Lion Finance Group PLC (BGEO) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the fourth quarter and full year 2019 financial results conference call. [Operator Instructions] I must advise you that this conference is being recorded today, Thursday, 13th of February 2020. I would now like to hand the conference over to your first speaker today, Archil Gachechiladze. Thank you. Please go ahead.

Thank you, operator. Very good job pronouncing my not-so-easy name. Welcome, everybody. Thank you for joining this call, and I will jump into basically the results. So in -- the results are pretty strong, as you might have seen, but I would like to give a little bit of a background. As you remember, in the beginning of the year, given the amount of new regulation and completely new environment, it was very unclear how the overall year will work out. I think we can clearly say now that it worked out fine and was fully readjusted to the new environment. Now what does that mean? I will try to explain that. So in the beginning, it was not clear if with the new reality where the high-yielding and high-risk loan portfolio basically not being generated anymore, how the revenue would look like and how the cost of risk would end at the end and how the cost provisioning growth would be. So so much has changed in the new environment that given the net interest income is not really comparable this year versus last year because the business model has changed. So we have part of the portfolio that was generating almost 100% yield, but it was generating very high cost of risk as well. So with both of that out, I think the one line that really describes how the business has done is the post provision line, which is in 2019 has grown by 18.5%. And that's what really is more or less comparable, with the best, let's say, a comparison is that. So overall, how the year worked out is that we had a very strong performance overall in all business lines, including the corporate and SME and retail. As I said, we have fully readjusted to the new environment and how the figures look far out, that for the year, our operating income has grown 7.8% with operating expenses up 10.9% and with cost of risk down. Cost of risk down, our net operating income before nonrecurring items are at least up by 18.5%. As I mentioned, this 18.5%, which is more or less our net income growth at the end of 18.2% as well, is a best indicator how the business is doing because the -- in the new environment, a lot has changed in terms of the revenue line as well as cost income. So both of them have decreased. In terms of the loan growth, I think we had an extraordinary year. In the beginning of the year, as you may remember, we were guiding currency-adjusted growth of roughly 10%. We are more than double that. So we have grown in nominal terms 27% of loan portfolio and currency adjusted at 22% growth year-over-year. And that in retail, that means 18.5%. And in corporate, that is 4% to 5% growth, 4% to 5% because some of the SME has been reclassified. Without that, would be 37%. So overall, we had a really strong growth in retail as well as corporate businesses, and that has resulted in -- with a strong rebound of the net interest income. So if you remember, in the second quarter, we were registering a flattish -- excuse me, operator, there's voice coming in.

The line is -- all participant lines are muted, sir.

Okay. Well -- so it's definitely not coming from us. So I will continue. So with that, what we have seen is that the net interest income started to pick up. In third quarter, it was up year-on-year 8.5%. And in fourth quarter, it's up 10.5%. So going forward, I think we are solidly on our way in terms of growth and that is very good to see. In terms of cost of risk, I think we have had a very good year. Strong in terms of not only the fundamental cost of risk which is down significantly, but also some [ grade ] recoveries in the fourth quarter as well as in third quarter which had strong recoveries in corporate as well as retail. So overall, the cost of risk has come to 0.9% full year. And in terms of our expectation going forward, the new portfolio mix that we have now, as in the past, has delivered a cost of risk over a long period of time of roughly 1% to 1.2%. So the best estimate that we have obviously of the future is similar to that. So 0.9%, maybe a little bit lower but not much lower than what we expect going forward. In terms of -- all of this has translated into a very strong return on equity of 26.1% for the year and that is well above our guidance of 20-plus-percent and we are keeping a guidance going forward as well. In terms of the capital position, I think we're very well-capitalized in the bank although we believe that the requirements of the National Bank are very strict, and in many cases, much stricter than the IFRS. And in our presentation, we provide what our capital position would be if we were accounting our capital position in IFRS, and there will be an extra 3% or 3.4% EBIT to our core Tier 1. With core Tier 1 and Tier 1 ratios, we are roughly 140 basis points above our minimum requirements for the year-end, and that is slightly lower than our medium term guidance of 200 basis points. As I said, the main reason is that we were able to deploy capital in much higher growth environment than we expected. So instead of, let's say, 10% to 12% growth that we expected this year, we've grown 27%. That means that we've deployed capital -- that we deployed it making 26% return on our pyramid, although will be in the best interest of the shareholders. So that leads me to the next thing, which is the dividend payout ratio, which, this year, we have increased the dividend by 5%. We've been the lower range of the payout guidance that we have at 26%. Again, that is because we are growing faster than we expected. So we keep the dividend, but we keep it on the lower range because in some years, we'll be able to deploy more capital. In other years, if the growth is less, we'll be able to be on the high end of our payout ratio. So in terms of the numbers, I think that gives more or less good overview, but I would like also to touch on something, which is, in some cases, at least as important as some of the good numbers. And that is how the quality of the business is doing. And I believe we have some very good indications that the business overall is doing very well. So one is strategically for us very important is number of mobile transactions. So digitalization and offloading our channels from all kinds of channels to mobile is our priority. And the easiness of usage et cetera is super important. So we have been adding new features to our mobile banking at an increasing speed. And all of that has resulted in a higher number of people using it, which is up more than 50% year-on-year as well, but also people that are using it are doing more and more of their transactions on their mobile phones. So currently, year-on-year, number of transactions has increased by 129%. That type of growth may not be sustainable but we should be closer to that level going forward for another year or so. In the fourth quarter, it was up by 109%, I have to say that this is mobile transactions. The internal banking transactions are more or less flat because people are choosing mobile as their primary way of banking, especially the newer generation. What makes me really happy is also that we've revised our marketing department. We have renewed our mission as well as the new CSR, 3 pillars that we've formulated and launched the new brand campaign a few months ago. All of that has resulted in the most recent research coming in and basically reiterating that we are the top-of-mind bank in the country, the long and most trusted bank along all age groups. And that is something which is a very solid fundamental to do business longer term. Overall, also something that is very important is the payment. And in the payment business, our number of transactions have increased on an annual basis 33.7%, and on a quarter-over-quarter -- so the fourth quarter of the last year, fourth quarter, so year-on-year, quarterly has increased by 42.2%. So in terms of number of transactions, we are doing very well as well. Something which also certainly is important for us is the ecosystem because of new way of banking and what our customers are expecting from us is the different ways of [ communicating ] for that, and to aid our main business, we have been launching different parts of ecosystems which are concentrating on 2 main customer segments. One is retail and the other one is the MSME clientele. For MSME, we've launched Optimo, which is a software that helps the micro and small businesses with a number of things, including this year as well as inventory management and order intake planning. We will be adding new features to that, including some accounting and HR and other things. So we'll make life easy for our clients is for MSME, and that will also enable us to offer our banking product better. Also on retail side, we've launched a real estate platform we think listing side, and we have acquired and now are in the process of relaunching [ xcelogy ], which is a retail site as well selling all kinds of things, everything. So besides this, we have a pipeline of other things that we'll be launching. So that business is developing very well as well. I think I will also -- I would like to review macroeconomic and political environment, touch a little bit on that. So macroeconomy, overall, the economy in the country has done very well, growing an estimate of 5.2% real growth, which was above the IMF estimates of 4.5%. The inflation was a little bit above the target rate. So the year ended with 7% inflation, and I think a lot of focus is coming to that. As a result of that, the National Bank has raised the financing rate from 6.5% to 9%. So some of the negative effect of that has already been reflected in our numbers, and we'll see that. But hopefully, we expect that the inflation should come down to 3% by the end of 2020. And with that, the refinancing rate should go closer to 6% in the next few quarters. That's the guidance and expectations by the National Bank as well as our bank. Something though was a very positive news during this year was the convergence or the minimalization of our current account. Current account of the country has decreased to 4.4%, which is the all-time low in Georgia over the last 10-plus years. So in fact, 20 years or so. And we got upgraded to BB by the last remaining agency, of I guess, by S&P this year. So overall, I think the country is doing well. And the fiscal discipline that I also wanted to touch on is that the target performance has been better than budgeted in terms of collection. Overall, that resulted in the budget deficit estimated at 2.1% for 2019, and the guidance for 2020 is that it will be at 2.4%. And again, it's an election year this year, and to have budget discipline well below 3% is a very encouraging sign. And this kind of fiscal [ propensity ] and discipline has meant that we have stability in the numbers in [ the year, too ]. This year, also the budget -- group budget performance has meant that the government has been increasing the CapEx. And in 2019, the CapEx has reached 8% of GDP, which is quite high by any standards, and that has been achieved without growing the budget deficit, which is a very, very encouraging sign, and very good sign of the discipline that the government is adhering to. IMF is expecting next year or 2020, in fact, a growth of 4.3%. Well, we are expecting slightly above that, but more or less in that line. And I have to note that all of this growth in 2019 as well as the expectation for 2020 is on the background of the political model that we have had. So we have been experiencing in 2019 in the middle of summer, Russia, bringing the flights and that had a lot of investors got nervous about it and caused the 7% devaluation of lari, which got a little bit better now on -- in the fourth quarter. So basically, all of this noise is the reality for us, and the country is performing -- it is performing with that noise in place and less of the noise I think that will be performing. So other than that, we don't expect any major changes on that front. So I think that summarizes more or less our results. Something that I didn't touch on, I'm sorry, is the NPL, which is down from 3.3% to 2.1% end of this year with our coverage ratio coming down from 90% to 81% of it. But was it -- what needs to be noted is that this is partly due to the fact that we've written off several corporate banking fully provisioned loans. So that basically resulted in the fact that whatever is remaining is better collateralized than the average we used to have. So because of high collateralization of the NPL loans, the NPL coverage is a result of the provision, which increased on IFRS. It takes into account the collateral that these loans have. That kind of thing is there to stay because going forward, given the fact that the high-yielding [ prepaid ] type of loans are no longer issued given the regulation, I think our group is more collateralized, and that will remain so. The testament to that or the reflection of that is if you look at the coverage ratio of the NPL, with the collateral in place, in fact, it went up. So we closed 129.3% and it went to 139.6%. So that basically reflects what I just described. So going forward, we expect that the growth will be in the range of our estimate, which is around 15%. So it'll be a little bit lower, a little bit higher and the -- on the years. But medium term, we expect that to be in place. We expect to deliver 20-plus-percent return on equity and our cost income to go back to 35% over the next 3 to 4 years. So that's our update, and I'm open for questions. Operator?

[Operator Instructions] Your first question comes from the line of Ronak Gadhia.

My first one is on your margins. If I look at your margin evolution, it seems like margins are still a bit under pressure in the fourth quarter. So if you could just talk about what was going on there and what we should expect this year in terms of margin evolution. The -- sorry, do you have to take it sequentially? Or should I just --

I think -- questions and I will take one by one.

Okay, okay. My second question is on your capital adequacy ratio. If I look at the slide, Slide 21, your CET ratio is 10 point -- sorry, I said it's 11.5%. The regulatory ratio is supposed to increase to 11.8% this year. Likewise, your Tier 1 ratio is slightly lower than what the regulatory minimum is for this year. So if you could just talk about how you will achieve those regulatory ratios by the end of this year. And finally, looking at your cost of risk, again, just based on the disclosures provided, I understand that the provision for the high-yield loans declined because the exposure to these loans declined quite substantially. But also within that, the estimate -- based on my estimates, the provisions made for the CIB portfolio and the consumer portfolio also declined despite the exposures to those segments continuing to increase. So I was just wondering, is there an element here of cyclicality? Are we at a point where the NPL ratio is at a multiyear low because we're at the start of a credit cycle but that should gradually pick up? And if that is the case, what do you expect is a normalized cost of risk and NPL ratio?

Thank you for the insightful questions. So I'll take one by one. So on the margin side, prices have been changed in terms of the margin over the year. So look at 2019 versus 2018, so the average margin of 6.5% to 5.4%. But with the -- I think we had stabilization of the margin, where the third quarter was 5.4%, which is the same in 2018. Now that may be affected slightly by the fact that there has been a raise in the refinancing rate of 0.5 percentage point in. So that will be fully reflected in the first -- third quarter. And we believe will be rather temporary because it should be coming down over the next couple of quarters as the inflation starts to subside. So in terms of the margin, I believe, the big change has happened and then the slight change is up and down. But overall, I think we are in a mode, as I said, other than the impact, slight impact that we will have because of the refinancing rate. But that could be reversed in the third quarter in a positive way. So margins may change as a result of the mix change, but that will be a gradual type of change other than the ramping change that we have been experiencing in 2009. We have had a stronger growth in corporate as well as SME, which these are the businesses that are operating in the margin roughly 3.5%. So corporate is at 3.8%, it's more or less at 3.5% to 6%. So if those businesses continue at higher rates than the rest of the business, [ 2% to 3% ], but that is not a major change that we expect going forward. So change has happened already. In terms of the [ out ] years, you're absolutely right. So over the next 2 years, we will be -- the full -- the new regulation will be affected in terms of the capital requirement, but that is well present in our -- we are doing. So we intend to keep a buffer of, let's say, around 200 basis points for the [ quarterly ] ratio over the next few years, regardless of the increase in the capital requirements and while growing. And that is possible given the stability and capital generation that we have. That's providing the comfort of meeting the capital requirements, which are growing, and growth and giving dividends to our shareholders. So obviously, if everything turns out. Now in terms of cost of risk, absolutely right, that the cost of risk with the consumer has declined as well. That is reflective of the changed mix of consumer results. So as we have said, the consumer loans which were higher risk have been limited. So I think the overall -- the consumer loans issued are of a different type. And we are [Audio Gap] They're used to and then the -- be responsible. But I think their relationship has resulted in all kinds of requirements in terms of taking the income and complying with the account PTI ratios and all kinds of issues that have resulted in the much lower cost of risk of 0.9%. But the fourth quarter, obviously, that is lower than what we expect medium term. So when there is a lift, what we've seen is that as the mix of the portfolio has -- have to look at the mix that we currently have and how this portfolio has performed in previous, let's say, 5 to 10 years. And what we see in that period of time is that this kind of portfolio is the corporate SME or the other of the current mix have delivered a weighted average of [ 1% ] over a long period of time, and that will be more or less specific on that, and that's all I can say in terms of cost of risk [ ratio ].

Okay. Sorry, just 1 question, maybe a follow-up slightly as well. On your corporate loan book, like you said, even after adjusting for the SME reclassification, corporate loan growth has grown 37%, which is very strong. So could you just maybe split that growth in terms of -- what was the actual growth in terms of -- how strong is the corporate borrowing appetite in Georgia? And how much or what element of that has created market share within the corporate space?

Yes. So you're absolutely right that in terms of the nominal terms we had, excluding the reclassification, we have 14.7% growth. And in real terms of currency, it just comes at 33.1% in corporate and that is a very strong growth. This is a result of 2 things. One is that you rightly said gaining in market share because we have had market share gains in corporate sector. But also, that is partly due to the fact that a couple of years ago or, let's say, 3 years ago, it was introduced and has had over the last few years is the corporate tax reform. In fact, the reform, just to recall, it was making the corporate tax 0 and also the dividend sales for any sector other than banking because we don't pay [ ATF ] overall, we're going to pay income tax, and tax for them would be lower. But for everybody else, for all that, that means that the state has left about GEL 700 million or GEL 800 million per year of money in the most profitable companies in the country, by definition, it was the corporate tax used. So that has meant that those basically equity in, specifically in the most profitable points in the economy, and that is why you see -- and leveraging capacity. So over 2018 and '19, overall, the corporate has enjoyed deflation. That type of growth, we may not see every year. So that would not be sustainable. But overall, partly it has the -- this reform has provided a very strong space for a lot of businesses to grow. So overall, that reflected not only the growth of credit, but also in the number of investments and exports growth. And in 2019, imports have not grown and exports grew about 12. That was partly financed -- the CapEx for that was partly financed [Audio Gap] reform as well as [Audio Gap]

Please hold the line. The line of the speaker got disconnected. Please hold the line. Our speaker will be joining now.

Yes. All right. Yes. So sorry that we dropped off and as there's some difficulty dialing back. But hopefully we're online, we don't see the participants. So to summarize in terms of the cost of risk. So basically, this year, we had 0.9%, but the current mix of the portfolio that we have currently, and the analysis that we have performed over the performance of similar kind of asset classes with current mix, we are getting roughly 1% to 1.2% and that's how this portfolio has performed over a long period of time over the last 5 to 10 years. And that is what we estimated to be going forward.

Next question comes from the line of Simon Nellis.

Actually, before I answer my question. I think before the gentleman asked about what was driving such a strong corporate loan growth, you were talking about the lower tax rate being a driver. I mean, are there other drivers because 45% growth is pretty...

Yes. Absolutely. So as I said, the currency-adjusted growth is 33%. Everything else is either currency which is another 3% or so and then the SME reclassification. So either 33% is pretty strong growth and that is a result of 2 things. One is the profit growth, profit tax reform, which was introduced end of 2016. So the result of it in 2017, '18 and '19 was leaning roughly GEL 700 million to GEL 800 million every year in the most profitable businesses that have been coming up with new ideas to expand the business. And that has been reflected in numerous ways in the macroeconomy. One way is the increased investment overall in the economy as part of the GDP as well as the growth of exports and growth in tourism which has also, on the hosting side, investment in restaurants and hospitality businesses, in hotels, et cetera. So that, combined with the market share gains that we have delivered this year, is -- has resulted in a total growth of roughly 40% in nominal terms, excluding the SME request. Hello? I think it's been dropped. Operator?

Next question comes from the line of Andrew Keeley.

Actually, a couple of questions. On your loan growth, thanks. You've talked some, yes, very clearly about the corporate lending. Can you tell us just what the numbers are for things like MSME and retail split between mortgages and consumer in terms of FX-adjusted growth? And maybe you can just give us a little bit of color about how you see the outlook for those different segments for this year? And then a second question is on your costs. I mean, this is one area that, I suppose, was higher than expected for the fourth quarter. You grew, I think, around 20% year-on-year. If you could talk a little bit about the extent to which that's being driven by the kind of ongoing kind of digitalization, IT transformation that you're -- that's taking place. And maybe just give us a sense of whether you think the costs are going to remain kind of quite elevated, that you've still got quite a long way to go in terms of this kind of IT spend and some thoughts for this year would be helpful.

All right. So on the first question, is that our SME -- in the SME segment, I'm not talking about the micro yet because that part is under -- it's mainly separately under retail and SME respectively. So SME is the segment where we are most underrepresented. So in most parts of the business, our market share is between 30, let's say, 33% and 40%, be it retail or be it all kinds of things. I mean, payments are a little bit higher even than 40% in corporate and all kinds of different businesses, and SMEs where we are in the low 20s. So we believe that SME has not -- we have a lot of potential to grow and to fully utilize the synergies that our retail as well as corporate business has with the SME sector and give an SME the full attention that it deserves. So we are starting to do that. And as a result of it, so we are streamlining the processes and the coverage model and doing all kinds of initiatives in the SME segment. We have started to see the results of it. The nominal growth, without the reclassification, because part of the assumption has been reassigned to corporate, as we mentioned. So without that, the growth in nominal terms in SME was 45%. We think that, that was very high, but we expect our growth to be above 20%, for sure, so 25-plus-percent in SME for the next 2, 3 years. And the main driver of that, we believe, will be market share gains because I think smaller banks have a hard time competing with us given the scale that we have in that segment. This is what more or less the smaller banks are leaning on. So that's how the SME grows. And in terms of the micro business, I think we are very well represented in micro. The automation that has been done there in the -- in middle 2018 is delivering good results. So we will be growing that business also in a very strong way and that expect -- we will expect that to continue going forward because there's continuous improvement in terms of process and the risk models, et cetera, that we are applying in that business. Now regarding the costs, you're absolutely right, that we have a relatively high growth in terms of the fourth quarter and costs of roughly 20%. As I said, these are mainly because we are investing in the business. Part of those investments are in the OpEx. And what I mean is we have decided to double our digital capabilities, and that's IT and digital products and processes. So we had to stop. End of second quarter is when we decided to do that, and that is a process of adding 50 to 70 digital professionals every quarter. So we started with 300, and that will continue with, over the next 2, 3 quarters, we'll be adding more and more. But as a result of it, we'll be doubling our IT resource versus our numbers end of second quarter. So that was one side. The second part was the -- was our marketing investments, where we are, as we said in the fourth quarter, was pretty intense launch of the new brand campaign. And overall, I think our activities in terms of overall marketing but, more specifically, on the brand side, has increased and that's reflected in the fourth quarter. We are also -- we have also increased the speed of renovating our branches, and some of the -- some of that basically means that some of the older renovation which has not been fully amortized will -- is being expensed at once, once you renew the branch. So that has some effect on that. Also, we are investing in SME capabilities where we are adding new staff. We invested in some consulting contracts that have advised us on the model and changing the approach, et cetera. So all of that combined has resulted in the growth in the numbers, in the OpEx numbers. So if we did not have the structural or the new way of approach and then investing in growth, our growth would be a little bit less than half of what you saw in the fourth quarter. Now going forward, what to expect is that, yes, there will be investments happening in the future. Our expectation is around 10% over the next year or 2 which should subside after that.