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

Good afternoon, and welcome to the TBC Bank Group PLC H1 results investor presentation. [Operator Instructions] Before we begin, we'd like to submit the following poll. I'd now like to hand over to the executive management team of TBC Bank Group PLC.

Thank you all. Thank you for joining our call. And I would like to start today's call with the announcement of an interim dividend of GEL 2.5 per share payable in October in accordance with our updated dividend policy to pay semiannual payments as announced last year. I'd also like to inform you that the Board of Directors has approved a share buyback program of up to GEL 75 million. Out of which, EUR 50 million will be canceled and the rest will be transferred to the employee benefit trust in due course. We believe this is a good decision at the current price levels. Now turning to our second quarter results. Let me 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 continued strong progress leveraging our international growth potential. In the second quarter, the group generated a return of equity of 24.1%, while our CET1 ratio stood at 15%, which is above the minimum required level by 2.9 percentage points. And we remain the best capitalized systemic package. Our portfolio growth in the quarter was 23%, which strongly outperformed our normalized growth of 15%. In the second quarter, we continued to deliver impressive business growth in Uzbekistan. As a result, our retail loan book reached GEL 180 million, while retail deposits exceeded GEL 230 million. I am also delighted to report that on the group's level, the number of digital daily active users reached 1 million in June, while the number of monthly active users amounted to 3 million for the same period. Now I'd like to review the recent macro developments briefing on Slide #5. In the first half of this year, GDP growth in Georgia reached 10.5% despite adverse impacts of the war in Ukraine. We expect the growth to stay at around the same level during the second half of the year, resulting in an estimated GDP growth of about 10% for the full year. Also on a positive side, the lari continued to strengthen against the dollar. The next slide shows the driver, we have a strong GDP growth. Recovery in tourist deposits [ extended ] during the second quarter and even exceeded 2019 levels in July, supported by the migration impact. Exports also remain strong on the back of countries other than Russia and Ukraine. Importantly, in terms of trade measures that export prices over the import prices remain stable, indicating the reasonably balanced net effect of the highly volatile commodity prices. So inflation remained elevated and stood at 12.8% in June, and it is expected to moderate on the back of the stronger lari and decline the commodity prices. Now let's move to the Slide 8, here I'd like to reiterate the group's positioning and highlight our offers -- our fast 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 a strong capital. Third, we stand out with advanced omnichannel distribution with best-in-class digital customer proposition and largest ecosystem network. 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 continue to increase the number of our customers every year. And at 30th of June, we had 3.7 million active users in 2 geographies. 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. These leading 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 the second quarter. As already mentioned, we generated strong results in second quarter, with return of equity standing at 24.1%, while return on assets amounted to 3.7%. The year-on-year decrease in net profit was related to high base a year ago due to provision recoveries and one-off gain from the disposal of investment property. As expected, our cost of risk started to normalize and amounted to an annualized 0.9% in the second quarter. Over the same period, our cost-to-income ratio slightly improved and stood at 35.3%. On the Slide 11, I'd like to share with you an update on our digital ecosystems. We held the large digital ecosystem in Georgia that consists of 4 digital verticals: lifestyle, housing, auto and e-commerce. We have 1.75 million unique visitors across all verticals, which is around 40% of the internet traffic among the Georgian websites. Our ecosystems allow us to leverage our large customer base and to data hub capabilities to: first, generate the net fee and commission income; second, create the leads for loans; third, strengthen customer loyalty and locking; and finally, increased customer engagement. The following slide gives more details on the results of our digital ecosystems. Total gross merchandise volume is growing rapidly and as our users are becoming more engaged. Our main sales performance indicated GMV and GMV per user have increased by more than 3x year-on-year. At the same time, number of lead generation has more than doubled year-on-year and a loan conversion rate grew to 8%. As a result, the loan disbursement reached to GEL 22 million, accounting for 6% of our total retail loan disbursement during the quarter. Let's move to Slide 13, which illustrates a strong growth of our Georgian payment business. In the second quarter, the volume of POS transactions and transactions conducted by TBC cards grew by around 70% year-on-year. 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 14, 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. As already mentioned, we have up to 3 million active digital users every month, while daily digital users exceeded 1 million in June of this year. Most importantly, our transactional floating continues to be high at 99%. In consumer lending, we issued 60% of loans digitally, while 70% of our deposits are issued outside the branches. Now I'd like to update you about our continued progress in Uzbek bank operations in more detail, starting on the Slide 15. By the end of June, the number of downloads of our TBC UZ application increased to 2.4 million, while a number of registered users was 1.8 million. At the same time, we reached GEL 236 million in deposits and GEL 181 million in loans. As the business is growing successfully, we invested additional capital in TBC UZ bank in the amount of $21 million, while our partners, IFC and EBRD injected $7 million each to support our expansion plans. Finally, on the Slide 16, I'd like to highlight the strong performance of our payment subsidiary, Payme, which is the second largest payment provider in Uzbekistan. In the second quarter, Payme continued its rapid growth in all major metrics. The number of monthly active users doubled year-on-year and reached EUR 2 million at the end of June, while the total payments volume increased by more than 50% year-on-year. Over the same period, the revenue and net profit continued impressive growth and reached GEL 12 million and GEL 7.1 million, respectively. Now I would like to hand over to Giorgi.

Thanks, Vakhtang. And as usual, I'll go all the financial performance starting from the Slide 18. And as Vakhtang mentioned, it shows very strong offset financial results. In Q2, our net profit is up by 5 percentage quarter-on-quarter on the back of the very strong income generation and ROE stood, as I mentioned, 24.1% and ROA was 3.7%. On an annual basis, our net profit decrease is due to high base a year ago, mainly actually related to the provision recoveries and gain from disposal of a real estate property. Now turning to Slide 19 that shows our growing and diversified revenue streams. Our NIM continued a very positive trend in Q2 and amounted to 5.8%, up by 20 basis points on a quarter-on-quarter basis and by remarkable 80 basis points year-on-year basis. The strong growth in NIM was mainly driven by loan composition and loan yield effects. We also recorded 17% growth in noninterest income year-on-year and 29% increase on a quarterly basis, which was mainly driven by strong FX gains and net fee and commission income. Now as you can see from Slide 20, we maintained our high efficiency levels. The cost growth in absolute terms was EUR 29 million or around 21%, out of which circa 30% was due to our Uzbekistan expansion. However, we continued our positive cost-to-income down trend, and our cost-to-income ratio decreased both year-on-year and quarter-on-quarter basis and stood at 45.3%. Now Slide 21, I would like to present our strong asset quality. Our NPL decreased both on year-on-year and quarterly basis and stood at 2.3%. NPLs improved significantly on a year-on-year basis due to resumed repayments of restructured loans in retail and MSME. Also, our total NPL coverage ratio remained very strong at 168%, comprised of 100% provision coverage and 68% collateral coverage. In Q2, the cost of risk started to normalize after the recoveries in '21 amounting to 90 basis points. The largest increase is coming from the retail due to the acceleration of consumer loans. Now going to Slide 22, let's provide a brief overview of our loan and deposit portfolio growth. We maintained our leadership position in both areas. Our loan book grew by 23% year-on-year on a constant currency basis, while our deposit portfolio increased by 30% year-on-year without currency effect. Slide 23 shows our solid capital position. CET1 ratio stood at 15% at the end of Q2, 2.9 percentage points above the minimum regulatory requirement. All other tiers, we are also comfortably above all regulatory requirements. One thing I would like to highlight here is that you'll probably [indiscernible], these ratios on a local basis, and if you translate the on Basel III basis, they are around 250 to 300 basis points more. Therefore, when I'm saying like 15%, it's more like 70% to 80% on the Basel basis. And based on these strong capital positions, we are happy to distribute interim dividend of GEL 2.5 per share and declared by share buyback, as Vakhtang already mentioned. Now moving to Slide 24, where I will conclude my presentation with funding and liquidity summary. As you can see on this slide, we have a well bond funding structure with high customer funding share of around 72%. Also, our NSFR and LCR ratios, we are comfortably above the minimum reg limit of 100%. Here also, those ratios are on a local basis. Our LCR ratio on a Basel basis is around 223%. Now I would like to hand back to Vakhtang who will update you about our medium-term targets and future outlook. Now over to you, Vakhtang.

Thank you, Giorgi. And I'd like to reiterate our medium-term guidance and compare our performance in the second quarter against these targets. Our loan book grew by 23% against our medium-term target of 10% to 15%. Our return of equity was 24.1%, as we mentioned already, meaningfully above our medium-term target of 20% plus. Our cost-to-income ratio was 35.3%, getting closer to our medium-term target of below 35%. And finally, I would like to reiterate the Board decision to declare an interim dividend of GEL 2.5 per share payable in October, which will be supplemented by the buyback program of up to GEL 75 million. And I'd like to finish today's presentation by keeping our strategic priorities going forward, which are maintain robust profitability backed by solid capital, diversify and increase our fee and commission income streams, continued steady growth in Georgia, harness high growth potential of the Uzbek market and continue to leverage our advanced digital capabilities to achieve high efficiency. Finally, I would like to inform you that we are planning to hold the Capital Markets Day in Uzbekistan on November 10 and would be glad to see you all there. Invitations will be sent out in the near future. With that, I'd like to invite you to ask the questions.

Thank you very much indeed for your presentation. [Operator Instructions]. I'd like to remind you the recording of the presentation along with the copy of the slides and the published Q&A can be accessed via your investor dashboard. As you can see, we've had a number of questions come through through today's presentation. And perhaps if I may, I will start with the first one. I read as follows. The digital client base and active users is very impressive. What opportunities do you have to cross-sell into this digital user base to drive margin?

Okay. I can take it. So if we start like, if we really to think in terms of the 2 countries, Georgia and Uzbekistan. If we start from Georgia here, actually, we are market leaders, and we have universal banking model and our customers has access to all the banking. But key point, as Vakhtang mentioned, we now are a very strong focus on Tenet, it's our ecosystem that provides very, I would say, strong cross-selling or cross-functional opportunity to our customers, where we can get product in one space. Our target at some point probably somewhere like this year, end of next year is to kind of also look at something like the [ super app ] that will help us to kind of support our customers and cross-selling opportunities. But it's kind of one of the key options in Georgia. And the data shows that it's a growing opportunity and growing business. In Uzbekistan, we have 2 businesses here. It is the bank and the payment business. There also -- it's a new start of business. We just started our bank last year. It's growing. And in payment business, we, at the moment, have the minority shareholders here who own 49%. We own 51%. We have an option there to acquire the minority shareholders of next year that we are kind of -- probably are going to take. That also will open additional fast approach opportunities between those 2 businesses, and we think there is a lot of upside. Vakhtang, is there anything to answer...

Just to add -- Anna, if you go to the Slide #11 -- next slide. As we see on the lower right-hand side, it's very important to mention here that just to begin, as Giorgi said already that we are beginning our journey through our network, through our ecosystems and only in the second quarter we generated 6% of our disbursement of the loans in the retail business by our ecosystem. So this is the beginning of our journey and believe that the medium term, this will grow up. So -- and this is -- we have already done in Georgia. But as Giorgi saying, just we began our business in Uzbekistan. This is a startup business we began from the green floater banking operations, but probably it take years. So in 1 year, in 2 years, we will see the huge results because in Payme, we have already more than 7 million registered customers. And in the bank, as we are reporting today, we have more than 2 million registered customers. As we already mentioned, we are inviting all of you to Uzbekistan on Investor Day and that you will see on a place in Tashkent what we are planning.

The next question got here, with the increase in loan book on 23%, 39% market share, how do you manage bad debts with such a large share of the market?

Firstly, we can say we manage it very well, how good, how we do it, it's kind of -- like normalized range is around 80 to 100 basis points. That's usually like -- and it's a product of portfolio structure because we are in corporate. We are -- it's quite -- we have quite a low cost of risk. We have a very high-quality portfolio, working with customers on kind of one-to-one individual basis in MSME is the same rate. In retail, one thing that you need to keep in mind, in Georgia, even in consumer lending, the bank can't lend to the supply market because of the regulation and the [indiscernible] again may not be aware of this. In 2019, we have been quite strict regulation coming into place very high PTI, for example, that are in place or other kind of, let's say, eligibility of the customers that allows us only access to sing more high-quality customers. And we have a very strong underwriting standards. We have a different committee, large loans going given up to board level. Therefore, I think as a product of this, our kind of cost of risk range is around 80 to 100 basis points that we expect.