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

Dear ladies and gentlemen, thank you for joining our First Quarter 2022 Financial Results Conference Call. I am Anna Romelashvili, Head of Investor Relations at TBC Bank. The presenters today are Vakhtang Butskhrikidze, CEO of the group; and Giorgi Megrelishvili, CFO. We will start today's call with a short presentation and provide an update about our financial and business performance. We will also briefly discuss the recent macroeconomic developments in the country. After the presentation, you will have an 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 today's presentation with a good news for our shareholders. The Board has recommended payment of a final dividend for 2021 of GEL 2.16 per share at the upcoming AGM. This, together with the interim dividend paid in September 2021 will acquire a total dividend of GEL 3.66 per share. The dividend payout ratio for 2021 will be 25%, in line with our medium-term guidance of 25% to 35%. Now turning to our first quarter results, I'd like to highlight our key achievements during the quarter. We continue to be the market leader in Georgia with robust profitability and strong growth supported by solid capital. We also continue to rapidly grow our business in Uzbekistan. In the first quarter, the group generated a return of equity of 24.3%, while our CET1 ratio increased to 14.6%. At the same time, our loan book grew by 21% and deposit portfolio increased by 14%. In Uzbekistan, we continue to deliver outstanding results and our retail loan book reached GEL 160 million, while retail deposits amounted to GEL 193 million by the end of April. At the same time, our registered users reached 1.6 million. I'm also delighted to report that on the group's level, the number of digital daily active users almost reached 1 million in March, while the number of monthly active users stood at 2.8 million for the same period. Now I'd like to review recent macro developments briefly on the Slide #4. In the first quarter, the Georgian economy maintained strong growth despite the adverse impact of the war in Ukraine. Real GDP growth reached 14.4% for the first quarter. Going forward, we expect the economy to grow by 5.5% in 2022 and the negative spillover from the world appears to be more limited than initially anticipated. Also on the positive side, the lari regained its value quarter-on-quarter after the short-term volatility and remains stable. The next slide shows the growth drivers in March more remained at strong levels. Tourist recovery strengthened in March, supported by the immigration effect and stood at around 70% of the 2019 levels. At the same time, remittance slowed, but still maintained a positive growth rate of 2.6%. Remittances from Russia decreased by 16% year-on-year, while inflows from other countries increased by 6.5% over the same period. The outlook for Lari is also broadly nature. Slide 6 show the major drivers underlying our GDP forecast for 2022. In our baseline scenario, we expect the Georgian economy to grow by around 5.5% this year on the back of the tourist recovery and resilient exports compared to 7%, 7.5% GDP growth without the war impact. Bank credit is also expected to be supportive growing around 60% year-on-year in constant currency rate terms. Now let's move to Slide 8 in this section, I'd like to reiterate the group's positioning and highlight our first growth potential. First of all, we are the market leader in Georgia with diversified business across all market segments. Second, we consistently deliver robust profitability and steady growth backed by strong capital. Said, we stand out with addressed omnichannel distribution and best-in-class digital customer proposition. In addition, we have 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 continue to increase the number of our customers every year. And at the end of the first quarter, we had 3.6 million active users. Moving on to Slide 9, 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. Significant positions indicate the resilience and diversity of our business model and allow us to extract significant cross-segment synergies and efficiency. On the next slide, I'd like to summarize our key financial results for first quarter, including strong profitability and a solid capital position. As I already mentioned, we delivered 24.3% of return of equity, while return of assets stood at 3.7%. Net interest margin improved by 0.9 percentage points year-on-year and reached 5.6%. In addition, our cost-to-income ratio stood at 36.6%, down by 2.7 percentage points year-over-year. At the same time, our CET1 ratio increased to 14.6%. It is important to stress that this is about the minimum required level by 2.4 percentage points. Let's move to the Slide 11, which illustrates the solid growth in our Georgian payment business. This quarter was successful for our payment business in Georgia as well. As you see on this slide, we have a solid increase in both transaction number and volume, which significantly contributed to the fee and commission income in the first quarter. It is important to highlight that our payment business is a significant contributor to our fee and commission income, accounting for around 30% of the total. On the Slide 12, you can see our digitalization metrics, both in Georgia and on the group's level. We have strong progress in expanding our digital footprint on the group's level. we have up to 1 million active digital users every day and 2.8 million active digital users every month. What is most important, our transaction of floating continues to be high at 99%. In consumer lending, we issued 62% of loans digital. Now I'd like to update you about our continued progress in Uzbek bank operations in more detail starting on Slide 13. By the end of April, the number of downloads of our TBC UZ application reached 2.1 million, while the number of registered users was 1.6 million. At the same time, we reached GEL 193 million in deposits and GEL 160 million in loans. Finally, on the Slide 14, I'd like to highlight the strong performance of our payment subsidiary, PayMe, which is the second largest payment provider in Uzbekistan. In the first quarter, PayMe continued its rapid growth in all major metrics. The number of monthly active users continue to grow, reaching 1.8 million at the end of the March, while the number of active merchants also increased to around 3,000. In terms of financial results, the revenue reached GEL 9.5 million, while the net profit almost doubled and reached GEL 5.8 million. Now I'd like to hand over to Giorgi.

Thank you, Vakhtang. Now I'll go over the financial performance of the first quarter into more details. I will start with Slide 16, that shows another very strong financial performance for Q1 '22. Our net profit is up by 46%. But more importantly, it's up by 13% quarter-on-quarter basis, driven by strong income generation across the board, while our book quality remains strong, translating into a cost of risk of 30 basis points. As a result, ROE stood at solid 24.3%, as Vakhtang already mentioned, for the first quarter, while our ROA was 3.7%. Now turning to Slide 17, that shows our growing and diversified revenue streams. Our NIM continued a positive trend in Q1 and was 5.6%, up by 20 basis points quarter-on-quarter basis and by 90 basis points year-on-year. The stronger growth in NIM was mainly driven by growth in loan yields, accompanied by loan composition change as well as the liability management. We also recorded robust growth of 44% in noninterest income year-on-year, which was driven by a strong increase in net fee and commission income and significant growth in FX gains due to increased volume and margins. Quarter-on-quarter noninterest income increased by 10% on the back of the higher FX gains. Now let's move to Slide 18, which shows our high efficiency levels. As you can see from the left-hand chart, in Q1, our total OpEx grew by 24% year-on-year or around GEL 29 million. Staff cost growth was mainly due to the growth of business as local in Uzbekistan, while our admin cost increase is mainly driven due to Uzbekistan rollout. On a quarterly basis, our operating cost increase decreased by 4% and that's mainly driven by seasonally low or high base in Q4. However, the most important thing is that we continued our positive cost-to-income growth trend. And as a result of cost-to-income ratio stood at 36.6%, down by 2.7% year-on-year. Now I'd like to go to Slide 19 that shows our strong asset quality. Our NPLs remains unchanged on a quarterly basis at 2.4%. However, materially decreased year-on-year from its [indiscernible], mainly driven by the resumed repayments of the restructured loans in the retail and MSME segments. Our cost of risk for the quarter consequently was 30 basis points as a result of the strong performance of loan book across all segments. Also, I would like to mention here that in Q1, we sold the return of consumer loans portfolio, that was around GEL 13 million. And without it, our cost of risk would have stood around 60 basis points. So the impact of 30 basis points from this portfolio sale. Slide 20 provides a brief overview of loan and deposit portfolio growth. We maintained our leadership position in total loans by slightly outperforming the market growth of 21% year-on-year on a constant currency basis. At the same time, our deposit portfolio outpaces the market and grew by 13% year-on-year constant currency effect. I'd like to highlight that we continue to hold the #1 position in Georgia, both in terms of total loans and deposits. Now let's go to Slide 22 (sic) [ 21 ], that shows our solid capital position. CET1 ratio stood at 14.6% at the end of Q1, 2.4 percentage points above the minimum regulatory requirement. All other tiers, we are comfortably above our regulatory limits. As Vakhtang mentioned, we plan to pay a final dividend for 21% or 25%. And after this payment, our pro forma ratio would have been 14%, still well above our regulatory requirements by 1.8 percentage points, positioning the bank very well for its growth, both locally and in Uzbekistan. And also, we static any potential headwinds. Now moving to Slide 22, where I will conclude my presentation with funding and liquidity summary. As you can see on this slide, we have a very well-balanced funding structure with high customer funding share of 71%. Also, our NSFR and LCR ratios, we are comfortably above the minimum regulatory limit of 100%. I also would like to highlight that without applying Georgian Bank specifics to LCR, the LCR ratio on Basel basis would have been 208 percentage. Now I would like to hand back to Vakhtang, who will update you about our medium-term targets and future outlook.

I'd like to reiterate our medium-term guidance and compare our performance in the first quarter against these targets. Our loan book grew by 21% against our medium-term target of 10% to 15%. Our return on equity was 24.3%, meaningfully above our medium-term target of 20% plus. Our cost-to-income ratio was 36.6%, getting closer to our medium-term target of below 35%. And finally, as already mentioned, we expect our dividend payout ratio to be at 25% for 2021 within our guidance of 25% to 35%. Now I'd like to finish today's presentation by recapping our strategic priorities which are maintaining robust profitability backed by solid capital diversify and increase our fee and commission income, continued sustainable growth in Georgia, capture high growth potential for use market and continue to deliver efficient growth by leveraging our advanced digital capabilities. With that, I'd like to invite you to ask the questions.

[Operator Instructions] And the first question comes from [indiscernible]. please ask your question.

I think it's on the mute so participant needs to unmute to ask the question.

Please unmute yourself.

Anna, can you do that?

Well, yes, I gave us the permission to talk but. Okay, maybe we can take another question, meanwhile.

Yes, please, we can get this question in the Q&A box as well, if there's a problem.

And the next question comes from Ronak Gadhia.

Can you hear me?

Yes.

Great. I have 3 questions. Firstly, can you just maybe give some guidance on the loan growth for the rest of the year. On a year-on-year basis, our growth was strong, but there was a slight deceleration during the quarter. So would be interesting to hear what you thought up for the rest of the year. Then secondly, related to that is the outlook for deposit growth. I see what has happened in the balance sheet over the last 12 or so months, loan growth has been strong. At the same time, we will optimize your balance sheet, reduced allocations to cash and investment securities. But as a result, now the loans deposits ratio seems relatively high. So going forward, are you seeking to grow deposits? And if not, how are you going to be funding your loan growth? And then the third question is on your margin expansion. Could you -- is it possible to share some thoughts in terms of what component of that margin expansion is driven -- is being driven by cyclical factors because of the high NBG rates? And how much of it is being driven by structural factors because you get -- because of the increasing exposure to lari denominated notes.

Thank you for this question. So I will try to answer the first 2 questions and the third questions Giorgi will answer that. So to answer your question about the loan growth. So for this year for 2022, we are forecasting growth in the range of 15% to 18%. But the growth in the different segments will be probably different. So the highest growth we are forecasting in the micro and the SME businesses and probably the least growth will have in the corporate businesses. To answer the second question about the deposit growth, we forecast that annual growth for the loans and deposits could be approximately on the same level. So the annualized growth for the deposits will be in the range of 15% to 18%. Giorgi, can you answer this?

And just to also continue on the deposit side, we don't expect any challenges on the side. But also, if you remember, we have a very strong relationships with our IFIs that also provide very strong ties and we have a huge pipeline in there. So far, we don't expect any challenges funding our portfolio growth. So now on NIM side, if I move there. So as you can see it on a year-on-year basis, it's actually increased by remarkable, 90 basis points, I would say that. And I highlighted the 3 major drivers. Loan yield effect, it was 25 basis points. And that potentially largely is driven by retail as well. But going forward, we also should expect USD rates going up, that will be one factor, that's the first point that we expect that trend to continue. But one thing as I said, we also had the increase of the lari funding cost. That was actually more than offset by our liability management that we did particularly deploying our excess funds that we did on the liquidity side. Also, we optimize the funding structure, as you can see, our customers share increase significantly, and we continue -- and we that trend to continue. But mainly one of the big drivers as you probably see on the slide is a long composition change and is twofold. The first is the increase of larization. And our portfolio -- lari portfolio share increased by 5% year-on-year basis. We expect that trend to continue, maybe not such a pace. It will be a bit more kind of noticed marathon as I used to say on this, but this trend is going to continue supporting our margins. And in addition, we are also getting and decreasing our share slightly on the consumer funding side that is emerging. It's not a huge shift that we change our portfolio structure or impact our cost of risk material or things like this, but it supports our margins. So therefore, to summarize our guidance in the medium term for this year, probably next year at least would be to remain at those levels, like 5.5%, 5.6%. We don't expect any material margin squeeze going forward on a medium-term basis. And I think that covers all your questions.

Just maybe a quick couple of follow-up questions on the margin side. So you mentioned going forward, the U.S. are growing and we're seeing that globally. What's the net impact on that on your margins? Obviously, there there'll be an increase in funding costs, but do you -- are you given you'll be able to offset that by achieving higher lending rates? And then the second question, margins because of the increased lari exposure is increasing. But how does the cost of risk on the lari exposure compared to the USD exposure?

Yes. So to start with U.S., kind of our book is quite well balanced at market because our big portion on a floating basis. Therefore, there may be some short-term noise, but on a medium- and longer-term basis, we don't expect a material impact from the perspective, of course, funding costs, we tend to increase gradually on the U.S. side, But so that our kind of loan yields as well. And it was historically low. It was up to 4% or 5% by Georgia standards that's quite low. So there is a room there. On the kind of lari side, of course, the increased rate increase payments from customers, but we have a very strong credit under rating standard. Therefore, where customers assess such a potential was also assessed. So -- and we have a very strong PTI. And therefore, we don't expect any deterioration in our cost of risk or provisions because of this.

And the next question comes from [indiscernible] Morgan Stanley.

My first question is about your progress in Uzbekistan. We saw that recently OTP Bank has kind of pulled out from the Ipoteka Bank transaction citing increased risks. Do you see any risks in this market? And if you could share any medium-term targets in terms of market share or loan portfolio size or transaction volumes size on the payment side business? And secondly, on a separate note, we saw that recently after the war in Ukraine and sanctions, VTB Georgia was forced to sell their assets and liabilities, which were required by some smaller Georgian banks. Where are you not interested in acquiring those assets or liabilities? Or was there any legal, regulatory or any other type of challenge in there?

Yes. Thank you very much for this question. So to answer the question about the Uzbek development. So we are looking on the macro Uzbekistan macro development and the countries developing smoothly and the dual our internal forecast for the Uzbek macro GDP growth, real GDP growth forecast. Our internal minimum 5.5% to 6%, approximately on the same level, and we are for accounted for the Georgian economy growth. And we are a very small clear in the banking sector in Uzbekistan. And as we have already shown in our presentation, we are doing quite well to be in a market in Uzbek market. This market is under penetrating, and we believe that it's one of the strategic priorities for TBC Group operations. And I think the growth will be continued during this year, Uzbek market where the growth in both sides. I mean on the loan side, on the deposit and we have a very ambitious place even within this 2022. To answer your question about the VTB Georgia operations, yes, the decision had to be made in a very short time. And it was also a regulator decision to fear for a medium-sized banks to make that deal but it was logical decision.

Thank you, Oto. At this point, we don't have any more questions. [Operator Instructions] And here comes the question from Brad [indiscernible].

The growth in your Uzbekistan Bank sort of dipped in through Q1 and seems to have started accelerating again in April. I was wondering what caused that?

I don't understand the question, Giorgi?

No, I could not get your question, can you repeat that please?

The growth in your Uzbekistan bank slowed markedly in Q1. And I was wondering what the cause of that was.

If you mean the monthly growth, [indiscernible] something like that because I think the quarterly growth was quite high growth we have here. Can you show the presentation and we could go to that slide?

Yes. Just a second. Probably Brad is referring to the drop in deposit in March, right?

Yes. If you're referring, Brad, on the deposit side. So if you look on the loan side, it was just normal and steady growth. If you have a question about -- if the question is about the deposits. So we have a very high liquidity and we made decreased rates on the deposits. And as a result, in much, it showed some kind of a decrease. But from April, as we see here, we also show the growth.

At this point, we don't have any more questions. It seems that we have answered all questions at this point. Thank you again for joining our call. And if you have any additional questions, please feel free to contact IR team via phone or e-mail. Thank you.

Thank you very much.

Thanks.

Thank you.