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

[Technical Difficulty] Sorry for technical difficulties here, apparently I was on mute. So on Georgian macroeconomic developments, it was a pretty good quarter. We had 14.4% growth in the first quarter, which was driven by good growth in exports and remittances have stayed up regardless of a relative drop in reduction in March, obviously given the regional issues and the war in Russia and Ukraine. So the tourist numbers have gone up and have registered 68% of the 2019 number, which was peak on the record in terms of tourist revenues. So all in all, it was regardless of the regional problems that we are all facing, the first quarter was a very good one economically speaking, partly due to the low base last year. But regardless I think overall, the performance has been good. Now in terms of the tragedy that is happening in our neighborhood, also has economic impact and the economic impact on one side is basically those are the different types of impact that we have from Russia and from Ukraine. So we import different types of commodities mainly from Russia and export some commodities, some with some rare export and some agricultural goods, as well as to Ukraine. So here are the numbers; so if we skip imports and go to export side, so together, the 2 countries represent 4.9% of exports for Georgia and 4.9% of Georgia's GDP as exported to these 2 countries. About half of that slightly more than half, is Georgia originated exports, the rest is either re-export or commodities that we export to these countries, which can be exports elsewhere. Remittances used to be Russia used to represent 60% and now it's significantly less. So in combination, Russia represents about 2.2% and Ukraine 0.5%. And in terms of tourism, you can see that it's 1.7% combined, these 2 countries. So all in all, the impact is significant, but then there are some other impact that is on the positive side, including the logistical corridor, other by [ Janet ] Georgia and logistical corridor becoming much more relevant for the whole region. Because [indiscernible] and [indiscernible] other countries, can no longer export effectively through Russia or are facing different kind of challenges, logistical challenges, so they're trying to put more and more goods through the soft Caucasian corridor, and that has resulted in some positive impact on the Georgian economy, as well as some IT specialists also relocated to the region, including to Armenia and Georgia and Turkey. So, in total, when the war started, we thought our initial projection was that we expected growth to decrease to 3% for the country. But later on, we upgraded that to 4.5%. So the current expectation is that the country's economy will grow 4.5% in 2022, more or less in line with the longer term trend of around 5%. Inflation though remains a challenge like in rest of the world, but here it leans slightly higher. So end of March with the inflation CPI registered 11.8%, which was down from 13.7%, which is high by historic. I mean, we have a target rate of 3%. So that has caused the national bank to raise the financing rate number of times, and the latest one was in March and it was raised to 11%. So, we believe that the national bank's reaction in terms of the rate hike was timely, and we believe that the inflation will start to come down. A lot depends on the global cost, the prices obviously. But nevertheless, probably inflation will remain in high single digit and can be around between 8% and 9% on average for 2022, which represents a challenge obviously. In terms of the currency stability, I think Georgia [ Lottery ] has demonstrated a very good performance. Since the beginning of the year it has been stable, slightly appreciated, as you can see 1.3%. So, although the appreciation has been short of the Armenian [indiscernible] appreciation of around [indiscernible], it was a still pretty decent performance. And as you can see from the real exchange rate trend here, it is in line from the longer term trend of stable. Stable, let's say currency vis-à-vis the trading partners. It was in fact last year was grossly oversold and we have seen some of the appreciation that has happened. And right now it is around a hundred or longer term trends where it used to be. One other thing that a lot of people overlook is that the dollarization rate in the banking sector right now is its historic low of 50%, and probably can come down further given some of the incentives that the national bank has created. And these incentives are working and have created basically a more expensive total financing for our borrowers. And that more expensive borrowing is subsidizing. So [ it's a lottery ] borrowing. So its additional capital requirements are required from banks for any additional one percentage of totalization of the books. And that is the price incentive to digitalize the book further. So I think as the inflation comes down, as the refinancing rates comes down and the [ life ] normalizes, I think we will see more of that incentive working in real life and doing its job. And also what we can see is that the NPL ratio is one of the lowest in the region. And you may remember that over the last few years, we have seen Georgian banking sector risk, overall risk being reduced significantly due to stricter regulation and more capital requirements overall. So I think that's something to keep in mind alongside good profitability. So a few words on the strategy, as you know, retail banking and corporate are 2 main directions in retail. We report mass retail premium bank, premium retail, and MSME. That in combinations are 2/3 of our business and our book as well. In payments we're more than 50% in acquiring business in the country. Our mobile app is doing well and is a leading financial mobile app in the country. [ 97% ] of all transactions are done outside of the branch in digital channels. We have a strong retail market share. We are most trusted point and top of mind bank, and have NPS of 54, which is significantly up versus few years ago of 27. And we are delivering more than 20% return on equity and intend to do so in the foreseeable future. So what we target and our main strategy is to make sure that we are leaders in daily banking, in mobile app and payments, and loyalty and how we do it is having a very strong franchise. That's why we highlight the top of mind bank and most trusted bank made by our customers. And we do a lot by focusing [indiscernible] on the customer satisfaction, and employee empowerment and deploy a lot of different data models and focus on profitability. So on some of those measures on that strategy side, before we get to the revenue numbers and profitability. So you can see that we have continued increasing our mobile users and mobile [indiscernible] users have gone up. The monthly active users have gone up to close to 900, 892,000, which is up 22% year on year. And one additional measure that we are introducing a share of monthly active users to digital monthly active users to total users. So something which we thought was not possible in fact was significantly increase our monthly active users within the country. And year-on-year we have I think more than 10%. Which around [ 950,000 ] are using our mobile application bank. In terms of the [ transactions ] by almost [indiscernible] percent year-on-year. So that [ needs to ] continue, let's say. It could also [indiscernible] this seasonal component where Q over Q is flat, but that is understandable because fourth quarter is much more active. And one of the measure which we also are quite happy about is daily active users to monthly active users right now, which is almost 45%, 44.6% for financial app is a very good [indiscernible]. In terms of the total number of [indiscernible] in our [ channel ] and mobile [indiscernible], mobile has become [ 50% ] [indiscernible] and we intend to keep that number going up. In fact, we saw our branch transactions coming up by 10%, we showed precedent activity overall in the country, and that was partly due to reflecting the economic growth. But that's why we are pushing a lot the offloading of not only transactions, but now, also some of the products that we are selling through our electronic channels so that we can grow this business and scale it up based on digital primarily. So on that note, the product offloading ratio has gone up 1 year ago from 19% to 35%. In fact, we promised you to take it up to at least 36% by the second quarter, and then let's see, we should be able to provide that. And this is obviously very important and there's plenty of upside here to sell more and more of the products through digital channels. In terms of our business mobile bank and business internal bank, our users have demonstrated the healthy goals. We've gone up to 43,000, in terms of users and number of transactions is up by 56% year-on-year and there's an [uptake] in transaction [indiscernible] as well close to 98%. In terms of our leadership in payments business, here the volume of payment business is up by 85% year-on-year, and we still think that there's plenty of growth left in this part of the business. Obviously here, there there's complex number of many different products that we are rolling out to make life easier for our merchants, including instant reflection on their accounts of the payment. To say that otherwise, when a customer pays in a shop or a restaurant, the amount will be reflected on the merchant's account instantaneously, and they will be rolled out very soon, it's very, very important to our merchants. They used to have to wait for 3 days now they're waiting for 24 hours, but it will be instant. I think there will be a big positive for our merchants. On the net promoter score, which reflects our focus on the customer satisfaction few years ago, it used to be a low point of 27%, now it's to about 54%, down from 54.6%. So more or less it's flat, which reflects our focus on customer satisfaction. It's a primary strategy for us to serve our customers and make sure they're happy. So what does happy customer bring us is a very good profitability of 30% return on equity, net profit up by 73%, revenue up by 30% and even Q-over-Q which is not very often that it happens that the first quarter number is high and then the fourth quarter, given the fourth quarter is a very active one. But we had the 4.4% growth in revenue, cost of risk was 0.8, closer to our normal levels, cost to income was 35% in fact, slightly improved from last year. First quarter is low seasonally, but still it was good to see improvement there. Loan growth was 11.6%, but 19% on a constant currency basis, and deposits was also up by about 10.6% on a year-on-year constant currency basis. We had strong capital, 13.7% core tier one above 11.8, which is our minimum requirement and the liquidity well above the minimum requirement. So slightly more on detail side, so basically, we had revenue growing by 30.3%, which we were happy with that growth as well as a Q-over-Q of 4.4%. So we have noninterest income representing 31% of our total revenue. In terms of the noninterest income itself, we had a growth of 36% year on year, and the core revenue grew even more where the other income we had close to 0 this quarter, where we had a very, very strong growth and performance in FX obviously given the very high volatility in the environment, especially in March. In terms of operating expenses, we had a significant growth there as well of 28.9%, it is a high inflationary environment and we are facing inflationary pressures, but luckily enough, our revenue growth, we have kept higher than cost growth. So that has resulted in cost income of 35%, which is our medium term guidance. Loan portfolio we did mention already, grew 11.6%, but the cost in currency growth was higher 19%. Deposits grew also third, 3.7% and 10.6% on constant time basis. In terms of dollarization, we are at 54%, which is the lowest historically, and as I described, I expect that number to come down. The NIM was stable at 5.3%, and you see the decomposition of NIM where we had a slight growth in loan yield, and we had also cost of funds and cost of deposits growing slightly, that was due to the financing rate obviously going up. Cost of credit risk as I said, was 0.8%, which was closer to our normal level. And in terms of liquidity, in terms of the -- sorry, NPL, we were flattish at 2.5%. Then our coverage ratios increased yet slightly. Profitability as I described was modest 73% up, and return on equity was also pretty nice above 30%. That was done on strong capital basis of core tier one of 13.7, almost 2% above the minimum requirement and tier one at 15.4, which was, you see the minimum requirements here, as well as the total capital being slightly more than 2% above the minimum requirements. And what's also worth noting is that as the puzzles 3 requirements are fully loaded, we expect December '23 is the date when the ratios will be fully loaded and you see our expectations of what capital requirements would be, assuming some of the things to be constant, so we should be above those requirements even with today's numbers. In terms of the numbers that you are seeing, obviously they are based on the local standards, and as the local standards move to IFRS, you should see higher capital requirements. The regulator has said that they'll probably introduce some buffers where this additional capital that you'll see will be absorbed. So you should not expect release of capital. But I think one thing is important to keep that when you are comparing these numbers in IFRS terms to other banks, you should probably add another 2%. So instead of 13.7%, you should be probably thinking closer to 16% core tier one ratio. And that is nice as well. Liquidity, we did mention, we are above the minimum requirement and comfortable at that. All in all, I think just to summarize, basically we are performing well above the promises that we have made of more than 20% return on equity delivering in this case, more than 30%. We are growing on a constant currency basis year-on-year at 19%. We have in fact made an interim dividend last year, after skipping 1 year during COVID times. And we intend to pay the last of it, bringing the payout ratio for dividends, to 25% and we will observe the regional environment before we say anything about [ sticks ] buybacks. So that's in short and I will move to the Q&A. So Nini, please let's move to the more interesting part [indiscernible].

[Operator Instructions] The first question is from Ronak Gadhia.

Thank you, Archil, for the presentation and taking the time and congrats on the earnings. I have 2 questions. Firstly, on your cost of risk, you mentioned 0.8% is more like a normalized level, but at the same time during the first quarter, there were some recoveries I think on the corporate side. So as those corporate recoveries start to ease up, should we maybe expect the cost of risk to normalize at a slightly higher level?

Please go ahead.

And the second question is, the loan growth on a year-on-year basis, was pretty robust, but during the first quarter was relatively modest. Could you just maybe give some guidance for what we should expect for the full year?

Thank you, Ronak, for congratulations. In fact, we were happy with the results, especially given the regional issues that we are facing. So overall I think the numbers were good, on not just [ lottery ] terms, but also on the performance and market chain and [ list ]. In terms of the cost of risk, you were absolutely right. I didn't say that we were at the normalized level, I said that we were closer to the normalized level, which we expect to be somewhere between 1% and 1.2%, depending on the loan mix. So, we will probably get to around 1% at some point. In terms of growth, you're absolutely right. So first quarter was less growth, but we didn't feel like it was time to push, and we saw that as loans got more expensive for our customers, we had a slowdown in mortgage demand, as well as corporates. Corporates were not eager to borrow. We have seen some of it come back in fact in April, but it was slightly less growth. Nevertheless, I think consumer micro and SMEs still continue to see some growth. So all in all, I think sentiment was obviously negative in March, but some of that nervousness is going away. Let's say what we are seeing in April. So we probably will be looking at less than 19% that we have currently year-on-year but well above 10% given the high inflation and the nominal growth expectation of [indiscernible].

And if I can just squeeze in one quick question as well. On the cost of funding side, obviously we're seeing very significant increase in rates globally. Could you maybe just share your thoughts on what's going on, on your foreign currency funding and whether you're able to pass that through to your borrowers?

So we have the lending in foreign currency mainly happens on variable rate and we borrow at variable rate long term. Short term we borrow deposits, which are fixed, but that's 1 year deposits mainly. So the mismatch there is not really there, and we have bonds obviously that are maturing next year, but we've bought out [indiscernible]. So most of it is on variable rate, so it should not be a problem to pass it through. It will more have an impact on demand if it gets really expensive and obviously it may impact the demand, but we're just an inflationary environment overall, I guess.

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

[Audio Gap] Please. Because well I'm interested is obviously revised up your GDP growth, the assumptions for this year. And also wonder is where you see the major sensitivities around that as we progress for further adjustments so that as we progress through the year. And secondly, assume the 4.5 is right. How does that play out in terms of expectations for loan demand? Particularly if you are also correct and inflation starts to come down to high single digits through the second half of the year?

Yes. Thank you, James. So we believe that this will be very close, but it is dependent on how this war plays out, right? So if it gets worse, then it will have an impact on the rest of the world, including ourselves, and if it ends soon, they're upside there. Or more specifically, I think tourism numbers are sensitive. So if regional tensions are really bad and their territorial functions and so forth, in that case, I think it will have an impact on visitors as well and so forth. So if we have more visitors, then these numbers could go up. If we have less visitors, I guess it can come down. So far, we have seen a lot of visitors and not just from the region, but people are coming back basically to Georgia in terms of visitors. So that's good. In terms of the nominal growth, yes. We believe that when we are talking about 8$, 9% average inflation, plus 4.5% of real growth, we're talking about, let's say 12% to 14% nominal growth, and that does have an impact on overall our loan demand. That's why I don't believe we'll be closer to 10%, which is medium term guidance, but rather higher this year probably mid-teens somewhere.

Archil, there is one question in the Q&A on Belarus.

So the question -- can you read the question?

So the question is, what in the P&L is the write down and what is the maximum exposure from the BLG shareholder perspective?

Yes. So the write down that has happened is totaled up to GEL 50 million and the current exposure is GEL 76 million total, remaining exposure to [indiscernible]. So it's 2.3%, I believe of the equity, which is -- yes, so it's more or less a monthly net income that we generate. 1 month net income.

And another question in the Q&A is, "What is expected impact on NPLs in case of long-term war scenario?" And we don't know, who's asking the question, but that's the question.

We will answer the anonymous certainly. So, it depends what kind of war we're talking about. So whatever we have right now is more or less reflected there. I mean, it could be depending how this war plays out. But it all depends on the severity of it. So we don't know. So right now, whatever we see is reflected. I think we have plenty of capital, we have a diversified economy, we have a country that people would like to send their goods through, because it represents alternative corridor to the Northern route. We have a place where people feel like they can work remotely on some of their Western customers. So all of this is positive. So all of this so far has provided the cushion for some of the negative impact that we are seeing from lack of less exports to Russia or less remittances from Russia. But who knows what happens in the war? So tell me what happens in the war, and maybe you can estimate what can happen in Georgia. Right now it's difficult to say. So your question is difficult to answer because it varies dramatically. What can that mean? So not just from LGM, could you talk about deposit growth and funding considering that your loan deposit ratio above 100% could improve your loan growth? We don't feel that at all in fact, because Georgia has historically and now as well enjoys long-term funding from [ my advice ]. So one of the issue that we look at is deposits plus [indiscernible] funding because there's no hot money, so to say, or market dependence there. So that money is long term and usually let's say 5 to 10 years, we have had some drawdowns from [indiscernible] that have provided financing post-COVID, to provide financing for businesses that need long-term financing. So, we are not concerned there at all in fact. Last year you remember that deposit growth was much higher, like almost 40%. While the loan growth was not.

Ronak has had his hand up all this time. I don't know if he has a question or not. Let me try just one more time. Ronak, do you have a question?

Sorry. This was from the previous time. I'll put this down.

So the next question is from [ John Damir ].

I wanted to ask you about the buyback. Can you talk a bit about the conditions you seek to initiate the buyback? Maybe we started that questions and then I'll have 2 follow ups, please.

John, so basically after the capital dissolution that will complete now, which is the 25% payout ratio, we on one side would like to see the uncertainty, given the war to be reduced. So we don't know when it plays out. So we don't want to be too aggressive. And on the other side, it's gross prospects. Right? We are seeing a nominal growth of the country going up mid-teens and that represents a chance for us to deploy capital and make more than 20% return on that. So it's between those things. So I would say the first one being more important. So we would like to not rush there and wait for the uncertainty to be reduced before we start more capital distribution.

And the dividends dividend, so is it now official that you're distributing I think it was GEL 110 million?

Correct. Yes.

Okay That's...

Yes, we put it in fact in the annual report, maybe it was not a separate statement, but we put in the annual report that we released some week or 10 days ago. Which basically reconfirmed our intention to distribute 25% of last year's earnings as cash dividend. So it was GEL 110 million in this case. The second part.

Okay, understood. And on retail cost of risk in the footnotes in the financial statements you mentioned, or the bank mentioned. Increased sales of unsecured consumer loans as the bank re-designed the landing process in digital channels in 2021. So are you talking about the growth and the aging impact here, or is there a different aspect to it that includes the cost of risk in retail?

Yes. We had slightly higher cost of retail than we expected in the fourth quarter, as well as first quarter. So we started tightening the risk issuance underwriting standards on the online consumer from October last year. So I think they were normalized from next quarter downwards.

Okay. And one last question on wholesale funding. So the short-term borrowing costs are as high as 6%, 7%, I think for Georgian sovereign. If they were to issue Euro bond today, I think that would be the rate that the sovereign would get these days and maybe it's potentially slightly higher for you. I know that there is the IFI's in that equation as well, which probably supply with cheaper funding. But I mean, does this mean that the normal liberal wholesale funding channel is closed for you? Because if you borrow at 6%, 7%, then you have to place at 10%, 11%. And is there a buyer for dollars at 10%, 11% yields these days?

Well, the answer is, there are buyers at 9%, 9.5%. So whatever we sold, let's say 1 year going back, which was total borrowing rates for Georgia and borrowers at around 6%, 6.5% currently is 9%, 9.5%. The reason for that is that about 1% to 1.5% is coming from the global hike of dollar rates. And another around 1.5% is coming from this incentive that the national bank introduced last year, which makes dollar borrowing more expensive, but then there's an equivalent pricing incentive on the lari one, which makes lari lending a bit cheaper. So yes, I mean the current lending to the corporates and SMEs and so forth are in some cases, double digit and in other cases, very close to it. So if that continues further, then yes, I mean, it would be at debt rates. And if you are surprised why there's demand for it, then look at the economic growth and inflation and the currency stability. So, as long as this inflation is global, I guess it's everywhere. And it's reflected in the revenue of these companies as well. So the revenues are increasing, plus you have decent, real growth, and that's where the demand is coming from. Having said that the first quarter there was a bit of slowdown, but the April showed that as the moment that the corporates thought, okay, there's more stability now, they like to borrow and invest, especially in the inflationary environment, because sitting on cash equities is not easy for a long time.

[indiscernible] we've seen the impact on the business from you close, so people from Russia and Ukraine to Georgia.

So slight impact. It's not very significant. I mean, the numbers of people that have relocated here, although we have seen some of the Western outsourcing companies like [ IPAM ] and others move some of their stuff, including their families in fact. There's a couple American companies that had software engineers in Moscow, and they moved them here with their families and so it's a few thousand people basically. You have seen office space go up pricewise, you have seen ready apartment prices go up in central [indiscernible]. But it's not significant. It's not very significant so far. But it's -- on an annual basis, you're probably looking at couple hundred million dollar positive impacts from that because they're well paid long-term individuals. And in fact, I was talking to this one American company that moved several hundred people from Moscow. And I said, "When that war is over, what is your plan?" And they said, "No, no, no, it's long term for us. Regardless of the outcome of this war, we're not going back to Moscow for many years." So, it looks like rather permanent, some of that move. Which is economically speaking positive for the country.

I don't see any hands or questions.

These results speak for themselves. Let's wait 1 minute or 2, and then otherwise I think we can wrap it up. Well, this was I guess the shortest call. At the same time, it was a call to describe record numbers by any measure, in terms of the revenue, I think it was the record revenue. In terms of profitability, this was a record profitability and we have had some, one of income, but we also had a significant write down in our subsidiary. So all in all, I think more than 30% return on equity, given very healthy growth on the revenue side and the core revenue side, as well as increased capital ratios and risk ratios being very decent. I think it was decent performance. We've had also registered very good numbers in terms of our digitalization drive, and we've seen year on year, our number of customers growing by about 10%, which is a challenge in a country where we have retail market share of about 40%. So this was a good quarter regardless of the war in the region and the human tragedy that is happening. And there too, we've done maximum we could in terms of mobilizing funds and helping the refugees and so forth. So, we believe that [indiscernible] probably showing a little bit less nervousness in our customers, and we've seen some of the mortgage demand and corporates coming back slightly. We see inflation as a challenge, but overall, I think the expectations of economic growth are pretty decent at 4.5% for the year. So with that, what rate inflation would become an issue for growth was an answer. So I'll wrap it up at that. It is double digit it will have an impact. This, whatever we have already is in the numbers. So with that, I'll wrap up the call, thank you for your interest, and stay tuned for more information and second quarter numbers. Thank you very much. Bye-bye.

Thank you all. [indiscernible]