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

Dear ladies and gentlemen, thank you for joining our fourth quarter and full year 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 group; and Giorgi Megrelishvili, CFO of the bank. Traditionally, we will start the call with a short presentation and provide an update about our strong financial and operating performance. We will also briefly discuss the recent macroeconomic developments in the country. After the presentation, you'll have the opportunity to ask questions. 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 our presentation with a recap of our key achievements in 2021. TBC continues to be the market leader in Georgia with robust profitability and strong growth, supported by solid capital. We also achieved a remarkable progress in Uzbekistan. Last year, the group generated a record high return of equity of 24.4%. Our term profitability was backed by solid capital. And at the end of December, the CET1 ratio was 13.3% (sic) [ 13.7% ], the strongest among the Georgia systemic banks. At the same time, we delivered very strong growth in loans and deposits where we outperformed our medium-term targets. Our bank in Uzbekistan also delivered outstanding results for the first year of operations. Our loan book and deposit portfolios reached around GEL 93 million and GEL 208 million, respectively, and we had 1.1 million registered users on our application. We also improved our digital presence, and I'd like to highlight that we increased the number of our daily active users by 24% in 2021. Now I'd like to review recent macro-developments briefing on the Slide #4. Anna, can you go to the next slide. Thank you. In quarter 4, the microenvironment continued to rebound and the economy posted 10.6% GDP growth for the full year, exceeding the 2019 level by 3.1%. Going forward, we expect the economy to grow by 6% in 2022 and 5.5% in 2023. Also, on a positive side, lari remained stable during the quarter and appreciated by 5.5% during this year. The next slide shows that GDP growth during the last quarter was driven by strong external inflows and increased domestic demand. The main drivers of this strong external inflows via exports, remittances and recovering trends in tourism. Exports increased by around 29% and the remittances were up by 15% year-on-year. At the same time, recovery in tourist inflows continued its positive performance over the year. And at the end of the year, tourism inflows, we are at around 60% of the 2019 levels. Now let's move to Slide 7, and I'd like to reiterate the group's positioning and highlight our fast-growing potential. First of all, we are the market leader in Georgia, with diversified business across all these segments. Second, we consistently deliver robust profitability and steady growth backed by this strong capital. Third, we standout with the advanced omnichannel distribution and the best-in-class digital customer proposition. In addition, we have the fast-growing payment business in Georgia and Uzbekistan. And finally, our Uzbek operations give us a strategic advantage to deliver long-term growth and profitability. In line with our group's strong market position and growth strategy, we continued to increase the number of our customers every year. And at the end of 2021, we had 2.7 million active customers. Moving on the Slide 8, we show our leading position in Georgia. As you can see from this slide, we hold leading positions across all segments with steady growth levels. These leading positions indicate resilience and diversity of our business model and allow us to extract significant cross-segment synergies and efficiency. On the Slide 9, I'd like to summarize our key financial results, including strong profitability and solid capital position. Last year, as I already mentioned, we delivered 24.4% on a return of equity. It was especially important for us to achieve higher net interest margin in 2021. And I'm happy to say that we increased our net interest margin by 0.4 percentage points last year. In addition, we managed to improve our group's cost-to-income ratio slightly, even though we have been actively expanding our business in Uzbekistan. At the same time, our CET1 ratio increased to 13.7%. It is important to stress that this is above the minimum required level by 2 percentage points. On the Slide 10, you can see that we continue to deliver strong progress in our digital channels. We continue to increase digitalization and the number of digital users. Our transactions-to-offloading ratio is 98% and only 2% of our total transactions are conducted in the branches. Additionally, we continue to increase the share of remote sales in consumer loans, which amounted to 45% at the end of the year. Now let's move to the Slide 11, which illustrates the solid growth of our Georgian payment business. This year was successful for our payment business in Georgia as well. As you see on this slide, we had a solid increase in both transaction number and the volume, which significantly contributed to the fee and commission income growth in 2021. Now I'd like to update you about our Uzbek operations starting on the next slide, #12. We operate in all the major regions of the country, reaching 97% of the population. In the first quarter, we continued to develop new products and launched auto loans in a friend and family mode as well as introduced term deposits and virtual card to the wider population. I'm also delighted that our digital bank application gained international recognition and Global Economics magazine named us the best digital bank in Uzbekistan. On the next slide, you can see that we delivered impressive growth in our Uzbek bank. By the end of the year, the number of downloads of our TBC UZ application reached 1.5 million while the number of registered users was 1.1 million. At the same time, we reached GEL 208 million in deposits and GEL 93 million in loans which resulted in 2% and 0.5% market shares in the retail segments, respectively. Finally, on Slide 14, I'd like to highlight our strong performance in the payment operations in Uzbekistan through our payment subsidiary, Payme, as well as TBC UZ bank. Payme, which is the second largest payment provider in Uzbekistan, is growing at a rapid pace. Last year, its net profit more than doubled compared to the previous year and reached GEL 18 million. Finally, I'd like to highlight that TBC UZ bank issued more than 220,000 new cards during the year, and our customers attached more than 380,000 cards from other banks to our application. Now I'd like to hand over to Giorgi. Giorgi, please.

Thank you, Vakhtang. So before I go to my presentation, that is lost by the way. Okay, here it is. Okay. Thank you, Vakhtang. So now I will go over the financial performance of the first quarter and for full year into more details. I will start with Slide 16 that shows the strong financial performance for Q4 and full year '21. Our net profit in both periods was driven by robust income generation across the board as well as strong performance on asset quality side. As a result, we achieved a record high ROE for the full year of 24.4%, while our ROE in Q4 stood at solid 22.1%. At the same time, our ROA was 3.4% and 3.3% in '21 in Q4, respectively. I'd like to stress that we managed to return this strong profitability while actually expanded into other countries. Turning to Slide 17. I will present our growing and diversified income streams. Our NIM continued a positive a trend in Q4 and amounted to 5.4%, up by 10 basis points on a quarterly basis. For the full year '21, our NIM improved by 40 basis points, it stood at 5.1%. This strong growth in NIM was mainly driven by loan composition changes and liability structure optimization. We also recorded very strong results in noninterest income, which grew by circa 25% year-on-year in the fourth quarter and was up by 40% in '21. For both periods, our noninterest income grew on the back of strong rebound in net fee and commission income of 36% year-on-year for the full year '21, and that was further amplified by one-off payment from the sale of a real estate property in '21. Now let's move to Slide 18, which shows our high efficiency levels. As you can see from the left-hand chart, in '21, our total operating expenses grew by 25% or around GEL 180 (sic) [ 108 ] million, out of which around 60% was driven by restored bonuses and TBC UZ. The rest is due to the increased business activities, investments for growth and higher performance-related costs driven by the higher revenues. However, I'd like to highlight, we continued to increase operating efficiencies with positive cost-to-income growth and improved our cost-to-income ratio, which decreased to 37.6% for the full year '21. In the first quarter, OpEx increased due to the staff annual bonuses and the common seasonal increase. Now moving to Slide 19, where I would like to present our strong asset quality. By the end of the year, our NPL ratio improved across all segments, mainly driven by repayment of the restructured loans in retail and MSME. At the same time, our total NPL coverage stood at 175%, comprised of 100% provision and 75% of collateral coverage. The provision recoveries in corporate segment continued into the first quarter. And as a result, our cost of risk amounted to minus 0.1%, while core for the full year in '21 stood at minus 0.3%. Now moving to Slide 20 that provides a brief summary of loan and deposit portfolio growth. In '21, we maintained our leadership position in loans by growing in line with the market at 80% on a constant currency basis. At the same time, our deposit portfolio outpaced the market and grew by 25% without currency effect, which led to increased market share. I'd like to highlight that we continue to hold #1 market position in Georgia, both in terms of total loans and deposits. Now Slide 21 that shows our solid capital position. We remain the highest capitalized systemic bank in the country, as Vakhtang mentioned, with CET1 ratio standing at 13.7%, 200 basis points above the reg minimum, the CET1 ratio is up by 13 basis points quarter-on-quarter, mainly driven by the net income generation, partially offset by growth of the loan book. At the same time, our Tier 1 and total capital ratios, we are further supported by the issuance of USD 75 million AT1 bonds in November '21 and stand at 16.7% and 20.3%, respectively, well above the regulatory requirements. Now I will move to Slide 22, where I will finish my presentation with funding and liquidity summary. As you can see on this slide, we have a well-balanced funding structure with higher customer deposit share of 73%. Also, our NSFR and LCR ratios, we are comfortably above the minimum regulatory limits. Now I would like to hand back to Vakhtang, who will update you about our medium-term targets and future outlook.

Thank you, Giorgi. And now I'd like to reiterate our medium-term guidance and compare our performance again these targets. Our loan book grew by 18% against our medium-term target of 10% to 15%. Our return of equity was 24.4% as we have already mentioned, meaningfully above our medium-term target of 20% plus. Our cost-to-income ratio was 37.6%, getting closer to our medium-term target of below 35%. And finally, as you know, we have paid an interim dividend in September last year and are planning to pay a final dividend in 2022 to be in line with our targeted dividend payout ratio of 25% to 35%. Anna, can we go to the next slide? And to finish today's presentation by recapping of our strategic priorities, which are, as we see on this slide, maintain robust profitability backed by the solid capital, diversify our fee and commission income, continue sustainable growth in Georgia, capture a high growth potential of Uzbek market and continue to deliver efficient growth by leveraging our advanced digital capabilities. So with that I'd like to invite you to ask the questions.

Thank you, Vakhtang. [Operator Instructions] And the first question comes from Karim [indiscernible]. The next question comes from Robert Sage.

I'll have 2 questions, if I may, please. The issue that I'm receiving mostly from investors is in connection with potential impact of the Russian-Ukrainian situation on Georgia and on the Georgian banking system. And I was wondering whether you could give any comments on that and whether or not you've seen any impact on banking markets so far sort of in the year-to-date. And I also noticed that you've given no short-term guidance for 2022. And I was wondering whether that was because of heightened uncertainty sort of relating to the geopolitics. The second question, which is entirely unrelated, is just looking at your cost growth, which was about 25%, I thought the results as a whole were really strong. But I am quite interested in terms of how you see the trajectory of cost growth developing as we move into 2022 and whether there's going to be a similar amount of growth that you would be expecting for the current year?

Thank you, Robert. I'll start with the last 2 questions, and then you can move to Ukraine and Russia. So starting with medium term guidance for 2022. We kind of -- we are going to achieve all our mid-term guidance in 2022 as well, ROE 20% plus as well going towards our cost-to-income ratio, maybe not 35%, but well progressed towards that, and I will talk about this because that was the part of the question as well. And again, loan book growth probably will be higher, 15% this year that we expect, it will be like, we might surpass 15% at the moment. And now talking about cost guidance, yes, indeed, we actually saw the big increase, and I explained the reason. Going into 2022, [ 14 ] parameters might stay in place. For example, we are going to expand into Uzbekistan. So that remains in place. Also, we are going to invest into our growth because we are coming back to our foot. Therefore, we probably expect not such a magnitude, but growth in absolute number of the costs. However, our motto is that we need to deliver an efficiency through spending the cost. Therefore, we need to get more income. So we target to have a positive cost-to-income [ close ] and probably decrease our cost-to-income ratio by around 50 to 60 basis points more. That will be our cost guidance at the moment for the next year. And if something goes not as planned, we already evidenced our strong discipline that we can manage cost in 2020 with our discretionary and other types of costs.

Robert, your first question, I think our internal team, macro team made some kind of the research and analysis, it's very difficult to make any assumptions, but what we did and what kind of assumptions we are making that total exports from -- to Ukraine and Russia in 2021 from Georgia was around 21%. Remittances from these 2 countries is around 22%. And the FDIs which Georgia is getting from these countries is around 7%. And in addition to that, tourist inflows from Ukraine and from Russia in 2021, we are around 27%. And if you make assumptions that relatively short-term military escalation, with no cut of Russia from the [ suit ] system. So in that case, total net inflows around $240 million, which will be decreased for Georgia for the Georgian economy and which will be -- potentially would result in around 1.5 percentage point lower GDP growth for Georgia. And as you remember, we presented that we are forecasting the foreign base scenario the growth of real GDP for 2022, 6%, and this in that scenario decreased by around 1.5%. And in that case, we have forecast lari appreciation around 10%.

I think we have some technical problems, we've lost Anna. So probably a few -- I really can't invite the next in this. But so in the sake of the time, if you can write in the chat or Q&A and then we can answer before we get Anna back. We have some weather problem. So apologies for that. I'm looking at the Q&A, and I don't have any questions. Hopefully, just some technical.

Can you invite, Giorgi.

I cannot [ first ], I am trying.

Have we got the question?

Yes, so let's...

So the question is, yes, can you read it?

Yes. Is Uzbekistan [indiscernible] IFC and EBRD deal closed? Are we able to comment on this?

Yes. In December, we closed the deal and IFC and EBRD shareholders of our TBC Uzbek bank, each of them, they got 20% in our holding and invested up to $90 million.

Okay. Is there a follow up, probably he can type the next one. Thank you. What is the outlook for the core, very expected question. Frankly. And thank you very much. I think the era of the reverse inventory recoveries is probably over. We are entering into a normalized economy, as I mentioned. And gradually, we expect to go back our cost of risk that has been unchanged for the [indiscernible], it's probably 80 to 100 basis points. So that is the range we would expect and we would kind of for the 2022. And thank you, [ Andre ], so this is -- I saw your note and indeed, we are able to talk. It was part of our annual review of our foreclosed assets that we usually do, it is immaterial amount, like less than 3% of our total book. That was kind of the -- sorry, I said [indiscernible] for the foreclosed assets. So your note was correct. But again, it's a very immaterial amount less than 3% part of our annual review. So if I answer your question, next one, we are trying to get Anna back at the moment. So what dividend payout ratio do we target? At the moment, a bit like -- a bit premature, we will be assessing, but what I can guide it will be at least in the lower end of our guidance. So our target is 25% to 35%. We will target at least minimum 25% this year. And because you know that this year is quite a few top-ups, like [indiscernible] on like NBG is increasing the -- like regulatory buffers, but let's see how it goes. And probably from next year, we -- our target will be going to the higher end.

But also, we will give more information after the first quarter results. We are trying also not to be on the minimum level; we are trying to perform.

Yes, probably it will be Svetlana. So I have 2 questions. First one, I'll start with Svetlana's question, it is 14% to 16%. It will be very difficult to provide. Probably I would say.

Could you read the question because everybody had to listen.

So the question is, shall we expect 14% to 16% OpEx growth. So the question is probably it's very difficult to provide and we don't provide such a precise [ outlook ] but around that range, like around 15% of what we can say probably will be the right assumption. And then question comes from [ Ronak ]. What is the impact of rising global rate on bank NIMs? At the moment, you can see that our NIM improved quite materially driven by a few factors that I won't repeat. Next year, we expect certain of the factors support our further growth. Probably, we expect somewhere 10 to 20 basis points uplift for the 2022, mainly will be driven by the, again, larization, that we expected a slight shift of our [indiscernible] portfolio. And again, the rate increases well. Again, the question on core. It remains a usual 80 to 100 basis points guidance for our normalized cost of risk that we expect to land in 2022. Could you elaborate a bit more on Uzbek expansion. How are you tracking in terms of footprint and OpEx compared to where you wanted the business to go. How has the expansion gone so far compared to your initial expectations. So I will start with the financial point of OpEx. We don't provide detailed guidance for Uzbekistan business financials that we target to start somewhere mid of this year. But at the moment, the initial start-up business, of course, requires the OpEx investments. That's not something we did not expect. Again, with our income [ space ], we are able to manage and fund this maintaining our lower cost-to-income ratio. From a financial perspective, what I can say is that it's going better than our expectations and what we can kind of communicate at the moment is that probably somewhere at end of this year, we target to breakeven on a monthly basis. And that means that 2023, we target to be fully profitable here. So on financial part, that will be my comment and Vakhtang, if you want to comment more on the business side.

Yes. I fully agree. And in addition, I can say that if we have to look on the Uzbek as a country. And as we know, we have 2 businesses that we have in our presentation. So we have 2 businesses, Uzbek bank and the Payme. And as Giorgi mentioned in the -- before the end of this year, we have to come to the breakeven point, [indiscernible] breakeven point. But on the other hand, our payment business is doing quite well. We have generated only last year, GEL 18 million, probably that would be increased within 2022. If you look TBC's operations in Uzbekistan -- probably this year, if you take together Uzbek bank and Payme business together, this year will be profitable.

We have Anna back. Anna, probably it's better to continue inviting people and asking questions in live.

I'm very sorry, I had a [indiscernible].

[ Ronak ] is next as I see from the questions. I think, you can follow the list.

Okay. Thank you. So now I would like to invite [ Ronak ] to ask questions.

So Anna, should I continue reading the questions? Okay. I will read next question? How much of the OpEx growth in full year '21 was due to Uzbekistan expansion? Probably it's, I would say, around half like -- what I mentioned, 60% bonuses in Uzbekistan. It's safe to assume half of this probably Uzbekistan. Now moving to next question. Move to IFRS for capital ratios, then what would be bank to regulatory requires to do with the release capital. We kind of are doing parallel around this year. We are -- the target is that plan is to move fully next year. And I think our guidance was a few times that we don't expect any capital release. Therefore, it's a very simple question. No capital release. We come to nothing released, therefore. Now moving to the next question. What are the drivers, main drivers for your fee and commission income? What are downside risks? That 20%-plus growth look reasonable. So main driver, for net fee and commission income are twofold. One, of course, the economy rebound, you have seen GDP growth, almost 11% tourists coming back. Of course, it's supported. But in addition, the bank also kind of run certain business initiatives. For example, you have seen a number of transactions or number of merchants growing up, adding new products. So it's a combination of both business initiatives and macro factors. What are the downside is probably downside risk general macro risk if like in a baseline scenario, we do expect 20%-plus growth and we are quite confident in this. And we see baseline and key macro variables play out. But otherwise, we don't see much risk again, other than macro. Next question. Okay. So I think this is the last question I read. If anything else. [indiscernible] So NBG disclosed sponsors [indiscernible]. So currently, at the moment, what I can say is that -- currently, there are no grace -- under-grace periods for TBC in retail or MSME segments. There is a very small portion. It's more kind of restructured, not a grace period, remains for corporate. It's a very kind of minor amount. And at the moment, all these loans are quite like access to be -- not to be a high-risk for the bank, but again, for retail and MSME, no grace period loans. So a question for [ Can Demir ]. What is the [indiscernible] product in Uzbekistan? Is it card payments? Vakhtang, probably, this is for you.

Can you repeat the question, Giorgi?

What is the -- our major product in Uzbekistan. Is it card payments?

Yes. I think we have a few products. So this is the P2P transactions, utility payments. And on the other hand, we have the consumer loans, where we are doing very well and also the deposits. So we began our term deposit business recently 2, 3 months ago. And as we report now, we have around 2% market share in the retail in the total market. So I can say that deposits, consumer loans and also in the transactional business, we are doing quite well.

Okay, thanks. So going to question -- or second question for [indiscernible]. When do you expect cost of risk to pick up to a normalized rate just to understand the '22 earnings momentum a bit. So probably, it's very ungrateful job to give it early, let's say, detailed cost of risk quarter-by-quarter production and it's not usually we do. But what I can say in Q1, we can -- we don't expect yet to normalize there. Probably, it will be somewhere half like -- halfway through or kind of below our normalized -- probably picking somewhere from Q2, Q3, that period. On the OpEx, the banks keep on hiring people and the headcount reached almost 10,000. I was wondering what's the presence of workforce in Uzbekistan operation?

I don't remember the exact number, but I think in Uzbekistan, we hire up to 700, but to be clear, just all the operations and all kind of [indiscernible] transactions are done through our mobile application there. We have not anything in [indiscernible] there. But it's a technical thing that by the regulations which to the existing Uzbekistan to register customer, we have to very physically register customers. So they have to come to us to register them. So for that to cover the whole country, we have these service centers and why we hire this so many employees and also another part to deliver our debit cards, and we were doing very well. So this is the only reason why we hire [indiscernible] all kinds of the businesses which we have in Uzbekistan are done through our application.

I think so far, I believe I covered all the questions in chat, if I missed that or -- okay, I think [indiscernible]. It appears there's another question coming in the chat. Can you comment on growth expectation -- question from [ Anthony B ]. Can you comment on growth expectation of foreign currency loan book deposits versus lari loan book deposit? It is this 10%, 15% medium-term loan growth guidance blended or almost expected to grow at the same rate. How should we think about the deposits? So let me phrase this, this way. At the moment, the key forecast generally in Uzbek bank of the country of the regulator is going towards the larization. And if you can look at our book, probably you've seen that's a portion of the lari loans increasing. Therefore, we target to continue that trend within our book and to have a kind of gradually increase the larization. Also 10%, 15% is the medium-term guidance. As I mentioned, this year, probably we will have more than 15% growth due to the [indiscernible] and kind of different factors. But in the medium term, we will get to 10% to 15% on a blended basis. And deposits probably we expect to follow more or less the same rate, maybe a -- we don't expect much, I would say, disconnect between loans and deposits. Does this 700 headcount regarding Uzbekistan include Payme?

No, it's excluding Payme. So this is only TBC Uzbek.

Any more questions? What is the normalized tax rate for the bank going forward? It is probably quite difficult to say in terms of that it is larger, it depends on a few aspects like provisions on the local level of the inference. But probably something like somewhere 10% to 12%, somewhere that range would be more or less sensible assumption. Of course, it will move. We've had an exceptionally different rate maybe in 2020 because we booked a lot of provisions. But gradually, we are going to the more normalized level and somewhere like around 10%, 11%, 12% with the bill assumption. Any more questions? What is the headcount at Payme. Thank you.

Openly said, I don't know, but I guess, as I remember, up to 120, but majority of the employment in Payme, it's the IT and technology people we have there. So we have [indiscernible]. So majority of the employees there, we have the technology people.

Just [indiscernible] from the group's perspective, are not the biggest share? What's your next question? Sorry, we are making you to [indiscernible]. Let's wait for one minute just in case some more questions are coming. I think there are no questions. Again, apologies for the technical mishap, we will kind of try -- okay, there is one more question. Payme works only on Uzbek market or in Georgia, too? It's only in Uzbek market. Anymore? Any updates on the KPIs on Space?

So Space today operates in 2 countries, so in Georgia, in Uzbekistan, and we want to launch a few new products for the 2022. We have a timetable what we want to do within this year, as we already mentioned in our presentation. So auto loans, we had in December, we brought to the market to the Uzbek market for the friends and family. So push more to the public both in March in 1 month's time. So other products also will come to the market. And before the end of this year, probably we'll go to the SME and micro businesses.

I'm just looking at Q&A. There are some more questions just to ensure. So far, I think most of the questions have been covered because I was looking at the chat. I think I covered all the questions post in the Q&A in chat. Before any more questions come, Vakhtang and myself, we will be meeting with you more personally on 1 to 1 or having any questions because of the technical error we could not answer, we are more than happy to be reached or to cover.

Yes, once more apologies for the technical problems, and we will try to answer just through e-mails or when we have a face-to-face meetings or through the conference calls, any kind of the questions you will have.

[indiscernible] Close to come, we are in a very good place. Our 2021 actually repeated our strong place with to go into 2022 and probably thank you all for trusting us. Again, one more question from [ Costantine ]. It seems [indiscernible] that regulatory provisions are higher than IFRS. So excess provisions will be released by the date of transition to IFRS? Again, we kind of -- if you look last year, we had quite a big release into like on a local basis as well. Initially, the provision was at a much higher level than a local basis. But again, to repeat to transition to IFRS, we don't expect any capital release. But we don't see it as a problem because currently, we are very super capitalized. Our regulatory -- our kind of capital ratio is 200 basis points above regulatory requirement. We expect to continue: a, to fund the growth into Georgia; b, to fund to growth in Uzbekistan; and c, to continue paying dividends at least 25%, if not more, this year and go to higher end next year. Therefore, I would be kind of quite confident into our core capital position in a baseline center [ organic some macros ] it's a different story. But if we are within baseline, I would kind of won't worry about our capital position and let's say, capability. Thank you, always note that with additional apologies in that case, I will close the call. We will close it as for our next call to technical issue to ensure that not happen. And again, thank you very much.

Thank you. Bye.