TBC Bank Group PLC (TBCG) Earnings Call Transcript & Summary

Hello, and welcome to the fourth quarter and full year financial results conference call. My name is Jess, and I'll be your coordinator for today's event. [Operator Instructions] I will now hand you over to your host, Giorgi Shagidze, to begin today's call. Thank you.

Good afternoon, everyone, and thank you for joining us for the full year results call. We are here with Vakhtang Butskhrikidze, the CEO of the bank; and Giorgi Shagidze, the CFO, myself. Vakhtang will start the presentation, and then I'll try to go through the financial performance in more detail. So here we are. Vakhtang, please?

Thank you, Giorgi. I am delighted to present our strong financial and operating results for the full year 2019 and to provide an overview of the recent macroeconomic developments in Georgia. Our underlying consolidated net profit for the full year 2019 reached GEL 545.1 million, up by 19.8% compared to 2018, while our underlying return of equity was 22.6% and our underlying return of assets stood at 3.3%. In 2019, our operating income amounted GEL 1.1 billion, up by 3.7% year-on-year, which was supported by increase in net fee and commission income and net interest income. The net interest margin increased by 1.1 percentage point year-on-year and stood at 5.6% in 2019 and 5.3% in the fourth quarter of 2019. By the end of 2019, the net interest margin has been fully based on the new level, and we expect it to stabilize at the fourth quarter level. The growth in net profit was also strongly supported by decreasing provisions, which was driven by improved performance across all segments and change in the product mix. As a result, our cost of risk stood at 0.7% in 2019 compared to 1.6% in 2018. We also updated our guidance on cost of risk for 2020 and expect to be around 1%, given the positive effects of the responsible lending regulation on the loan book quality. In terms of balance sheet growth, our loan book expanded by 22.1% year-on-year or by 17.9% on a constant currency basis, mainly supported by growth in the corporate and MSME segments. Over the same period, deposits increased by 7.5% year-on-year or by 2.9% on constant currency basis, driven by our policy of reducing deposits due to high liquidity as a result of the recent bond issuance. As a result, as of December 31, 2019, our loan book market share stood at 39.5%, while our deposit market share stood at 39%. Regarding macro development, the Georgian economy demonstrated continued strong performance in first quarter 2019 and expanded by 5.3% year-on-year, following 5.8% growth in third quarter, while the growth for the full year 2019 was estimated to be 5.2%. High GDP growth was mainly supported by solid external inflows, driven by stronger exports and remittances as well as by recovering tools. The latter was mainly driven by strong growth in the number of visitors from the EU, Turkey and other neighboring countries. The exceptionary fiscal stance and relatively strong increase in lending also contributed to GDP growth. I'd also like to update on our progress in Uzbekistan. In January 2020, we obtained the preliminary banking license in Uzbekistan, which is an essential step in the process of launching our banking operations in the country in the near future. As previously announced, our strategy is to develop a greenfield, next-generation banking ecosystem for retail and MSME customers. The primary focus will be on digital channels, including our neobank, Space. For our Uzbek venture, we are planning to join forces with International financial institutions and their local partner. Our plans foresee a minimum 51% shareholding. We have already secured interest from the EBRD and IFC and have reached an agreement on the main terms with Uzbek-Oman Investment Company to act as our local partner. Last year, we launched several important introductionary work-streams, including implementation of the core banking system in cooperation with a local IT company. We also set up a pilot branch in Tashkent for proof of concept and built a core team for the bank. Thus, we are well advanced in process and expect to obtain a final license and start banking operations in summer 2020. The total amount of initial investments from all the shareholders is expected to be USD 40 million, which we plan to invest in 2 stages; USD 12 million before receiving the license and USD 28 million after receiving the license. In terms of our product offerings, we plan to start with consumer and car loans, saving and the current accounts and mortgages and MSME loans later. In parallel, we are actively developing our payments business in the country through our recently acquired subsidiary Payme, which is the leading payments company in the country, already serving around 1.8 million customers. The company is growing rapidly. And in 2019, its revenue went up by 84% and amounted to GEL 8.6 million, while its EBITDA reached GEL 4.5 million, up by 77% year-on-year. In December 2019, we also launched our point-of-sale consumer financing operations, which is already available at 15 locations, and we plan to expand to 50 locations by the end of 2020. Finally, I'd like to give you an update about recent changes to the composition of Management Board of Joint Stock Company TBC Bank. David Chkonia, our Chief Risk Officer, left the bank at the end of his contractual term in order to pursue other carrier opportunities. Consequently, Nino Masurashvili, Deputy CEO, who was previously in charge of Retail Banking Development, has been appointed as the new Chief Risk Officer. And Tornike Gogichaishvili, Deputy CEO and Chief Operating Officer, has been appointed to lead the retail business. The functions that were previously carried out by the CEO have been reallocated to the responsibility of the CFO and Deputy CEO for SME and Micro Banking. Now I would like to hand over to Giorgi, please.

Thank you, Vakhtang. I'll continue my presentation -- our presentation from Slide 23 and give details about fourth quarter and full year financial performance. Slide 24, you can see from this slide, we can -- we continue delivering robust profitability. For the full year 2019, our underlying net profit grew by 19.8% year-on-year and reached GEL 545 million. The increase was supported by growth in net fee and commission income and interest income as well as decreasing credit loss allowances related to the improved performance across all the segments and the change in the product mix. I will elaborate more on these factors on the following slides. In the first quarter 2019, net profit stood at GEL 160 million, up by 23% year-on-year. This growth was supported by increasing net fee and commission income as well as improved quality of the loan book. On the next slide, I'd like to present our net interest margin. As we said in the last quarter, in quarter 4, the net interest margin got stabilized and was at 5.3%. Now with regards to 2019, overall NIM decreased by around 1.3 percentage point, mainly driven by the effect of the responsible lending regulation. This effect was partially offset by the reclassification of net gain and currency swaps in the amount of GEL 27 million, which increased net interest margin by about 20 basis point, both on year-on-year -- both on full year and quarter 4 basis. And again, we can reiterate that net interest margin during 2020 will be stable at around the quarter 4 point. Moving, on Slide 26, I'd like to present our performance of noninterest income. Net fee and commission income increased by 18.9% year-on-year for the full year 2019. The growth was spread across all categories and was related to overall growth of the business. In the fourth quarter 2019, the increase in net fee and commission income, both year-on-year and quarter-over-quarter, were mainly related to the growth in cards operation and settlement transactions due to the overall growth of the business and seasonality. Total noninterest income, without net fee and commission income, for the full year 2019 decreased 24.9% year-on-year and increased by 2.8% quarter-over-quarter. The year-over-year decrease was mainly driven by the high base of other operating income last year and the reclassification I mentioned during the NIM slide. Next slide is about our sound asset quality. In the first quarter 2019, loan book dollarization level remained broadly stable, both on quarter-over-quarter and year-over-year basis. As of December 2019, NPL ratio decreased by about 20 basis point quarter-over-quarter and 40 basis points year-over-year. Quarter-over-quarter decrease was mainly attributable to the strong performance of the retail and MSME segments, while year-on-year improvement was mainly driven by the strong performance of the corporate segment. For the full year 2019, cost of risk decreased by 90 basis point, driven by the change of the product mix as well as robust credit quality across all the segments. In the fourth quarter 2019, the decrease in cost of risk was driven by strong performance, again, across all the segments. In terms of loan book concentration, top 20 and top 10 borrowers to gross loans stood at 12.3% and 8.3%, respectively, while our related party-to-gross loan ratio remained stable and stood around 0.1%. Now I'd like to move on to efficiency slide, Slide 28. In 2019, our operating expenses increased by 9.7%, mainly driven by the staff cost and depreciation. Staff cost increased due to expansion of the business overall as well as the increase in the share-based bonus accruals of the top and middle management due to increase in the share price over the 3-year period, which is relevant for the accrual purposes. The increase in depreciation was mainly due to the adoption of IFRS 16 from January 2019, which led to the reclassification of leases from administrative expenses to depreciation. In the fourth quarter 2019, OpEx increased by 13.8% quarter-over-quarter. This increase was driven by admin expenses resulted from mostly seasonality -- seasonally high cost in quarter 4. The group underlying cost-to-income ratio for the full year 2019 stood at 39.5%, while if we take the bank's standalone cost-to-income ratio, it was 35.9%. Next slide is our -- is about solid capital levels. As of December 31, 2019, regulatory CET 1, Tier 1 and total regulatory capital ratios stood at 12%, 14.6% and 19.1%, respectively. The respective minimum requirements are 10.4%, 12.5% and 17.5%. Quarter-over-quarter increase of capital was mainly driven by net income generated during the quarter, while year-on-year increase in Tier 1 specifically was related to the issuance of AT1 instrument with the amount of $125 million, which we did in the summer last year. The growth in risk weighted assets was mainly driven by the portfolio growth, both on quarter-over-quarter and year-on-year basis. Funding is given on the next slide, Slide 30. The total IFI funding, including senior and subordinated loans, stood at around GEL 2 billion as of December 31, 2019. We did have 2 more transactions, 1 from EIB and the other one from EBRD at the end of last year. Over the same period, the total liquidity coverage ratio, as defined by NBG, was around 110%, above -- comfortably above the 100% limit. Net stable funding ratio was at 127%, above the 100% limit. Now I'd like to hand over to Vakhtang.

Thank you, Giorgi. Now I'd like to finish today's presentation by reiterating our medium-term targets. Loan book growth in the range of 10% to 15%, return of equity of above 20%, cost-to-income ratio below 35% and dividend payout ratio of 25% to 35%. With this, I'd like to invite you to ask your questions.

Thank you. Jess, maybe we can open this for the questions now.

[Operator Instructions] And we have just had a question come through, and this comes from the line of [indiscernible] from Transcapital.

Just one question regarding the provision coverage for the year. It seems that your provision coverage has gone down this year versus the year before. Can you provide the reasons or drivers for this?

Yes, I mean, sure. Thanks for the question. I think that even though it went down, it's very strong at 91% in cash and up to 200% in cash plus collateral. And also, we need to note that the consumer loans portion within the total portfolio also fell down, so consumer loans are the ones that you expect the most of the cash coverage. So that has been quite consistent with the development.

There are currently no questions in the queue. [Operator Instructions] We have -- had another question come through. This comes from the line of David Shapiro from Vanshap Capital.

Just had a quick -- 2 quick questions. On the cost-to-income guidance, just a point of clarification. Is your target 35% on the group level or the bank level?

Thank you for this question. So this is the group target, medium-term target below 35%. If you look on our results on the stand-alone, the bank side, already in 2019 it was closer to 35%. As we are making investments in technologies and we are acquiring ecosystems, and we are doing investments in Uzbekistan, it went up to 39%. But in the medium term, on the group level, we are targeting below 35%.

Okay. What -- I guess, what gives you -- as a follow-up to that, what gives you confidence that you can achieve that? I mean, it seems like in the modern world that we live in there's constant high-technology investments just to stay ahead of fintech and other potential forms of competition. Do you think that the expenditure has been exceptionally high recently, and that's going to moderate, and the growth of the loan book will spread those costs? Just maybe provide a little bit more color as what's going to bridge that gap?

David, and thanks for the question. I mean, there are couple of areas, the first is our investment in technology clearly decreases the unit cost and that's -- that will support further decrease of the cost-to-income ratio. The second one is that at the Uzbekistan franchise where what we are building there is the next-generation, mostly, digital bank. So after we finished the initial scale-up phase and start operating at the scale, the cost-to-income target there, too, is 35%. So combining these 2 will -- gives us assurance that we will reach the 35%. And you've seen that we did reach it at the bank level, pretty much at 35.9%. I mean, before the NIM was rebased, we were at a very good position at the group level as well. Now last year was different from the NIM rebase. But again, I can highlight that this year NIM will be stable, which means even better growth in the income levels.

Okay. Another question. In regards to your investment in Uzbekistan, you stated the total amount of capital, the initial capital, and I understand you're going to be 51%. Does that mean that you're going to be putting 51% of that capital up? Or are you putting less than your pro forma ownership in the entity?

Yes, it's roughly 51% of the capital that we mentioned, say GEL 40 million or so roughly.

[Operator Instructions] The next question comes from the line of Can Demir from Wood & Company.

This is [ John ] with Wood. Just one question on capital. What kind of risk-weighted asset growth would you expect the current growth profile to give you in the next couple of years? And how would you expect your CET 1 ratio to stack up against regulatory threshold?

[ John ], thanks for the question. We expect risk-weighted assets to grow slower pace than our loan book given the potential to optimize them and also higher growth in mortgages and MSME. So we are saying that up to 15% growth of the loan book is our target for next year -- sorry, this year, which should mean the risk-weighted assets roughly growing around 12%. Now in terms of CET 1, after the increase, we anticipate the minimum requirement to be around 12%, but we do generate certain capital if we take the Georgian business. And after dividend disbursement the generation is roughly 50 basis points if you take the longer term. So we are comfortable from this perspective. Now in Uzbekistan, the investments are step-by-step this year. We will be doing this GEL 22 million roughly. This is not very big amount. And next year, we'll start seeing the results.

Okay. And what would be a reasonable buffer on top of the regulatory threshold for potential depreciation going forward?

So you remember within the regulatory framework, there is a potential to release capital if there is a depreciation up to a certain percent. So that is also helpful and you remove some type of uncertainty to some extent. So being on top of minimum by 50, 100 basis point is a number that is not overaggressive, and we can continue delivering strong profitability.

The next question comes from the line of David Shapiro from Vanshap Capital.

Just one follow-up question in regards to Uzbekistan. As you're rolling this out, can you talk about, I guess, some of the institutionalized risk controls that you're putting into the bank at that organization? Obviously, this is a new market for you guys, and it's a pretty virgin market overall as I understand in the country. So maybe help talk us through some of the controls you're putting in place so that, that initial capital is well preserved?

Yes. I mean, this is clearly a very good question, but a couple of points perhaps to highlight. I mean, the first is the proper governance with proper committees at the Uzbek level, and you've seen that we already have 3 independent directors at the Supervisory Board, and they all have tremendous experience, some of them specific experience in accounting...

As per the newly listed IFIs.