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

Hi, and welcome all to Bank of Georgia Group plc's First Quarter of 2023 Results Call. My name is Nini Arshakuni, I'm Head of Investor Relations at Bank of Georgia and I'll moderate today's call. [Operator Instructions] And now I'm joined by the Group CEO, Archil Gachechiladze, who will discuss the business performance as well as the macroeconomic developments. And Archil, you can go ahead now.

Thank you very much, Nini. I will jump into the presentation. Thank you very much for joining the call, and we'll go through the presentation very quickly so that we can add a bit more time for Q&A, which is usually the most interesting part of the call. So we had a very strong performance in the first quarter of this year, which continued a strong last year's performance. So the profit was EUR 300 million, up 25%. Return on equity of just shy of 28%, cost/income, 29.1%. So this is the first quarter after the 3 quarters where return on equity was higher than cost income that is unfortunately reversed, but only slightly. And NPS of 58% with digital monthly active users up on an annual basis of 31.6% to 1.2 million, which is extraordinary given the small size of the country. Now a few words about the macro because that has a very big effect on us as a large player here. After 2 years of above 10% real economic growth, we had a first quarter which is -- which had a real growth of 7.2%. And there's some monthly numbers, but quarterly is what [indiscernible] driven by the strong extent of flows and overall very good performance. So you see here that there's a healthy growth in exports as well as imports, healthy growth in [indiscernible] and the tools, which is a very important part of our country's economy is up by 38% versus the 2019 numbers, which were the peak before covid [indiscernible]. And -- but in terms of the number of tools, we're still at 80% versus the peak, and we expect very strong performance this year because we're just starting the year, and they will have some good results for the country. So apologies -- so going forward, to the next 2 years, the projection for this year is to 5.8%, which got an [indiscernible]our it subsidiaries projecting 5.8%. And next year, 5%. That is an upgrade from the initial 4%, and the upgrade comes from a very strong start of the year. So macro numbers are very strong in the beginning of the year. What's even more exciting is the fact that the inflation is under 3%. So 2.7% is the last reading at the end of April, although core inflation still remains slightly elevated at 4.7%, but this is much, much lower than South regional comparable comparisons, and this allows the National Bank to lower the refinancing rate, which has been lowered by 50 basis points just recently a week ago. But that, I think, creates more room to lower it further to -- by another 100 basis points that we are projected by the end of the year, and further after that. [indiscernible] has got a stronger up by 7.6% by end of April from the beginning of the year. This is on top of about 12% strengthening versus U.S. dollar last year. So overall, very strong performance by regional comparables. Obviously, the excel [indiscernible] also have been helping [indiscernible] gets stronger. And this has been happening regardless of the fact that the National Bank has been buying very strongly. You can see on the right chart here, all the buying that the bank has been -- National Bank has been doing and the reserves are at an all-time high at around $5 billion and have built up very good buffers for bad times. Also, on the loan growth side, it has slightly picked up on a normal basis in constant currency terms at 13.8%, slightly shy of the nominal growth of GDP, where it has been below normal growth of GDP over the last 2.5 years and has resulted in deleveraging and we'll see it in the next slide. In nominal terms, it's much less at 3.6%. That's due to strengthening of [indiscernible] because about 40% -- 44% of bank loans in U.S. dollar terms, which is at the historic minimum, as you can see, it has come down strongly from the 60s level over the last, let's say, 7 8 years down to 44%. The nonperforming loss is low by regional standards and the system import about 1.5%. This is the deleveraging that I mentioned as the economy had a very strong growth and [indiscernible] got stronger. The loans to backlog to GDP came down to 6.7%, which is roughly 2018 levels, and that creates more room for growth going forward. And also the national debt to GDP is below 40% at the end of 2022 and is projected to further decrease towards 36% over the next 2 years. So that's briefly about the Macro. Now a few words about the Bank. We are 250 companies, as you know, a strong leader in digital banking in the country and top of mind and most trusted bank, delivering more than 10% return on equity and high standards of corporate owners and strong focus on [indiscernible] and we'll cover some points going forward. We have about 45% of our portfolio is retail and then have strong SME and corporate banking, which is distributed almost equal. We are focused on mobile payments, mobile application, payments and loyalty going forward. And the main focus is being relevant for our customers on a daily basis, and that's to the mobile application to payments, and we have achieved significant progress in those and how we achieve it is by focusing on customer, customer [indiscernible] and centrist religiously almost, focusing on our people and the culture within the organization, the strength of our brand, use data and AI in decision-making increasingly and focusing on risk culture on all levels, first-line second line, and third line. We are delivering more than 10% return on equity. We're distributing 30% to 50% of our net income and with a growth of 10-plus percent, which we've been beating these ratios. Going forward, I think we have discussed briefly that our mobile application is a financial super app. It's not a super app in a sense that you cannot find all kinds of things on the application, but it's a financial super app where you find most of the things from the financial point of view that you can be looking for in this application and the number of products and abilities are increasing on this application constantly, and we are also monitoring the user experience on a constant basis and modifying the satisfaction of the clients. And these are the results. Over the last 12 months, our number of retail clients have grown by almost 70%, but the digital users have grown by 31.6%. So when we say how that is possible, that is possible by increasing the number of mobile application users in total customers from 62% to 17%. So while the number of customers increased from 1.4 million to 1.7 million, roughly rounding it, the number of mobile users increased from 900,000 to 1-point-almost-2 million. And more importantly, more and more people are using it on a daily basis, 47% of our users are using it on a daily basis. So when you look at and think about our financial app, more than 0.5 million people opening on a daily basis. This is probably after Facebook, the most, let's say, popular and used application in Georgia, definitely financial application. But in other ones, not all stats are available, but it's a very popular media. In terms of number of transactions, mobile is becoming larger and larger with Internet banking, what is predominantly mobile, it's now 60% of all transactions. As you can see, in terms of product offloading, we have come a long way, but still 44% versus all the other products that are sold to branches or otherwise. So there's still plenty of upside here. And we are selling more and most of our mobile application. In terms of our business offering, monthly active users are up by 40% and that's also underlined the basis of number of transactions also going up by almost 38%. So there is strong growth here and very good customer satisfaction there that we strive to have more than 80% usually customer satisfaction score, and here, we have very good progress. In terms of our merchant acquiring business, -- our volumes are up by 55% on an annual basis. That represents market share of 62% almost. And we have almost 1.1 million people using our cards to make payments, -- so monthly active users of our cards is up by 53% in 1 year, which is also significant. So this is less to do about digitalization and more to do with our integrated approach to payments and loyalty, and it's working very well. In terms of customer satisfaction, you're all used to this that we are religiously focused on this. We are about in the range of 60%, 58% over the last few quarters, and we are focused on increasing the quality of our services as well as removing some of the unhappiness with a number of different services than we do in the channel by channel. And we will be starting to attune more in terms of results now in the numbers, return on equity, just share of 28% cost of risk of 1%, and our range is 1% to 1.2%. You may remember, cost income of 29.1%, very strong capital position, 500 basis points above the new requirement at 19.5% and loans up by -- in a constant class terms by 15.1% on an annual basis and 3% from Q-over-Q, which is a good start for the first quarter. And similarly in deposits, our deposits are up by 2.3% Q-o-Q, but on an annual basis, very strong growth of 42%. So in terms of income, our operating income is up by 42%. Net noninterest income is up by 54%. There, you can see more normalization of FX, as you can see. -- in the net fee and commission income, we had a chunky advisory fee of PLN 27 million in the first quarter. But without that, I think the growth was north of 50% on all the other types of fees as also very strong growth overall. The operating expenses have grown by 18.7% on an annual basis, resulting in the improvement -- significantly growing, I would say, of cost-income ratio from 35% on an annual basis to 29.1%. Loan portfolio growth, I think I touched off 15% on an annual basis and 42% in deposits, the similar comparable numbers in loans of 3.3% and 3.3% so very strong funding overall. As you can see, we have about PLN 17 billion of loans and PLN18.3 billion deposits of very strong, very strong growth here. What's very interesting here is that we have managed to increase the loan yield given the high interest rate environment and in some cases, with pricing of loans because they are available. And we have managed to keep the deposits and notes at a relatively low rate and the uptick here is lower. Moreover,-- because we had strong growth in deposits, we have been able to replace the other wholesale funding with our deposits, and that has overall resulted in the cost of funding coming down to 4.5%. And the result is net interest margin, which is a very strong growth, up to 6.4%. Year-on-year basis, it's 110 basis points. A lot of people may be asking, is this sustainable or not long term, probably not sustainable. -- short to medium term looks pretty good. So as we go forward over the next few quarters, we expect this number to stay relatively flat. But at some point, it will probably come down as we will be paying more for our deposits in high interest rate environment. Cost of risk is at 1% on the lower end of our medium-term guidance of 1.4 1.2%. We had improvement in the NPL ratios coming down to 2.4%, resulting in a slight improvement in the coverage at 73%. That was mainly in the corporate side. So we are pretty happy with the quality of the portfolio. So all in all, profit resulted in 25% uptick, and what we are paying more and more attention to is return of assets, which is roughly 4.4%, which is very strong by any standard for financial institutions. We have very strong capital ratios. And I think the next page here summarizes all the buffers that we have on the core Tier 1 is 5% and Tier 1 is 4.6%, slightly less on the total capital because we're going to have to borrow that money. But we will as it would be the risk-weighting slight drop in risk-related assets is caused by more less utilization. So utilization happening in deposits as well as in loans. So there is some capital position. This capital position, obviously, will be reduced by about 200 basis points by the issuance of the dividends. and the share buyback that is ongoing. But nevertheless, capital generation is such that It will build up very strongly, very quickly. Liquidity ratios are also high at around 130 basis points, it was 130%. And as I said, the funding of our loans with our deposits is also strong and below 50%. So all in all, to summarize, basically, you see that our profits have over the last few years have gone from EUR 514 million to EUR 1.1 billion last year. And we have put some other numbers here, the qualitative numbers, which is digital monthly active users alongside. And you can see the -- they are very close, and this is a coincidence, but there could be some causality there as well as well as the net promoter score, which shows our customers' satisfaction. So it's all interrelated, not a direct relationship, obviously, but it's interrelated and over the last few years, our focus on digitalization, the counting the organization and the customer satisfaction have resulted in very strong numbers. Overall, the loan book growth, we have bid our 10% constant currency growth guidance over the last couple of years, first quarter is stronger as well. We are returning more and more of our capital to our shareholders because we are in a very strong position to do so, and we will continue going forward, being very diligent about our capital. We also wanted to show here the number of shares that due to the buyback and cancellation that is happening. We are reducing the number of shares, and you can see the numbers here, and that's an ongoing process. Thank you very much. That was probably the shortest presentation i've ever had. So that's 20 minutes. So Nini, I am happy to answer the questions that our investors may have.

[Operator Instructions] the first question is from Robert Sage.

I've got a couple of questions, actually. I think you were alluding to this, but wondering if you would encourage to think about your capital ratios, I mean, even given the fact that I appreciate the dividends and buybacks will reduce at a longer. You do appear to be directing more capital that you're not expecting with the reduction in risk assets intensity. Do you think that these simple sort of further share buybacks over and above the EUR 148 million that you've already inferenced for this year. Or would you sort of see the levels of remaining at a significantly higher level than your minimum requirement. I've also got a second and unrelated question related to costs. Now you've sort of shown us how the fit out, it seems you reduced quite significantly within Georgia. And I was wondering if you could sort of look forward in terms of how you think your costs could progress through the course of this year, particularly because you're running with very positive operating jaws in the first quarter in terms of cost grow significantly below the level of income growth...

Thank you, Robert. So on the first one, this year, regardless of the fact that the macro numbers are very strong, et cetera, et cetera, we would like to have higher capital ratios than we would usually have. So we will be running high capital ratios this year. Having said that, I would not exclude further capital distributions, obviously. But in general, we'll be having higher capital ratios than we would in more comp environment, let's say, there's still a war going on, and there's some political improvements around this region. So that's on capital. So do we foresee further buybacks? We may, but we will let you know if and when we decide. But otherwise, I'm in no position to guide on further buybacks at this point. Regarding the costs, -- we are seeing some cool down, let's say, in inflation, but this is relatively new, and we'll be seeing how that has an impact on further, let's say, expenses. But so far, we have been able to grow -- to have operating deals positive, and we will try to have that going forward. I cannot provide more guidance in terms of the exact amount of exactly, let's say, growth. All I can say is that it will be higher than the inflation. Our OpEx growth, obviously, because our businesses are growing. So we are hiring more people in the back office and our numbers are growing, but we have been able to grow the business much faster than our costs and number of people. So that results in the cost income of now below 30%...

So the next question is from Ronak Gadhia.

Maybe the first one is a follow-up question to Robert. On the capital side, you would like expand you said you'd like to maintain a slightly higher capital ratio this year. Any particular reason for that?

We have more work going on in the region, if you have heard. So that's the reason.

Okay. So it's really just the geopolitics that you're being cautious about.

Yes.

Second question on NIMs. A bit surprised by the increase in lending rates, in particular in the first quarter, it seems to be coming quite late in the rate hike cycle, the NBG rate has been at 11% for quite a while, like while LIBOR rates have been relatively elevated but flattish for a few months as well. So if you could just help us understand why we saw a significant increase in lending rates during the quarter.

Yes. So in corporate and SME as well as some cases in the mortgages as well, it's common to have first year fixed rate, which basically as the rates go up, those fixed rates don't go up in the first or second year. And -- and that's why I think whenever it comes, we never the fixed period expires than the high CapEx as what has been happening over the last, let's say, 6 months. So it's not a real time. When the rates go up, it's not repriced on a monthly basis. It's repriced in some cases, on a quarterly basis. In other cases, some semiannual cases. But then this on top, I think the high interest rates kick in slightly late because of the fixed rates that some of the clients were enjoying for 1 or 2 years on the multiyear credits.

Could you maybe just help us understand on the monetization of the digital payments revenue. Could you share some, I don't know, information on the revenue or transaction or take rate or any of that or anything of that sort?

No. Not at this stage, we'll be separating out more numbers on the payments business as it has become a significant business. But overall, I think on the margin side, we have been able to maintain the margin on our payments business especially with lower cost provider of services on [indiscernible] specifically. And we have been passing back the loyalty points to our customers for that, and that has been working very well for us. But all in all, I think the margins and numbers we'll provide later on, but it's more than 100 basis points net margin on acquiring basis.

And the momentum that we have seen in the past couple of quarters, you think you can sustain it at those levels, excluding the -- obviously, the investment banking fees.

We will see -- I mean last year was a very strong year, right? I mean when you look at the second and third quarters last year, obviously, the FX was outsized, and we pointed out that those will be coming down and you've seen somewhat reduction in the fourth quarter. And then in the first quarter, you are seeing more normalized levels. So that, I think, will probably continue at those levels roughly. So it's not going to go back to those higher levels unless other things change. The business itself and the macro economy is doing well. So other parts of the business, I think, will do well. I don't know Ronak, if that answers your question.