daily basis. This is probably, after Facebook, the most, let's say, popular and used application. um in in in Georgia definitely financial application but um in other ones not all stats are available but it's it's a very popular media um in terms of number of transactions uh mobile is becoming larger and larger with internal banking but it's predominantly mobile it's now sixty percent of all transactions uh as you can see in terms of product offloading we have come a long way but still 44 percent versus all the other products that are sold through branches or otherwise so there's still plenty of upside here and we are selling more and more to our mobile application in terms of our business offering monthly active users are up by 40 percent and that's And that's also underlies the basis of number of transactions also going up by almost 38%. So very strong growth here and very good customer satisfaction there that we strive to have more than 80% usually customer satisfaction score. And here we have very good progress. In terms of our merchant acquiring business, our volumes are up by 55% on an annual basis. That represents market share of 52% almost. And we have almost 1.1 million people using our cards to make payments. So monthly active users of our cards is up by 33% in one year. which is also significant. So this is less to do about digitalization and more to do with our integrated approach to payments and loyalty, and it's working very well. In terms of customer satisfaction, you're all used to this, that we are religiously focused on this. We are about in the range of 60%, 58% over the last few quarters, and we are focused on increasing the quality of our services, as well as removing some of the unhappiness with number of different services. And we'll do it channel by channel. And we will be striving to achieve more here. In terms of results now, in the numbers, return on equity just shy of 28%, cost of risk of 1%. And our range is 1 to 1.2. You may remember cost income of 29.1%. Very strong capital position, 500 basis points above the minimum requirement at 19.5%. And lows up in the cost and currency terms by 15.1% on an annual basis and 3% on QOQ, which is a good start for the first quarter. And similarly in deposits, our deposits are up by 3.3% QOQ, but on an annual basis, very strong lows of 42%. So in terms of income, our operating income is up by 42%. Net non-interest income is up by 54%. There you can see more normalization of effects, as you can see. In the net fee and commission income, we had a chunky advisory fee of $27 million in the first quarter. But without that, I think the growth was north of 50% even on all the other types of fees as well. So very strong growth. Overall, the operating expenses have grown by 18.7% on an annual basis, resulting in the improvement, significant improvement, I could say, of cost income ratio from 35% on an annual basis to 29.1%. Loan portfolio growth, I think I touched on 15% on an annual basis and 42% in deposits. very similar comparable numbers in loans of 3.3% and 3.3%. So very strong funding overall. As you can see, we have about 17 billion Lari of loans and 18.3 billion Lari of deposits. So very strong growth here. What's very interesting here is that we have managed to increase the loan yield given the high interest rate environment and in some cases repricing of loans because they're available. And we've managed to keep the deposits and notes at a relatively low rate and the uptick here is lower. Moreover, because we had strong growth in deposits, we've been able to replace the other wholesale funding with our deposits, and that has overall resulted in the cost of funding coming down to 4.5%. And the result is net interest margin, which is very strong growth, up to 6.4% year-on-year basis. It's 110 basis points. A lot of people may be asking, is this sustainable or not? Long term, probably not sustainable. Short to medium term looks pretty good. So as we go forward over the next few quarters, we expect this number to stay relatively flat. But at some point, it will probably come down as we will be paying more for our deposits in high interest rate environment. Cost of risk is at 1% on the lower end of our medium term guidance of 1 to 1.2%. We had improvement in the NPL ratios coming down to 2.4%, resulting in a slight improvement in the coverage at 73%. That was nearly in the corporate side. So we're pretty happy with the quality of the portfolio. So all in all, profit resulted in 25% uptick and what we are paying more and more attention to his return assets, which is roughly 4.4%, which is very strong by any standard for financial institutions. We have very strong capital ratios. And I think the next page here summarizes well the buffers that we have. on a core tier one is 5% and tier one is 4.6, slightly less on the total capital because we're gonna have to borrow that money, but we will as if need be, the risk weighting slight drop in risk weighting assets is caused by more dollarization, less dollarization, so dollarization happening in deposits as well as in loans. So very strong capital position. This capital position obviously will be reduced by about 200 basis points by the issuance of the dividends. And if I share buyback, that is ongoing. But nevertheless, capital generation is such that it will build up very strongly, very quickly. Liquidity ratios are also very high at around 135. basis points was 130%. And as I said, the funding of our loans with our deposits is also strong and below 100%. So all in all, to summarize, basically, you see that our profits over the last few years have gone from 514 million to 1.1 billion last year. And we have put some other numbers here, the qualitative numbers, which is digital monthly active users alongside. And you can see they're very close. And this is a coincidence, but there could be some causality there as well, as well as the net promoter score, which shows our customer satisfaction. So it's all interrelated, not a direct relationship, obviously, but it's interrelated. And over the last few years, our focus on Digitalization, the culture in the organization and the customer satisfaction have resulted in very strong numbers. Overall, the loan book growth, we have bid our 10% constant currency growth guidance. So the last couple of years, first quarter is stronger as well. We are returning more and more of our capital to our shareholders. because we are in a very strong position to do so. And we will continue going forward, being very diligent about our capital. We also wanted to show here the number of shares that due to the buyback and cancellation that is happening, we are reducing the number of shares. And you can see the numbers here and that's an ongoing process. Thank you very much. That was probably the shortest presentation I've ever had. So that's 20 minutes. So Lini, I am happy to answer the questions that our investors may have.

Just a quick reminder, you can raise your hand in Zoom or you can use a Q&A chat if you want to type your questions. And if you're dialing in, please press star nine and we'll see you in the Q&A queue. And we have a couple of hands actually.

The first question is from Robert Sage.

Yes, hi there. Thanks very much for the presentation.

I've got a couple of questions, actually. I think you were alluding to this, but I'm wondering how you would encourage us to think about your capital ratios. I mean, even given the fact that I appreciate the dividends and buybacks will reduce at an ongoing basis, you do appear to be generating more capital than I was expecting with the reduction in risk in asset intensity. Do you think that the central patient sort of further share buybacks over and above the 148 million that you've already announced for this year? Or would you actually sort of see the levels remaining at a significantly higher level than your minimum requirement? I've also got a second and unrelated question related to costs. Now, you've sort of shown us how the infliction seems to be reducing quite significantly within Georgia. And I was wondering if you could sort of look forward in terms of how you think your costs could progress through the course of this year, particularly because you're running with very positive operating jewels in the first quarter in terms of cost growth significantly below the level of income growth.

Thank you, Robert. So on the first one, this year, regardless of the fact that the macro numbers are very strong, et cetera, et cetera, we would like to have higher, capital ratios than we will usually have. So we will be running high capital ratios this year. Having said that, I will not exclude further capital distributions, obviously. But, you know, in general, we'll be having higher capital ratios than we would in more calm environments. Let's say there's still a war going on and there's some political turbulence around this region. So that's on capital. So do we foresee further buybacks? We may, but we will let you know if and when we decide, but otherwise I'm in no position to guide on further buybacks at this point. Regarding the costs, we are seeing some some cool down let's say in um in inflation but this is relatively new and we'll be we'll be seeing how how that has an impact on on father uh let's say expenses uh but so far we've been able to grow uh to have operating jaws positive and and we'll try to to have that going forward I cannot provide more guidance in terms of the exact amount of growth. All I can say is that it will be higher than the inflation, our OPEX growth, obviously because our businesses are growing. So we are hiring more people in the back office and our numbers are growing, but we have been able to grow the business much faster. than our costs and number of people. So that results in a cost income of now below 30.

Thank you, Robert. Thank you.

I think Robert is done asking questions.

I think the connection was patchy, so yes.

So the next question is from Ron Akadia.

Yes, good afternoon, Archul. Thanks for the presentation and congratulations on the results as well. Great numbers again. Maybe the first one is a follow-up question to Robert. On the capital side, you said you'd like to maintain a slightly higher capital ratio this year. Any particular reason for that?

Well, there's a small war going on in the region, if you've heard, so that's the reason.

Okay, so it's really just the geopolitics that you're being cautious about?

Yes.

Okay, okay, understood. Second question on NIMS. A bit surprised by the increase in lending rates, in particular in the first quarter, it seems to be coming quite late in the rate hike cycle, you know, the the NBG rate has been at 11% for quite a while. Like what, you know, LIBOR rates have been relatively elevated, but flattish for a few months as well. So if you could just help us understand, you know, why we saw significant increase in lending rates during the quarter.

Yes. So in corporate and SME, as well as some cases in the mortgages as well, it's common to have first year fixed rate, which basically as the rates go up, those fixed rates don't go up in the first or second year. And that's why I think whenever it comes, whenever the fixed period expires, then the hike happens. And that's what has been happening over the last, let's say, six months. So it's not a real time. When the rates go up, it's not repriced on a monthly basis. It's repriced in some cases on a quarterly basis, in other cases on a semi-annual basis. But then this on top, I think the high interest rates kick in slightly late because of the fixed rates that some of the clients were enjoying for one or two years. on their multi-year credits. Okay, understood.

And just a final one from me on the fee and comp side, again, kudos on the strong growth we're seeing. Could you maybe just help us understand on the monetization of the digital payments revenue? Could you share some, I don't know, information on the revenue per transaction or take rate or anything of that sort?

No, not at this stage, but we'll be separating out more numbers on the payments business as it has become a significant business. But overall, I think on the margin side, we have been able to maintain the margin on our payments business, especially with lower cost provider of services, Unmixed Debit specifically. And we have been passing back the loyalty points to our customers for that, and that has been working very well for us. But all in all, I think the margins and numbers we'll provide later on, but it's more than 100 basis points net margin on acquiring business.

Okay. And the momentum that we have seen in the past couple of quarters, you think you can sustain it at those levels, excluding obviously the investment banking fees?

We will see. I mean, last year was very strong year, right? I mean, when you look at the second and third quarters last year, obviously the FX was outsized and we pointed out that those will be coming down and you've seen somewhat reduction in the fourth quarter. And then in the first quarter, you're seeing more normalized levels. So that I think will probably continue at those levels roughly. So it's not going to go back to those levels higher levels, unless other things change. The business itself and the macro economy is doing well. So other parts of the business, I think, will do well. I don't know, Ronak, if that answers your question.

No, it does. It does. Thanks. Thanks for that. And thanks once again for your time.

Thank you, Ronak. So the next question is from James Hamilton.

And I... Hi James, just to add to Ronak's question, I would say that in the merchant acquiring business, our main competitor is not other players in the market, but rather cash. And we have to also realize that even people that are actively using their cards, they they only spend about 40% of what they receive on their cards as salaries or otherwise electronically. And they withdraw about 60% of all the money from their cards and spend it as cash. So when we are talking about acquiring business, what we are trying to do is basically incentivize our customers as well as merchants to spend through there with their cards instead of withdrawing cash and spending with cash. So that is our main competitor and there's plenty to grow and do there. So I think we will be attacking cash, let's say, over the next few years there. Thank you, James. I apologise and I'm all ears.

Two, if I may. Firstly, given where inflation is and where central bank base rates are, what's your outlook for base rates at the National Bank? following on from that if you expect them to decline from here which i'm assuming you do what are the nim implications of that over and what sort of time frame do you see before um base rates were to get to a sort of a normal level uh apologies that's an analyst one question um the uh the second question is more sort of strategic um you've talked a lot about digitization of the business What I'm wondering is, as you look through over the next sort of two, three, five years, as digitization penetration gets higher and higher, will you get to a point where you can start shrinking your physical infrastructure? And if you can shrink the physical infrastructure and digitize more, where do you think the cost benefit can get to?

Thanks, James. So the first question, at the end of the year, we expect our current expectation is 9.5%. So from the current 10.5%, let's say a couple of reductions to the refinancing rate, further going down to 8% over the next 12 months after that. So end of 2014, let's say, using the economist's favorite phrase, all else being equal. We will be seeing reduction to 8% by the end of 2024. Implications on NIEM are not significant because we will be also reducing the, so a slight reduction will happen as a result of that, but it's not as significant as you may think. Obviously, the funding that we have from current accounts will be deployed at less than that, but it doesn't affect the consumer. It only affects really the mortgages and lower margin business, and it's part of it. So you may have, I don't know, 20, 30 base points reduction over that period of time, only a lottery for you. which is about, let's say, two thirds, slightly less of the total portfolio. So let's say, just off the top of my head, around 20 base point reduction, but not significant. Regarding the, what was the second question? Digitization and the implications of the need of physical infrastructure. Yeah. So in Bank of Georgia, we have, several types, but mainly there are two types. One is a larger type of full service branches, and then we have smaller branches, so-called express branches. I think what we are doing now is that it looks like express branches, which we initially focused on transactions for people to do more and more through electronic channels, for people to start banking, let's say. So it was for unbanked population to have easy access. That strategy worked very well. And we also issued a lot of consumer loans, high interest margin consumer loans through this network. I think that network is maturing, let's say, and some of it will be closed down and others will be transformed into a smaller scale, but full-fledged branches. All in all, I think over the next, let's say, three to five years, we'll be seeing reduction in branches and getting larger format, but less branches so that people go there for major things and they don't go there for transactions. And we are seeing that movement towards that. In terms of the costs, what does that mean for our costs going forward? It doesn't change much because as we... close down a small branch and save a little bit of money on a few operators, we actually employ more and more digital staff that we pay several times more, be it user experience or customer satisfaction people or coders or others, so testers and so forth. So, you know, all in all, I know it looks very good to see the branches shut down and you think, okay, we'll save a lot of money and this Excel works very well, but it doesn't work like this. So we will be shutting down branches, but we'll be employing more people in the back office. All in all, I think what we are trying to do is maintain positive operating jaws as long as the business doesn't suffer. If the business requires more, we will we will spend more like we did four or five years ago. But right now, we are able to maintain positive operating jobs by, in fact, increasing the quality of our offering. So I think as long as we continue that, there will be ups and downs in different parts of the business, including in branches and block offers.

Could I have sort of one more?

I know it didn't answer your question. It just confused you. But not by design.

This is the real world. Clearly you're the dominant merchant acquirer in Georgia and I'm sure you'll have seen what's happening at Network International. All of the UK banks divested their merchant acquiring operations a long time ago. They're completely standalone units, non-capital intensive and extremely valuable. at the to contextualize this i haven't got your numbers but i have uh i have asked them and to contextualize this um if you look at someone like a bank of cyprus if you apply the network international multiple to their jcc business a part of the group that is three percent of profits is worth 33 of the market capitalization and i suspect it may be a very similar story for yourself so i was just sort of wondering strategically how do you view merchant acquiring

We view it as a very valuable business. We view it as a fee business, low capital intensity and high growth as well. So as I outlined, I think it is clear that the ability to grow business there is much higher than in the rest of the, in the other parts of the business, including in balance sheet business, because balance sheet, you cannot grow much higher than the nominal growth of the economy. although the short to medium term, that may be possible given the deleveraging that has happened. But in the payments business, we've been growing, let's say 40 to 50% over the last few years now. Is it possible to continue at those rates? Maybe not at those rates, but definitely higher than 20%, probably higher than 30. And that is possible because of still larger part of the cash usage in the country. So I would, Our position there, I would say, you called it the dominant position. I think it's very valuable to our investors. And at some point, if we have to spend it out, we may have to monetize the value. But hopefully, investors can see through that. It's not very complex. It's payment business and bank.

Thank you.

Thank you, James. So next we'll have a question from Craig Matherow and I'll allow him to talk.

Thank you. Hi, Archul, and congrats on the results as well. I did step away, so apologies if this has been asked. Just around cost of risk, at a group level, it's normalized, but you're still seeing recoveries in the CIB business. Can you just talk me through the dynamics there and perhaps how much longer you expect that to happen or when will... cost of risk for the corporate and investment bank to normalize and what that might do to the group cost of risk? Will it push you significantly higher than your through the cycle target that you have? Thanks.

Very good question. So we expect the cost of risk to normalize I mean, there's not much more to recover, right? And we had some strong recoveries over the last few years. Having said that, cost of risk in corporate is, let's say, it's much less than retail. So when it will play into the normalized overall cost of risk, we expect our cost of risk to remain between 1% and 1.2%. This is what we expect medium term. In terms of other things that play into it, we had cost of retail risk relatively high historically over the last 18 months, and we are seeing it come down slightly in that there are a lot of things going on in the background for that with a lot of activities in the risk department, in data and so forth, and that is going very well. All in all, we expect our cost of risk to remain between, let's say, 1% and 1.2% that is with normalized cost of risk in corporate.

OK, thanks. Thank you. I don't see any questions in the chat. Let's wait for one more minute or two more minutes. If there are no more questions, then we can wrap it up.

Thank you very much for your interest and for being on the call and interesting questions. As the second quarter is progressing, we are already thinking how it's going to go and we'll be reporting, we'll be talking to you in about three months time and talk to you then. Bye-bye.

Thank you.

Bye-bye.