Bank of Georgia Group PLC
LSE:BGEO
Bank of Georgia Group PLC
LSE:BGEO
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Earnings Call Transcript
Earnings Call Recording
Other Earnings Calls
Welcome everybody to Bank of Georgia Group PLC's Third Quarter and the First 9 months of 2021 Financial Results Conference Call. My name is Natia Kalandarishvili. 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 2 parts. During the first part, Bank of Georgia's CEO; Archil Gachechiladze will be presenting financial results over here. And during the second part, you will be able to ask questions as part of Q&A session.With that, I'll turn the call 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 in 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 with -- in acquiring business POS acquiring business, our number of transactions have grown by 45% almost and volume by 70%. In our mobile transactions, mobile phone transactions, mobile bank transactions in fact, the volume is 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 a recent dip to 43%. So that's a -- back to the positive trend. And our employee NPS is also slightly up to 61% to all-time high. And we measure 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 we 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-o-q of 9.2%. We also have a pretty strong net tax gain, up by 73.9%. And back to the roughly GEL 30-plus million where we used to be and slightly more in fact in the 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-o-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 cost of 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 lines 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 a 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 being consistently since the payment holiday expired, has been more than 6 months. So they've paid consistently, and more and more people have been reclassified as normal loss from Stage 2 loans to Stage 1. 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 with -- and with the adjusted discounted value of collateral, it's more than 140 basis point -- 140%.And 2 other things to highlight as well was that we had a very good growth in the third quarter in terms of the loans issued. On a constant currency basis, it was 6.5%. On a nominal basis was 5.3%. 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 a slight strengthening of the currency. And on top, we had -- regardless of such a strong growth in the quarter at the same time, we had pretty good capital ratios. 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.A couple of 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-40% 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, 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 GEL 200 payment for the elderly, 60-plus years old, who 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 a 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 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 remittances have been very strong and has provided a pretty good growth impetus 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 have 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 it 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 there 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 upside 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 1 in every 2 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 -- 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 1 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 royalty. And we define that as core things with which we make sure that our retail clients are attached to our franchise, and we do it through making religious focus on our customer satisfaction and employee empowerment as well as developing data-driven decision making and focusing on the strength 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 stats. And there, again, we have resumed the growth of our number of active users, and that has grown by 4.5% last quarter, and it 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 2-year basis, let's say, here, if you notice, the number of transactions overall, let's say, over a 2- year period has gone up 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 30.2 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 has been happening over the last, let's say, 2, 3 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 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 will be focusing on that going forward as well.Now the next step there, and we mentioned in 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 the 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 held [Technical Difficulty] with different providers of payment services, cross-border payment services, and they are fully integrated now in our mobile banking through the -- through providing number, you can get directly to your Bank of Georgia account, and you don't need to do extra steps there. And that has basically resulted in almost every second payment turn the automated way, and it's more comfortable for our clients. And our number of -- or the percentage of the market share of the receiving site has also grown to 35%. There, I think other than banks also, the microcredit organizations also are competing on 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 selling 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 pretty happy is the number of transactions growing by about 45% year-over-year in terms of the volume growing by 70%. And Q-over-Q is also quite significant. As you can see, is 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 hard on it. 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 getting -- becoming more and more popular with our micro customers or micro business customers. There also, we had 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 are still using our branches, and we believe there's 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, is 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'd 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 dip of 43%, where a lot of unhappy customers would the interest payment becoming higher 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, this trend is very positive over the last few years and you see it very clearly 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 of -- is the employee engagement, which also was slightly below the high-performing organization benchmark developed by KORN FERRY, 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 full -- expected full cycle impact. The operating income year-on-year has grown by 25.8% and for the 9 months is about the same. The non-interest income growth was quite significant, in fact, and it was very nice in terms of 44.7%. When you look at the 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 2 quarters here to be fair, the fourth quarter 2020 and the first quarter 2021, we're relatively low in terms of the activity, and that does impact the NIM as well. There was a 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 have -- we are committed to a medium-term guidance of 35%. We had a positive operating jaws, 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% NPL 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 have 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 core Tier 1 is 11%, and we are at 12.8%. And let me highlight 1 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 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 a healthy -- very healthy margins there for us to continue growing. We have highlighted a number of times that our capital strength does not fully represent the IFRS numbers. And if we were accounting in IFRS, we believe that we would have higher -- even higher capital ratios by at least 200 basis points, if not 100.That basically, sums it up for us. We think that we had a very, 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 mobile application, increase in margin, increase of portfolio, higher-than-expected, as well as profitability and revenue lines in each and every side. So with that, I would like to open it up for Q&A. Natia?
[Operator Instructions] First question comes from Ilan Stermer.
Well done on the results. I have few questions from me. First of all, on the fees and comms. Obviously, very good growth there. Just wondering how sustainable that growth rate is in fees and comms and maybe a little bit of insight also into the FX translation gains that came through in the quarter and whether or not we can expect that to continue? So that's the first question.
Yes. I think our strength in our franchise in terms of the payment franchise, which we have been highlighting for a long period of time, is what you see in the net fee and commission income. Is it sustainable? We hope so. We'll see. But there's still a very large cash economy in the country. And we are very thoughtfully developing products. So our biggest competitor is not our bank or another bank. Our biggest competitor is cash. And that's how we are approaching it. So we are rolling out little by little different types of products and incentives and so forth to really win more business away from cash economy, and it's working. And next year, in spring next year, March, maybe April, probably, we are going to have a Demo Day, where we will tell you more about the products that we are rolling out as well as tell you more about the calculation and potential that we see in different directions, including repayments. On the FX, there's nothing particular to highlight other than the fact that there was slight volatility and volatility helps us in our FX business because it's a fee business. It's not a position. We don't keep large positions on our books. Volatility helps and there was slight volatility, and that has helped us. Overall, we are -- yes, we are developing and scrutinizing that business so that, to make sure that we can deliver good service to our customers and our business as well.
Next question on corporate deposits. You mentioned -- you obviously had quite high level of deployment of liquidity and so on. The quarterly movement in corporate deposits in Lari deposits, there was quite a significant drop there. Is that part and parcel of the deployment of liquidity or is there something else in there?
This is mainly liquidity, but then there's also some volatility. I mean, that's the most volatile part of the business, in fact, is the corporate deposits. And we use it for the liquidity management and other banks also use it for liquidity management and sometimes for other banks it's more justified to overpay for ForEx for whatever reasons. And we allow it to happen because it's a liquidity management exercise and nothing else. So it's...
A pressure belt.
Yes.
That's a pressure belt. Okay. The last question for me on -- maybe more of a medium-term question on lending growth and margins. On the lending side, the target is to exceed 10%. You're well above that already, and we, hopefully, will be moving into a reducing rate environment. How does that -- how do we square that circle of more than -- are you happy that -- or shall I put it differently, are you comfortable with the thought that we're going to have more than 10% growth pretty much for the foreseeable future with a dropping rate environment over the next few years?
Yes. First is that when we said that we -- when we provided the guidance of 10%, above 10% growth, we lowered it from 15%. We highlighted the fact that this year, we expect that would be higher. Higher than 15%, in fact. So if you remember that -- so basically, that's -- we are well on the route of having higher than 10%. And where that 10% is coming from roughly is that as we are banking assets to GDP of roughly 70% or 72%, it's not high, but it's not 30% anymore either. So while there's a significant growth potential and that growth may be coming from OTGs and other different directions, it will be happening as the interest rates come down. But our expectation is that it will -- that penetration will not significantly grow. It will grow somewhat, but not significantly. And as the economy is growing real rate of 5% and the inflation is running around 4% or so, nominal growth in this economy is close to 10%, a couple of percentage points here there, and we are talking about 10-plus percent without growing the banking as penetration in the economy. But it could change. There could be some pickup there as well. So do I expect growth of 10-plus percent for the future until Georgia GDP catches up with the Eastern European levels, which is like 3x, 4x more? Yes, I do. And that could be a very long time. If -- for some people, 10-plus percent growth is not exciting. And I hear that, but then we'll grow in other directions, which is something to do with our fee business. And there, I think there's more growth opportunity than this.
And last one for me is on margins. Your -- the 5% you've spoken to before, it happens, again, what happens next year directionally with interest rates hopefully coming down?
I think what we expect in terms of the margins are broad stability. I mean, sometimes will be slightly up, sometimes slightly down. But overall broad stability. And the reason for that is the way the capital requirements are formed in this country. So we entered, due to regulation, into a lower risk environment where the consumer lending is limited in many ways in terms of the payment to income in terms of sold -- so a lot of micro credit organizations have gone out of the market and pay the loans, et cetera, et cetera, do not exist anymore. So with all of that and with Basel III coming in now, over the next 2 years, we will see slightly more capital requirements, which we are already meeting. That means that a lot of capital increased leverage and low-cost environment means that especially decreased leverage means that with margins, if you decrease the margins, your overall profitability will decrease, and that doesn't seem to be profitable for -- either for large banks or small banks, in fact. I mean, for us, we don't like to see less than 20% return on equity, imagine how it is for smaller banks, right? I mean, in terms of the scale that we have, a lot of people were expecting that scale to be less important, but as the time has proven for smaller countries, especially if you are subscale, it doesn't make sense. So competition, I don't think competition will be pressuring it down. So I think I expect broad stability in the margins.
Next question comes from Ronak Gadhia.
Well, just as a follow-up, maybe a couple of follow-ups from Ilan's questions. Firstly, on the payment side, is it possible to give a bit more breakdown in terms of the transactions you're doing? Can you categorize them into P2P, B2B or any such categorizations? And also maybe just share how the take rate is evolving as you move from traditional channels to more digital channels? That's the first question.
Yes. I don't think we've provided at this stage any more breakdown. I mean the majority of the fees are coming from the acquiring business and acquiring business is pretty simple. It's through the POS tenders. In terms of the other fee and commission income, we don't provide this breakdown at this stage, and we will consider doing that in the future.
Okay. Understood. And then the second one, also somewhat of a follow-up to last questions. You mentioned growth should be slightly above 10% or so. Could you highlight what segments you think will drive that? Will it be more retail or more mobile [Technical Difficulty].
I think it will be well balanced throughout, in fact. So last year, we saw a lot of growth in corporate and mortgages, in fact, in second half, obviously. This year, we are seeing consumer micro and SME growing, and I believe those 3 segments have more firepower left in them because there's a fundamental demand, and growth may be coming from that. But then looking out, although mortgages have slightly slowed this year versus last year. I believe that fundamentally, this country still has a lot to go in terms of mortgages. So every way you look this growth opportunity, which all translates into so far, 5% expected growth for the country, which has some upside there as well.
Yes. The reason I ask you that is if I look at your breakdown, it seems your NIMs on the corporate side are higher compared to the retail side.
But that is temporary effect. So let's well noted, Ronak, but when you look at it, basically, the year-on-year [Technical Difficulty] in the case, basically. So the corporate subsegment sales Lari deposits to our retail subsegment. So corporate attracts and retail. So in retail, people save mostly in dollars and they borrow in Lari because of regulation. So retail franchise is a net borrower of Lari, and as Lari has become expensive, retail margins have suffered, but then corporate has benefited. So it's too much detail probably, Ronak but to assume that NIM is higher in corporate, that would just be wrong. It's relatively temporary. And as the refinancing rates will come down, it will correct itself.
Yes. I was going to ask about that because when you look at the asset, you have cost of funding, it seems retail is doing better, but the NIMs seem to be reverse, so that didn't add up.
Reason is that in retail, basically, retail has a bunch of fixed Lari portfolio. So call, let's say, consumer some mortgages as well for the first 1 or 2 years is fixed Lari. So as the Lari rates go up, retail margins suffer short term. So their cost of funding goes up faster than the income side. So that's what you're seeing. But overall, I think the profitability is still pretty good. On corporate side, this is slight worse because it's benefiting from the current accounts that it has the Lari on. And that's why you see it slightly higher. So basically, there's some skewing in profitability there. But overall, profitability is something to focus on.
Got it. Last question on your potential write-backs. As you noted, the NPL, this looks quite high. Should we expect any more significant write-backs in 4Q or maybe 2022?
Not from that, I mean not because we think 90% is high per se. But as you see the NPLs coming down, you will naturally see higher coverage ratio. The reason for that is that, let's say, Stage 1 loans, have a general provision on it, right? So yes, NPLs will come down, but is -- if they came down to 0.1%, you would have 300% coverage or more. So basically, general provision rate changes, there could be, but nothing in our sleeves right now. But we have seen some things that we had fully provisioned becoming some recoveries, et cetera, that is helping our cost of risk. So that could be in the next quarter or 2. But overall, I think we will be getting closer to the normal cost of risk in the next few quarters.
And there's been no change in modeling for Stage 1, Stage 2 provisions because of the rising COVID rates.
Not really because what we have seen is that unlike in like the first wave when we -- when the country was shocked and what's going on, et cetera, right now, we have high rates. Having said that, the hospitalization rates are slightly lower because we have more and more people vaccinated or who have had COVID was. That's one. And the second thing is that somehow the country adjusted to this new reality. And this is the new reality. And the government has been very decisive on the fact that since vaccines are widely available, the government does not intent to go into hard lockdowns one way or the other. So if that's not happening, then the economy is not impacted in a relative either. Unfortunately, people are dying, obviously, the ones that contracted. But overall, in terms of the economic impact, it's less so because the lockdowns is not something that the government is considering. Having said that, I think this Green Passport thing will push up the vaccination significantly. Because it will create discomfort for people going into restaurants and bars, et cetera, the ones that are not vaccinated. So -- because the younger population does not want to get vaccinated, and I think if they don't get into the bars, they will get vaccinated to get in. To get -- they'll do anything to get into the bar.
You next question comes from Simon Nellis.
I have a few questions. Yes, the first one would just be on the non-credit related risk costs. Can you tell us why that's still coming through? I thought that was related to legal cases, which were done. So I was surprised to see continued non-risk costs -- non-credit related risk costs coming through. That would be my first one. Maybe we can go 1 by 1.
Yes. I mean, this quarter, we had a number of different things. Impairment of assets held for sale was slightly, there was some legal cost, there was about half of it slightly more coming from impairment of leasing assets. So that's what we had, probably something of -- to speak of a larger size.
And the outlook?
The outlook -- I don't know. I thought that $5 million was not a very significant number for that. But if -- to have an outlook of that -- yes, I don't have -- I don't expect any major thing coming through. But if there will be $2 million or $3 million, our normal cost of risk of $30 million to $40 million, it could be.
Okay. And then just on the dividend, it's good that you've restarted the dividends. Can you just give us an idea of what you're thinking about going forward? So are you committed now back to being an interim, so twice a year?
Yes. So...
And what kind of level, what kind of payout?
We upgraded our policy and basically have guided the market that we'll be paying out 35% to 50% over the next 2 years, and we announced it 3 months ago. Over the next few couple of years, we expect 35% to 40% payout ratio. So that's what we are guiding. It will be a mix of dividend and share buyback, 2/3-1/3 roughly, but there's slight changes here and there. So we're done an increase, so that will be followed by the dividend early next year, probably we will announce. And there will be some buybacks as well.
Sorry, the half between the 2 -- what was the split between the 2?
We don't have a strong guidance there, but 2/3-1/3, roughly.
2/3-1/3. Okay. And then just 2 more questions. One is just on deposit growth, which has been relatively subdued, and your loan deposit ratio has been going up. Are you going to look to rebalance that and drive faster deposit growth going forward?
In terms of loans to deposit ratio, we are very comfortable because we see that as well as the long-term financing that we get from the outside is pretty stable sources of funds. So we're not concerned about that. So we will be attracting as much funding as we'll see the economy is relative to absorb. So we will not be rebalancing it because we are concerned about it. We will be growing and borrowing and doing whatever is needed for our asset time.
Okay. And then just last, I was hoping to get an update on your marketplace business, how is that going? The Extra e-commerce site?
Yes. Extra is, in fact, not going so badly. It's increasing its number of sales, et cetera, but still loss making. So because it's not significant. I don't spend too much of your time on it. So it's an experiment that's continuing, but if there's any significant success we will report to you.
Okay. How many active users do they have?
I don't not remember, in fact. But they've had close to 400,000, in fact, if I'm not mistaken. So they had 2 marketplaces. One was for the reselling, so like an intermediary between the 2. And then another one that is a marketplace for new things of shops selling to the customers. So B2C. And basically, I think that, that part is the one that we are developing actively. And we have seen over the last couple of quarters, a significant pick up there, and it's becoming a leading place. Having said that -- so I just got a message from the head of that business, that we have 300,000 active users there. And basically, the e-commerce development in Georgia is still in very early days. So only 1.1% of all retail sales is done through e-commerce. So far no exciting numbers or figures, but I think position wise, it's good to have it, and we'll see where that goes. Because I think the team here has done some significant improvements, and we'll see where that goes.
And who are the largest competitors, if you don't mind me asking, I don't know the space that well?
The largest competitor is our competing banks' similar project, which is called Vendoo. But Extra is leading in some ways. There's also -- there's also -- so basically, there are 2 types of activities that Extra is doing. One is the, let's say, intermediary C2C, let's say, C2C is one very large player, the micro, but B2C is something that we think is more interesting in B2C. I think we are leading and off-line stores are the biggest competitor because, as I said, it's 1% -- 1.1% of total retail sales, which is nothing to speak of. It has a potential to grow significantly. But we'll see.
While we are waiting for live questions, we have 1 question in Q&A box. Do you have a view on U.S. dollar GEL moving forward?
I see broad stability with some upside on based on tourism. So basically, over the last 9 months, we only had insignificant participation by the National Bank of Georgia to support Lari. So it was just once or twice, but it was like less than $60 million or -- $60 million throughout the year. So it was nothing to really speak of in terms of the overall amount. And you have seen the stability in Lari. So I think there's some upside there next year as we see tourism coming back and if it comes back strongly, and then there's upside there. And if it doesn't, then we see the stability.
The next question comes from Svetlana Aslanova.
I have a follow-up question on the cost of risk. Given that now you answered one of my questions that you expect stable FX rate, could you please give probably more details on your outlook on cost of risk in the next few quarters versus full year '22? Or when you're talking about normalized rate, what would it be in the next quarters?
I think we may have a quarter or 2 some recoveries. But after that, I think we should be getting back to the normal cost of risk, which is -- our current guidance is 1 to 1.2.
Okay. And also, I have a question. Probably I got it wrong, but I noticed that the -- with the outflow from the corporate accounts you borrowed from the banks, and that was more expensive. So shall we assume a less pronounced positive effect on NIM in coming quarters due to more expensive funding or you expect NIM to slightly improve or stay stable, as you already said?
Broad stability. An unexpected worsening, but broad stability, 20 basis points up or down, we'll see. But overall, we expect broad stability. Our consumer franchises helped us a bit. Our leadership in the retail deposit franchise is also helping. Most Trusted Bank status is also helping. So overall, I think we are in a very good position.
And the very last question. So am I right that you expect no further movements in the refinancing rate, in the policy rate by the National Bank? No further...
Expectation is no further changes although...
No further increases, I mean in semi.
It's very hard to predict. I would say my expectation is no further increase. And from next year, let's say, second quarter of next year, slight -- starting to decrease as well. Having said that, inflation is running at 12.8%. So it cannot -- it's not definitive. Obviously, the National Bank may raise it further. But I would say that in terms of balancing out, given the fact that we are running at core inflation close to 6%, which is significantly lower than the headline inflation. I think 10% refinancing rate gives you some justice, and it should come down. Having said that, headline inflation is also important. So we'll see. But my current expectation is no growth.
Next question comes from -- sorry. Okay, we have 1 question regarding the -- so you've flagged in the statement some political instability around regional elections. Can you please elaborate?
Yes. I mean we have had elections where the Georgian dream got 46% proportional walls, which was important to demonstrate more than 43% for historic reasons, you may remember. And after that, we have had our third President Saakashvili returning from Ukraine going to jail. There is noise about -- around it. Other than that, only 1 small region where the U&M won the Amir's portfolio. In others, there were a number of second rounds, but was they have lost it. So overall, I think there was a lot of, let's say, opposition excitement and discussion and so forth, but it's always some kind of normal. That's all I can say at this stage. We don't expect that changes to happen of any kind. So there will be noise, but it's no news to Georgia to have some noise.
And our next questions comes from Can Demir.
Congratulations on the results, particularly on the payment side of the business. I think it's very impressive. So I want to ask a question about e-commerce. You mentioned the e-commerce penetration is not exciting, but I think 1% is actually a very exciting number in terms of penetration. There's a lot to do that. So given what's going on in the world because COVID was a big bump in the e-commerce penetration, apparently not in Georgia, but would you consider growing capital into customer acquisition in e-commerce or any other fields where you see the penetration as abnormally low in Georgia rather than returning it to the shareholders through dividends or buybacks?
Yes. I mean, all I can say is that our extra.ge franchise is a leader in what it's doing. It's just so small right now that it's not attracting much attention. Having said that, on top, our regulator makes it clear that they want to see that banking and e-commerce and other activities are fully separated. And whatever success that extra.ge demonstrates it should be also open for other banks to participate in. So we are looking at it as a separate business and are looking at it as a separate profitability. And obviously, it's not profitable at this stage, but it's leading in its category. So if you check it out, you'll see that it's developing and the customer acquisition's pretty nice and the returning churn is that -- they're doing their job. And in terms of going in other directions, in fact, we are very much focused on banking and the marketplace like extra, more or less. I mean, there's one other thing that we're looking at this, which is MIS provider for the small and medium businesses called Optimo, which we also think brings a lot of value to its customers, but it may, in fact, be not just Georgia play, but going outside as well. We'll see. So we are not looking at a lot of other things.
Okay. And so the regulator is relatively conservative. Is that your message?
On the side very much so. Yes. So let's say, when you look at models like you see in Kazakhstan, you wouldn't see here because the regulator is very clear about it that I don't want to see that. But as a separate business, the marketplace, it could be exciting, and that is happening, and we'll see it happen, probably. It's a free option.
Yes. But what I'm trying to understand is in Georgia, it's also separate. So they -- if you're talking about cost base, it's a separate business and Cosby is actually sort of a holding company, right? So is that okay to do in Georgia, the PLC being the mother ship for the bank and the e-commerce company. And then the bank, let's the e-commerce come, use its balance sheet for e-commerce.
Probably it's doable. What the regulator wants to make sure is that whatever is done, it's done on an basis and it's available to other participants in the market as well.
Okay. So this can't be an exclusive deal between your companies.
We have 1 question. One of the attendees is asking to -- if you could repeat the guidance about the dividend related to number of payments during year-end by size.
35% to 50% Natia, am I right there? Is it 25% to 50% or 35% to 50%, because I'm focused on the upper side of it. But...
30% to 50%.
It's 30% to 50%. I apologize. So 30% to 50% total capital return to shareholders. Over the next 2 years, we expect 35% to 40%, given the fact that the growth we expect this year and next year, slightly above the medium-term guidance of 10% as well as the capital buildup, given the full loading of Basel III requirements. And then we'll have some dividends, which will be probably roughly 2/3, but that is not a hard guidance, and the rest will be in share buybacks.
Thank you. At this point, we don't have any questions. Sorry, we have 1 just coming in.
This is Petr Grishin from VTB Capital. Can I ask you a question about something that's not necessarily Bank of Georgia related, but wider macro-related thing for Georgia? So we've lived through this a period of interest rate hikes by the National Bank. If you compare this period with previous hiking cycles, and given that now you see the reaction of the depositors from the bank, is there any difference? Is it your transmission mechanism in monetary policy terms in Georgia? Transmission, I mean how the refinancing rates gets transmitted to other rates that U.S. Bank, as bank said. Is there any difference from previous episodes? Is the system evolving? Or it's basically raised in a similar fashion to what you saw or what you could expect in previous hiking cycles?
It's a very insightful question, in fact. And I will to show you a slide to highlight 1 point that I would like to make. Yes. Natia, the slide that had the overall banking organization. It is in the big pack, right? I have a big black open in front of me, and I only see the RB loss, but here you go. So Petr, Natia will look for the overall. But you can see here, this is the retail loan -- retail loans. And you see that the loans in Lari have gone up over the last, let's say, 3 years from roughly 49% to almost 60%. If you look at the new issuance, it's even more, it's like 80% or 75% issued in Lari terms, right? So you see more and more, almost 2/3 of the loans outstanding to retail now is in Lari. So that mechanism, the monetary mechanism that the National Bank has, I think, is becoming more powerful. So some years ago, let's say, was less significant. There were a bunch of fixed interest rate as well. And we have gone to, let's say, the -- we've got to variable rate as well as Lari lending, and as you know, that the regulator has limited the banks to issue only in local currency, below GEL 200,000, which is the majority of all the lending in any case. So that basically has made that impact more powerful on the economy. That's why I think that 10% raise, which is significant, right, from the normalized rate of longer-term rate, which should be -- which will be close to 5%, 6%. It is quite significant. It is having an impact. Overall, the demand is pretty strong still because of course, the economy is doing so well. But I think next year, especially as we go into a slightly lower economic activity because we are growing at 10% now. We are expecting 5% next year. It will have a significant impact, and it should be more than enough to offset those inflation periods.
We don't have any more questions.
Well, it was plenty of questions, and I would like to thank you for that because it lasted for more than 40 minutes, the Q&A, and thank you for your time. Understanding that you are very busy with a lot of different earnings coming out and a lot of different companies to look at.I would like to congratulate our team with a very strong set of numbers. And with any dimension you look at starting from the revenue to balance sheet, to the margins, to net fee and commission income, to the number of digital users, to the number of payments in through POS terminals. And is, in fact, Can has reminded us to focus on extra.ge as well, where we have gained leadership there. But so far, it's -- the numbers are not huge, and we are not highlighting those all the time.Thank you very much for attending, for your time and for very good questions. Bye-bye.