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

Dear ladies and gentlemen, thank you for joining our first quarter 2021 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 Megrelishvili, CFO of the bank. We will start today's presentation with a brief overview of recent macroeconomic development and also provide you update about our financial and business performance. [Operator Instructions] With that, I would like to hand over to Vakhtang.

Thank you, Anna. I'd like to thank everyone for joining our call. I'll begin my presentation with the main highlights for the first quarter from the Slide #2. Georgian economy seems to have reached the turning point in March, with GDP achieving stronger-than-expected growth of 4% year-over-year. More importantly, March GDP was also around 1.3% higher than the 2019 level. Exports also demonstrated impressive results, growing by 70% year-over-year in April 2020 and significantly exceeding April 2019 numbers. In terms of our financial results in the first quarter, we achieved strong profitability, which resulted in return of equity of 20%. At the same time, our cost-to-income ratio stood at 39% on the back of our bank stand-alone cost-to-income ratio of 33.1%. Over the same period, our capital and liquidity positions remain strong. The liquidity coverage ratio stood at 136% and CET1 capital was 10.9% at the end of the quarter. In terms of our Uzbek venture, I am pleased to report remarkable progress. Total registered users of the TBC UZ application as of May 11 stood at around 192,000, while the loan and deposits portfolio amounted to GEL 9.3 million and GEL 8.7 million, respectively. Now let's move to the macroeconomic update on the Slide #3. As already mentioned, real GDP growth was 4% in March, which you can see at the top of this slide. Also some of the market increase was attributed to the low base in 2020. Notably real GDP exceeded its 2019 level in March, which you can see at the top of the slide. Overall, the GDP growth for the first quarter stood at minus 4.2%. As you can see on the left side of this slide, exports of goods were supportive of growth, reaching the 2019 levels already in February. Along with the eased restrictions and the recovery in economic activities, there are also strong signs of improvement in the aggregate demand as imports of goods have remained only 3.8%, below the year 2019 levels as of April of this year. Furthermore, remittance has continued to be a solid performer in the first quarter, increasing by 31% compared to the first quarter of 2019. As for the tourism inflows, margin recovery is evident in recent months. In particular, compared to 2019, revenues in the tourist sector decreased by 88% in March, while rates of construction were around minus 94% in January. At the same time, the housing market has recovered quite quickly on the back of the strong demand and the lack of a bubble in the pre-pandemic period. Despite the end of the state mortgage subsidy program, the number of units sold in Tbilisi exceeded the 2019 level already in March. While in Batumi, April transactions are only 9% below the same month of 2019. Overall, taking into account stronger performance in exports, imports and remittances, the gradual recovery in tourism inflows, we have updated our 2021 GDP forecast from around 4.2% to 4.7%, followed by a solid 7% growth expected in 2022. The above-mentioned projection is based on this scenario in which herd immunity among Georgian population is reached by the second quarter of 2022. Slide 4 shows fiscal and monetary policy. After relative stability in the beginning of the year, with the depreciation of Turkish lira at the very end of the first quarter, the lari weakened further against the dollar. At the same time, the National Bank of Georgia stayed active on FX market, selling a total of $160 million in auctions in the first quarter. Nevertheless, as you see on the lower right-hand side on this slide, the Central Bank reserves have not decreased as the interventions were financed by the government's external borrowings. Top right chart shows monetary policy rate and inflation and annual inflation, which stood at 7.2% year-over-year in March and April. The end of the state subsidy program, which acted as the main drag on price during the winter month, coupled with increased prices for all commodity groups and weaker lari led to high inflation. According to the latest projections, inflation is expected to reach 9% by the end of this year. In order to manage inflationary pressures, the National Bank of Georgia increased the monetary policy rate by 0.5% in March and additional 1 percentage point in April to 9.5%. Fiscal stimulus remained supportive in 2021, which is a planned -- with a planned deficit of 7.6% of GDP. According to TBC Capital estimates, as you see on the lower left-hand side of this slide, out of external funding raised by the government in 2020, approximately $280 million is to be utilized in 2021, together with the planned additional borrowings of around $800 million. And finally, on this slide, in April, Georgia successfully issued a $500 million 5-year eurobond with a coupon rate of 2.75%, which is the lowest ever coupon for a Georgian borrower. Now to Slide #6, I'd like to discuss our best-in-class digital offerings. We continue to build on our digital offerings to make our customers' lives easier by providing them with simple and convenient offerings. Our retail offloading ratio in the first quarter stood as high as 95%, while the Internet and mobile banking penetration ratio amounted to 53%. In parallel, we are expanding our online lending platform to offer our customers alternative channels to get a loan remotely. Our floating ratio of MSME clients also remained high and amounted to 91% in the first quarter, while the share of Internet banking users in total active users stood at 83%. In addition, we launched a digital factoring platform for our business clients, which will lead to faster execution of deals. Slide #7 showed the positive trends in the number of digital transactions and the number of products sold remotely. In the first quarter, the number of retail digital transactions grew by 22% year-over-year, mainly driven by mobile banking. The share of mobile banking transactions in total digital transactions amounted to 55%. Over the same period, 73% of all deposits we have placed outside the branches, while the sales of floating ratio for consumer loans and debit cards amounted to 37% and 24%, respectively. Slide 8 gives us some more color regarding our Internet and mobile banking applications. As you can see from the top left chart, the number of active retail Internet and mobile banking users increased by 16% year-over-year, while mobile banking users grew by around 20%. Furthermore, the number of our daily and monthly active digital users continued to grow in the first quarter. Notably, the number of active daily users increased by 70% year-over-year in March. On this Slide 9, I'm pleased to provide an update on our leading payment businesses in Georgia and Uzbekistan. In Georgia, we maintained the leading position in the payment business by the number and volume of transactions, which stood at 53% and 58% market share, respectively. I'd also like to note that we have more than 800,000 active payment users at the end of the first quarter, while our contactless card payments remained at high level standing at 94%. I'm also delighted to present the results of our Uzbek payment subsidiary, Payme, which is the second largest payment provider in Uzbekistan, serving around 3.4 million users. Payme recorded strong financial results in the first quarter. Its revenue and net profit grew by around 100% and 134%. These strong results were underpinned by the impressive growth by both in volume and number of transactions, which increased by 163% and 108%. Over the same period, the number of active and registered users reached up to 1 million and 3.4 million, up by 71% and 73% year-over-year. On the Slide 10, I'd like to provide an update regarding our international strategy. As you are aware, in 2019, we successfully launched TBC UZ, a digital commercial bank in Uzbekistan, by leveraging on our digital banking platform. So far, throughout 2021, we have achieved significant growth in major metrics. As of 11th of May, as already mentioned, our registered customers reached around 192,000, and we delivered 47,000 debit cards. At the same time, our loans and deposits portfolios amounted to GEL 9.3 million and GEL 8.7 million, respectively. Moreover, the number of transactions is also growing fast, as shown on the bottom right chart. Currently, we operate around 23 outlets and 3 branches, which are used for customer onboarding and assisted service support. Now I'd like to hand to Giorgi. Giorgi, please.

Thank you, Vakhtang. I will begin my presentation from Slide 13 and cover the financial performance of the first quarter of 2021 in more details. On the current slide, you can see the performance of the loan book. Our loan book grew by 6.1% year-on-year and remained broadly stable quarter-on-quarter on a constant currency basis. The limited growth on quarter-on-quarter basis was related to seasonality and partial lockdown throughout January and mid-February. We remain leaders in terms of lower market share, which stood at 38.5% as of March 2021. Now let's move to Slide 14, and I'll discuss our deposit portfolio. On a constant currency basis, the deposit portfolio grew by 23.1% and 10.6% year-on-year and quarter-on-quarter, respectively. Year-over-year growth was mainly driven by CIB and retail, while quarter-on-quarter was largely due to a large placement from a single CIB client. We have the largest market share of 39.8% in Georgia as of 31st of March. Now moving on Slide 15, I'll discuss our solid profitability. In Q1 2021, we managed to achieve solid profitability, driven by income generation, coupled with lower provision charges. Our net profit increased by 51.9% on quarter-on-quarter basis. As a result, our ROE and ROA stood at 20.3% and 2.7%, respectively. Now moving on to Slide 16. I would like to go through our net interest margin. In Q1, our NIM was 4.7%, down by 40 bps year-on-year. This was driven by growth in NBG FX mandatory reserves and decrease in respective income due to decline in Fed rate, increased liquidity and currency depreciation. As expected on quarter-on-quarter basis, NIM decreased slightly by 10 basis points as a result of partial lockdown in January and mid-February. Now moving on Slide 17. In the first quarter of 2021, our net fee and commission income increased by 3.9% year-on-year basis, mainly driven by Payme, our Uzbek subsidiary. On quarter-on-quarter basis, the net fee and commission income decreased by 13.2% as a result of partial lockdown from January to mid-February and seasonality. Our other non-interest income increased by 5.4% and 5.2% on quarter-on-quarter and year-on-year basis. The increase was supported by sales of [ IFS ] in the amount of GEL 2.4 million. In addition, quarter-on-quarter increase was also driven by net insurance income. Now let's move to Slide 18 about our credit quality. In Q1, the NPL ratio increased only slightly by 10 basis points on quarter-on-quarter basis. Increase was mainly on the back of retail and MSME, partially offset by CIB. Our NPL had 81% provision coverage as of March 31, 2021, and additional 73% collateral coverage with total NPL coverage being at 154%. I'd also like to note that only 90% of NPLs were unsecured loans, which -- and the provision coverage for them amounted 187%. At the same time, cost of risk stood by 0.5%, down by 1.5 percentage points quarter-on-quarter. Now move to next Slide 19. I would like to discuss our efficiency levels. In Q1 2021, OpEx remained broadly stable on quarter-on-quarter basis. However, year-on-year increase was 14.7%, and it was mainly driven by low cost base in Q1 '20 as a result of one-off reversal of management bonuses that we have previously accrued over 2019 and Q1 2020, depreciation of lari and decrease of the cost of TBC Uzbekistan. Now move to Slide 20, where I'd like to discuss our strong capital positions. As of year-end, we maintained solid capital levels. CET1, Tier 1 and total capital ratios stood at 10.9%, 13.5% and 17.6%, respectively, and remain comfortably above the eased minimum regulatory requirements. The increase of CET1 ratio on quarter-on-quarter basis was mainly due to net income generation, partially offset by the lari devaluation and some capital deductions and other RWA changes, for which we actually expected some portion of this to be reversed in Q2. I will finalize my presentation with funding and liquidity on Slide 21. In Q1, our liquidity position stood strong. And at the end of the quarter, our regulatory LCR ratio was 137%, well above the regulatory limit of 100%. At the same time, our NSFR ratio stood at 131.4% and net loans to deposits plus IFI funding ratio was 92% as of 31st of March. Now I would like to hand back to Vakhtang, who will update you about our future outlook.

Thank you. I'd like to finish today's presentation by reiterating our medium-term guidance. Return on pay-for-equity above 20% and cost-to-income ratio below 35%, loan book growth of around 10% to 15%. In terms of dividend payments, the Board has decided not to recommend the payment of dividends for the financial year 2020 since we still need to grow back sufficient capital to meet the National Bank of Georgia's regulatory requirement. However, we understand the importance of dividend payment to our shareholders and to lessen the timing of future dividend payment. We believe that the recovery is on track as indicated by the latest macroeconomic data and bank's capital generation is strong, which makes us regarding the possibility of dividend distribution from 2021 profits, latest subject to playing out base case market scenario and COVID containment. Thank you. Now I'd like to invite you for the questions.

[Operator Instructions] And the first question comes from Robert Sage.

Can you hear me?

Yes. We can.

Yes, go ahead.

Can I have 2 questions? The first one really relates to the very strong growth that you highlighted in your deposits, over 10% quarter-on-quarter. And you made reference to this one single large corporate deposit. And I was wondering whether you could give some idea in terms of how large that was, so that we can also then be able to understand how large the underlying increase was? And I'd also be interested to hear what you have to say in terms of your expectations for ongoing deposit inflows for the remainder of the year? The second question is entirely unrelated. And it essentially relates to your comments that you're confident that 2021 profitability will return to pre-COVID levels. I assume that, that's 20% or above. And when I'm looking at the consensus expectation, it's sitting at a little bit over 18%. So there's clearly you're more confidence than consensus would appear to be at the moment. And I was just wondering in terms of where exactly it is that you see upside in the consensus expectation? Is it largely due to a lower cost of risk? Or is there more to it than that?

Thank you very much. I'll start with your first question about the growth of deposits. So it's kind of no secret, the amount was around GEL 800 million. That was one-off and now it actually has been called back. So we don't have this deposit anymore, but we have very comfortable liquidity levels, and we expect liquidity like income to continue. There is market growth, like up to around 10%. So I don't think there is any issue on that side. Now if I move to 2021 profitability guidance, actually, it's, again, it's subject to the building -- like normal building blocks like macro, COVID containment, et cetera, as Vakhtang mentioned. But if everything plays out, as we actually expected -- expect -- yes, we actually to target to be at our medium-term guidance around that level. And we are kind of -- we are looking at different angles, for example, probably it can be coming from -- a little bit from each side, like net interest income, operating expenses, also looking at our cost base and can we leverage there and probably some -- in the cost of risk, there might be some room. If I answered your question?

The next question comes from Ronak Gadhia.

Anna, can you hear me?

Yes.

Just 2 or 3 questions. Firstly, on your NIMs, as you pointed out, it was a bit weak because of the increase in CRR requirements by the NBG. Could you give some guidance on what you expect through the rest of the year given that the CRR was introduced towards the end of the quarter? Should we expect a further reduction in the next quarter and through the rest of the year as the full impact comes through?

Sorry, I missed a few of your words. Can you repeat the last bit?

No. I was just saying, should we expect the NIM to come under further pressure through the rest of the year given that the CRR was introduced towards the end of the quarter. So should we expect the full impact through the rest of the year? My second question is on cost of risk. I think on the full year call, you're guiding towards a cost of risk of around 1% to 1.3%, if I remember correctly. First quarter was a bit low. So should we expect it to go a bit higher? Or are you revising your guidance given that the economic outlook seems to be a bit better? And then my final question is on your intangibles. If I look at your goodwill and intangibles, it's been on a firm upward trend, I think, since 2018. Could you -- and it's now almost 10% of shareholder equity. Could you just maybe give a bit of insight in terms of what is driving that? And how much further should we expect that to grow?

Of course, let me start with the NIM. So that was your first question. And on that side, we had a slight dip around 10 basis points, and that was actually expected because during our call at year end, I guided the market that was potential outcome. So from that perspective, like -- I think the economy is recovering. And our guidance of from around 4.8% to 5% actually remains in place. We don't expect far so much pressure on the NIM. On, let's say, contrary, there are a few factors that we increased to support our NIM, let's say, cover it. For example, we had at the moment quite surplus, let's say, liquidity. We expect that to kind of gradually decrease plus some change in portfolio mix, that actually would help us to achieve our guidance. Now if I move to the cost of risk side, yes, our guidance was 1% to 1.3%. And probably that rate still remains the case. But now seeing the real situation, the economic recovery, probably, we should expect more to a lower end rather than higher end. So that kind of would be our kind of guidance. And now on intangibles, yes, I do understand it's kind of a bit increased. But you need to consider, we're kind of technology, IT type of company, and we also launched our Uzbekistan subsidiary. We need to launch the core banking system and update our mobile and digital. And that was actually, let's say, investments coming through around 2 years. So that's kind of as simple as that. Any, further follow-up questions on that or any of the points?

No. Well, just on the last one, on the intangibles, has that largely been now accrued? Or now -- or should we still see further intangibles coming through as the Uzbek subsidiary continues to grow? Are you expecting more investments in software?

Probably, once we are rebuilding our technology platforms across Uzbekistan and Georgia, and we should expect for the very short term, some slight increase. Maybe not as such a magnitude, but probably next year or 2, TBC is going to heavily develop on the technology side and that might remain the case.

And we have the question from Andrew Keeley, Sberbank. I will read the question. You posted a very low-cost of risk in the first quarter, 0.5%. How do you see the outlook for the rest of 2021? And what drove the provision release in the corporate segment? This is the first question. And the second one is, how do you see the new outlook? Should it improve as you put excess liquidity to work?

Thanks, Anna. I think I largely covered those questions during my previous reply, so -- both on cost of risk. And I think all the things that I did not cover is the provision in corporate segment, that was kind of mainly -- kind of related to 2 clients, 1 was the larger one. And I think we mentioned this during our call at the year-end. And there was a more kind of a bit less magnitude, but it was kind of driven by 2 clients, mainly. I think I already answered second question as well.

At this point, we don't have any more questions. [Operator Instructions] Here, we do have 1 more question. And the question comes from Can Demir.

Yes. Just one question on Uzbekistan. Can you onboard 100% online there? Or if not, how do you plan to distribute the product? The other questions, can you also give us a bit of a guidance on maybe GMV numbers and things of that nature on the e-commerce side of things? I remember you had a platform in Georgia, perhaps things are picking up a bit on that front as well. And also on your GDP revision, so the currency depreciated, I guess, a bit more than expected. Tourism, I'm not sure if it's going to pick up, maybe you have a better opinion. But so far, I guess, it's a bit muted globally. And inflation is going higher than expected. So what turn -- what made you more positive? Could you break it down a bit?

Okay. So I'll start on like on the Uzbekistan. I think kind of -- it's kind of 100% online onboarding. Customers can onboard 100% online. So from that side, I think that's our key competitive advantage there. And you can see that customers kind of had a quite significant increase over the period on that side. Now on the, like, macro side and GDP growth, I think what we are seeing in March and April and compared to our base case scenario is quite positive and the upward in change was not material, it's like from 4.2% to 4.7%. And if you look at the forecast, it usually varies from 4% to 5.5%. We are somewhere in the middle. But key drivers probably are remittances, exports, some signs of the tourism recovering. So also it is the key point. And on GMV, frankly, I don't have on the top of my head. I need to come back on the number, but we'll come back to you offline. We have this number, but I don't have GMV. Any more questions?

Okay. And the next question comes from [indiscernible]. Can you hear us?

Yes. So for many years, it seems like TBC was guided by market share growth. And a couple of years ago, you achieved your goal in terms of becoming the leading bank in Georgia. And you've maintained that for a couple of years now. I'm curious, as you go forward, how important market share is to you relative to, say, return on equity? And I'm curious if -- is your goal more to sort of be the leader in every single segment? Or are you sort of trying to pick and choose where it makes sense and try to maximize ROE in certain segments instead? Just philosophically, how are you thinking about your Georgian business in that sense?

Yes. Thank you, [ Brett ], for this question. So you are right that we became market leader in the last 5, 7 years. But for us, it's important to be in every segment in Georgia and to have -- to be systemic clear, I mean, in retail, in micro, SME, corporate businesses. But for us, not important to have -- just we have 40% or 38%. For us, key important, as you are saying, profitability and what kind of business we have in each smaller segment or in every segment. So this is very important for us. On the growth, we believe that the growth in Georgia, it will go down. And in the medium term, when we are saying that for the group, we are forecasting growth around 10% to 15%. For the Georgian operation, we are forecasting growth around 10% to 12% in average. And our Uzbek operations in the medium-term will help us to increase our group growth, and it will add to have a growth up to 15%.

And the next question comes from Simon Nellis.

It's Simon Nellis from Citibank. Could you elaborate a bit on the likely change in the capital requirements going forward? And when do you think you'll be in a position to pay dividends? And how much do you think you could pay? And then also, if you could give us a brief update on the political situation, that would be helpful.

Okay. Great. I'll start with the capital impact of our sudden political situation. But on capital side now, as you can see on this slide, at the moment, we stood at 10.9%, kind of quite well above the eased regulatory requirement. But the key point here is that there are kind of 2 factors from capital perspective. The first one is that the NBG released the buffers, and they are going to communicate exactly in June, how much the regulatory compliance would be. That we are waiting. But as we also had to pay dividends, we have to comply with the buffers already, and we know those buffers. We got this communication already, and we are aware. So -- and talking about this -- for future prospects, of course, in this uncertain times, it's a bit risky to make any forward-looking statements. A lot depends on pandemic, macroeconomic situation. But as Vakhtang already mentioned, we believe that recovery is strong on the track, indicated by the latest macro and bank has very strong capital generation and that, in our opinion, lays out very strong foundation for the dividend distribution from 2021 profits latest, of course, subject to playing out our base case scenario and COVID containment. And on political situation -- if I answered on dividends, can I confirm?

Yes. I was just hoping you give a little more indication of what kind of payout you might be able to pay. But if you don't feel comfortable, I understand.

Yes. Usually, we are looking like probably, as you know, our medium-term guidance from 25% to 35%. In the short term, we need to look, probably that will be our target. But we need to see how -- maybe at lower end, maybe slightly, probably not too far from lower end that will be our target.

So closer to 25% level. Okay. Great.

Of course, I can't give you exact numbers. At the moment, it's quite difficult to foresee. But that's our current thinking. So now I will pass to Vakhtang to explain the political situation.

Yes. As you remember, so we had the parliamentary elections at the end of the last year. After that, we have stability. Part of the opposition parties -- it was big debate and finally, part of the apposition parties decided to go to the parliament. And I can say the last 3 months, we see more stability politically in Georgia. As you know, probably the next local elections, municipality elections, we have in October, November of this year. So this is the most important political challenges, which we have in our country. Otherwise, we see more stability, political stability in the country. And on that side, the ground is very good for that. And as we have made in our presentation, the economy began to give some kind of the good results. Thank you.

I think at this point, we don't have any more questions. [Operator Instructions] I guess we have answered all the questions. Thank you very much once more for joining our call. And if you have any additional questions, please don't hesitate to get in touch with us either by e-mail or call. Thank you.

Thank you very much. Bye.

Thank you.