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

Dear ladies and gentlemen, thank you for joining our Third 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. After the presentation, you will have the opportunity to ask questions. And with that, I would like to hand over to Vakhtang.

Vakhtang, I think you are on the mute, so if you unmute.

Sorry, can you hear now me?

Yes. We can hear very well, yes. You can start now.

Okay. Thank you. So I'm delighted to report our another very strong quarter. So our group recorded return of equity of 24.1% in the third quarter. However, that is important to highlight that return of equity of our TBC Bank Joint was above 30%. The strong performance in Georgia allows us to invest in strategic projects like Uzbekistan. At the same time, our capital position strengthened during the quarter. And at the end of the September, CET1 ratio was 13.4%, the strongest among the Georgia systemic banks. I'm also very pleased with our progress in Uzbekistan. Growth in our banking operations was especially high. And by the end of October, we had up to 800,000 registered users, while our loan book and deposit portfolio reached around GEL 60 million and GEL 115 million, respectively. Our strong focus on digitalization is also paying off and we increased the number of our remote transactions by 25% year-over-year in the third quarter. Now I'd like to touch upon recent macro developments from the Slide 4. The economy posted 11.3% GDP growth in the first 9 months, exceeding the 2019 level in the same period of 4.8%. For the 2021, our GDP growth outlook is 10.5%, and 6% for 2022. Also on the positive side, lari remained stable during the quarter, while inflation has been showing a size of moderation. On the next slide, we show that GDP growth during the quarter was driven by strong external inflows and increased domestic demand. A record high rebound in GDP growth of 29.9% in the third quarter was related to pent-up in demand and reopening of the economy. In the third quarter, the economy posted a solid 9% year-over-year yield growth, which was broad-based. The external sector continued its strong performance with exports growing by around 13% and remittance is increasing by 9% in September, while imports went up by 23% in the same month. The recovery in tourism inflows also continued its strong performance, recovering by around 50% in September compared to the same period of 2019. Now let's move to the Slide 7. In this section, I'd like to tell you about our positions on the Georgia market and our priorities and achievements over the past period. First of all, we are the market leader in Georgia with diversified business across all market segments. Second, we consistently record a robust profitability as steady growth and backed by strong capital. Third, we stand out with addressed omnichannel distribution and with the best-in-class digital customer proposition. In addition, we have a fast-growing payment business in Georgia and Uzbekistan. And finally, and most importantly, our Uzbek operations was a strategic advantage to deliver long-term growth and profitability. Slide 8 describes our leading position in Georgia. As you can see from the chart, we hold the leading positions across all segments with stable growth levels. Our sustained living positions ensures a diversified business model, allowing us to extract significant cross-segment synergies. On the Slide 9, we summarize our key profitability metrics and solid capital position. We have delivered strong return of assets of 3.6%, which was increased by 0.7 percentage points. And it is important to note that we achieved very good progress in the net interest margin, which stood at 5.3% in quarter 3, up by 0.7 percentage points. And we have very good results on the group's cost-to-income ratio, which was 35.4%, down by 3.1 percentage points, even though we are actively expanding our business in Uzbekistan. At the same time, despite distribution of interim dividends in September, our CET1 ratio increased by -- to 13.4% at the end of the quarter. This is above the minimum required level by 2.1 percentage points. On the Slide 10, you can see that our engagement levels in our digital channels continue to rise. In the third quarter, the number of digital users grew by around 11% year-over-year and amounted to GEL 700,000, while the penetration ratio reached 56% in our internet and mobile banking. Our analysis show that our customers active use our digital channels on a daily basis and the daily users or monthly users stood over 41%. Now let's move to the Slide 11, which shows our offloading ratio and remote channels. As you can see on the left side of this slide, we had a substantial overall growth in the total transactions with the number of remote transactions were up by nearly 25%. However, we kept our branch activity at a stable level and even decreased the volume of cash-based transactions in ATS. As shown on the right-hand chart, we have a very good progress in sales of consumer loans with the offloading ratio growing to 51 -- 52% in the third quarter compared to 35% a year ago. Moving to the Slide 12, you can see the growth in our payment business side. The number and volume of transactions demonstrate the strong growth year-on-year and decreased by 20% and 36%, respectively. The growth is supported by the increase in the number of active merchants, which we reached around 24,000, up by 25% year-on-year. Now I'd like to talk about our Uzbek operations on Slide 13. As you are probably aware, in September, we entered into a partnership agreement with the IFC and EBRD. Our partners intend to invest equity into TBC UZ bank to become part of our growth story. As explained on this slide, before the end of the year, IFC and EBRD together will invest up to $90 million. Furthermore, I'd like to highlight that we already cover 25 regions in Uzbekistan, which represents around 80% of the total population. On the next slide, you can see that we delivered impressive growth in Uzbek bank. First of all, we had 1 million downloads of our TBC UZ application. We had nearly 800,000 registered users at the end of October, and we already -- as I have already mentioned, we have around GEL 115 million in deposits and around GEL 60 million in loss. And finally, on Slide 15, I'd like to highlight our strong performance in payment operations in Uzbekistan, which is represented by our payment subsidiary Payme and TBC UZ bank operations. Payme, which is the second largest payment provider in Uzbekistan, recorded strong results in the third quarter. The number of -- number and the volume of payment transactions grew by approximately 48% and 60% year-over-year, while revenue and profit reached GEL 6.7 million and GEL 3.8 million, respectively. And in addition, at the end of October, our TBC UZ bank issued around 120,000 new cards and test around 330,000 cards from the other UZ banks. Now I'd like to hand over to Giorgi.

Thank you, Vakhtang. So now I will go over the financial performance and metrics of the third quarter. And I will start my presentation from Slide 17. So that shows another quarter of our strong profitability that Vakhtang already highlighted at high level. So our net profit grew by 36% year-on-year, as you can see from the chart, and that was mainly driven by increased operating income across all revenue categories, and that was also partly supported by our recoveries in total provisions. So as a result, our ROE was at 24.1% and ROA was at 3.6%. I also would like to flex that we actually managed to retain a decent profitability, while we actually extended to Uzbekistan. Now I would like to move on Slide 18, where I will kind of discuss our growing operating income. So our NIM continued a very positive upward trend, and in Q3 amounted 5.3%. That is slightly above high end of our previous guidance. So all our kind of optimistic projections have actually materialized. The 17 basis points growth year-on-year was mainly driven by increase in loan yields and shifts towards our lari loans, along with optimizing our funding structure and deployment of the liquidity. In Q3, we also recorded very strong results in our noninterest income, which grew around 38% year-on-year, mainly due to our net fee and commission income on the back of increased business activities that was combined with our various business initiatives. The decrease on the quarter overall for the overall noninterest income was driven by the other category, and that was related to a high base in the previous quarter. You probably might remember that we actually mentioned a disposal of a real estate property. However, our net sales commission income in this quarter increased 9% quarter-over-quarter. Now let's move on Slide 19, that actually shows our cost base and our ability to maintain high efficiency. As you can see from the left-hand chart, even though our total operating expenses grew by almost 17%, and that was driven mainly due to an expansion of our Uzbek business as well as low base of our variable compensation last year, our income grew actually at much faster rate and our cost to income loss was positive at 10%. On a quarterly basis, our operating expenses decreased slightly and SDS consequently, we lend it at 35% cost-to-income ratio, broadly stable with the last quarter. Now let's move to Slide 20 where I would like to present our strong asset quality. The NPL ratio, as you can see, improved and in fact went down to 3.1%. And it was driven by across all segments, but mainly by the resumed repayments from restructured retail and MSME clients. NPL provision coverage stood at very strong 94% at the end of September '21, with an additional 75% collateral coverage. And as you might remember as well that we create procyclical provisions related to COVID-19 in 2020. In 2021, economic outlook has improved, and the restructured borrowers started to resume payments. and we observed recovery of the provisions. And consequently, our cost of risk stood at minus 0.1% in the third quarter on the back of strong performance across all segments again. Now I move to Slide 21 to give a brief overview of our loan and deposit portfolio growth. Our loan book increased by 30% year-on-year on a constant currency basis, CIB and MSME leading the largest growth followed by retail. Fortunately, growth was spread across all segments. At the same time, our deposit portfolio increased year-on-year results and fixed effect or 12.5% on a quarterly basis. And I also would like to highlight that both in terms of bonds and deposits, we still remain #1 position holding 38.4% and 40.1% of total market, respectively. Now I move to Slide 20 (sic) [ Slide 22 ] that shows our solid capital buffer. As Vakhtang already mentioned, we remain the highest capital light system in the country with CET1 ratio standing at 13.4% at the end of Q3, and we managed to increase our ratio by 40 basis points despite paying dividends and solid growth. At the same time, our total capital and Tier 1 ratios stood at 15.4% and 19.3%, respectively, well above the regulatory requirements. Also, I would like to mention here that you might probably remember, in November our subsidiary, TBC Bank, successfully issued additional Tier-I capital USD 75 million. This issuance will further support our solid growth while keeping prudent capital structure, it's all capital tiers well above the regulatory requirements. And now I'd like to move to Slide 23. The last slide of my presentation, we are -- I will finalize with funding and liquidity summary. So we have a very balanced and stable funding structure. Customer deposits were around 71%, while IFI funding stood at GEL 1.7 billion, it's around 8% and we've maintained a very strong liquidity position. Our LCR and NSFR, we are comfortably above the minimum reg limit of 500%, 116% and 127%, respectively. So now I would like to hand back to Vakhtang who will update you about our medium-term targets and our future outlook.

Yes. Thank you, Giorgi. I'd like to reiterate our medium-term guidance and give you a brief report on how we are delivering against these targets. On the loan growth, our loan growth was 12.6% against our medium-term target of 10% to 15%. Our return on equity was 24.1% against our medium-term target of 20% plus. And our cost-to-income ratio was 35.4% against our medium-term target of below 35%. And finally, as you know, we have a paid interim dividend in September and are planning to pay a final dividend in 2022 and be in line with our dividend payout target ratio of 25% to 35%. And Anna, if you go to the next slide, I'd like to finish today's presentation with recapping on our strategic priorities. Maintain the robust profitability based by the solid capital, diversify our fee and commission income streams to continue sustainable growth in Georgia, capture high growth potential of Uzbek market and create value for our group and continue to deliver efficient growth by leveraging our advanced digital capabilities. Now we would like to invite you to ask the questions.

Thank you, Vakhtang. [Operator Instructions] And the first question comes from Ilan Stermer.

Well done on the numbers. My first question relates to cost of risk. Just back to what we were saying earlier. Are there any macros overlay type of provisions that are still in the provision numbers that can be reversed in future periods? Are we through that? And whatever comes next is basically ongoing cost of risk. And with that also, how quickly do you think the cost of risk charge will normalize in coming quarters?

Thank you, Ilan. Very topical question. First of all, I would like to highlight as I mentioned to the follow-up procyclical approach, they are following the economic deteriorates, like it was the case last quarter, we booked quite a significant provision based on that outlook. Now they economy is actually recovering. And what I can say is that at the moment, whatever factors [indiscernible].

Giorgi, I don't know if anybody else has lost the sound, but I've -- I can't hear you.

We see a positive outcast over the period, we need to see how the macro grows, because this is...

Giorgi, we lost you. Giorgi, we lost you.

Sorry. Okay. It says my internet connection is unstable. So I don't know, I was just going to summarize. I think at the moment, we are reflecting the current economic outlook. If economy improves, macro flows will flow, like will be reflected. But to provide the guidance, yes, this level of provisions is not sustainable, of course. We expect to go back to normalized cost of risk, and that's around 80 to 100 bps, whether it has like in 1 or 2 quarter to actually observe in this environment, but will be actually difficult to provide exact guidance. But what I can say is that this probably we should expect some way up to that -- at the reversal territory on a full year basis on a [indiscernible] basis.

Okay. Then the second question on fee and commission income and fee and commission income growth. That has been a remarkable engine in -- well, this way, you certainly keep beating our forecast on F&C. Can we -- and I see a similar, obviously, in the strategic priorities. Can you give a bit of insight into what is specifically driving that? And whether or not we can expect this to be sustainable in the sort of growth that we're seeing to be sustainable?

As Vakhtang mentioned at the end, we have still our strategic pillars. One of them is actually to diversify net fee and commission incomes. The bank has been working actively on this, and these results are kind of results of this work. Still have not only macro rebounds, set of course a driver because number of transactions volumes are growing through GDP growing. But bank also has been doing some sort of initiatives like move to subscription model, repricing our, let's say, merchant base as well increasing our merchant base, also offering new products or new cards. So there are a few business initiatives that we are doing, and we expect to focus on that to continue basically by guided market to end up somewhere between 20% to 25%, and next year 15% to 20%. So we will be targeted at higher end, but we will expect our fee income, commission income to continue a key role into our delivery of the robust profitability.

Yes. In addition, what is Giorgi saying about fee and commission income probably for -- in 2022, we will see Georgia more income from the payment business, from the trade businesses, which has accelerated, and we see the bound of the economy and next steps we will receive in the more fee income from the trade business. In addition to that, as we have shown already in our presentation, we are doing very well in the payment in Uzbekistan. So we are the second largest payment provider in Uzbekistan, and the growth we see here already up to 50%, that probably that growth would be continued next year.

And just one last question, and it does relate to the Uzbek corporations. Twofold. Firstly, the comment about the EBRD and IFC potentially putting in additional capital debt to -- over the next few years, that would be in order to maintain the shareholding, I assume, not to increase it. It'd just be step -- in step with whatever TBC puts into the business?

Yes. For this question, so EBRD and IFC are our long-term partners, and we are partners of TBC Georgia more than 20 years. So we invited them in Uzbekistan. And as we have in our presentation, each of them, they will have 20%, and this is long term. So in the long term, TBC as a group will have minimum 60% in that business in Uzbekistan bank and IFC and EBRD together they keep their 40%.

Okay. And that $34.3 million, I think, that was mentioned in the write-up, that is in order to keep their holding at 40%?

Yes. You see, we are doing very well. So we are beating all kind of -- for the customers we have internally, and we are showing that we are already thinking on the deposit side on the loan side. So probably we will see in 24 to 36 months the profitability already in Uzbekistan. So in probably 24 months, we will see that Uzbek bank is financing themselves, which will not need any extra investment from ourselves.

Okay. And just one other thing on Uzbekistan, the OpEx impact, the -- I think it was 16.8% growth year-on-year in Q3 OpEx. How much of that was Uzbekistan? How much -- or put differently, and I might have missed it in the writeup, how much would OpEx growth have been without Uzbekistan?

Yes. So you could like -- it will say the assumption I got to kind of assume around 60% Uzbekistan, around 40% other. And this, at least -- as I mentioned, also key driver of like Georgia [indiscernible] was also the really about compensation restoration on management level bonuses, plus also the increased revenue drives, increased payment for the staff for their performance. But as we keep on again here, I want to mention that once business grows, the cost grow, increasing towards the kind of income to grow faster.

And the next question comes from Robert Sage.

Hello, can you hear me?

Yes.

I think we lost him.

Sorry, I've got 2 questions. Following from the previous question, could you give a sense of how investments in Uzbekistan will actually develop next year relative to this year? Is there going to be a further significant step up in terms of the investment dollars you put into that business? And my second question, entirely unrelated, is in connection with the net interest margin, which came in, I think you yourself said, a little bit above expectations. And I was just wondering whether you think that you can sustain it at these higher levels in the short and medium term.

Yes. I will start with Uzbekistan. It's as Vakhtang mentioned, we are growing there. The portfolio growth at the moment would require certain support, and we are ready to support them with our partners of -- EBRD and IFC, certainly we'll be depending on the portfolio growth, of course, but we are ready and set up to go and work with our partners. And if you are going to second point, yes, what I said, not expectation about our guidance because initially in the business, you can have fewer initiatives or few works and the capital that we managed actually to deliver and lend all of them, and lend it at 5.3%. So how we see this going forward is that probably in the medium term, at this level, we should expect to stabilize in Georgia level like, give or take like 10 basis points probably in Georgia at a stable level. But in the medium term, we should also expect some additional upside from Uzbekistan business, maybe up to 20 bps. So for, again, at this level, probably in the next few quarters is the correct level with the potential upside coming through late.

And the next question comes from Andrew Keeley.

Just a question in terms of your outlook next year. I mean, given such a strong year you've had this year and the likelihood, I think you mentioned of kind of net recovery of provisions. As -- did you expect kind of cost of risk to start normalizing next year? And if you're also going to be putting further investment into the Uzbek business, I'm just interested in your thoughts on the extent to which you think you can increase earnings next year, given it's been such a kind of super strong year this year.

Thanks. Indeed, it was quite amazing, here we see a lot of one-offs. And that's not -- just understand that's not sustainable next year obviously, but the bank is in a very strong position for this operating income from its growth and from its capital level to continue this growth. We recovered our -- as Vakhtang said, this medium-term guidance, 20% plus. And as I guided already, this level of cost of risk is not sustainable. We will go to the normalized levels, probably it will happen over the next few quarters. But this is -- even this kind of normalized risk, the bank is really well positioned to deliver 20% plus low LTV as we are guiding to the market, while continuing our growth into Uzbekistan and international markets.

At this point, we don't have any more questions. [Operator Instructions] And the next question comes from [ Peter Greshim ].

I have a question on the macroeconomic side, please, if I may. If you read the most recent monetary policy report of the National Bank and take a look at the alternative scenario, not the central one, but the alternative. They warned very openly that if credit growth is large, then we can have another 3.1% of increases in the refinancing rate. They give you the number straight away, right? So that the cycle would end not at 10% or, give or take, but at 300 bp over this number. I have 2 questions in this regard. First, I understand that U.S. as a business are very well positioned to withstand this because there's a big portion of floaters on the lending book, and that should be protective for your NIM. But still, how do you see this risk? That's number one. And second, do you get any feeling, any communication, any pressure from the regulators that the growth rate that the system is now showing is excessive and is not compatible with a baseline scenario? Are they asking you that in one way or another, you probably should reconsider and aim at lower lending growth in your core market.

Thank you, [ Peter ], for this question. So first of all, the regulator -- local regulator, they are looking on the penetration of total loans to GDP. And as we mentioned in our presentation, countries doing very well on the -- I mean on the macro level, especially around the nominal GDP side, they probably -- the growth will be very high. And if you look on the banking sector loan growth in 2021, probably to be a little bit less now than the nominal GDP growth. So what that means, it means that the penetration of the bank, et cetera, I mean, the banking but also GDP, we will have a trend that it will decrease, not increase. So I think on that side, probably the regulator will have a comfortable level. So directly it means that we don't see in this short term any kind of the new regulations coming from the national regulatory.

At this stage, I don't see any questions. Maybe just wait a minute. Thank you, everybody, for your questions. And if you have any further questions, please feel free to contact us by e-mail or phone. Thank you.

Thanks, Anna. Thanks, everyone.

Thank you.