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

Good afternoon, and welcome to the TBC Bank Group PLC Third Quarter 2022 Results Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question received during the meeting itself. The company will review all questions submitted today, we'll publish response where appropriate to do so on the Investor Company platform. Before we begin, we'd like to submit the following poll. I'd now like to hand you over to the Executive Management team of TBC Bank Group PLC. Good afternoon.

Good afternoon. Thank you very much for joining our call. I'd like to start today's presentation with highlights of our key achievements during the third quarter. We continue with the market leader in Georgia with robust profitability growth supported by solid capital. We also continued strong progress in exploiting our international growth potential. In the third quarter, the group generated the exceptional return of equity of 31.1%, while our CET1 ratio stood at 15.3%. It's above the minimum required level by 3.5 percentage points. We remained the best capitalized system is back in Georgia. Our loan book portfolio growth was 19%, while our deposit portfolio grew by 29% on a constant currency basis. In the third quarter, we continue to expand our position in Uzbek market and our loan book reached up to GEL 300 million and deposits, around GEL 300 million. I'm also delighted to report that the group's level -- on the group's level, the number of digital daily active users reached 1.1 million in September, while the number of digital monthly active users amounted to 3.2 million for the same period. On the next slide, I am pleased to announce that we are adding 2 new medium-term targets. Uzbek operations to account for 10% to 15% of the gross net profit and to achieve 7 million monthly active users on the group's level. Now I'd like to review recent macro developments briefly on Slide #5. In the first 9 months of this year, GDP growth in Georgia reached 10.2% despite the adverse impacts of the war in Ukraine. We expect the growth to stay at around the same level during the remaining 3 months, resulting in an estimated GDP growth of about 10% for the full year. Also on the positive side, the lari continued to align with its strong term trend against the dollar. The next slide shows the drivers behind the strong GDP growth. The current geopolitical crisis has once again proved the resilience of the Georgian economy. Exports have remained strong on the back of countries other than Russia and Ukraine. And recovery in tourism flows, partially supported by the migration impact contributed with strong exports, remittances, as well as recovering FDI inflows supported about 10% GDP growth for the whole 2022 year. Also, inflation remains elevated as stood at 11.5% in September, and it is expected to gradually moderate. Now let's move to the next slide. Here, I'd like to reiterate the group's positioning and highlight our huge fast growth potential. First of all, we are the market leader in Georgia with diversified business across all market segments. Secondly, we have consistently deliver robust profitability and steady growth spread by the strong capital. Third, we stand out with the advanced omnichannel distribution network with best-in-class digital consumer proposition and the 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 strong market position and growth strategy, we continue to increase the number of our customers every year. And at the end of September, we had 3.9 million monthly 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 the leading position across all segments with steady growth levels. This 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 third quarter. On a year-on-year basis, our net profit increased by an exception of 55% and stood at GEL 321 million. This growth was related to the strong income generation across the board with substantial contribution from noninterest income. Our return on equity in the quarter reached 31.1%, while return on assets amounted to 4.8%. As expected, our cost of risk started to normalize and amounted to an annualized 1% in the third quarter. Over the same period, our cost-to-income ratio strongly improved to 5.5 percentage points and stood at a little bit less than 30%. And our capital position remains strong with CET1 ratio at 15.3% as mentioned above. On Slide 11, I'd like to share with you on an update on our digital ecosystem, TNET. We have the largest digital ecosystem in Georgia that consists of 4 digital verticals: lifestyle, housing, automobile and e-commerce. We have 1.8 million unique annual visitors across all verticals, which is around 40% of the Internet traffic among the Georgian websites. Our ecosystem allows us to leverage our large customer base on a data hub capabilities. First, to generate net fee and commission income; second, create leads for loss; third, strengthen our customer loyalty; and finally, increase our customer engagement. The following slide gives more details on the results of our digital ecosystem. For gross merchandise volume it's growing rapidly as our users are becoming more engaged. And at the same time, the number of leads generated increased 4x year-on-year, and the loan conversion rate grew by 9%. As the result, load disbursement reached GEL 26 million accounting around 80% of our total retail loan disbursed during the quarter. Now let's move to the Slide 13, which illustrates the solid growth of our Georgia payment business. In the third quarter, the number of POS transactions and transactions with TBC cards increased by 28% and 30%, respectively year-on-year. And also, it's important to highlight that our payment business is a significant contributor of our fee and commission income. On Slide 14, you can see our digitalization metrics, both in Georgia and on the group's level. We have made strong progress in expanding our digital footprint on the group's level. As already mentioned, we have up to 3.2 million digital active users every month, while digital daily active users stood at 1.1 million in September. Importantly, our transaction of loans continues to be high at 99%, and our consumer lending and deposit sales offloading ratio also remains a high in the third quarter. Now I'd like to update you more details about continued growth progress and rapid growth on our Uzbek banking operations. By the end of quarter, the number of downloads of our TBC user application increased to 2.8 million, while the number of registered in was 2.1 million. At the same time, as mentioned already, we reached up to GEL 300 million in retail deposits and up to GEL 270 million in our retail loan portfolio. 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 third quarter, Payme continued its rapid growth in all major metrics. The number of monthly active users increased by 62% year-on-year and reached GEL 2.1 million at the end of September. And total payment volume increased by around 64%. And over the same period, in both revenues and the net profit continued to be a impressive growth and reached GEL 12 million and GEL 7.5 million, respectively. Now I'd like to hand over to Giorgi. Giorgi, please?

Thanks, Vakhtang. Really great quarter. Great financials and results, and I'll start with Slide 19 that shows kind of growth. I would say, outstanding financials and results. So in Q3, our net profit, as Vakhtang already mentioned, increased by actually impressive 55% year-on-year, and that's driven by a continuation of our strong revenue trend that we have been delivering for the -- since the banks, let's say, started. And as Vakhtang mentioned, substantial contribution was from our noninterest income that I'm going to touch a bit later. So as a result, we are looking at an ROE of 31.1% for the quarter, probably one of the best that we have seen so far. And I will now go to Slide 20, where I will deep dive bit more into our profitability drivers. As I mentioned, cost actually interest and noninterest income performed extremely well. And NIM our continued upward journey and increased post year-on-year. It's 100 basis points and a quarter-on-quarter basis and landed at 6.3%. NIM increase is mainly driven by loan composition and loan yield effects. On noninterest side, the contribution is twofold. The first one is the strong FX growth due to higher volume of transactions, wider spreads, but also new treasury products. Net fee and commission income actually increased by higher payment transactions as well as our new business products that we put in place. So all that actually resulted in a very robust and strong noninterest growth. So I would like to move now to Slide 21 to review our operating expenses. So in Q3, the increase was 34% year-on-year, and that was mainly driven by -- we expand our business post legally, let's say, in Uzbekistan. That also resulted in higher staff and admin costs. We actually put money into technology. We continue to invest into our business to ensure on moving trend growth. In addition, staff costs also increased due to performance costs driven by higher [indiscernible] income. However, the key point is that consistent with the previous periods, our income grew at a much faster rate and our cost-to-income ratio decreased in Q3 to 29.9%. It's not only below our target of 35%, but I think it's the first time it is below 30%. Now I would like to go to Slide 22 that shows our very strong book quality. As of 30th of September 22, NPL remained stable quarter-on-quarter at a very healthy 2.3%. Here on the trend actually is mainly driven by resumed payments from loans in retail and MSME segments. That was still like how we detailed last year. And since NHBC customers start paying and our NPL is at 2.3%. Total provision coverage was very robust to 164% -- sorry. And in Q3, cost of actually continued to -- I would say, within our normalized range that we anticipated and landed at 1%. So I would like now to go to Slide 23 as it shows performance of our loan and funding portfolios. Year-on-year, the loan book growth was very high at 90%. That's actually above our guidance, 12% to 15% on a constant currency basis, and that was mainly driven by our MSME, I would say retail segments. However, on a quarter-on-quarter basis, our loan portfolio remained more or less stable, up by 2%, and the driver was actually the repayment from one CIB client. That is also the reason why CIB portfolio actually decreased a bit. As for the customer funding side, the growth was more prominent. We actually outpaced the market and that resulted in actually to increase our customer funding share. I would touch at a point later on in one of the following slides. Now I would like to move to Slide 24, where you can see our very solid capital position. Our capital ratios remained at very strong levels at quarter end, and all of them are well above the minimum regulatory requirements. And the key point to mention here is that ratios increased despite paying a generous dividend in September, and the majority of growth was delivered by our net profit. And that also was supported by [indiscernible]. Now I would like to move on Slide 25. That shows our very strong liquidity and funding base. The share of customer funding in total liabilities, as I already mentioned, increased and reached 73%. It is up by 2 percentage points on a year-on-year basis. IFI funding, that includes both senior and sub loans is around GEL 1.9 billion. That is 8% of total liabilities. And our liquidity ratios, both LCR and NSFR continue to be available in regulatory requirements. Here, I also would like to highlight that our LCR on positive basis is 351%. And I would like to conclude with Slide 26 with our promise that [indiscernible] financials of our Uzbekistan business. To start with, I'm very pleased to announce that our Uzbekistan business consisting of our fully digital consumer banking and payment subsidiaries, TBC, Payme turns profitable in Q3 '22. In addition, I also would like to highlight that we expect with, let's say, Uzbekistan Bank itself to be profitable for '23 and throughout the year. For the third quarter, TBC Bank UZ -- TBC NIM was 16.2%, and cost of risk was 7.4%. That provides us very healthy risk-based need. And here, I would like also to announce the midterm targets of our Uzbekistan business. First, it's 30%-plus ROE; second, 5 million MAU; and third, 10% to 15% share in group's net profit. So that concludes my part. Thank you. And I would like to hand back now to Vakhtang. Vakhtang, please?

Yes. Thank you, Giorgi. And now I'd like to finish today's presentation by reiterating our new and logistic medium-term targets and copying our performance in this quarter, again, these targets on Slide #27. Our monthly active users stood at 3.9 million compared to our 7 million new target. Our Uzbekistan banking and payment business generated positive results as Giorgi mentioned in this quarter, and we plan to grow to 10% to 15% of the total gross profit in the medium term. Our loan book grew by 19% year-on-year on constant currency basis against our target of 10% to 15%. Our return on equity was 31%, meaningfully above our midterm target of 20% plus. Also, our cost paid income ratio was 29.9%, meaningfully lower than our medium-term target of below 35%. And finally, our dividend payout ratio was 25% in 2021 and we paid the interim dividend of GEL 2.5 per share in 2022 compared to our target of 25% to 35%. With that, I'd like to invite to ask the questions.

[Operator Instructions] I'd like to remind you the recording of the presentation, along with a copy of the slides and the published Q&A can be accessed via Investor dashboard. And as you can see, we've had a number of questions come through throughout today's presentation. If I may, I'll just start off with reading the first one out. What risks do you face with such a large market share in Georgia? How do you manage this? And any potentially bad debt risk?

Maybe I will try to answer this question. So this year, we have 30th year universally in Georgia as a TBC Bank. And we have a brand, we have a very strong brand. So everybody knows TBC in Georgia, and we built our brand and market shares in every segment year-over-year. So already for 30 years. And for example, in the retail, as I already mentioned, we have a very strong brand. We have a very customer-oriented products. We are doing very well in the technologies in the digital products. If you go to the corporate SME businesses, we are trying to be long-term partners to our renew sized businesses to our corporate customers. So in every segment, we have a special strategies, and we are implementing in the long term. And as a result, as the [indiscernible] may be single question, so we have market shares in the different way. So from 35% to 40%.

And maybe I will cover on the debt risk cost. That's the second part of the question. And one thing to add to what Vakhtang said. Georgian market is a bit specific because [indiscernible] own 80% of the market, [indiscernible] only has 6% share. Therefore from market actually perspective, given the market structure, we don't foresee any change in future. And maybe Georgia market specifics. So on [indiscernible] side, we have a very strong underlying standards. We are quite like a strong risk appetite and we monitor our customers very carefully. Even during COVID year, we are very prudent and very conservatively, the cost of risk was around 2% like cost of risk. However, once COVID ended, that showed the resilience and strengths of our portfolio. Customers have fully paid their loans, and we had a quite a large, I would say, recoveries last year. And therefore, given our portfolio of structure, our credit characteristics, that's why we say that for the bank, cost of risk is around, let's say, 100 basis points that we are now, and we don't expect any material change from that level.

Especially here is how sustainable are the growth rates? Obviously, you mentioned 55% here, which is fantastic, but how sustainable are they?

That's a very good question. Probably, this quarter and maybe next few will be something like a -- I would say, headwinds like let's say supporting from a fixed income because Georgia market has seen some volatility both on wholesale side and retail side that also helped us and 55% might be difficult. However, despite we have a very strong growth projections. As I mentioned, our targets are 10% to 15% loan growth probably near future, it is higher end and even higher. And we mentioned 20% plus ROE. That would say that it will be probably 20% fuel plus ROE. We are going to target. And that will be supported by our strong NIM and noninterest income because on NIM side, 96.3% in like near to medium to future, we don't anticipate to change much. We target to remain at least at 6% [indiscernible] for the foreseeable future and noninterest income, which expected to continue at least 20% to 25% growth to continue. I already mentioned the cost of risk around 31% and plus our uses Uzbekistan business is also going to fuel the growth. So as I mentioned, next year, the banks will also become a profitable business. Uzbekistan is also profitable and that will support our growth and, let's say, profitability even faster.

We touched on the digital bank. Obviously, it's been a huge success question here saying it's been a huge success. How do you replicate this to countries, other jurisdictions. The same applies for Payme what's really driving that growth?

You see, first of all, the country because Uzbekistan is very interesting for us, if you take only this population, the growth of the population 2% every year, and the market is underpenetrated. So the first driver is the under penetrated market with growth potential there. And also same as in TBC very well-known we in Georgia. Payme has a historic market as a Payme for the -- it's very well known. On Uzbek market, we have a very strong plan, and we are bringing new products. And we are trying to be very customer-oriented there and by these new products, we are trying to grow. And as we already made presentations here, it showed that year-over-year, we have very high growth first in the number of the customers and also in the number of the transactions.

And one of the points that I would like to add here is that we had our team the last week. Hopefully, if you did not dial-in all the materials on our website, that shows actually our detailed strategy, how we are going to succeed in Uzbekistan, including Payme. We have actually letting put super up. So I'm not going to a very, let's say, details here. But if you have a look at our website, it provides our detailed strategy breakdown.

That's great. Another question here for , which is 3 questions. I think one of which we just covered off asking is this growth sustainable? The second part of that is, will you make increasing dividend payments and the third part, how you actually grown those active users so quickly?

Maybe I'll start. So like, if you think from our capital allocation perspective, we have 3 major pillars. One to support our growth in Georgia, that will be probably more or less with the nominal GDP growth, but it will be about 10% tend to feel like that level. So we need to support that and we have sufficient capital to support. Second point, we need to support our Uzbekistan business growth. And here to [indiscernible]. First, we need to support our Uzbekistan bank growth that we have kind of, I would say, very high plant for them. And second point for Uzbekistan is that at the moment in Payme, we have minority shareholders own 49%. We have an auction next year that we are going to exercise. And for that and it will happen not in a distance future, probably in 2Q next year. And for that, we have -- we need capital and we have capital. And third, we, of course, need to pay our shareholders back. And we also have more than sufficient capital for that and to guide you how we are thinking about this. Currently, our dividend payout ratio is 25% to 35%. Last year, we paid 25%. However, if you compare our interim dividend in September, that was materially higher than last year's interim dividend. Probably is least the direction of tell that our dividend payout ratio, most probably is actually intended to go about 25%. That was last year, we need to see. But from interim dividend, that was kind of the direction. And like I would say, it's mid that range -- probably in the middle of the range would result in a very healthy, like even with the current share price, up to 9% to 10% dividend yield. So as the banks grow through, as we support our growth plans in Uzbekistan. Of course, we can look at our GPR, how it will evolve. But nowadays, I would say that we will pay very healthy dividends shareholders. It's like again, 9%, 10% yield. And we will grow not only in Georgia but in other say, countries and markets.

Thank you very much indeed then. That actually concludes all the questions that we've had through. So thank you for that. Of course, any further questions that do come through from investors today, the company will have the opportunity to review those questions more, and will publish responses where appropriate to do so on the Investors company platform. Vakhtang, before we direct to investors to provide you with their feedback, which is particularly important to you and the team. If I can just ask you for some closing comments, please.

Yes. So from our side, so thank you very much for participating. And Giorgi already mentioned. So we have a very robust results in the third quarter, and we will continue to deliver it. And as we've already mentioned in our presentation today and on our CMD we updated our medium-term targets. So now we have more ambition plans to increase number of monthly users. So we have to do much more in Georgia. We have to do much more in Uzbekistan. And I think as a management, we are ready to deliver much more.

Fantastic. Thank you Giorgi, thank you again, for updating investors today. May I please ask investors not to close the session. You should be automatically redirected to provide you feedback in order the management team could better understand your views and expectations. This will only take a few moments to complete and it's greatly valued by the company. On behalf of the management team of TBC Bank Group PLC, we would like to thank you for attending today's presentation. Thank you, and good afternoon to you all.