Lion Finance Group PLC

Hello, welcome everybody to Bank of Georgia Group PLC's earnings call. Thank you all for joining. Today we released and are presenting the Group's consolidated financial results for the second quarter and the first half of 2024. As always, I'm joined on this call by the Group's CEO, Archil Kaciciladze. And we'll start as always again with the presentation and then we'll move on to the Q&A session. For your information, this call is being recorded. And with that, I'll hand over to Archil.

Thank you for being on the call. We are seeing the numbers that are usual numbers, pretty high, which is surprising given the fact that we are at the last decade of August, which basically means that you should be on vacation. So I hope you did get a little bit of rest and vacation. And with that, let me dive into the numbers and quickly go through the numbers that we have, which are pretty decent. So we have return on equity of 28% with cost income of 35.6, which is in combination of Ameriabank. On a standalone basis, we are just shy of 30% for the Georgian operation. That is profit, net profit consolidated is 430 million, although ECL charge, which is related to the acquisition and does not reflect the round rate. If you add that, you get 480 million Lari, which is more or less what we're looking at in terms of the profitability. So based on that and pretty strong capital numbers, the board recommended Dividend per share of 338, which is about 95 pence, but it will be determined, the exchange rate will be determined in September. And the buyback of 73 million Lari, with the current price, it should be around half a million shares. So with that, let me have a quick review of the macro economies of two countries, Georgia and Armenia. The format is slightly changed because this is the first time that we are presenting on the income statement side, the consolidated company. So hence the macro as well, we are presenting both countries. Both countries are doing very well. In fact, Georgia has delivered 9.5% second quarter real growth, which is extraordinary. And we've upgraded the expectation for 2024 to 7%. 5% for next year, which as you can see from the 2021, which was slightly as a result of the lower base in 2020, but then 2022 was 11%, 7.5% last year and expected 7% this year. Armenia, in a similar way, had very strong numbers as well. Second quarter, 6.4%. Real growth and expected for the full year is 6% and 5.3% next year. We have seen the inflation coming down. As you can see, CPI, the latest number is 1.8% in Georgia and 1.4% in Armenia. And refinancing rates have come down from 11% down to 8% in case of Georgia and 7.75% in case of Armenia. So very similar trends in both geographies and very similar economies in many ways. As you can see, because of very strong economic growth in both countries, we have seen mid-teens and high-teens wage inflation in nominal terms and in real terms pretty high as well in Georgia as well as in Armenia. This is relevant as we discussed the cost inflation that we have seen in this quarter. So we see that as the inflation, CPI inflation comes down, also the wage inflation is coming down. Real still remains high in case of Georgia of about 13%. Having said that, I think the trend is downwards and we should see it coming down to high single digit or low double digit. In Armenia, it's already about 5.4%. Also, what we would like to present here in both cases, I mean, in Georgia is the main source of external sector inflows and outflows, which trend-wise we are seeing very decent numbers. This is not the full current account balance, but current account balance are usually published a little bit with delay. So we'll be presenting those in the appendices of the larger presentation, but in terms of to seeing how the exports as well as the net transfers and tourism are doing. It's a good indication to present this. Also something that has become bigger and bigger part over the last few years of the hard currency inflows is the services. And on the last page, as you can see, we have presented tourism there, but on this page, you can see that the other parts, especially transport and IT have become bigger contributors overall to the economy. IT, for example, in 2023, in case of Georgia, you can see that it's about $890 million of export revenues that are generated in Armenia is even more, although Armenia itself is about 20% smaller in terms of the population and the economy, but the IT is a larger part of the economy. As well as when we see the other, also there, the education, especially the university education is becoming a bigger part of the economy in Georgia as well as in Armenia. So I think the trends here are decent and flat and increasing in some cases. We have seen Armenian drum getting stronger by 4.1% from the beginning of the year, while Lari has stabilized. So it devalued slightly in May as we had some demonstrations and some volatility in the currency, but it came back to 2.7 per one US dollar. So from the beginning of the year, it's flat. And as you can see, the real effective exchange rate over the last 10 years has been flattish to appreciating in case of Georgia, slightly more so in case of Armenia, although in both countries, we are seeing good inflows and credit on appreciation. which is something that we have seen now, especially in July. We have seen it strengthened to 2.68, but then the National Bank started to buy it as well lately in end of July and beginning of August. So we are seeing good numbers in terms of the gross reserves and net reserves. The first quarter decrease, slight decrease, was a result of the... repayment of some of the foreign debt, as well as we bought some in the first quarter, some hard currency to pay for the acquisition, as well as then in the second quarter, National Bank intervened to support Lari because of the volatility, but then he has started to buy back in July and August. In Armenia as well, we have pretty strong numbers. So from a historical perspective, the growth as well as net reserves are pretty strong. On the fiscal side and the government debt side, we see that Georgia is below 40%. Armenia is about 50%. Fiscal balance also in case of Georgia is 2.5% currently running at that rate, although we are ahead of the budget in terms of the revenue collection there. In Armenia, the fiscal balance is planned for slightly more in terms of the deficit because of very ambitious projects in the infrastructure, especially on the roadside, which is very encouraging and very good for the country, medium to long term. As you can see on the banking sector, the growth is pretty healthy around, in case of Georgia, 17.8% and 19% in case of Armenia. De-dollarization is very good levels down from mid 65s and about eight, nine years ago, down to 45 and 33. Armenia performing even better on this. And Georgia has stabilized at about 45%. And the quality of loans in the whole sector is pretty healthy in both cases. Here, we would like to underline that Georgia has a gap in terms of the long-term trend. If you long-term trend of banking assets to GDP. I think we would be at very healthy levels between 70 and 80. We're at 65 right now, so there's more to grow there. But in case of Armenia, it's even more so. As you can see, banking debt to GDP is 53, 12 points behind Georgia, which represents more potential for growth in Armenia. Now, a few things about the about the numbers, about the strategic direction, and then we'll go to the revenue and expenses and numbers. So we are developing our retail and our application for the legal entities. We have added three new languages to our retail app, which is Armenian, Azeri, and Turkish. Azeri and Turkish are obviously very close to each other. About 70% of words are similar, but still very different language. So basically, we added these three languages because they are minorities in Georgia, which Armenian and Azeri specifically, which I think will enjoy our services even more in their own languages because some of them have difficulty in Georgian or English. So that should allow us to basically cover better some of the minorities in the country. In terms of the number of clients, our growth is still impressive, although our overall penetration in terms of the coverage of the population is still pretty good, but overall numbers are growing at 11.8%, as you can see. In terms of digital usage, it's growing by 20%, so 1,469,000. million users, and in terms of daily users, it's more than 700,000, as you can see, and it's growing. So engagement is growing even more than the usage, and usage is growing overall better than the overall client numbers. On the legal side as well, we have seen 20% of 20% more users of our digital channels, be it the internet application for the legal entities or the mobile application. And in terms of the monthly active users, we have 26% growth. So that means the higher proportion of overall clients are using our digital channels. We've seen more and more of our retail sales being done through digital channels. As you know, some few years ago, we were looking at the ratio of transactions being done digitally. So now almost all transactions, I mean, 99.2% are done in non-branches, about 70% done in digital channels, about 28% done in ATMs and self-service. Then also that combined is 99.2%. So 0.8% are done in the branches and that number is decreasing even further. But what we are concentrating on right now is selling more products digitally. And that number used to be in mid-teens a couple of years ago, as you can see, and we have achieved 57 in terms of retail. So that's increasing in a very healthy way. And specifically in terms of loans, retail loans, about 80% of all sales are done fully digitally. Mortgages are predominantly still issued through branches, at least part of the process. In terms of the acquiring business, payments acquiring is a very strong franchise that we have, and the strong growth is continued there with 35% increase in volumes. year-on-year and quarter-over-quarter is, there's some seasonality there, but 17%. So year-on-year is 35%. Market share is very strong with 6.8% up by percentage points year-on-year. On the issuing side, so that's number of people using our cards actively, so monthly active users of our card usage in terms of number of people, not number of cards. is up by 18.7%, also very good increase. So in terms of the franchise strength and growth, very good numbers there. Something that makes me very happy is our NPS number. So you remember five, six years ago, we started focusing on this and have managed to increase it from the low of 27, in fact, six years ago to 71. And 71 is a new historic high. which I would like to thank all Bank of Georgia staff for focusing on this religiously and basically increasing the quality and satisfaction of our clients to a point where it's 70%. 70% is very high showing for any universal bank that may or may not be sustainable. We'll be happy between 60 and 70. So we don't aim to go above 100. but rather keep it at these levels. I highlight that because at some point, cost-wise, it becomes too expensive to further grow it. But 60 to 70 is a very healthy level of showing for any universal buy-in. In Armenia, as you can see, the growth rates for individual clients are very good. The number of clients have grown by 13.4% and digital users by 43% and daily users by 55%. So here as well, you can see that 57% of customers are now digital. active users of the application and there's plenty of upside here. There's plenty of upside in overall the retail customers, monthly active users of the services. So we expect that a lot of growth will come here, but it will take time because there's more product development and more overall user experience improvements and other things that will be introduced over time and the teams are working together and this will take time, but I think there's plenty of upside here. Now, in terms of the numbers, The second quarter numbers include Ameriabank and therefore some of the growth numbers are basically very high. So I'll talk about the group, but I'll also talk about the Georgia operations so that you can see what like for like comparison as well. So it's not lost in the overall big numbers. So the revenue is up by 42% year on year. But in terms of Georgian financial services, it's up by 4.8%. Now here, what's important to say is that the interest is up by 14.8% from 382 to 438. So the core revenue interest is up. but also then some of the other fee and commission income numbers, which are core numbers have grown significantly as well. So net fee and commission numbers are up by 37%. So 88 to 120. So you remember a few slides ago, I discussed the acquiring business and how the volumes were growing at 35% and so forth. That's the main driver. Net effects revenue has gone from 88 to 99. So that's about 12% growth. And the only decrease that we see is in other income, which predominantly was based on the gain on the real estate sale that we had one year ago in the second quarter of 2023. So if you excluded that, you would have 17% increase in the non-interest income, which is very strong. So although the non-interest income seems like 10%, reduction and the overall revenue number is only 4.8%. The core components of it have grown in a very healthy manner. So we are quite happy about it. In terms of consolidation, you can see the big numbers as well. I'm not gonna dwell on that. In terms of expenses as well, those are also big numbers with 88 and 53%. Here as well, although Georgia numbers have grown as well with 20 plus percent here, we would still, in terms of the cost income basis, we would still be shy of 30%. And in combination, we are at 35 here. So costs and containment of cost growth is one of the focus areas. We basically have experienced this situation where the business has grown significantly over the last three years. And we've done a little bit of a catch up of building the infrastructure as well as the people and staffing to make sure that the services are delivered at a high quality. So we have seen some stuff growth, but also this stuff, wage inflation has been significant. Having said that, I think we are seeing the trending down, as I explained in the macro section, and we should have, we should be close, by the end of the year, we should be close to the long-term ratios, which should probably be high single digit or low double digit. So that should be in line with our business growth. In terms of the loan portfolio growth was 64% again and 56 here. But if you look at the Georgian side was 23%, constant currency was 19.6. So very strong growth. We are very happy with it. Quarterly growth was also good. On the Armenian side, year on year, When you look at it, it was 36%, but in terms of the constant currency, it was 26.6%, so a very strong growth there as well. Plus, Armenian drama got stronger versus Lari in dollar. So that caused the Lari translated number to be even higher. Yeah. So on the deposit side as well, we are seeing very strong growth in both geographies. So very good growth, partly reflecting strong growth in the economies, in both economies, but also leading franchises in both cases. So net interest margin, 6.3, almost flat, which in Georgian case, it was decreased slightly as a result of the tier one, $300 million that we raised in the beginning of the quarter. And we repaid the old one at the end of the quarter. So there was some negative carry about 10 basis points. We should help us in the third quarter and going forward. And then in Armenian case, it was slightly more. So it balanced it out at around 6.3%. In terms of cost of risk, We have an ECL charge, which when you do the acquisition, those of you that have spent a lot of time understanding some of the complicated I3S rules will know that when you do the acquisition of financial institution, the Fair value of the loan book is added as if you issued that loan fresh, although there's some charges of stage three loans already have deducted in the fair value. And then you apply the ECR to the whole portfolio, which in this case is about 73 basis points for all of Armenian book. although we've not seen any deterioration there at all or whatever was separate. So basically if we didn't have that ECL charge, our cost of risk would be 0.4%. Although you're seeing the numbers of 1.1% and half a year would be similar as well here. The MPL coverage slightly reduced, but no major movement there either. we disclose separately the two, separately because consolidation is also affected by ECL. So I think it makes more sense to look at it separately at least next three quarters, and then it somehow balance it out. So profit as well, we saw that it's up by 11% year on year, but if you included the sale charge that I've discussed quite a bit now, it would be 480, which is, comfortably higher than the run rate of 450 that I mentioned on a previous call. So, you know, 28% return on equity, but if you added the ECL, it would be a 31. So 28 is pretty good number, but 31 is reflective of the, more of the core of what we are looking at. So in both cases, both numbers are pretty good. So the capital ratios are strong in Georgia and in Armenia as well, especially on core tier one. And basically, as I mentioned on the previous quarter result and during the acquisition, although Almeria is highly profitable, we expect that profitability to be deployed to finance high growth in Armenia. And here as well, because we have higher ratios and buffers for the Kortia one, you see that there's a capacity to add tier one or tier two instruments and further find us growth in Armenia. Georgia numbers are also very high, but given the elections and the volatility in the region, I think it's good to have high buffers. Liquidity is high and we like it that way. And probably at some point close to the end of the year, we may look at slightly reducing it. All of this basically means that dividend announcement was 3.38, which is 10% growth on last year and very comfortable for our numbers and buyback of 73%. Again, this is for half year only and then second half year we'll do in spring of next year. You can see that the numbers over the last three and a half years have been reducing of shares outstanding. That's a result of our buybacks that we started three years ago as part of the capital repatriation. So the number of shares are decreasing. So I will stop here and open the floor for your questions.

If you'd like to ask questions, please use the raise hand feature in Zoom as well as a Q&A chat if you prefer to type your questions. And we have the first question from Robert Sage Pilhand.