Bank of Georgia Group PLC

LSE:BGEO

Earnings Call Transcript

[Nini Arshakuni, executive]

Good day, and welcome, everyone, to Bank of Georgia Group PLC's 3Q 2023 Financial Results Conference Call. My name is Nini Arshakuni and I'm Head of Investor Relations at Bank of Georgia, and I'll be moderating today's call. Today, I'll be joined by the group CEO, Archil Gachechiladze will start, as usual, with our presentation, and then we'll have the Q&A session. Please know this call is being recorded, and we'll hand over to Archil.

[Archil Gachechiladze, executive]

Thank you for being on the call. Let me share the presentation. Just a second. So we had a very strong quarter. Let me just jump into it. So as you saw, the results already probably, we delivered $257 million, which was up 23% year-on-year on a very, very strong quarter 1 year ago. In fact, third quarter last year was an exceptional one. Return on equity, we delivered above 30% and cost income below 30%. So it's another quarter of higher return on equity than cost income. On 9-month numbers are also similar and strong. We delivered a net promoter score of 59%, broadly flat, slightly down from the previous quarter, which is an exceptional level for any universal bank, and monthly active users grew by 25%. Now let me touch on the macro, how the Georgia macro is doing. Georgian macro is doing very well, much better than we expected 1 year ago. So far this year, the GDP estimate is 6.8%, inclusive of September 1. And we expect a stronger quarter in the fourth quarter to also deliver around the same. So Galt & Taggart investment banking now expects 6.8% for the full year and 5% next year. So as you remember, 2 years in a row, we delivered above 10%, although 2021 was based on lower 2020. But still 2022 was very strong and 2023, a very high base has been ahead of our expectations. So we see somewhat slowdown in growth in exports and imports, but at the same time, and remittance is balancing out because we have a few quarters of high remittance last year. But then while remittances from Russia has reduced and normalized, we see that remittance from other countries, especially the U.S. has grown quite significantly. Tourism flows are growing as well and nicely in terms of revenues, it's 28% in the third quarter versus the peak year, which was 2019, that's why we compare to 2019. High inflation was a challenge in Georgia. And now I think we have the inflation parameters have normalized and where we reduced below 3%. So headline inflation is hard 8%, as you can see in October and core CPI is 2.1 and target is 3% as we may remember. So we are seeing the monetary authority reducing the refinancing rate from 11% to 10% over the couple of quarters. And we think that there will be further reductions going forward towards 8% to 8.5% end of next year, which should be supportive of the overall lending in Lari, especially. We have seen broad stability in late terms versus U.S. dollar from the beginning of the year. while we've seen Turkey, Russia, Bell Russia, some of those betas weaken significantly versus the U.S. dollar. So that, I think, real effective exchange rate will further come down not because of the exchange rate, but because of the inflation differential, which we are seeing in these countries that are listed by far. You see the gross international reserves growth is stable, slightly down in September, but it basically stable. And you see the net reserves at $2.9 billion and significantly higher over the last 2 years. So we have been buying significant amounts of reserves over the last 2 years, as you know. -- somewhat slowed down because we much more significant, but still, first 9 months, the National Bank has bought $1.4 billion of [Indiscernible] on market. We have seen a slight pickup in growth of bank credit year-on-year to 13.9%, which is in constant class is 14.9%, which is good, and it shows economic activity that is picking up, especially on the investment side, which we are happy to see projects that are middle corridor are emerging and are becoming real in terms of starting to become real now. So it will take a couple of years for that to come online, but they are very specific projects, more and more like logistical logistical hub, strive ports as well as for modernization, et cetera, that are emerging. We have seen de-dollarization continue slightly flat, but still at 45% of the credit. And what's also notable is that over the last 3 quarters, we've seen a significant reduction of dollar deposit -- dollarization in deposits as well around 50%, which provides a funding base order loans, which is very good as well. Nonperforming loans by the investors lowest by regional standards and are low by all standards as well. You may remember from our previous presentations talking about the potential that we have in terms of loan growth above the nominal because of deleveraging that happened over the last couple of years. We have seen that flat to slightly increasing, and that's what we were talking about. There's potential to leverage more businesses because deleveraging has happened and will probably continue going forward. We have seen fiscal discipline as well as lot of getting stronger, resulting in national debt to GDP dropping below 40% at 38.5% and 2024 budget is out and is further tightening next year, which is an election year in fact. So we're going from down from 2.8% budget to 2.4% predicted, which is a welcome news when you are in election year. So it's very strong macro, and we are very well positioned to capitalize on it. You noticed is our -- this is who we are [Indiscernible]. We are top of mind and most trusted back in Georgia and in the country as well delivering with profitability. How do we do it? It's being relevant in customers' daily lives. So it's not only about mortgages, but on a daily basis, and that's the digital channels as well as payments, we want to be leading that, increasing customer engagement payments as well as excellent customer experience, and we measure that. So in terms of the retail application, we are up by 25% year-on-year, which is an incredible number for the largest operators. So 1 million monthly active users last year this time and 1.26% we have about 1.3 now. In fact, as we speak, and engagement on a daily engagement is 46.8%, which is a very good showing for any financial and financial after is, we call it financial Superior because in TM, it includes a lot of different products that are listed here. In terms of number of transactions, we have seen it grow and the share of digital channels is 65. \ We slightly changed the presentation here, which only includes the transactions and not the products sold because let's say, card sale was included as a transaction here, and we changed that because that's going to wait is now. But then the thing we'll be reporting and measuring the product sales in digital channels. And this is where we would like that number to be about 50% and closer to 60% and 70% in the medium term. And it has closed from, let's say, 38% to 47% of our 1 year. And we think it should be above 15% by the end of the year. In terms of the -- our digital app and the as well as the computer application for the businesses in terms of banking. We've increased the customer structure, which is an internal measure, but still year-on-year, it's a significant increase above 86% and 84% is incredibly good. And you can see it in the number of users as well. We have increased the number of business users of our application by 31.9% year-on-year, which is showing as well as number of transactions by 26%. And for Global Finance, which is a magazine that does the competition, et cetera, names the best in the world what it's worth. It's becoming a real competition, in fact. So we're glad to hear that. So it's -- in terms of payment volumes in acquiring business, we were up by 46% year-on-year. and added 6.3% year-on-year in terms of market share, so above 55% includable showing from where we started 3 years ago, focusing on this as well as on the issuing side. So our number of people that have used our card over the last 30 days is up by almost 25%, which is a really good growth, and we are happy about this. A number of merchants are up by 27% as well in terms of acquiring POS tenants. That's our commitment in Net Promoter Score. As you know, we are focused on this, and it's something that we focus on to see ourselves in. So these are the numbers that we covered in the beginning, 30% recurrent equity, 0.6% cost of risk in this quarter, which is below our medium-term expectation of 100 to 120 basis points and core income below 30%. And CP was 18.5% well above the minimum equivalent of 14.7%. So in terms of the numbers, revenue numbers, we are up by 22% for 9 months up by 32%. Net noninterest income is up by -- is down, in fact, by 4%, 3.9% and slightly lower as well from the last quarter because we had a one-off in nature in terms of the gain that we had on the asset sale of about EUR 60 million. You may remember last year.  But overall, we saw the FX normalize at these levels. So you remember the incredibly high numbers that we had last year, second quarter, third and fourth quarter was pretty good as well. But they've normalized around 10 million. Operating expenses were up by 15%. So it was close to operating jaws below the German growth. And therefore, we had the improvement year-on-year to cost-income ratios. Loan portfolio growth was very good at 17.6% year-on-year. In constant currency at 19%, which is very good. And similarly, Q-over-Q basis, there was 4% and constant currency going forward. Deposit growth also strong at 26% and constant currency stands at 29% year-on-year. And I would like to highlight that it was predominantly the resident deposits grew in our bolting in terms of the market share that we have a space to be on the list and deposits and lot at. In terms of the net interest margin, it was broadly flat at 6.6% like last quarter and year was significantly up 130 basis points. Loan yields were broadly stable as well. And while the cost of client deposits were slightly up, we had less pressure from the wholesale funding because we repaid some of the debts in the previous quarter. And you can see the overall, let's say, cost of funds have are flat or slightly down. Quarter risk was 0.6%, as I mentioned, and the coverage ratio is about 70%, and we feel quite confident about the NPL ratio is 2.4%. And profit was up by 23% Q-o-Q is slightly down because of the one-off in nature of the asset sale that we had last quarter. And you can see that return on assets is just shy off 5%, which I think a lot of banks would be happy about. In terms of the capital ratios, they are significantly higher than the requirements, as you can see here.  The total capital ratio is the lowest here into the buffer, and this is something that we can raise, and we're quite comfortable with 2.8%, obviously. Liquidity ratios are also quite strong at 130 plus and our loans-to-deposit ratios are also very healthy, as you can see. These are not quite comparable because this is 9 months, but you can see that this digital mile number is growing over the last 4, 5 years significantly from about $0.5 million to above what we will have, let's say, by the end of the year as well as the profits going from $0.5 million to level we will have at the end of the year, which is could be a coincidence, but it's -- there's more tweak than that. And strongest -- and growth is much stronger than the promised above 10% as well as the profit to be increased so much above our medium-term guidance. We have been good in terms of return capital and will continue being good and obviously, we cancel the shares that we buy for the buyback. And what can we buy for the management. We don't call it buybacks. We call it for the emergent management shares. And that's that. I will wrap it up in almost record of 17 minutes. So now I open it for the Q&A and also would say that our CFO as well as CRO are on standby, if there are specific questions that they would have to -- they'll answer I will refer to them. So Nini, please open up QA.

[Nini Arshakuni, executive]

Thank you, [Operator Instructions] And the first question is, I think I see the first hand from Robert Sage.

[Robert Sage, analyst]

I've got 2 probably connected questions. The first of which concerns your deposit growth, which seem to be very strong in the third quarter. I was wondering if you could perhaps provide more details about some of the drivers behind this. It looks as if your market share has moved very strongly up. Is this largely a function of pricing? Or are there other drivers there that might explain it? The second question concerns the the net interest margin. I think previously you'd indicated in the second quarter, you might have reached peak margins. But here, we're looking at a stable margin. I hear what you say in terms of likely falls in interest rates -- and I was wondering if you could sort of see how you see the margin developing over the course of the next year or so. Is it still going down towards 6%? Or should we think in terms of something a little bit higher?

[Archil Gachechiladze, executive]

Thank you, Robert. So first is the deposit. So it's very slow. As you can see, it's not driven by the by, let's say, higher prices because we have lowest cost in the market of any major bank, let's say. So our yields on deposits are low. Yields on loans are higher. Cost of risk is contained and hence, the profitability is very good, and we control the operating costs as well. So all in all, I think pretty good franchise, you can say. In terms of what is driving it, when we are highlighting the fact that we are the toenail bank for our customers that results in a number of things, including ability to attract deposits and current accounts and source. So we have 1.3 million customers that on mostly users of our retailer. But also we have a pretty strong coverage in terms of the branches. And we are top of most trusted bank in the country. So all of these results are very strong franchise and that's resulting in that growth. Some of it came from the legal entities as well, which goes up and down. And this quarter, it was slightly stronger than in other quarters. But whatever you see in retail and SME, et cetera, that's more of a franchise growth franchise -- in terms of the -- in terms of the NIM. So as I said, our expectation is that the deposit rates will go in line, let's say, of the international rates. And that's what's happening globally, I think. It's not happening very fast, and it's happening for, and that's -- which -- that's where we are heading, let's say. So as we can see, it will come on how much and how quickly we'll see. Obviously, our interests is to prolong and we've been able to slightly increase of deposits, but that's more than compensated by other income. We will we see it come down to 6% or below, of course, we will -- of course, we will -- it's a universal bank and -- and we'll be normalizing those levels as we go forward. But our objective is to hold it as high as possible for as long as possible if we can if the competition allows -- thank you, Robert.

[Nini Arshakuni, executive]

Thank you.

[Archil Gachechiladze, executive]

Nini, I think there are 3 questions. Mark Wexter is asking, can you please comment on the range of possible outcomes for the next general election in 2024? I do not know Mark, what you mean of the outcome for the general elections in 20 -- you mean the -- okay general elections. I think after the enough announcement 1 week ago about Georgia being granted, not being granted the consultation or recommendation of Georgia to regard to the transit of EU, which was new for us. I think the rolling part is much stronger. And it's -- although it's early to judge, we would expect that there will not be any major change in terms of the political party at [regards to majority]. The next one is by James Hamilton. Growth of 90% is very strong. What is the outlook for growth James, I think 19 is very good indeed.  We think we will be above our medium-term guidance of next year as well because I think there's needs to provide credit, especially for investment. But medium term, probably is 10%-plus. Next year, we don't have a specific guidance, but we should be comfortably above -- and then James has another question. Can you comment on the outlook for NIM, the impact of moving the Lari assets, lower rates and mix -- there's too many comments to too many I say, too much math for me to do while online. But I can say that, that there will be deposit rates going up. There is the Lari rates coming down because the refinancing rates are coming down. And I think all of that should result in us being able to give [dollars] slightly more, which carries slightly less NIM, but it's more capital efficient. So what we're looking at is return on equity, and we should be able to sustain it at a group level. I cannot give you more guidance than that on some of the mix and more specific questions that we had. Please feel free to ask questions. So let's wait for a minute. And then if there are no more questions, I'll wrap it up, which will be the shortest quarterly call we have ever had. But I don't want to beat the records this time. Well, there are no more questions, I would like to wrap it up. This is the last call we have for this year. This year is looking much better economically speaking than we expected. The 2 ends, obviously, the is not just a tool or but some human tragedy happening around the region in Ukraine and in Israel. I really hope that this will end soon and in the right way. One thing I can say is that we are the digital leader on the market here as well as the payments acquiring an international leader as well as leaders in terms of top of mind and most trusted but I think that's the strength of the franchise, which we have been highlighting that is based on the internal culture and the dedication to serving our customers. and measuring it rigously by channel and product and trying to improve it continuously. We will continue focusing on the strategic priorities being active and being relevant in customers' lives and being committed to the quality of our services and products that we provide to our customers, and we will build the future together. So thank you very much, and we'll talk next year. Anonymous identity is asking why this show maybe I'm not missing something. Maybe [indiscernible] Results are very strong. So that I cannot comment on the market.

[Nini Arshakuni, executive]

Yes, and we'll hear from the person.

[Uknown Analyst, analyst]

Can you hear me?

[Archil Gachechiladze, executive]

Yes.

[Uknown Analyst, analyst]

Yes. No. Well, thank you for your answer by yes maybe I'm it because I looked at everything, I looked at every number, they look great to me. So I can't understand, but if you can't then either it makes 2 of us.

[Archil Gachechiladze, executive]

Look, I can only say one thing that we won't focus on daily trading or daily prices. What we focus on is building a strong franchise and value for our shareholders and our customers and our employees and the management. So that is going very well. As you can see from the numbers, not just financially but from the strategic point of view. And we will continue focusing on that and returning the capital and build the business. The rest is the markets and markets, if I understood it very well, maybe I will be doing something else. -- but I know how to turn the deposits and to remit and transfers and service to clients. So basically commercial banking so we -- so we'll continue to do...

[Uknown Analyst, analyst]

Thank you.

[Archil Gachechiladze, executive]

Very good. So it's a bit early, but I will still take the risk and wish a happy new year and a merry Christmas in many months slightly early. But we'll talk next year, and we'll present the annual results as well as the fourth quarter when it's the end. So thank you very much. Thank you for record attendance, in fact, and have a great evening.

[Nini Arshakuni, executive]

Thank you. See you next time.