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

Hello, everyone, and welcome to Bank of Georgia Group PLC's Third Quarter Results Conference Call. My name is Nini Arshakuni and I'm Head of Investor Relations, and I'll moderate today's call. So we'll start with a presentation and Group CEO, Archil Gachechiladze, will discuss the results and the key developments of the quarter and then we'll open the floor to questions. Now I'm handing over to Archil, and we will take it from there. Archil, you are on mute so that you know and we can't hear you. Yes.

Hello. Thank you for joining the call. We will -- I'll cover a number of different things and then probably move to the presentation. We had a very strong quarter regardless of very challenging regional situation, geopolitical, war ongoing in Ukraine. Nevertheless, I think Georgia is going through a very positive economic trends, and that is reflected on the bank. And we've done slightly better in terms of not just the economy, but overall, I think our profitability numbers are very good and the franchise has done very well. Let me share the presentation and I'll try to cover it quickly. So our profit is GEL 290 million, which is a record for the quarter. It's up by 56% year-on-year. Return on equity was 32.4%, which I think is it occurred as well. Cost income is 30.6%, which is record low. NPS is all-time high, which is also a record of 60, which brings me the most joy, quite frankly, out of all these numbers, and the monthly active users, our mobile and internet bank has gone up more than 1 million, which was almost an unachievable number 1 year ago. So 31% year-on-year growth. So overall, I think these represent very strong numbers in terms of profitability, cost control as well as the franchise trends, as you can see in NPS and monthly active user growth. Now a few words on the economy. As I mentioned the economy is, Georgian economy is doing very well. 9 months numbers were 10.2% real growth and that is on top of last year 10.4%. We raised the expectations for the full year to 10.2% again as well because of 9 months' 10.2%. And overall, the numbers are very strong. They are driven by strong export growth, strong remittances, tourists full recovery. We use comparison to 2019 number, which was pre-COVID and was a record tourist inflow numbers. So we use that as in dollar terms as a comparison. And we have achieved more than that, although in numbers, there's still a lot of upsides for next year. Next year, we expect -- so as I said, for the full year, the expectation is that the growth will continue at the same pace. But after more than 10% growth for 2 years next year, then some global slowdown, we expect 4.8% growth. Still, we see a lot of tourism and as well as large projects starting because of Georgia becoming really important corridor given the current geopolitical developments. On the monetary side, inflation remains a challenge. Although as you can see over the last few months, let's say, there's a trend downwards. And the last showing was 10.6%, still high, much higher than the 3% target. But -- and that is the reason why the National Bank is maintaining tight monetary policy with 11% refinancing rate, which has been there, and we don't expect that number to come down for next quarter and probably somewhere from spring, we should see that number decreasing gradually. Also, the National Bank has a few months ago, limited the maximum lengths of consumer loan and made the payment-to-income ratio stricter, thus limiting the availability of consumer loans to slowdown the the expansion of money. Lari, as a result of all the regional trends, Lari has strengthened from the beginning of the year by 9.5%, which is very nice, and that is happening while the initial reserves are at all-time high, above $4 billion. And the National Bank has been buying U.S. dollars since the military conflict or the war that started every month's after March, basically. And nevertheless, Lari is getting stronger and is strong. At the same time, what we are seeing is that dollarization on the bank asset side on the loan side is at historical low at 45%. So the measures that National Bank have introduced in terms of basically dollar loan, subsidizing long loans, basically, but asking for more capital on dollar loans than Lari that is working and working very well. So I think there's definitely less loan issue, if at all. But what we are seeing is that loan legal entities that SMEs and corporate year-on-year growth has dropped to 8.5%, largely due to uncertainties as well as much higher cost of borrowing in U.S. dollars. And the households have continued to borrow mainly on the consumer side and some mortgages. You can see that as the economy, the real growth is at more than 10% and inflation is more than 10%. So nominal growth is 20%. And in dollar terms, there's some appreciation of Lari. Basically, there's a major deleveraging going on in the country. So as you can see, banking sector loans to -- banking loan to GDP basically has come down to 62%, which is a pre-pandemic level, basically as well as the national debt is also expected -- public debt is expected to hit below 40%, which is pre-pandemic level as well. So that, I don't think many countries can say that from countries without natural resource studies. But that we are experiencing a rapid deleveraging. And also, I don't have it here, but the fiscal discipline is there. They updated the budget to total budget deficit of 3.2% from the original 4.2% this year. But probably, we expect the actual performance to be at around 3% budget deficit, which is already quite an improvement after the COVID expansionary period. So a few words about bank now. You do remember that our strategy is to be best in mobile payments and loyalty and do it through focusing on customer structuring and employee empowerment and the strength of franchise and good data capabilities while doing it all profitably. This is important because we want to remain relevant to our customers on a daily basis. So we pay a lot of attention to that. And I think we've been delivering quite well there. So those are some of the numbers of -- as a result of our focus. So this middle line here shows the monthly active users to digital monthly active users. And I mentioned it already, we are up by 31% year-on-year. And also what is interesting and I think quite notable is that our monthly active user, which includes digital as well as non-digital total is at more than 1.5 million is 18.7% higher versus last year. In October, we added another 50,000, which is an incredible number. So I think more and more people are using Bank of Georgia services. There are some double users, obviously there with other bank users also using Bank of Georgia. Also, there's still plenty of cash economy in the country and more and more people are using our services, which makes us quite happy. There's plenty of upselling opportunities on these customers and that is good. Also, daily active users to monthly active users, though the [ MAU ] is 45%, year-on-year is up by 4%, which more and more people are using it on a daily basis. So what this means basically is that 450,000 people on a daily basis use our services every day, 450,000 almost 0.5 million people. 65% of our total customers are digital right now. But also, this includes some people that are digital, but also are using non-digital other channels. So there's plenty of opportunity to also offload our services to digital channels there. In terms of number of transactions, we are growing and 96.7% is done in non-branch transactions and increasing proportion, which is all at 56% now is done through our mobile and internet bank, mainly it's mobile. Our product offloading is 34%, and we would like to increase that further. There are certain products where it's 70%, other products, they are at 20%. So we'd like to increase that and there will be a lot of focus there on that front. In terms of monthly active users on our business digital channels, it's up by 34.7% and a Q-over-Q is up by 11.8%. It's number of transactions through those channels are up by 40%. This is a very important channel, and we would like to have more and more capabilities added to it and we are rolling out our different products and services for our legal entities, including on mobile app for -- mobile app for business. In acquiring business, our franchise is growing. Our market share is up by 7.6% year-on-year, which is an incredible number, and we'd like to see that. So 48.8% in all acquiring in Georgia is done. So our acquiring services in physical costs, we have a larger market share at 54%, but I think we should look at combined version. And the volume is up by 45% year-on-year. This one is the one that I think I love to look at. Net Promoter Score going up from last quarter of 52% to 60%. And that is an incredible result of a lot of work by the team that -- by the whole team that is of Bank of Georgia, delivering products, services, listening to our customers, incorporating their feedback in our product development and services. And all of this have resulted in 16% Net Promoter Score. Again, that is done by a third-party, and it's done with random citizens. So it's not testing our customers. It's basically everybody on the street of [indiscernible]. And it's a high number for any universal bank. Now in terms of results, you have seen it, so I'm not going to dwell on it. Operating income up by 51% for 9 months, up by 43.7%. Profit, GEL 290 million, which equates to roughly GBP 2 per share in 1 quarter of net profit. Cost of risk at 1%, which is a more normalized level where we are. And deposit growth has been very strong and I'll cover that. Capital growth and capital buffers are at all-time high with around 2.3% buffers at all levels. And share of noninterest income, which we monitor closely is also a record at 44%. That may come down a little bit after normalization, but still aside. And the rest of the numbers, I think we've covered. Liquidity is at an incredible high level. And deposit franchise is very strong. We have always been quite strong, but I think it's becoming more and more important given the place in the cycle. So we are going into a high interest rate environment and deposit franchises that is more and more important, especially in emerging markets. So operating income, I think we mentioned are 51% up 9 months, 43% up. Net noninterest income is up year-on-year, 121%. That is as you can see, a big increase is in FX, but also net fee and commission income has increased quite well, which is very nice. Net other income, by the way, we had a negative effect of bond buyback that we implemented in the third quarter as well of roughly GEL 7 million Lari, and that's why we have a very low number here in terms of net other income. Operating expenses were up year-on-year was 25.7%. As you can -- as you know, we are in an inflationary environment. So we have experienced high cost increase, Luckily, that is still way below our revenue numbers. And as you can see, cost-to-income ratio has come down to 30.6%, which is historically low and 32.5% for 9 months. Loan portfolio growth, we look at the constant currency basis because that's what really represented the business activity. And there, we are at 12.9% year-on-year. As you remember, we guide around 10% growth. And now we are slightly higher than that, and we probably expect to be slightly higher next year as well. Deposits grew incredible 40% on the nominal terms that was 29%. And basically, there's been a lot of liquidity that came in. Some of it -- about 1/4 of that growth is coming from the non-resident Russians. But 3 quarters are from the residents. With that 3 quarters could probably have benefited from the capital flows into the country because when migrants come in, they buy apartments and they spend money in shops and so forth. So all of that money kind of comes in from residents. But overall capital flows has benefited quite a bit from recent trends. In terms of net interest margin, we have kept it flat this quarter versus last quarter. We increased the investment in the tradable securities and criminals and treasuries and so forth, which have much lower NIM. So as you can see on the balance sheet, basically, all the growth in nominal terms at interest-bearing assets have been in treasuries, which have a much lower NIM but still accretive. If that increase did not happen, it would be probably 20 to 30 bps higher. We expect next quarter, next quarter or two a slight increase, probably more than 20, 30 basis points, but broadly stable, slightly higher. Basically, that's the expectation. Loan yields you can see cost of client deposits is flattish, but also we should see a slight uptick there in the future. Cost of risk, as I mentioned, it's at more normalized level of 1%. We are seeing the NPLs come down slightly and the NPL coverage roughly same with 90%. Profit, we mentioned already up by 56% year-on-year for 9 months up by 53%. Return on equity, we covered already, so I will not dwell here. So this is also very good that all of this is done while maintaining very strong buffers above the minimum requirement. And they are quite well above the minimum requirements of fully loading expected ratios, which will be in 1 year's time in December 2023. Just a reminder that if we were reporting in IFRS, our ratios would be higher by 2% to 2.3%, which we will be showing probably from next year because National Bank is working. And I think if all banks are ready, then we should start reporting National Bank as well as IFRS standards from next year. So you will be in kind of -- National Bank old standard and National Bank new standard, which will be under IFRS rules, and you'll see both of these numbers and even higher capital issues. Liquidity is very high. And as you can see, the loan demand is not as much as the deposit inflows, which is a good thing, but we'll be deploying the liquidity in liquid instruments or loans depending on the demand. So this is the summary slide. Basically, we are delivering well above our mid-term guidance of 20-plus percent return on equity. Above the loan growth of 10%, and we think we'll be about both of this all else being equal, that is for next year. And capital distribution of 30% to 50%. We have done interim dividend and share buyback where the first part of last year's share buyback, so GEL 73 million is done. And right now, GEL 40 million share buybacks will be going on for -- it's only a small part of that for that is done. I think 30-plus will be used for buyback. So I think I'll stop here. It's a record quarter by all measures, and I'm happy to answer your questions.

So we'll be taking the questions [Operator Instructions]. And we have actually the first question from James Hamilton.

Congratulations on the great set of results. I'm sure all the U.K. banks will be getting 32% ROEs in Q3. I am interested in the FX, obviously, a fantastic result. And what I'm interesting is if you could talk a little bit about where the influence into Lari are coming from, where they're going to? And what the sort of outlook is for the Lari and FX revenues, if we get to a point where some of the sort of migration unwinds, maybe there's a resolution in Ukraine at some point? And how you sort of feel about where FX revenues are and where the Lari is relative to what you would maybe expect in a more normal environment?

James, so in terms of FX, it's anybody's guess. But I think I would say that the current income about 1/3 is probably extraordinary and at some point, will go away. But so far, we are seeing good activity there still, slight decrease, perhaps on the peak, but still good numbers. And in terms of Lari, we are seeing not only like the temporary inflow of people coming in and doing something here, but we are seeing tens of thousands of people setting up their businesses here, working from here for their IT customers worldwide, buying apartments and so forth. So it's part of it is temporary, but part of it is not. Also, what's interesting is that when you look at what has happened, regardless of the resolution, which we would all like to see sooner rather than later, I think taking off sanctions from Russia will take some time. And Iran is sanctioned heavily, and Russia is now heavily sanctioned. Central region countries, transportation route for them, basically the South Caucasus corridor is becoming more and more important. And for the West as well, for Europe, for U.S. So I think a lot of different projects are being discussed right now in logistics, some railways, in energy corridor, ports. There are so many big projects being revived at an unprecedented speed that I think this -- yes, there's some downside that some people may live, but some upsides that we are seeing is incredible. So I think there will be developments, but I think Georgia is becoming more and more important for quite a large region as a corridor. And that corridor is not just for goods, but for services. There are companies that are being set up, regional international offices being set up for the region in Georgia that covers, let's say, not only Caucasus, but some Central Asian countries. So those are all the trends that we are seeing. So that 10% increase in real growth that you are seeing against a challenging environment in the world in most places. These are result of these large movements that are happening. And those large moments, I don't think they will disappear regardless of, let's say, several dozen thousand Russians going back.

Okay. And now I have a second. On capital, I mean, clearly, CET1 ratio of 14.8% is great. It's very, very strong. And you have significant surplus there. Is there a hard ceiling that you have in terms of where you think shareholders' best interest not to see in CET1 ratio rise above? Or are you happy for it to continue to move higher, add in for item?

We have been throughout our history, we have demonstrated that we are careful with capital and we distribute it to our shareholders other than the COVID year [indiscernible]. And that's what we intend to do. But right now, given the -- although we are in a very, very profitable times, at the same time, it's a very volatile time. So there's still a conflict not too far from where we are. And I would like to keep slightly higher buffers until we see that those uncertainties coming down. Having said that, there's plenty to distribute and we will be distributing in dividends as well as share buybacks. And as we said, 30% to 50% buyout -- payout ratio will be respected. And given the high numbers that you're seeing, those will happen. If there's more capital, there could be extraordinary distribution as well. But basically, in that -- we'll be careful with capital.

I now have the next question from Ronak Gadhia.

I guess my first question would just be maybe a sort of a follow-up on James. You talked about the FX trading income and how sustainable that may be in the medium-term. Could you also talk about -- a bit about the same fees and commission income? We've seen a pretty strong growth for a while now. How much of that could be due to exceptional transaction volumes? And how does that play out?

I would say it's not an exact science. I would say 90-plus percent is sustainable and we have 90% also. So I don't see it's decreasing substantially. Now obviously, it's the overall macro situation FX. But it's not like -- yes, most of it is sustainable, 90-plus.

Okay. Understood. The second question, I guess, is on your margins. We've seen a year-on-year improvement, which is positive, but there's a bit of a contrast now compared to what your competitor is reporting. Could you maybe just touch on your thoughts on what's causing the difference between your numbers and there's? Why are we seeing a persistent trend there versus your sell sort of flat line?

Yes. I would not be the best person to ask about their margin. We can talk about ours and expectation of a slight increase over the next quarter or 2. I would just note that we are talking about consolidating numbers. And they have other things to consolidate and we have other things to consolidate. On the national NBG numbers, we don't see such a big diversion.

Okay. So you think this is just because of -- maybe from an IFRS perspective at the group level?

I would not be the best person to ask about their numbers. So please refer to them. We can talk about our numbers. In our numbers, we will see a slight increase in NBG as well as IFRS reporting over the fourth quarter and the next one.

Okay. And just as a sort of again, following up on the theme of exceptional growth, something that you highlighted, you've had very strong deposit growth, a lot of liquidity coming in. A lot of that has gone into government securities. How do you -- yes, how do you manage your or how do you manage your balance sheet? Or how do you think of managing your balance sheet over the next 6 months? Do you think some of that liquidity could reverse? And then we start to see slightly more normalized balance sheet? Or how should we see that progressing?

Certainly. I don't -- we wouldn't like to see such high liquidity, and we want to deploy it. So it will be deployed in profitable ways basically. And if not, then we decrease the rates and push some money out. But right now, I think it's a good problem to have, given where the rest of the emerging markets are.

Have you seen loan appetite pick up? Like in the third quarter, it had moderated a bit because of regulatory reasons and whatnot, but is that starting to turn around?

I mean this some seasonal activity fall usually is pretty good. But I wouldn't say that the loan demand is picking up in a major way. We see slightly more activity on the corporate side. But these people are still kind of not too aggressive. Also, what you see is that dollar loans are becoming even for the West corporates are double digit now. and Laris are also expensive in the high refinancing rate. So national banks are doing everything globally as well as locally for people to slow down borrowing and it's working. Same with Georgia, plus you have this regional instability. So the economy's growth is so strong that there are plenty of opportunities. Companies are having very high profitability recently. And there is some business activity happening. But will it be a huge boom of borrowing? I don't think, not at this rate.

And we have two questions in the Q&A chat. So one is about buybacks. Is there a valuation level at which the company feels that buybacks will no longer be a prudent use of the bank's capital? That's the first question.

We are nowhere close to it, [ Steve ]. So right now, I think we are grossly undervalued. I mean, we're trading at 3x, 3.5x speed even at these levels of capital. So probably, I mean, finance theory tells us that it shouldn't matter as much. But right now, do we think that we are undervalued? I think we're closely undervalued. [ Johan Mueller]. Congratulations on another great quarter. Why did the risk-weighted assets go up so much in Q3? Some of it is -- we can ask our CFO to join if that is easy. Would that be possible, Nini? It is something to do with investments and security side. Sulkhan Gvalia, our CFO, will answer. Also CRO is on standby at any point.

The main reason for the increase, it's -- we keep reserves -- minimum reserves for the deposits in foreign currency in National Bank on increased deposits in foreign currency. And these reserves are weighted 100%, and this was the main reason for risk-weighting asset growth.

So it's maybe obvious, but basically, when we deposit 25% or more, 25% mainly of our U.S. dollar and euro deposits with National Bank, those are treated as 100% risk-weighted assets because it's not in the same currencies as the National Bank as the printing machines. They're considered quite risky. And this is just one hidden capital pocket. There are many. There's plenty of capital on the system.

Ronak has his hand up or I think he just forgot to -- or should I wait? No, he doesn't have the hand up anymore.

All right. Let me wait for about 30 seconds. And if there are no more questions, that would be it but please, if you have questions. Well, if there are no more questions, then I would like to say thank you for your attention. It's very volatile times. But having said that, I think the economy, Georgia as well as Bank of Georgia is doing much better than we expected in the beginning of the year when this war started. It looks like there are some downsides as well as some upsides. But I would say that the upsides are very significant based on the fact that Georgia is becoming more and more important for a larger region as a transport corridor and almost -- I want to say exclusive, but almost let's say, the main corridor for a very large region. And that is important in terms of energy safety for Europe. And I think all of that is translating into a very significant projects being discussed for the South Caucasian region. In rail, in energy, gas, in oil, some of this will take time. Ports, their energy projects in Georgia being revived as an unprecedented speed. So there will be medium-term positive things happening for sure. Now negative may happen as well, but those things are quite good. And I think we, as a franchise are getting stronger. So these two things combined, I think, means that Bank of Georgia should benefit disproportionately well given that our franchise is getting stronger and also the country is doing very well. So that's what we are looking forward to. We will continue focusing on our cost and what our customers want, making sure our employees are empowered and motivated to deliver good results. So thank you very much. Bye-bye.

Thank you. Bye. Take care.