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

Dear ladies and gentlemen, thank you for joining our second quarter 2020 financial results conference call. I'm Anna Romelashvili, Head of Investor Relations at TBC Bank. Today with me are Vakhtang Butskhrikidze, CEO of the Bank; and Giorgi Shagidze, Deputy CEO and CFO of the bank. We will start today's call with a brief presentation and give you an update about recent macroeconomic developments in the country and provide an overview of the financial and operating performance of the group in the second quarter. Afterwards, you'll have an opportunity to ask questions. With that, I would like to hand over to Vakhtang.

Thank you, Anna. Thank you, everybody, for joining our call. I'll start my presentation with the main highlights for the second quarter from Slide #3. As you can see from this slide, Georgia has been quite successful in fighting COVID-19. As of 14 August, the total number of cases totaled around 1,340 out of which around 1,100 has recovered. Fortunately, the death rate is also relatively low in Georgia. In terms of TBC results, we achieved a solid profitability and high efficiency in the second quarter, with return of equity standing at 19.5% and cost-to-income ratio at 38.5%, while the bank's stand-alone cost-to-income ratio stood at 32.3%. Over the same period, our capital and liquidity position remains strong, with our CR ratio standing at 124% and Tier 1 and total capital standing at 12.7% and 17.2%, respectively. At the same time, our digitalization level remains high, with offloading ratio reaching 96% and mobile banking penetration ratio at 45%. Now let's move onto the macroeconomic update on Slide 4. In June, we observed the recovery in the economy on the back of the gradual reopening after the lockdown. The remittance picked up sharply by 18% year-over-year, while the drop in exports moderated substantially, and we also -- also see slow improvement in imports. International flights are also starting to resume this month. At the same time, hotel occupancy rates in most of the regions improved this summer, largely due to domestic tourists. Additionally, the government has introduced a new plan to attract remote workers to the country, which could, to some extent, balance the shortage of the tourist influx. Georgia's immediate, safe and attractive country is an important precondition for the success of such a strategy. In summary, GDP contraction moderated to 7.7% in June after a drop of 16.6% and 13.5% in April and May, respectively. We maintained our projection of a 4.5% to 5.5% drop of GDP for 2020 and expect it to mostly recover to pre-crisis levels in 2021. Moving on to Slide 5. You can see that the recovery is evident across all wide range of sectors. This [ partly ] shows positive growth dynamics for majority of sectors, including groceries, clothing, health care and other consumer goods, while demonstrating improved trends for hotel and entertainment industries. Now let's move to Slide 6, which shows increasing fiscal spending and cautious monetary policies. Fiscal stimulus increased in the second quarter, and its impact on the economy is expected to be much larger in the second half of the year, supporting the recovery until the economy returns to its normal growth rate. The NBG continues to ease the monetary policy in order to stimulate the economy and delivered a 1 percentage point rate cut year-to-date, bringing the policy rate to 8%. Per the latest NBG projection, inflation is expected to decline towards the target rate of 3% in the first half of 2021. NBG actual interest in the FX market to compensate the shortage of inflows and to reduce the fixed rate volatility, we think that the NBG international -- the international reserves, together with the additional extension -- external funding to the state could be sufficient to continue supplying FX currency to the market. From the beginning of 2020, the Central Bank already sold $290 million on the market. And at the end of July, National Bank of Georgia's gross reserves reached $3.84 billion, the highest level historically. Gross reserves increased by 6.2% month-over-month largely on the back of government external borrowings, increasing the net reserves, which amounted to around $1.5 billion. Now I'd like to briefly tell you how we manage the pandemic. Slide 8 shows that it was our priority to support our share -- stakeholders during this difficult time, while ensuring the financial stability of the group. For our front-office employees, we introduced social distancing and infection prevention measures in branches and offices. As for the back-office employees, we moved them to the flexible remote working practices. This proved to be very effective, leading to increase in efficiency levels, creativity and employee happiness. Furthermore, as you know, in order to keep our costs under control, senior management decided to forgo their entire bonuses for 2020 and LTIP grants for the 2020 cycle. Now we are moving to the Slide 9, which discusses what we are doing for our customers and community. For our customers, we introduced grace periods for loans in 2 stages. As you can see from the left-hand chart, the take-up rates for the second stage in June were much lower than in March due to stricter eligibility criteria. We also provided additional incentives to our customers to use our market-leading digital banking platform, such as the temporary waiver to fees on money transfers and utility payments in Internet and mobile banking. In addition, we are actively participating in various government supporting programs in order to provide affordable financing to both companies and individuals. Most of these programs started in July, and the impact will be evident in the second part of the year. Now going to the Slide 11, you can see our progress in relation to our Uzbek venture. On June 29, we launched banking operations in this country. Initially, we'll be operating in a pilot mode for friends and families and plan to extend our services to the broader population in fall of 2020. On the other hand, our Uzbek payment subsidiary, Payme, is growing rapidly, and the number of registered customers reached 2.3 million by the end of this quarter. In addition, we have launched several new products, including online volume. Now we are moving on the next slide, 12, and I will describe the recent changes in our Board. As you know, Giorgi intends to leave the group at the end of this year, and he will carry out on with his duties until the year-end in order to ensure a smooth transition to his successor. I'd like also like to welcome our new independent and Executive Director, Abhijit Akerkar. Abhijit has a strong background in artificial intelligence in banking and has 25 years of experience in -- at Lloyds Bank Group, McKinsey and other global companies. The Board also intends to add one more independent Non-Executive Director by the year-end, and the company has started the search process to identify suitable candidates. The Board intends to use the -- this opportunity to further support diversity at the Board level. In addition, the bank was informed by the founders that they are taking steps to transfer their shares into the blind trust and expect this process to be completed before the year-end. As you can see on the Slide #13, we have made the good progress in our ESG ratings, which highlights our commitment to the higher standards of corporate and social responsibility. In June, TBC Bank became a member of the FTSE4Good Index Series. In addition, we have been rated as low-risk in terms of our ESG performance. And finally, on Slide 14, you can see that we have won multiple digital awards from Global Finance Magazine, which once more underlines our best-in-class digital capabilities in Georgia as well in the CE region. With that, I'd like to hand over to Giorgi, please.

Thank you, Vakhtang. I'll start my presentation from Slide 17, and I will go over financial performance of the second quarter 2020 in more details. Slide 17 starts with the loan growth. As you can see from the slide, quarter-over-quarter loan book remains broadly stable across all segments and increased by 18.1% year-on-year on constant currency basis, which was primarily driven by corporate and MSME segments. As a result, our loan book market share in loans stood at 39.5% as of 30th of June 2020. Slide 18 is about deposits. On constant currency basis, deposit portfolio remained broadly stable, both quarter-over-quarter and year-on-year. Over the same period, the decrease in corporate deposits is related to our high liquidity based on which we have decided to release costly corporate deposits. As a result, our deposit market share stood at 37.1% as of 30th of June 2020. As you can see from the next slide, Slide 19, we already delivered solid profitability in the second quarter 2020. Our net profit amounted to GEL 126.2 million, up by 5% year-on-year, mainly driven by recoveries in provision and decreased operating expenses, which was partially offset by the reduction in operating income, which I will discuss in detail on the next slides. At the same time, quarter 2 COVID-19-related nonrecurring charges amounted to GEL 3.5 million in relation to net modification loss and GEL 9 million additional credit loss allowances in relation to our Azeri subsidiary, TBC Kredit. As a result, our net profit without the above-mentioned COVID-19 impact amounted to GEL 136.8 million in quarter 2, while our return on equity and return on asset without those expenses stood at 19.6% and 2.8%, respectively. On the next slide, Slide 20, I'd like to present our net interest margin. As you can see from this slide, in the second quarter 2020, we stood at 4.3%, down by 80 basis points quarter-over-quarter. The decrease was mainly driven by: firstly, high liquidity and respective pressure on GEL funding, which more than offset the decrease in the refinancing rate; secondly, the drop in LIBOR and Fed rates; and thirdly and lastly, with the average exchange rate depreciation. However, I'd like to highlight that the NIM will start recovery. Already in June, NIM was 4.6%.

July.

July. NIM was 6 -- 4.6%. Until the year-end, we expect further increase up to additional 30 basis points. Slide 21 shows our noninterest income. In quarter 2 2020, due to slowdown in economic activities related to COVID-19, net fee and commission income decreased across all major categories, both quarter-over-quarter and year-on-year. The decrease in both periods was partially offset by an increase in fees from guarantees and letter of credit due to an increase in the respective portfolios. Our FX income also decreased in quarter 2 due to slower economic activity as well as decreased margins related to lower volatility in quarter 2 2020. On the next slide, Slide 22, I will discuss our asset quality. Cost of risk in quarter 2 contains the additional GEL 9 million charges related to TBC Kredit, our Azeri subsidiary, one of COVID-related charges. Given its nonrecurring nature, these charges has not -- have not been annualized. Other cost of risk in the second quarter stood at 0%. Over the same period, our NPL ratio remains steady quarter-over-quarter and improved by 20 basis points year-on-year. I need to highlight that COVID-19 impact has not yet been realized due to the long holidays that we discussed during this and previous release. In terms of loan book concentration, the top 20 and top 10 borrowers to gross loans stood at 12.3% and 8.2%, respectively. Related party to gross loan ratio remained unchanged at 0.1%. Slide 23, this is about operating costs. In this quarter, we continued to implement cost efficiency across all levels -- cost efficiency initiatives across all levels. Thus, our operating expenses decreased by 9% quarter-over-quarter and 12% year-on-year. The decline was mainly attributable to decreasing administrative and other operating expenses, where we were able to implement our cost cutting measures. They include discretionary administrative expenses, such as advertising, marketing and consultancy services as well as the impact from renegotiated rent expenses, which is posted under IFRS 19 -- 16 requirements. As a result, our cost-to-income for this quarter stood at 38.5%, improved by 1.6 percentage points year-on-year; while our stand-alone cost-to-income ratio stood at 32.3%. Next slide, Slide 24, is about our solid capital levels. In quarter 2, as you can see from the slide, we started to generate sufficient capital buffers and generated by 90%, 70% and 50%, respectively, from CET1, Tier 1 and total capital adequacy ratios. As you can see, our CET1 capital ratio stood at 7% versus the minimum required of 6.9%. Slide 25, this is our funding -- it is about our funding and liquidity position. IFI funding stood at around GEL 2.2 billion as of 30th of June 2020. Over the same period, our liquidity position stood strong, with the regulatory liquidity coverage ratio of 125%, comfortably above the regulatory limit of 100%. Over the same period, our net stable funding ratio stood at 128%, with the net loans to deposit plus IFI financing ratio was at 105%. Now I would like to hand over back to Vakhtang.

Thank you, Giorgi. And now I'd like to finish this presentation by giving some guidance about our future outlook. Given the uncertainties associated with the COVID-19 pandemic, our focus in the short term will be on maintaining prudent capital and liquidity positions, proactively managing asset quality and cost optimization. At the same time, we expect to continue profit generation in each [indiscernible] further supported by net interest margin and cost efficiency. In the medium term, we remain committed to our guidance, return of equity of about 20%, a cost-to-income ratio below 35%, a dividend payout ratio of 25% to 35% and loan book growth of around 10% to 15%. Thank you.

Thank you, Vakhtang. Now I would like to open the floor for Q&A.

[Operator Instructions]

Hi. Can you hear me?

Yes. We do.

This is Ron from EFG Hermes. Just have 2 or 3 questions. My first question is regarding your level of provisions. I see in your presentation that in this quarter, you have modeled a slightly optimistic macroeconomic scenario. Could you just elaborate why that is in the sense that are you seeing data to suggest that macroeconomic outlook could be better than what you had modeled initially? And also on the back of that, if you hadn't modeled that optimistic scenario in this quarter, what would be your provisioning levels have been in this quarter? I have a couple of other questions. Should we take them sequentially? Or should I just ask them and then you can respond?

Maybe we'll start with the first question, and then we can go through the others. We basically, from the perspective of macro scenarios, are quite consistent with our earlier forecast. And -- I mean we are seeing slightly -- a slight positivity in terms of remittances, perhaps, but this is not too different. And our macro team has revised this scenario but has not changed the main items. So basically, we are quite consistent. Therefore, we -- assuming the consistency will go on or will remain until the year-end, we do not expect additional COVID-related expenses. I mean the GEL 9 million that we posted during quarter 2, this is COVID-related, but in relation to our Azerbaijan subsidiary. So yes. Am I answering your question, Ron?

Yes. Yes. Yes. And just another question related to provisioning levels. So if I -- this is a slightly long-winded question. So just excuse me, but if I look at the level of provisioning levels you have currently, and I look at what the normalized levels were historically, I estimate that the bank is currently holding excess provisions of around GEL 170 million, which would roughly be enough to absorb around -- NPLs of around 3%, assuming the bank maintains an NPL -- specific NPL cover of 40%. So I guess my question is as the repayment holidays come to an end, as the government support programs come to an end, what is the probability that the bank's NPL ratio could increase by more than 3 percentage points?

Well, I believe this is a difficult question to answer at this stage. I guess what I can tell you, though, is that for certain loans where the grace period expired and we did not offer the grace period, we see quite low par -- over par or par 9 -- PAR 30 or any overviews. We -- based on the macro assumptions that we shared and we repeated this -- under this appendix of this presentation, we believe that the actual losses, which is the multiple of probability of default and loss given default, will not exceed the 1.7 percentage points of the book that -- which -- based on which we created the provisions in quarter 1. Now specific -- up to how much would go specific NPLs towards the year, and it's very premature to tell you because whatever it goes, it will go up and then it will -- that will decrease. But for now we don't have this answer.

Yes. To add to what Giorgi is saying, as you remember, for the first wave, our -- for the EBITDA loans, it was more than 70%. For the second wave, as we mentioned in our presentation, it decreased to less than 30%. And the country has a very good result for the unemployment. So the employment increased by up to 50,000 during July. So this country has a very good trends on that side, and we believe that before the end of year, also our employment will be increased. And we view that in the base scenario, the cost of risk, which we made in the first quarter and in the first half of this year will be enough for the potential employees.

Okay. And just one final one on your run rate through the rest of the year. Can you just speak about your run rate on noninterest revenue and operating expenses through the rest of the year?

So for the OpEx, we target this year to be flat, and that includes the -- this is group OpEx, which includes investments in Uzbekistan. So they actually -- the OpEx will be cut, especially on the back of currency depreciation in the first 2 months of this year. We've been -- we were continuing expenses as business in -- business-as-usual scenario. So basically, despite all this, our OpEx will be flat, and we also target flat cost-to-income ratio. As I said, we expect the NIM to recover towards the year-end already in July, which is the fact NIM was at 4.6%.

Okay. And then noninterest revenue, how do you expect to see that evolving through the rest of the year?

Yes. I mean when comparing the number and volume of transactions, I think it -- volume of transactions in July and beginning of August already up by 30% if you compare it to quarter 2. So that will support the generating of fee income, and we should see the result. For the year, we should be slating fee and commission income maybe a little bit better. For FX income, we don't see any volatility, so it's very stable for now. Therefore, the growth in FX income is unlikely. However, we should see growth quarter-over-quarter basis still. So overall, we should see, again, flat fee and commission income, improving NIM, flat cost and flat costs across the income.

And the next question comes from Andrey Mikhailov.

I have a question on the charge on the fixed assets that you booked in Q2, but you actually retracted it, and it started to apply to year-end '18 accounts as I understand. My question would be, if you maintain the previous methodology under the veil of fixed assets at fair value at the end of the second quarter, how big would this adjustment be?

Andrey, so are you mentioning the charge about the deposit asset revaluation methodology or IFRS 16? Sorry, I didn't get you.

Yes. IFRS 16.

Sorry. IFRS 16 charge was up to GEL 4 million. If we -- and this is the kind of modification effect similar to the modification -- similar conceptual to the modification effect that we post in loan book. So it's up to GEL 4 million. If we do not have IFRS 16, then the OpEx would have grown by GEL 4 million -- up to GEL 4 million.

Yes. But I think maybe these 2 charges are based on IFRS 16. My question was about the charge to the value of fixed assets. It was in excess of GEL 50 million.

Sorry. So -- okay. So that's about the repossessed assets. So that is not -- it is not charged per se. It's more a revaluation of the repossessed assets. So in the past, we did have repossessed assets at market value, and we changed the accounting policy and moved to a cost basis. The reason we did it is because of very high volatility in the market value of such items. Plus, we are seeing this to be the trend there and quite consistent across our peers, both locally and internationally. So that changed the equity position. It did not have effect on P&L, nor it had effect on capital adequacy. It basically offset it, the revaluation reserve, with the repossessed assets at market value.

On these assets, are they still planned to be sold when the environment permits that? Is that correct? Or does the bank plan to use them for its own purposes now?

Most of those assets are planned to be sold. There are some assets that are rented out, and we don't -- and assuming they meet the IRR requirements, we don't rush to sell them. But usually, repossessed assets are for sale. Again, some of the assets are rented out. Some of the assets would have some capital appreciation in the business-as-usual scenario, not on the COVID situation. But in the long term, they all need to be sold.

And the next question comes from [ Sergi Gonzalenco ]. I will read them out as they were written in the Q&A session. "Could you please describe in more detail the standing of the loan book and COVID moratorium?" This is the first question. And the second one is, "any projections on the recognition of the NPL in relation to the moratorium's expiration and soft call provision?"

Sure. Anna, can you put the slide showing the numbers on grace periods?

Yes.

So the first grace periods were offered initially, which -- where we might default, offered it to all retail, all MSME and selected corporate customers, out of which, as you can see from the Slide, 77% retail, 59% of MSME, 32% of corporate customers accepted. This was the 3-months payment holiday. The second one was more targeted, so we offer it only on the specific group of market. And as you can see from the slide, 29% retail, 24% MSME and 5% of corporate have accepted it. I think the good news is that if we judge it from the very first reaction of the customers who had the moratorium in the first phase and have not been offered for the -- during the second phase, the good news is that their PARs or overdues are actually below than that of entire portfolio. And that would -- I mean, obviously, we see the early signs. Nevertheless, they are meeting the first 2 or 3 payment obligations. With regards to the NPL forecast for the year-end, given its temporary nature of NPLs and PAR 90s, we -- it's early for us and, unfortunately, we will not give you the precise or accurate numbers. But what we can reiterate is that we -- assuming the economy and the virus situation is consistent with what we've forecasted and what we have forecasted, we've shown it, and we -- and so far, it has been consistent. So assuming this consistency remains, our cost of risk related to COVID-19 should not increase, and the 1.7 percentage points of the loan book that we posted in quarter 1 should cover COVID-related cost of risk, which is the multiple of probability of default and loss given default. We will have the cost of risk related to business-as-usual scenario, but that's different.

Thank you. And we have got one more question from [ Sergi ]. "Could you please comment on NBG's standards of 50% growth of NPLs in Q2?"

So per NBG standard, we still need to allocate specific provisions into specific standard categories. And I mean, these numbers are very premature for now to discuss. Even though the numbers that you are basically seeing are pretty much one of the best or the best in the -- on the market or one of the best, at least, and very consistent with our guidance -- our expectation, they are super premature to discuss.

Thank you. And we have a question from [indiscernible]. What is the demand on loans? Which sectors show more activity?

Okay. So it's very difficult to make an assumption to the short term, but what we have seen already last 2, 3 months that the government project, especially for the mortgages, we think the demand for these mortgages, especially for the [ loans ]. And in our case, it shows that 35% or 1/3 of the loans, which we are discussing in the areas are more different from the majority we see, these special loans, where the state is participating. But in the other areas, such as the semi and the corporate, we see slight increase of the demand, but we need more time, and economy needs more time just to recover.

And we have got one question from the mobile phone. Please introduce yourself and ask your question.

I think the number is muted.

Yes. Okay. Please, if there are any more questions, please feel free to ask. We will wait for a minute or so. I think at this stage, there are no further questions. Thank you once more, everybody, for joining our call. If you have any further questions, please don't hesitate to contact us by e-mail. Thank you.

Thank you very much.

Thank you very much. Thank you.