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

Dear ladies and gentlemen, thank you for joining our Second Quarter 2021 Financial Results Conference Call. I am Anna Romelashvili, Head of Investor Relations at TBC Bank. Today with me are Vakhtang Butskhrikidze, CEO of the Group; and Giorgi Megrelishvili, CFO of TBC Bank. We will start today's call with a short presentation and provide a brief update about our strong financial and business performance. We will also provide an overview of the recent macroeconomic developments in the country and COVID-19 situation. [Operator Instructions] Now I would like to hand over to Vakhtang.

Thank you, Anna. Dear all, thank you for joining our call. I'd like to start by highlighting our recent announcement about the Board's declaration of GEL 1.5 per share interim dividend payable next month. I'm sure this news has been well received by our shareholders who have stayed with us throughout the last challenging 1.5 years. The Board had also approved the change in the dividend policy to include semiannual payments going forward. As evidenced by today's presentation, the reinstatement of the dividend is the result of our strong operating and financial performance and the much improved economic outlook. I'd also like to highlight that we maintain prudent capital buffers, about the minimum regulatory requirements post dividend distribution, which would be sufficient to withstand the potential economic slowdown related to COVID-19 uncertainties. Now I will begin my presentation with the main highlights for the second quarter from Slide #3. The Georgian economy rebounded strongly in the second quarter. GDP growth exceeded expectations and grew by 29% year-over-year and 12.6% relative to the same period in 2019. Exports also demonstrated extraordinary growth of 47% year-over-year or 10.9% compared to the same period in 2019. In the second quarter, we reached a record-high profitability, which translates into a return of equity of 31% for TBC Group and 34.7% for the stand-alone bank. As of June, our capital and liquidity positions remain strong. Our liquidity coverage ratio stood at 127% and CET1 capital was 13%. I'm also delighted to report about our excellent progress in Uzbekistan. By the end of July, the total registered users reached more than 400,000, while our loans and deposits portfolios reached GEL 32 million and GEL 50 million, respectively. The next slide shows the key metrics of our outstanding financial performance in the second quarter. Net profit almost doubled year-on-year and reached GEL 250 million, driven by the increased net interest margin, strong growth in noninterest income as well as improved performance on asset quality. Net interest margin reached 5% in the second quarter, up by 70 basis points year-over-year. Over the same period, net fee and commission income grew by 60%, while other noninterest income increased by 184%. Consequently, our cost-to-income ratio stood at 35% in the second quarter or at 28.6% for the stand-alone bank. In addition, cost of risk was minus 1.3% on the back of the provision recoveries across all segments. Giorgi will discuss our financial results in more details later during the call. At this point, I'd also like to give you update about the vaccination statistics and recent COVID-19 development in the country. According to the latest data, around 20% of the adult population is currently vaccinated with at least 1 dose, out of which 4.4% was vaccinated during the last week. With the current pace, the government targets to achieve vaccination levels of 60% of the adult population by the end of this year seems realistic. At the same time, in response to the increasing number of the cases in the country, the government has introduced the following restrictive measures for the 3 weeks period starting from the 14th August until September 4. Public transport in large cities is suspended. All types of entertainment events and sports competitions are prohibited, and restaurants are allowed to work until 11 p.m. And I'd like to highlight that the partial lockdown during the third quarter was expected in our current GDP forecast, therefore, we do not see the need to revise our forecast in light of the newly introduced restriction measures. And we remain positive that the economy can still grow by more than 10% during this year. As already mentioned, the Georgian economy demonstrated strong growth in the second quarter. Importantly, the growth was broadly reflected in all sources and external inflows as well as in the domestic demand. As you can see from this small chart on the right, exports and remittances demonstrated exceptional performance over the second quarter. In June, exports and remittances grew by 30% and 19%, respectively, year-over-year or by 12% and 40% compared to the 2019 levels. The positive trend also continued in July. At the same time, we observed a gradual but steady recovery in tourists, which recovered by 36% and 52% in June and July, respectively, compared to the 2019 levels. The domestic demand was also strong during the second quarter with imports going up by 38% in June or by 13% compared to 2019 levels. In July, the imports growth also remained above the 2019 levels. While the increased infection cases and possible election-related uncertainties pose downside risk to the outlook, it seems that even under conservative assumptions, 2021 GDP growth could exceed 10%. Slide 6 shows fiscal and monetary policy. As you can see from the upper left chart, the lari real effective exchange rates strengthened against the dollar on the back of the rebound in external inflows and the tighter monetary policy. Due to the stronger inflows, the National Bank of Georgia has eased its FX market operations, selling $83 million in April and only $9 million in May and June. On the other hand, the inflation remained high at 9.9% at the end of the second quarter and reached 11.9% in July, mainly due to the depreciation of lari early in the year and higher commodity and utility prices. A significant part of the July price increase can be attributed to elimination of wheat price subsidies. Inflation is expected to stay high throughout the year before moving back towards the target of 3% in 2022. In response to increased inflation, the National Bank of Georgia increased the monetary policy rate by 50 basis points to 10% in August. And finally, on this slide, the fiscal debit is expected to remain large in 2021 at an estimated 6.9% of GDP and is anticipated to gradually reduce to 2.5% by 2025. Now let's move to the Slide 8, which summarizes the progress towards our strategic objectives. During the quarter, we concentrated our efforts on increasing the utilization of our digital channels, enhancing our payment business as well as expanding our Uzbek operations. Furthermore, we continue to make good progress in relation to our environmental, social and governance matters. I will go into more details about each of these topics on the following slides. Slide 9 shows our best-in-class digital offerings. In the second quarter, our retail digital transactions grew by 53% year-over-year on the back of the revised business activities. On the same period, our retail offloading ratio remained high at 97%, with the share of Internet and mobile banking accounting for 57% of all transactions, up by 4.4 percentage points year-over-year. The number of digital sales also remained strong. The consumer loan sales offloading ratio amounted to 37%, while the deposit sales offloading ratio stood high at 72% in the second quarter. On the Slide 10, you can see our progress in terms of digital users. In the second quarter, our retail digital users grew by 16% year-over-year, leading to a penetration ratio of 53%. Notably, our daily and monthly active digital users are also increasing at a fast pace, thanks to our various targeted sales campaigns. As a result, the share of daily active users and monthly active users grew by 3.2 percentage points year-over-year and stood at 41.8% as of June. On Slide 11, I'd like to provide an update regarding our leading payment businesses in Georgia. The second quarter was quite active for our payment business, with total number and volume of payment transactions growing by 22% and 26% quarter-over-quarter, respectively, driven by the increased number of activities. In addition, I want to highlight that our active payment users reached almost 850,000 while the number of merchants went up by 14% over the same period and amounted to around 19,000. Moving to the next slide, I will continue with our Uzbek payment business, which continued its rapid growth in the second quarter. Payme is the second largest player in Uzbekistan and provides payment solutions to 3.5 million users. Payme once again recorded strong financial results by delivering revenue and net profit growth of 87% and 82% year-over-year in the second quarter. This strong growth was driven by increase in volume of transactions mainly on the back of P2P and utility payments. Over the same period, the number of active users grew by around 50% and reached around 1 million. As a recognition of its efforts, Payme has won 2 awards this year. Firstly, it was named the Best Brand of 2020 among the payment systems in Uzbekistan. And secondly, it was also named The Most Widespread Mobile Application. Moving on to Slide 13. I will provide an update regarding our digital bank in Uzbekistan. As you know, in 2020, we successfully launched TBC UZ, a digital commercial bank, by leveraging our digital banking platform. We are in expansion mode and have already entered 12 major cities and are operating 34 outlets and 2 branches. By the end of July, as mentioned above, our registered customers reached 403,000, and our loan and deposit portfolios are growing fast, standing at GEL 32 million and GEL 50 million respectively at the end of July. At the same time, the number of TBC UZ debit cards amounted to almost 80,000, while the number of other Uzbek banks cards attached to our applications stood at around 190,000. In addition, transaction numbers are expanding strongly and the monthly figure reached more than 326,000 in July. Finally, on the Slide 14, I would like to update you on our recent ESG achievements. In June, we published a full-scale sustainability report, which outlines our impact on the economy, environment and society, and describes our contribution towards sustainability development. Furthermore, in July, we received accreditation by the Green Climate Fund, GCF, making us the first commercial bank in the Caucasus region to receive such accreditation. This will give us direct access to GCF funding to finance various green projects. And I'm also proud that in June, TBC Capital participated as a joint lead manager in the very successful placement of $500 million green Eurobonds by Georgian Railway on the London Stock Exchange, a very important transaction for Georgian economy and for our country. Now I'd like to hand over to Giorgi, please.

Thank you, Vakhtang. During the presentation, I'll go over the financial performance of the second quarter into more details. I'll start from Slide 16 to discuss our record-high profitability. In Q2 '21, we managed actually to deliver robust profitability driven by strong operating performance across all revenue categories and net provision releases. As a result, our ROE for the quarter stood at 31%, while the bank's stand-alone ROE was 34.7%. Now moving on to Slide 17. I'd like to present our net interest margin, which is coming back to its pre-pandemic levels. In Q2 '21, our NIM was 5%, up by 70 basis points year-on-year or 30 basis points on quarter-on-quarter. The year-on-year growth was mainly driven by an increase in loan yields, portfolio shifts towards lari loans and the change in liability structure and wholesale funding management. The quarterly increase was primarily due to higher loan yields as well as the deployment of our extra funds. Now moving on to our next slide, Slide 19. I'll go through our strong growth into noninterest income. As you can see from left chart, our net fee and commission income showed a solid increase in the second quarter and went up by 39.1% on a quarterly basis and almost 60% on an annual basis. This was mostly attributable to the economy restart as well as the various business activities that we undertook, mostly in Georgia in our Uzbek payment subsidiaries. The right chart shows also our solid increase in other noninterest income mainly due to a gain from the disposal of one of our real estate properties that was GEL 26 million gross and GEL 19 million net post tax and increase in FX gains. Now I would like to discuss our efficiency levels on Slide 19. Also, the cost increase in less absolute terms was year-on-year and quarter-on-quarter basis. This growth was more than offset by our strong operating income, with positive cost-to-income growth of around 12% and 10% on quarterly and year-on-year basis, resulting in an exceptionally low cost-to-income ratio of 35.4% in Q2 '21. The quarterly increase in staff costs was related to the expansion of our Uzbekistan operations as well as bonus staff costs incurred in Q2 '21, while the annual increase was partly amplified by restoration of management bonuses and increase in staff variable compensation, driven by increased operating income. The quarterly growth in admin and other expenses was entirely attributable to the expansion of the Uzbek operations. As for year-on-year growth in admin and other expenses, it was mainly due to the very low cost base in Q2 2020 when we took a lot of cost optimization measures related to COVID-19. Now moving to Slide 20. That is about our sound credit quality. In Q2, our NPLs improved across all segments and stood at 3.4%, driven by payments from the restructured retail and MSME customers as well as the repayment from a single large CIB borrower. Our NPLs had 91% provision coverage as of 30th of June and an additional 79% collateral coverage. Only 13% of NPLs were unsecured loans with strong provision coverage of almost 300%. At the same time, the cost of risk stood at minus 1.3%. The recoveries were driven by the improved macro outlook on the back of the better-than-actually-expected economic performance as well as the repayment from the CIB borrowers that I already mentioned. Now moving on Slide 21. I will discuss our loan portfolio. As you can see from this slide, the portfolio increased by 8.5% year-on-year on a constant currency basis that was spread across all segments. On a quarterly basis, our loan book growth was actually impacted by lari -- by, let's say, strong lari, while on a constant currency basis, it's increased by 3.7%. We maintained the #1 position in terms of low market share, which stood at 30.1% as of June '21. Now moving on to Slide 22. We'll actually discuss our deposit portfolio. The portfolio grew by 20.1% year-on-year on a constant currency basis, and the increase was driven by all segments. The decrease on a quarterly basis was due to the decrease in the Ministry of Finance and as well as the release of the short-term placements from a large CIB client that I actually mentioned on the last call. We actually have a leading position on the market with a deposit market share of 37.8% as of 30th of June. Now I would like to move on Slide 23, that is about our solid capital position. As you can see from the bottom right chart, as of 30th of June, our capital ratios were comfortably above the minimum regulatory requirements, including the restored buffers. By the end of July, we also restored all the temporarily released capital buffers. This actually lifted any, let's say, restrictions set that there was to capital. And also as Vakhtang -- sorry, I'd just get some water. So this quarter already actually, let's say, measured our solid capital generation that allowed the Board to declare the payment of GEL 1.50 per share interim dividend in September '21. We do actually realize the existing potential risks and uncertainty due to the COVID-19. And being on the prudent side, the bank retains sufficient capital buffer to withstand any potential headwinds for dividends. I will finalize my presentation with funding and liquidity slide. As you can see from this slide, we have a well-balanced funding structure. LCR decreased 10% quarter-on-quarter basis, but we actually remained with strong liquidity position in Q2 at 127%, well above regulatory limit of 100%. Now I would like to hand back to Vakhtang, who will update you about our future outlook.

So thank you, Giorgi. And on the right-hand side of this slide, you see our performance. On the left-hand side, you see -- I want to reiterate our medium-term guidance: return on equity, above 20%; our cost-to-income ratio, below 35%; and our loan book growth, around 10% to 50%; and our dividend payout ratio, 25% to 35%. So with that, I'd like to invite you to ask the questions.

Thank you, Vakhtang. Now I would like to open the floor for Q&A. [Operator Instructions] And the first question comes from Ilan Stermer.

It's Ilan Stermer from Renaissance Capital. A couple of questions from me, please. Firstly, your outlook for NIM. Obviously, quite big movements in margins in recent quarters. Can you give a bit of a sense of what the dynamics are for, let's say, the balance of the year?

Okay. Thanks for this question. So as we guided market, our like target for this year was around 5% that we already achieved this year. And I already mentioned the key drivers. We expect NIM to stabilize actually around this level with sizable upsides that might be coming around 10 bps still because of our portfolio structure change as well. And we expect them to use the extra liquidity that we have. So these 2 factors might result in a slight uptick. But more or less, we will stay where we are.

You see, Giorgi is the CFO, and all the time, he tries to be very -- to make conservative assumptions. I think that before the end of this year, we see -- we will see the slight increase of our net interest margin.

Right. The other question, Vakhtang, is about the dividends. Obviously, we introduced the interim dividend. The payout ratio, given that you haven't paid -- perhaps I should preface that, you haven't paid the 2019 to '20 dividends, capital ratios look healthy, profits look good. Can you give a bit of insight into your thinking about dividends going forward? The payout is between 25% and 35%. How do you balance that with the growth prospects? Investment in Uzbekistan, any other factors that we need to take into consideration? Is this space for more dividends, I guess, is what I'm asking.

As I already mentioned a few minutes ago, our medium-term target is 25% to 35%. So our full target next year, minimum will be 25%. And in the medium term, we target to increase this to a minimum, to 35%.

Thank you. And the next question comes from [ Julius Vocher ].

Vakhtang, I just wanted to clarify on the dividend. I believe that you are now paying an optional dividend, which gives us the option to accept the dividend in stock. What is the reason for offering the dividend in stock given the previous point on the strong capital ratios and that you didn't pay the previous dividend?

Giorgi, can you answer this please?

I don't think we kind of offered discrete dividends or paying by stock. It will be a cash out. I would be grateful if you can kind of direct your source. But the intention is to pay through our cash.

Sure. Okay. I -- yes, I have the source, so I can send it to you and follow-up. But maybe there is some confusion.

Because we did it last during, like, in 2019, but this year, it's not the case. But we're happy to take it.

[Operator Instructions] And the next question comes from Simon Nellis.

My question would be just on your costs. They grew by, what, 28% year-on-year. Can you just elaborate a bit on what's driving that? What's the outlook for the second half? And are we going to see elevated costs? And to what extent, I guess, is it linked to continued high revenue growth, I guess, coming out of Uzbekistan, hopefully?

Okay. So there are a few factors on the cost side. First, when we are looking into Q2, we need to consider it was in the middle of pandemic, when the back took a lot of measures. For example, this slide actually highlights financing measures when we optimized our like rents, and we decreased our cost by GEL 4.2 million. Also, we cut our marketing costs, I think all the type of costs, we cut, let's say, all the management bonuses. That actually drove the quite low base. In addition, this year, we also launched our Uzbekistan operations, as we mentioned, that caused the cost increase, as expected. But despite that, we kind of actually remained very efficient, driving our cost-to-income down. And one of the things you need to consider, when your income grows, some of our kind of bonuses are linked to our sales. Therefore, when you have higher sales, you have higher costs, when you have lower sales, you have lower costs. So it's actually, let's say, one of the reasons as well. And particularly in Q2, also there was one-off staff cost, so that will help further support to optimize our cost base going forward, that is also in as a cost. So all in all, what I want to say is that we stick to our guidance to have this year cost below last year cost of around 38% cost-to-income ratio, and we are quite comfortable reaching 35% cost-to-income ratio in the medium term.

Including Uzbekistan.

Including Uzbekistan.

But on the stand-alone, as a TBC Bank, we are doing quite well, as you see on this slide, as the TBC Bank's Georgia operations, our cost-to-income ratio in the second quarter was 28%.

Okay. So the guidance this year is for 38% roughly around cost income and then down to 35% next year?

I would say for the group around 38%, around this range. And the absolute terms increase will be somewhere at 22%, 25%, around that range, half of which will be coming from Uzbekistan.

And can you just -- what's the net contribution of Uzbekistan to the group expected roughly this year? Is it a negative number? Or is it a positive number?

From a material perspective, it's a start-up business. Of course, it's negative because we are launching at the moment the operation. We are testing the market. So it's -- every start-up, you should expect the first year to be like money burning. But we expect in the medium term, it's to kind of bring a lot of like, say, benefits to our shareholders and to the bank.

When do you think it could breakeven?

We will target that after 3 years of the operation to come to the breakeven point.

Thank you, Simon. And the next question comes from Robert Sage.

Can you hear me?

Yes.