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

Good afternoon, good morning, ladies and gentlemen. Thank you for joining our Third Quarter 2020 Financial Results Call. My name is Zoltan Szalai, Director of IR and International Media. Today with me, we have Vakhtang Butskhrikidze, our CEO; Giorgi Megrelishvili, our new CFO; and Giorgi Shagidze, our former CFO, currently an adviser to the group. We will start today's call with a brief presentation and give you an update about recent market macro developments and financial operating performance of the group in the third quarter. Afterwards, as usual, you will have an opportunity to ask questions by using the Raise Your Hand function on Zoom. Before asking a question, please introduce yourself. Now I would like to hand over to Vakhtang.

Thank you, Zoltan. Thank you, everybody, for joining our call. I will start my presentation with the main highlights for the second quarter from the Slide #3. As you can see from this slide, Georgia's economy continued to recover in the third quarter, with GDP declining by only 3.8% year-on-year compared to a 12.3% drop in the second quarter. The recovery was particularly visible in September with GDP decreasing only by 0.7% year-on-year. In terms of TBC results, we achieved solid profitability and high efficiency in the third quarter, with the return of equity standing at 22% and cost-to-income ratio at 38.7%, while the bank's standalone cost-to-income ratio stood at 33.5%. Over the same period, our capital and liquidity position remained strong, with LCR ratio standing at 123.6% and CET1 capital amounting to 9.9%. At the same time, our digitalization level remained high. We saw offloading ratio reaching 95% and mobile banking penetration ratio standing at 47%. Now let's move on to the macroeconomic update on the Slide #4. While the decline in tourism has been significant during this year, the recovery in other inflows has been strong. Remittance has picked up by 29% in September year-over-year, while exports increased by 8.6%. On the back of increasing domestic demand, imports also recovered, falling only by 9% year-over-year in September. Finally, on this slide, total wages received by hired employees also demonstrated a positive trend in September, as you can see from the bottom right chart. This is a particularly promising development from the retail portfolio quality and growth perspective. Now I'll be moving on to Slide #5, and you can see that following some improvement in the summer, positive trends in the hospitality sector reversed in September due to increased number of COVID cases. At the same time, the recovery is very evident across a majority of nontourist sectors. Consumer spending shows positive growth dynamics for the majority of sectors, including grocery, personal care and construction materials. Now let's move to the Slide 6, which illustrates the approach taken by the fiscal and monetary policy makers. As you can see from the top-left chart, strong fiscal stimulus continues to support the economic growth and fiscal spend is expected to remain exceptional especially in 2021, mostly financed by the external borrowings. It should be highlighted that this year, the additional external funding amounted to $1.7 billion. Out of which, about half has already been dispatched and the rest of the funding is expected to arrive in the fourth quarter. Despite decline in inflation, the NBG has kept its monetary policy rate unchanged at 8%. The National Bank of Georgia's relatively cautious monetary policy aims to support the exchange rate stability. It is important to note that National Bank of Georgia actively intervenes in FX market to compensate the shortage of currency inflows and to reduce volatility. We believe that the NBG's international reserves together with additional external funding to the state are sufficient to continue supplying FX to the market. Finally, on this slide, I would highlight, from the beginning of 2020, the central bank has already sold $750 million on the market, while its gross reserves have actually increased and net reserves have remained approximately at the same pre-pandemic levels. On the Slide 7, you can see exchange rate developments of Georgia's key economic partners and real effective exchange rate of lari. The USD-lari exchange rate continues to broadly follow the dynamics of the exchange rates of key economic partners against the dollar. Recently, on the back of positive vaccine news, regional currencies have somewhat strengthened against U.S. dollar, and USD-lari also appreciated by around 3% from its peak levels. At the same time, lari's effective exchange rates indicate that lari still likely remains undervalued. Now let's move to the Slide 9 and discuss our recent developments. First of all, I'd like to welcome Giorgi Megrelishvili as the CFO of TBC Group. He joined TBC in March of this year as a Deputy CFO. Giorgi has a vast experience in the financial and risk management roles and held various senior positions at Barclays as well as other institutions. I would also like, once again, to thank our outgoing CFO, Giorgi Shagidze, for his tremendous contribution to the group. I would like to inform you that in October, we published our first full-scale sustainability report prepared in reference to GRI standards. You can find the report in our IR website. Finally, I'd also like to provide a quick update about progress regarding our initiatives in Uzbekistan and Germany. We have successfully rolled out the digital banking platform in Uzbekistan, which I will discuss on the coming slides. However, in light of the COVID-19, we have decided to postpone our plans to launch our neobank, Space, in Germany. Moving on to Slide 10. I would like to provide more comprehensive updates regarding our activities in Uzbekistan. Our digital banking platform in Uzbekistan, TBC UZ, have become available to the public in live beta mode at the end of October. Since launch, our application has already attracted up to 2,000 downloads and 1,200 customers. In addition, we have opened the second smart next-generation branch in Tashkent. In addition, [ 256% ] of market share by volumes in Georgia, we are also actively developing our payment business in Uzbekistan. Our subsidiary, Payme, is a fast-growing profitable payment service provider and has attracted around 2.5 million registered users by the end of the third quarter. Year-on-year revenue growth in the third quarter was 100%. Slide 11 shows our inclusion into MSCI UK Small Cap Index, active from the December 1. This is a very significant development, which has been primarily the result of the improved liquidity of our shares on the London Stock Exchange. Finally, on the Slide 12, I'd like to update you about our private banking developments. In August, we rebranded TBC Status to TBC Concept and introduced a new private banking service proposition based on a subscription model. In addition, in October, we opened an entirely different multifunctional space for our TBC Concept customers, which is distinguished by superior interior design. I'm also delighted that we have been named the Best Private Bank in Georgia for the second year in a row by the Global Finance Magazine. Now it's time to update on our financial performance in the third quarter. These updates are always presented by our CFO. But given that these results were still on Giorgi Shagidze's watch, we thought it was best if he presented them. During the Q&A session, we will be joined by our new CFO, Giorgi Megrelishvili. Giorgi, this is your part, please.

Thank you, Vakhtang. I'll begin my presentation from Slide 16, and thereby, we will go over the financial performance of the third quarter 2020 in more detail. On this slide, I'll be presenting the loan book growth. As you can see, quarter-over-quarter loan book remained broadly stable and increased by 15.2% year-on-year on constant currency basis. Quarter-over-quarter, our corporate loan book decreased by 1.8% on constant currency basis. This was primarily due to the repayment of our large customer on the back of issuing green Eurobond co-managed by TBC Capital. As a result, our loan book market share in loans stood at 39.3% as of 30th of September. Now I'll move to the next slide, Slide 17, to discuss deposit portfolio performance. On a constant currency basis, deposit portfolio grew by 12.7% and 16% quarter-over-quarter and year-on-year, respectively. The increase in deposit portfolio in quarter 3 2020 was mainly driven by corporate and retail segments. Corporate deposit include Ministry of Finance deposits in the amount of GEL 856 million in quarter 3 2020. These are the specific deposits. And without Ministry of Finance deposit, the quarter-over-quarter growth of corporate book at constant currency basis would have been 8.4%. Eventually as a result, our deposit market share stood at 38.3% as of 30th of September. Slide 18 shows that we delivered solid profitability in the third quarter 2020. Our net profit amounted to GEL 152.6 million, up by 20.3% year-on-year, mainly due to the increase in net interest income and decreasing provisions. On quarter-over-quarter basis, growth was driven by operating income related to the higher economic activity. As a result, our return on equity and return on assets amounted to 22% and 2.9%, respectively, in the third quarter. Moving on to the Slide 19, we can see the trend in our net interest margin. As expected, our NIM increased in the third quarter and stood at 4.9% (sic) [ 4.6% ], up by about 30 basis point quarter-over-quarter basis. The increase was mainly driven by increasing retail loan yields and decreasing cost of funding resulting from easing pressure on GEL funding. Now let's move on Slide 20 to discuss noninterest income. In the third quarter 2020, our net fee and commission income increased by 20.3% quarter-over-quarter basis mainly due to the settlement transaction driven by expansion of economy activity as well as other fee and commission income. Total noninterest income without net fee and commission income demonstrated a strong recovery as well. It is increased by 29.4% quarter-over-quarter basis, mainly driven by increase in FX operations and related to higher GEL volatility in September. I'll discuss our asset quality on Slide 21. As anticipated, our NPL ratio started to increase in quarter 3, as the COVID-19 impact began to materialize and amounted to 3.5% compared to 2.9% at the end of the previous quarter. However, as previously communicated, we have created upfront COVID-19-related provisions in the first half of 2020. Cost of risk during the quarter stood at 0.2% or negative 0.2% if we calculate it at constant currency basis. This was driven by slight recovery of provisions in retail and corporate segments, which were partially offset by the increase in provisions by MSME segment. In terms of the loan book concentration, the top 20 and top 10 borrowers to gross loans stood at 12% and 7.9%, respectively. Related party to gross loans ratio remained unchanged at 0.1%. Next slide, Slide 22, is about operating expenses. In quarter 3, we continue to operate at high efficiency levels, and our cost-to-income ratio stood at 38.7%, broadly stable quarter-over-quarter basis. In this quarter, our operating expenses increased by 17.9% quarter-over-quarter but remained broadly unchanged year-on-year. The quarter-over-quarter increase was related to, firstly, a reversal of rent expenses in quarter 2 as a result of renegotiations in rent expenses and -- which is then based per IFRS 16. And secondly, an increase in other provisions for liabilities and charges and professional expenses in quarter 3. The staff cost increased in third quarter compared to previous quarter, related to a low base in quarter 2 due to reversal of share-based payment expenses when we canceled management bonuses for the year. Next slide, Slide 23, is about our solid capital level. In quarter 3, we maintained sufficient buffer in the capital, in CET 1, Tier 1 and total capital ratios amount to 9.9%, 12.7% and 17.1%, respectively, standing around 300 and 400 basis points above respective minimums. Overall, our capital ratios remained broad with stable quarter-over-quarter as income generated during the quarter was offset by the GEL depreciation effect. Now I'll move on to our funding and liquidity positions on Slide #24. In the third quarter 2020, our liquidity position stood strong with regulatory liquidity coverage ratio at 124%, well above the regulatory limit of 100%. Over the same period, our net stable funding ratio stood at 127% and net loan to deposit plus IFI funding ratio at 97%. Now we target to optimize the liquidity structure end of the year, both through getting rid of our excess liquidity and reducing negative tariff from the remaining ones. This was final slide of my presentation, and here, I would like to highlight that while I'll be on the upcoming digital roadshow, this is my last call in my capacity as CFO of TBC Bank. I'd like to thank you all very much for your continued cooperation, partnership and trust, which was indeed a privilege for me. I look forward to staying in touch and continue cooperation for my other endeavors or initiatives. Thanks again. Vakhtang, I'll give the floor to you.

I'd like to finish today's presentation by reiterating our medium-term guidance: return of equity above 20%, cost-to-income ratio below 35%, a dividend payout ratio in the range of 25% to 35% and loan book growth around 10% to 15%. With that, I'd like to invite you to ask the questions, please.

[Operator Instructions] So the first question is from Andrew Keeley.

Can you hear me?

Yes, we can.

A couple of questions. Just wondering if you can give us any thoughts on the kind of triggers that you need to pass to resume dividend payouts. Interested to hear how you see this. And in particular, what kind of capital ratio boost you can potentially expect from this kind of switch to IFRS or kind of equity reporting kind of for local regulatory purposes that seems to be happening next year? And when you kind of expect that? That would be my first question. And then the second question is just generally, we saw obviously a bit of a recovery in the margin in the third quarter. What is your -- what are your thoughts on the margin outlook for the next few quarters? Do you kind of see further kind of upward movement back towards 5% or so or not? And then what do you think in terms of a kind of relatively normalized kind of cost-of-risk run rate, now we're kind of hopefully getting towards the end of the kind of COVID impact?

So first of all, I will say thank you, everyone, for attending the call. I'm going to start with those questions. I will start with the dividend question. So I would like to mention that we still are at that early days to provide a specific guidance. However, we target a sound capital generation, but we also need to assess other factors such as, for example, how the economy recovery goes on, what would be the business' outlook. Also, we need to get through the end of the pandemic, and actually, last but not the least, we need to get some more clarity from our NBG how the capital requirements will change and actually, let's say, evolves throughout the period. Therefore, we will be in a position to provide more clarity during our, let's say, Q1 call, more or less. So that's on dividends. I'm happy to take any further questions on this. Now moving to IFRS. So probably we reached at somewhere around 300 to 400 bps with that [ cap risk ]. But actually, we don't expect any capital increase from NBG. It will be just increase on our capital ratios, and it will become more comparable with our figures to report on other basis. So -- and on the timing, it's still a bit early to say. It's around more of '22, but we need to compare it after we get the formal guidance from NBG. So that's the first part of the question. Now moving on NIM. As you have seen, our NIM actually increased by 30 bps. However, it was the FX impact. For the Q4, we still actually expect a bit increase, around 10, 15 bps, and also expect that to actually materialize -- to moderate in 2021, with partial increase around 10, 15 bps again and stabilize around 4.8%, 4.9%. That's actually how we see it. If you have any, kind of, further questions, I'm happy to cover them. Sorry, the last one I was reminded is cost of risk. Now, cost of risk, as Giorgi mentioned, we already took all COVID-related, let's say, specific provisions, and we don't expect any more risk. And we expect now to move more on a normalized basis, somewhere around like -- in Q4, around 0.5% at this range. And next year, it will be like the [ EU ] again, our guidance will actually remain as it was previously. Any more questions?

Yes. Can you just remind what the guidance -- the previous guidance on the cost of risk was, was it 1.2% to 1.4%?

1%.

Sorry, say again?

About 1% of cost of risk.

The next question is from Ronak Gadhia.

My couple of questions. Firstly, if I were to look at your 9-month results, it seems like you reported a loss on the FX income. And at the same time, there's a big FX translation gain. That's quite different from what you used to report historically. So could you just talk about what was going on there, especially with the FX translation gain? I think that's something we haven't seen in the past. Second question is on your restructured loans and repayment holidays. Could you just remind us where you are relative to 2Q? And then the third point is, I guess, if I look at your Slide 36 of your presentation, now I know it's hard to compare, and we might not be comparing apples-to-apples. But from what I see on that slide, the number of digital transactions was around 22.5 million for 3Q. If I compare that to your peer bank, it seems their number was almost double. So could you just share your thoughts in terms of are you -- is your peer bank just much more ahead now in terms of the volume of digital transactions they are processing? Or could you just share some information on what your relative market shares are, especially on the digital side?

Sure. Well, thanks for the questions, Ronak. I'll try to answer them. So on the first one, on the FX, I think we should just look to the 2 items together. There is an accounting reason why one item delivers gain and the other one the loss, especially when we speak about the PLC versus JSC. So I think you just need to look to the one item together. And in this regard, we -- there is an increase in FX transactions and income quarter-over-quarter basis. However, this is not as big if you see there is a decrease on a year-on-year basis, which is related to growth in kind of the business activity as well as decreasing margins on FX, which is the continuing story. With regards to the grace periods, we currently -- we had 2 waves of the grace periods. We finished -- we started the first wave in around March and the second wave around June. There was a significantly reduced numbers during the second wave. Now we are not offering grace periods widely. That said, though, we are engaging individually with the customers in need. And when they need this, we do the restructuring. But partially, this is the reason why the NPLs increased in quarter 3 compared to quarter 2. Now in this regard, what we saw is that people who came out from first grace period, they actually are paying -- happen to be paying better than average and better than the entire book, judging purely from PAR 30. People who came out from the second grace period, they are a little bit worse than the overall. But again, the current NPL levels try to reflect them, but we obviously continue restructuring the customers so the numbers might change towards the end of the year. But again, from -- judging from the payment perspective, that's the picture. With regards to your question on Page 36, I mean, I'll open the page, but it's very difficult to compare to the competitor numbers, especially not understanding what is included there in corporate clearance or what. What we do know is that there is a -- NBG has called a number on a number of payments. If we take our payments and divide by NBG numbers, then we get 56%, which is obviously arguably the largest share. There are not many banks competing in the field. So of course, competitor has quite a big market share as well.

Sorry, if I could, maybe just a couple of follow-ups. And again, I probably need to look for the right slide. But I think where you show your FX balance sheet, yes -- the presentation I have has slightly different paging as you. But if I look at the open interest rate position on your FX balance sheet, you seem to have a net open position of around GEL 2.3 billion. If memory serves, I think historically, you never used to have such a significant net open position. So is this something that's changed recently? And is this something that's going to be sustained going forward?

No, we don't have an open currency position. I don't know which slide you are looking for. Our open currency position is close to 0. Sometimes, we close it. If it comes between euro and dollar, we use swaps from mostly AAA institutions that might go down to AA. But when it comes to lari and dollar, clearly, there, we basically close it with the actual cash. I'm not sure which slide you're looking for. But despite any slide, we don't have open currency position.