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

Dear, ladies and gentlemen, thank you for joining our fourth quarter and full year 2022 financial results conference call. I'm Anna Romelashvili, Head of Investor Relations at TBC Bank. The presenters today are Vakhtang Butskhrikidze, CEO of the group; and Giorgi Megrelishvili, the CFO. We will start today's call with a short presentation and provide an update of our financial and business performance. We will also briefly discuss the recent macroeconomic developments in the country. After the presentation, you will 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 to review our fourth quarter and 2022 full year results. Despite regional challenges, it has been an exceptionally successful year for our group, and I'd like to walk you through our main achievements. As already announced in the fourth quarter, we incurred one-off tax charge in the amount of GEL 117 million, related to changes in the Georgian taxation model. I'd like to highlight that during the presentation, I will refer to our underlying performance adjusted for this given tax charge. I will start my presentation from Slide 3, which summarizes our key achievements for the year. Last year, the group generated an excellent return on equity of 29.9%. Our CET1 ratio also remained very strong at 15.5%, which is around 3.7% [ greater than ] minimum required level. We also continue to be the most well-capitalized systemic bank in Georgia. At the same time, our balance sheet growth was impressive with loans increasing by 16% and deposit rising 31% both on the constant currency basis. I'm also delighted with the performance of our Uzbek operations, we generated positive returns on the back of the high growth. The net profit amounted of GEL 8 million in 2022. It is important to highlight that return of equity of our Uzbek operations reached 27% in a seasonally strong fourth quarter while it stood at 6.5% for the full year of 2022. For this year, we expect it to be around 20%, which would mark a great year-on-year progress. Also, share of TBC UZ Bank in our total retail non-mortgage loan book already reached 12%. This gives us a great platform to build from this year and beyond. Meanwhile, a digital user base continues to grow with digital daily active users reaching 1.4 million by end year and digital [indiscernible] users at 3.8 million. Before I review our performance in more detail, let me provide you with a brief update on the recent macro developments in Georgia. In 2022, GDP growth reached double digits in Georgia, despite the adverse impact of the war in Ukraine. Also, inflation started moderating in the second half of the year dropping below 10% by year-end. And at the same time, the lari appreciated by almost 15% against the dollar, making it one of the world's best performing currencies throughout the last year. And finally, last year, we saw an accumulation of the central bank reserves and the improved fiscal positioning. The next slide further shows Georgia solid economic fundamentals. In contrast to sluggish growth in the region, the Georgian economy had grown over 10% last year. And for this year, we expect a modest slowdown to 5%. It's also important to note that there has been further improvement in the net balance of the trading goods as well as increased inflows from tourists and remittances. These inflows remain very diversified across different regions with the European Union as the largest contributor. The next slide shows the -- how Georgia's robust economic reforms has been reinforced by easing inflation and growing monetary and fiscal buffers. As already mentioned, inflation ended the year below 10%, and we expect it to fall further in this year. In 2022, we also saw a strengthening of our international reserves and the positive dynamics in both fiscal deficit and public debt-to-GDP ratio. The former narrowed to 3.1% in 2022, while the public debt-to-GDP ratio fell to 40%. Now let's move to the next slide, and I'm proud to reiterate our leading position in Georgia and once again to emphasize our huge growth potential. Our strong market position in Georgia and financial service sector gives us a solid base of steady growth and solid profitability. At the same time, our digital ecosystem team is helping us build customer loyalty and engagement. Finally, we see huge potential in expanding our Uzbek operations through our banking and payment subsidiaries. By the end of this year, the number of our registered users in both geographies reached a seasonable 17.6 million, out of which 4.4 million we are monthly active users. Moving to Slide 9, you can see our leadership positioning across all the major segments in Georgia. The main point here is that in 2022, our loan book growth was mainly driven by retail and MSME loans, while deposits grew across all segments. Next on the Slide 10, I'd like to briefly summarize our fourth quarter and full year financial results. In fourth quarter, our net profit increased by 70% year-on-year, reaching GEL 336 million, while the full year earnings grew by 38% to record GEL 1.1 billion. This earnings growth was driven by strong income generation across the board with a large contribution from noninterest income. Our return on equity in the quarter stood at 33.6%, while for the full year, it was 29.9%. On the next slide, I'd like to highlight some of the positive developments in our digital ecosystem, TNET. As already mentioned, we held the largest digital ecosystem in Georgia, consisting of 4 verticals: lifestyle; housing; auto; and e-commerce. Last year, we had 1.9 million unique annual visitors across all verticals, equivalent to 67% of the adult population of country, which accounted for around 40% of the Internet traffic among with Georgian websites. The next slide dives into a bit more detail on our digital ecosystem. Last year, our key operating metrics grew very nicely. Total gross merchandise volume increased 4x, reaching GEL 103 million. At the same time, the synergies with our core financial services are growing. The number of leads more than doubled to over 300,000 and 5% of TBC's retail loan disperse. Last year, we generated from [ teen athletes ], a result we are very pleased with. As our ecosystem business continues to grow, we expect it to generate an increasingly meaningful contribution to our fee and commission income as well as supporting our loan book growth. Next slide highlights the excellent growth of our payment business in Georgia, which is a significant driver of our net fee and commission income. Last year, the number of POS transactions and transactions with TBC card increased by around 30%. And according to the latest update from the VisaNet, Georgian banks ranks #1 in contactless payment penetration globally, and we are proud of our substantial contribution to these outstanding achievements. Slide 14 highlights the increasing digital engagement of our customers. Last year, our group's digital daily active users grew by more than 60% year-on-year to 1.4 million, while the number of monthly active users rose by almost 50% to 3.8 million. Our transaction of loan in ratio of 99% means that only 1% of all transactions are conducted in branches. In addition, the share of consumer loans and deposits also sold remotely remains high end, stood at around 70% by the end of the last year. Now it's my pleasure to provide some more color on the rapid growth and significant milestones achieved in our Uzbek banking operations. By the end of December, the number of registered users for our TBC UZ Bank application reached 2.4 million. While monthly active users, we have 400,000 both substantially up compared to the previous year. Our retail loan and deposit books continued to grow strongly according -- accounting for 1.4% and 2.2% market shares at year-end. And I'd like to draw your attention to the top right chart, which, for the first time, we show the key quarterly financial metrics of TBC UZ Bank. As you can see, revenues are growing well and the business is close to the breakeven point. Finally, on the Slide 16, I'd like to highlight the excellent performance of our payment subsidiary, Payme, which is the second largest payment provider in Uzbekistan. Last year was a great year for Payme, as this number show the number of daily active users and monthly active users grew by 150% and 56%, respectively, with the former hitting 1 million customers. The number of merchants also increased by 22% year-over-year. And I'd like to highlight that in fourth quarter, net profit more than doubled year-on-year to almost GEL 13 million. Now I would like to hand over to Giorgi. Giorgi, please.

Okay. Thank you, Vakhtang. Now I would like to present our very strong financial performance for Q4 and '22. As Vakhtang already mentioned, I will discuss our performance on an underlying basis, adjusted for one-off tax change. But people, I go through our excellent financial results. I would like to briefly address the updated treatment for our options for Uzbekistan subsidiaries. I think a few key points are worth mentioning. The first of all, we reassess this treatment in light of the upcoming call option on Payme due in Q2 '23. We have very standard put and call options in our shareholder contracts with Payme's founders and EBRD and IFC who are our bank's partners as we previously said to the market. According to IAS 32, we are required to recognize the put options for noncontrolling interest and CIS liabilities. And the startup actually assumes that they will definitely be exercised into. That rate applies just because we control both Payme and TBC UZ Bank for consolidation purposes. We should only recognize this effect at the holding company level as the counterparty is the holdco, not a Georgian JSC. In effect, the Georgian [indiscernible] is not part of these deals. And as you can see from the results, there is no impact on its capital and already healthy capital position and ratios. I want to highlight that what is booked is not fair value of the option. The put option, for example, for Payme is out of the money and call option in the money. The standard actually requires recognition of the discounted exercise price as a potential liability, which is not fair value of the options, I want to reiterate again. Given the options related to [ACI ], 3 of fair value can't be booked in P&L. Otherwise, the group would have actually already recognized a gain on its Payme call option, for example. In case of Payme, as mentioned, the put option is heavily out of the money, meaning that it is almost certainly not to be exercised. While our call option is heavy in the money. When we acquire the remaining 49% that we intend in Q2 '23, the put liability on the payment transaction will unwind. There will be no material part equity impact, as we already booked for the equity impact of this acquisition now. I would like to highlight just because Payme is a consolidated company, we are booking through less equity. Otherwise, if it were an external company, the treatment would be just booking goodwill of the books. A critical point to bear in mind is that we fully expect the purchase of the remaining 49% stake in Payme to be value positive from day 1. The market value of the business is materially higher than the option exercise price. And as the result shows the business is performing extremely well. In the case of TBC UZ Bank, the earliest possible exercise date in '27. So, that portion of the put liability will remain on the balance sheet as then being revalued on a quarterly basis, probably we don't expect material impact. If it increases, it means that business doing greater. The 3 put option is not exercised, it will reverse, but if we exercise the treatment will follow exactly the same logic as I just described for payment. I would also like to stress that this treatment has absolutely no impact whatsoever on our group P&L nor on our Georgia bank capital or capital ratios. In addition, there is no impact on group's let's say ability to pay dividends or pursue its current growth plans. Indeed, we intend or for subject to Board and AGM's approval to increase our dividend payout ratio for '22 relative to last year's 25% to be communicated in due course. I hope that this clears up some potential pressure. And of course, I'm more than happy to take any further questions later in Q&A. Now I will go back to show our fantastic achievements for '22, and I'll start with Slide 18. First of all, I would like to say that we are very proud of what we achieved for this year. It has been yet another very successful one for us. Our ROE remained stable quarter-on-quarter at very solid 33.6%, and net profit was up by 5% to around GEL 337 million. For the full year '22, net profit increased by 38% year-on-year with a record just over GEL 1.1 billion, while our full year ROE stood at 29.9%. Now I would like to move to Slide 19 and discuss the main drivers of our profitability. In Q4 post NII and noninterest income have continued to perform extremely well. Our NIM stayed stable quarter-on-quarter at very robust 6.3% in Q4 and was up by 95 basis points year-on-year. This strong growth was mainly driven by loan yields, composition effect and very disciplined balance sheet management. With TBC Uzbekistan contributing now 20 basis points, as you can see on this slide, which we are really, very pleased to see. Our noninterest income was broadly stable quarter-on-quarter, while net fee and commission income was up by 11%. Noninterest income on annual basis more than doubled with 118% growth. Key drivers being strong FX gains as to very strong 74% increase in our net fee and commission income, driven by growth of our payment business. Now let's move to Slide 20 to review our costs. In Q4, our cost went up by 40% on a quarterly basis just to a general, let's say, seasonality that we see every year, while year-on-year increase was related to the overall expansion of our business as we remain in growth mode in a number of areas. However, the most important fact is that our income continues to grow at a much faster rate, resulting in a decrease of our cost-to-income ratio to 33.2% in Q4 '22, compared to just above 40% last year. Also for the full year '22, our cost-to-income ratio stood around the same range, 33.4%, an impressive 4.2 percentage points decrease year-on-year. Now moving on to Slide 21 that underlines our strong asset quality. NPL decreased both quarter-on-quarter and year-on-year across all segments and stood at 2.2% at year-end. Total provision coverage stood also at very robust 156%. In Q4, cost of risk decreased to 0.6%, mainly driven by better macro assumptions and strong performance of the portfolio. Consequently with full year '22, the cost of risk ended at 70 basis points. Only following Slide 22, I'd like to show very briefly performance of our portfolios because we have not already covered them. Our loan book grew by 16% year-on-year on a constant currency basis, mainly attributable to retail and MSME. And over the same period, our deposits grew by 31%, spread more or less across the segments. Now let's move to Slide 23, where you can see our very solid capital positions. Our capital ratios remained at a very prudent level at December '22, well above the minimum regulatory requirements for all years. Our CET1 ratio increased by 20 basis points quarter-on-quarter, mainly driven by net profit. That shows the strength of our franchise to generate capital through its organic growth. On Slide 24, I would like to talk about the transition to the IFRS-based capital compliance that many of you asked before, starting from the first of January, per NBG's new regulation. The banks need to comply with IFRS-based capital requirement. So technical details are on this slide, so I won't go into there. However, it's important to highlight that the transition was broadly capital neutral, positive for CET1 and Tier 1 capital with slightly decreased in total capital. The good side also, 1 of the good side is that going forward, we won't need to explain to you the differences for our capital ratios between local and IFRS regulatory basis. While this will clearly show our capital spreads at a comparable basis with other banks globally. The bank retains very strong capital ratios, as I mentioned, on IFRS basis, well above the regular requirements. For example, our CET1 ratio is 18% plus. Now on Slide 25 that shows our liquidity and funding position as the share of customer deposits in total liabilities stood at 72%, more or less constant compared to previous quarter, while IFI funding, it will be senior and sub loans, was 8% of total liabilities. And our liquidity ratios, both LCR and NSFR continue to be well above the regulatory requirements. Now Slide 26, where I would like to highlight the financial -- I would say, fantastic financial performance of our Uzbek business. I'm very delighted to reiterate Uzbek operations is profitable for '22, as Vakhtang already highlighted, generated GEL 8 million in net profit, while ROE reached 27% in Q4. The quarter was elevated by Q4, let's say, seasonality. However, we expect to generate around 20% ROE this year, meaning that we are well on track to hit our 30% plus ROE target sooner rather than later. As Vakhtang already mentioned, our Uzbekistan Bank approached breakeven in Q4, but I'm also very pleased to have -- actually, it was profitable in January already. Therefore, we are on track for this as well. In terms of financial measures of TBC UZ Bank with TBC Uzbekistan Bank NIM stood at 17.2% for Q4 and cost of risk was 7.6%. As Uzbekistan Bank was startup mode in H1 '22, Q4 numbers are a better assessment of what we can expect going forward for NIM and cost of risk. And I would like to mention also would have some upside potential. I would also like to reiterate the midterm targets of our Uzbek business. 30% was ROE, probably few pluses, not only just 1, 5 million monthly active users and 10% to 15% share in group's net income. So on this note, I will conclude my part and hand over back to Vakhtang. Thank you.

Thank you. And now I'd like to wrap up today's presentation by reiterating our new and existing medium-term targets and comparing our performance in 2022 against those targets. Our monthly active users stood at 4.4 million compared to our 7 million target. Our Uzbek banking and payment business as Giorgi mentioned, generated positive results in 2022, and we have a plan to grow it to 10% to 15% in our total gross profits in the medium term. Our loan book grew by 16% year-on-year on a constant currency basis against our target of 10% to 15%. Our return on equity was 29.9%, meaningfully above our medium-term target of 20% plus. Our cost-to-income ratio was 33.4%, lower than our medium-term target of below 35%. And finally, our dividend payout ratio, as you know, is targeted 25% to 35%. And last year, we already paid an interim dividend of GEL 2.5 per share and launched a share buyback program with the value of GEL 50 million. And now it's the last part of our presentation. And now I'd like to invite you to ask the questions.

Thank you, Vakhtang. [Operator Instructions] So the first question comes from Robert Sage.

Yes. I have 2 questions, if I may. The first question relates to capital. When -- and I'm really looking at the new IFRS sort of based sort of capital ratios that you've shown us where the headroom, as you say, has remained very high over and above your minimum requirements. And I was just wondering at this stage because my modeling sense does suggest that you continue to generate sort of excess capital, at what sort of type of level we should expect to see you moving into capital distribution mode? Is there a particular level of CET1, a target level perhaps where we might be able to begin to calibrate when, say, buybacks or enhanced dividends might be sort of come into the frame? The second question, entirely unrelated is just in terms of the net interest margin, I was quite struck by the fact that the Uzbek operation contributed 20 basis points to your group margin in 2022. And looking forward into 2023, given the fact that your Q4 margin was stable in Q3. Do you think that there's potential for this to move higher given the impact of Uzbekistan as that sort of grows in materiality terms within the group?

Thank you, Rob. I'll take both questions. Our capital position is indeed very strong. And as I highlighted during my presentation, our intention to move up higher from 25% that we paid last year, subject to Board and AGM approval. At the moment, as I highlighted a few times, we have a few capital directions. It's to support our robust loan growth in Georgia to support our Uzbekistan business, and we have upcoming payment deal in Q2 that we intend to exercise and Uzbekistan bank needs to grow as well. And in addition, we are going to increase our dividend payout, as I highlighted, capital, of course, we generate sufficient amount of capital. We've always been looking how to best distribute those capital back to our shareholders. As Vakhtang mentioned, we last year completed buyback this year, it was part of our official capital distribution policy. But during the year, we will reassess what's the best use of the capital, whether it be dividends put in gross loans, but what I can promise our shareholders will be happy with the, let's say, return they will get. And the other part of this question is that what buffers do we intend. Currently, it's quite a significant uncertainty around the region, and we are keeping a bit higher buffer. But usually, we intend somewhere like maybe it depends on the currency and 1.5% maybe somewhere 1.5% to maximum 2% of the buffer or reg minimum, that will be our target, depending on the situation in the medium term. Hopefully, that covers the first part of the question. On net interest margin, indeed, we saw our margin to stay stable. And going forward, we expect loan composition to contribute [indiscernible]. We continue our disciplined balance sheet management and Uzbekistan to contribute more. There may be some headwinds for reference rates coming down that probably will be slower than we initially expected. But despite that, we probably see some upside here to be honest, like maybe 10% or 20% basis points more. So we should be like thing that -- so it's not a tough if kind of from our side, 6.3%.

[Operator Instructions] And we have a question coming from Simon Nellis.

Thanks very much for the opportunity. I guess, 2 things. Could you just give a bit of an outlook for each of the key P&L line items and loan growth, that would be helpful. I guess, just fees outlook for FX operations given that, that's kind of uncertain OpEx and risk cost and loans. And then second, just on the buyback. So can you just run through exactly how much you've bought back, if there's anything else left? It doesn't sound like there is. And I was looking at your share count, it doesn't seem to have changed much despite the buyback. Why is that?

Okay. Let me start with the second question because the first one is [indiscernible]. So we almost completed GEL 50 million, maybe a few hundred thousand are remaining. So -- and all the strategies are not certain because we have become an exact probably we can come back, but it should be adjusted at the moment. But we definitely bought [indiscernible] I can assure. So on the key P&L line, I already provided our expectation for the NIM. And the second component of the NII is loan for growth. Probably this year was a bit at higher end with the GDP growth. We expect GDP to slow down even the very strong increase for the last 2 years, 10% plus. So probably, we should land between our 10% to 15% of loan growth maybe somewhere in the middle. So that will be our expectation for Georgia. However, we are going to increase our loan booking is a piston as well and the ARPU, we target to lend at a higher end overall for the group, if not surpassing that. That is on the NII side. On FX, really, it was certain one-offs, but I would like also to reiterate that it was not only one-off our strength of our treasury FX business has increased significantly. And I would say that what we saw probably in '22, 65%, 70% may remain as a BAU mode. Therefore, we should expect still quite a good support from FX income going forward. Therefore, it's a one-off maybe around 30%. On net fee and commission income, we always provide guidance that we would like to grow at least 20% up to 25%, but we always are past it. So we hopefully, our guidance remain 20%, 25%. But we do hope that we, again, overachieve this target. And on cost side, probably we -- as I mentioned, we remain in a growth mode. The inflation was there last year as well. We increased our key net increase in Uzbekistan, there for probably somewhere around 20%. We should still expect our cost growth However, we need to know that we do target to increase income like at around same level. And our cost-to-income ratio should be around our targeted level like 35%. That's what we kind of on target. And cost of risk, our guidance remains unchanged. We have very strong book. It's around 100 basis points in Georgia that we remain, maybe Uzbekistan adding EBIT up to 10 basis points. But overall, I would say that improve Uzbekistan and its materiality around 110% for the group and for Georgia, around [ 90, 100% ]. So that would be our expectation for '23.

And here comes the question from Can Demir.

I wanted to ask 2 questions on Uzbekistan. So you mentioned Uzbekistan could contribute 10%, 15% of net income. -- is that based on TBC owning 60% of the bank in Uzbekistan or 100%. So I just wanted to understand that. And maybe you could also disclose how much equity there is in Payme so that we understand how much capital is deployed there in Uzbekistan. And maybe also talk a bit about the cost of capital there, so we can gauge it. we can get a sense of it against your ROE. Thank you very much.

I think cost of equity for Uzbekistan is not much higher than for Georgia. And if you look at all and all this, they are more or less equivalent therefore at the moment. I think it's like around 20%, if I remember correctly, I don't want to mislead you. The Payme capital is actually not much, I would say. It is -- like it's a capital liability business. Therefore, we should like expects to generate quite high ROE. At the moment, I don't have exact number at the top of my hand, but we will publish it for everyone to see, not to mislead you. And for 10% to 15% initially, extra, we expect it's the entire Uzbekistan to generate, but we need to keep in mind that Payme, we are going to acquire Payme entirely. And again, we are targeting to usually over-surpass our target going forward. Vakhtang, is there anything you want to add?

No, just to add that, yes, it's a medium term -- medium term, we mean '25 in the 2 years period. And also just when we bought Payme 3 years ago, it was existing business. But as a bank, we began our operation 2 years ago. And as we mentioned already, we are in January, we became profitable already after 2 years of the operation. So this year, our Uzbek bank will be profitable and probably in 2024. It's already generating the profit just to give more profitability to our group's also. So 10% to 15% is realistic that as Giorgi's saying, all time we outperform our targets. So we believe that we will do much more into businesses in Uzbekistan that we are going for.

Yes. I actually meant to ask about the banking business in Uzbekistan rather than Payme because I know you will acquire probably 100% of it. So I was wondering if you're assuming you would own 60% of it in 2025 or 100% of it when you say the Uzbek operation will account to 10% to 15% of net income?

So the UZ Bank are indeed all net maximum 60%, it's around GEL 80 million of capital, and the option will be excess like the exercise date is 27%. But again, this exchange and we need to kind of see how the situation goes. But at the moment, 60% is basic assumption.

Okay. Okay. Understood. Can I ask one last question about this redemption label, which I think ruffled the feathers a bit in the market, just so that I understand clearly. So if you bought Payme today outright 100%, obviously, that would of course the goodwill, which we would have deducted from tangible equity. And we would have said, "okay, this is a return on tangible equity of the bank. This is a tangible equity, and we would do the math in accordance with that." And now because you cannot book goodwill, you just deducted the amount that you would pay over the book -- and as a result, nothing actually changes at the bottom line for you, right? I mean...

It's a very good summary indeed. So because we have noncontrolling interest mine to shareholders per IFRS standards, all the impact should go through equity measurement. But if payment we extend our company and we would have what we would have booked goodwill. Because at the moment, book value of Payme is small, exercise price is much higher, therefore, the comes goodwill. But 1 key point, the fair market value of the Payme is also much higher than the exercise price. Therefore, it will generate even more benefit for the group. And you can see from the numbers its performance.

Of course, of course. I was just focusing on the immediate accounting impact and how we would have gone about it if you acquired 100%. I'm just trying to...

That's correct. Yes. For example, if we any external company set to pay over book value, we will just look at it as good will. But given we already have controlling interest, we just need to follow what standard requires. So from growth perspective, nothing changed. You are right. .

Thank you, Can. Let's wait if there are any more questions. [Operator Instructions] It seems that we have covered all the questions. So thank you very much once again for joining our call.

Anna we have one more question. On the funding on Payme, you can probably show our surplus capital that we have, it's more than enough to exercise Payme [indiscernible], so...

Yes. Maybe I will summarize. So thank you very much for the participants. And once more, I will reiterate that 2022 was a very successful year for TBC Group. And as we mentioned already, our profitability was around 30%. It will be continued this year. And I think it was also very successful, and we are continuing our strategy, diversifying our portfolio 3, 4 years ago, we had business in Georgia. And today, at the end of the last year, as I mentioned in my part of the presentation, daily active users in December, we had 1.4 million and monthly active users around 3-point -- how much, 3.8 million. So it's more than the population of the country. So we will continue to work in that direction, and I believe that in 2023 where we will have better results. Thank you once more.

Thank you, again.