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

Good afternoon ladies and gentlemen, and welcome to the TBC Bank Group PLC Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, I would like to submit the following poll, and if you could give that your kind attention, I'm sure the company would be most grateful. I'd now like to hand you over to the executive management team from TBC Bank Group PLC, Vakhtang. Good afternoon, sir.

Good afternoon, and thank you, [ Diego ]. 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. I will start the presentation from Slide #3, which summarizes our key achievements for the year. Last year, the group generated an excellent return on equity of 26.5% despite the [ high off ] tax charge in the fourth quarter relating to changes in the tax model. Without the one-off charge, our return on equity would be 30%. Our CET1 ratio also remained very strong at 15.2%, which is over 3.5 percentage points above the minimum required level. We also continued with the most well-capitalized systemic bank in Georgia. At the same time, our balance sheet growth was impressive with loans increasing by 16% and deposits rising 31%, both on a 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 to GEL 8 million last year. It is important to highlight that return of equity of our Uzbek operations reached 27% in the seasonally strong fourth quarter, while it stood at 6.5% for a full year 2022. For this year, we expect it to be around 20%, which would make great year-on-year progress. Also, share of TBC UZ loans in our total retail nonmortgage loan book already reached 12%. This gives us a great platform to build from this year and beyond. Meanwhile, our digital user space continue to grow with digital daily active users reaching 1.4 million by the year-end and digital monthly active users 3.8 million. Before I review our performance in the more details, let me provide you with a brief update on the recent market developments in Georgia. Last year, GDP growth reached double digit in Georgia despite the adverse impacts 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 1 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 position. On the next slide further shows Georgia's solid economic fundamentals. In contrast to sluggish growth in the region, the Georgian economy has grown over 10% in 2022. And for this year, we expect a modest slowdown to 5%. It is also important to note that there has been further improvement in the net balance of trading goods as well as increased inflows from the tourists and remittances. These inflows remain well diversified across different regions with European Union the largest contributor. The next slide shows how Georgia's robust economic performance 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. Last year, we also see a strengthening of our international reserves and positive dynamics in both fiscal deficit and public debt-to-GDP ratio. The former narrowed to 2.8% in 2022, while public debt-to-GDP ratio fell to 40%. Now let's move to the next slide, and I am proud to reiterate our leading position in Georgia and once again to emphasize our huge growth potential. Our strong market position in Georgian financial service sector gives us a solid base of a steady growth and solid profitability. At the same time, our digital ecosystem, TNET, is helping us with customer loyalty and engagement. Finally, we see huge potential in expanding our Uzbek operations through our banking and payment subsidiaries. By the end of the year, the number of our registered users in both geographies reached a sizable 13.6 million, out of which 4.4 million were monthly active users. Moving on the next slide, you can see our leadership positioning across all 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. On the next slide, I'd like to briefly summarize our fourth quarter and full year financial results. In the fourth quarter, our net profit increased by 5% year-on-year, while the full year earnings grew by 22%. This earnings growth was driven by strong income generation across the board and with the large contribution from our noninterest income. Our return on equity in the quarter stood at -- [indiscernible] adjusted return on equity was more than 33%. On the Slide 11, I'd like to highlight some of the positive developments in our digital ecosystem, TNET. As already mentioned, we have large 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 the Georgian websites. Next slide dives up into a bit more detail on our digital ecosystem. Last year, all 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 the TBC's retail loan disbursement last year we had generated from [ TBC ] leads, 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. The number of POS transactions and transactions with TBC card increased by around 30%. According to the latest update from the VisaNet, Georgia ranks #1 in contactless payment penetration globally, and we are proud of our substantial contribution to these outstanding achievements. Next slide highlights the increasing digital engagement of our customers. Last year, our group's digital daily active users grew 61% year-on-year to 1.4 million, while the number of monthly active users rose by 50% to 3.8 million. Our transactions offloading ratio of 99% means that only 1% of all transactions are conducted in branches. In addition, the share from consumer loans and deposits sold remotely remains high and stood at around 70% by the end of the 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 previous year. Our retail loan and deposit books continued to grow strongly, accounting for 1.4% and 2.2% market shares at year-end. And I'd like to draw attention to the top right chart, which, for the first time, we show the key quarterly financial metrics of TBC UZ Bank. And as you can see, revenues are growing well and the business is close to the breakeven point. Finally, on the next slide, 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, and this number show the number of daily active users and monthly active users grew by 77% and 60%, respectively, with the former hitting 1 million customers. The number of merchants also increased by 22% year-on -- over-year. And I'd like to highlight that in fourth quarter, the net profit from -- then doubled year-on-year to almost GEL 13 million. And now I'd like to hand over to Giorgi.

Thank you, Vakhtang. And now I would like to present our very strong financial performance for Q4 and '24 -- sorry, '22. As Vakhtang already mentioned, I will discuss our performance on an underlying basis adjusted for one-off tax charge. And I will start with Slide 18. First of all, I would like to say that we are very proud of our results for this year. It has been yet another very successful one for us. Our ROE remains stable quarter-over-quarter at very solid 43.6%, and net profit was up by around GEL 337 million. For the full year '22, net profit increased by 38% year-on-year to a record high, just over GEL 1.1 billion. We are fully -- ROE stood almost 30%, 29.9%. On Slide 19, I would like to discuss the main drivers of our profitability. In Q4, both NII and noninterest income have continued to perform extremely well. Our NIM stayed stable on quarter-over-quarter at very robust 6.3% in Q4 but was up by 95 basis points year-on-year. This strong growth was mainly driven by loan yields, compositions and disciplined balance sheet management. And now we see that TBC Uzbekistan contributing to 20 basis points, and we are very much pleased to say that. Our noninterest income was broadly stable on a quarterly basis, while net fee and commission income was up by 11%. Noninterest, we have more than doubled year-on-year with 118% growth, key drivers being strong FX gains and strong 34% increase in net fee and commission income, driven by growth of our very strong payment business. Now I will move to Slide 20 for a review of our costs. In Q4, our cost went up by 40% on quarterly basis due to general seasonality that we see for the last few years, 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 key point is that our income continued to grow at a much faster rate, resulting...

Giorgi, we lost you.

Also, for the full year '22, our cost-to-income ratio stood at 33.4%, an improvement of 4.2 percentage points year-on-year. Now I'd like to move to Slide 21 that underlines our strong asset quality. Our NPL ratio decreased both quarter-on-quarter and year-on-year across both segments and stood at 2.2% at year-end. Total provision coverage also was very strong at 156%. In Q4, cost of risk decreased to 0.6%, mainly driven by improvement in macro and the strong performance of the portfolio. Consequently, for the full year '22, our cost of risk was 0.7%, very strong, let's say, result, I would say. On the following Slide 22, I would like to show you the performance of our portfolios. Our loan book grew by 16% year-on-year on constant currency basis, and Vakhtang already mentioned, was mainly driven by retail and MSME. Over the same period, our deposits grew by 31%, spread across the businesses. Now moving to Slide 23, where you can see our solid capital position. Our capital ratios remained at very prudent levels at -- as of December '22, well above the minimum regulatory requirements for all tiers and CET1 ratio increased by 0.2 percentage points quarter-on-quarter, driven by net profit generation. Now to continue the capital topic on Slide 24, I would like to talk about the transition to the IFRS-based compliance. Starting from 1st of January '23, per NBG's new guideline, the banks need to comply with IFRS-based capital. The technical details are given on this slide, so I won't go into the details. However, it's important to highlight that the transition was broadly capital neutral, positive for CET1 and Tier 1 capital while slightly reducing our total capital. But on the positive side going forward also and as a positive is that, going forward, we won't need to explain the differences for our capital ratios between local and IFRS regulatory basis, while this will clearly show our capital strength on a comparable basis with other banks globally. As you can see on IFRS basis as well, we are well above all the regulatory requirements. For example, CET1 is 18% plus. Now Slide 25 that shows our liquidity and funding position. The share of customer funding in total liabilities stood at 72%, more or less stable for the last 2 quarters, while IFI funding, including senior and sub loans, was 8% of total liabilities. 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 performance of our Uzbek business. I'm delighted to reiterate that our Uzbek operations is profitable for full year '22, generating GEL 8 million in net profit, while ROE reached 27% in Q4. The quarter was a bit less elevated by, let's say, seasonality. However, we expect to generate around 20% ROE this year, meaning we are well on track to hit our 30% plus target sooner rather than later. As Vakhtang already mentioned, our UZ Bank approached breakeven in Q4. But moreover, I'm very pleased to confirm that it actually was already profitable in January. In terms of financial measures of TBC UZ Bank, NIM stood at 17.2% for Q4 and cost of risk was 7.6%. As Uzbekistan Bank was in start-up mode in H1 '22, Q4 numbers are a better guideline of what we can expect going forward for NIM and cost of risk, and both have some upside potential. I would also like to reiterate the medium-term targets for our Uzbek business, 30% ROE, actually probably will be few pluses rather than 1; 5 million monthly active users; and 10% to 15% share in our group's net income. Now that's concludes my part. Thank you, and I would like to hand over back to Vakhtang.

And I'd like to wrap up today's presentation by reiterating our new and existing medium-term targets and comparing our performance last year against those targets. Our monthly active users, as we mentioned, stood at 4.4 million compared to our 7 million target. Our Uzbek banking and payment business generated positive results last year, and we plan to grow it to 10% to 15% of the total gross profit in the medium term. Our loan book grew by 16% year-on-year on 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. And our cost-to-income ratio was 33.4%, lower than our medium-term target of below 35%. And finally, our dividend payout ratio target is 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 to be canceled. With that, I'd like to invite you to ask the questions.

[Operator Instructions] But just while the team take a few moments to review those questions that were submitted already, I would like to remind you that a recording of this presentation along with a copy of the slides and the published Q&A can be accessed via your investor dashboard. And guys, as you can see there in the Q&A tab, we have received a number of questions throughout your presentation this afternoon. And perhaps if we just dive straight into it, guys, the first question that we have here reads as follows. What were the key drivers behind the significant increase in digital monthly users? And do you see this momentum continuing?

Maybe I will try to answer, Giorgi, and if you want to add -- so there are 2 drivers. So as we already mentioned in our presentation, we are operating in 2 countries. And last year, we had a very high growth in Uzbekistan. And as you know, we have 2 business in Uzbekistan. First is Payme, where we have a very high growth and monthly we -- the number of the customers are growing very fast. And on the other hand, in 2021, it was just beginning of our journey in Uzbek Bank, but in 2022, last year, we grow our business, so in deposits, in loans and also in the transactional business, so all of that helped us to increase number of the [ customers ] in Uzbek operations. On the other hand, we managed to increase number of the customers in Georgia and these both markets just showed the results, and we are very proud just to have 4.4 million active monthly users in both in Georgia and Uzbekistan.

That's great. The next question that we have here reads as follows. Are there any plans of acquisitions to diversify the customer offering into new products or services?

So how -- see, in Georgia, you know that we are not the only bank. So as if we are a financial provider, the products we sell -- we are offering, we have our insurance business. We have our leasing business. We have our brokerage company, investment banking operations, so we have a full range of the financial products. But as we mentioned in our presentation already, we have the largest technology company in the group. And we are offering different kind of the digital product to our customers, beginning from the entertainment and adding [ by ] the auto and the housing products. So this allows us to have around 1.5 million active monthly users in our different ecosystems. And if you take the reality of the Georgia with a population around closer -- a little bit less than 3.5 million, it means that around closer to half, 50% of the populations -- population of Georgia are users of our different kind of ecosystems in Georgia. So that -- to answer your question, that allows us in Georgia to offer to our customers not only financial products but also to offer different kinds of the digital products. This is in Georgia. But in Uzbekistan, now as we mentioned, we have payment business and banking products. Today, we have retail business, and in the medium term also, we want to develop also micro and SME business.

That's great. And just a follow-on question for [ Michael ], the second question he has says what do you see as the greatest risk to your position in the market.

So firstly, I think there are 2. First of all, if you look on the Georgia operations or the geography, so key risk we see, this is geopolitics and the region in Georgia -- we are operating in Georgia, this is the first. And second, the dollarization of the total banking sector. By that, I mean that less than 50% of the portfolio in Georgian operations we have in FX loss. We have very good trend. So I remember that a few years ago, our dollarization of the portfolio in Georgia was [ about ] 70%. Year by year, we are decreasing that dollarization of our portfolio. But if you ask the main systemic risk, not as TBC but all the Georgian banking sector, that is the dollarization of the total banking sector. But a lot of steps was taken by the government, by the local regulator, by the National Bank of Georgia and the commercial banks. As the TBC, we have a lot of programs, and dollarization is going down. And we believe that in the medium term, we know what to do and that systemic fees will go down.

Just turning on to a question regarding your Uzbek operations. The question reads good to see the progress in the Uzbek operations. But what percentage of revenue do you see this contributing to in the long term?

Giorgi, do you want to answer this question?

Yes. So as we've said, our medium-term target is -- in 3 to 5 years is 10% to 15% as we like disclosed during -- in our targets. And after the medium term, we will see.

Perfect, guys. And perhaps one final question I can see here. Are you affected by regional instability? Why do you do business in Uzbekistan as opposed to other countries?

I remember -- well, why we made the -- when we made decision, it was few years ago and why we made the decision. So there are a few reasons. So first is that the population of the country. The population of Uzbekistan is around 35 million. Second, the average age of the population. The average age of the population in Uzbekistan is very young population. In Uzbekistan, it's around 25 years old. Next is the growth of the population. Every year, growth of the population is about 0.5 million. Next is the penetration of the banking sector in Uzbekistan. We see we have a huge potential for the growth. I will give just only one example. If you take retail and MSME penetration to GDP, it turns less than, as I remember, 12% to 15%. So it means that, for next 3 to 5 years, there will be huge potential for the growth in these segments where we are operating in this country, retail and MSME business. And finally, we believe that the products, especially in retail and MSME, which we sell now, we have know-how and we can export to this very interesting market. Just for you to remember, in Georgia, we have history and we have a legacy, and we are operating with all kinds of -- we are covering all these segments. But in Uzbekistan, we are more technologically driven company. So we have mobile application, and all kinds of the businesses are done through our mobile application. I mean the transactional business, deposits and the loans have disbursed through our mobile applications. So we have not a cash business. We have not ATMs or cashing terminals. But as we presented today to you, you have seen that, successfully, we are developing our Uzbek business.

That's great. Vakhtang, Giorgi, thank you very much indeed for being so generous of your time addressing all of those questions that came in from investors this afternoon. And of course, if there are any further questions that do come through, we'll make these available to you after the presentation, just to review and then add any additional responses where it's appropriate to do so. Vakhtang, just perhaps before redirecting those on the call to provide you with their feedback, which I know is particularly important to yourself and the company, if I could please just ask you for a few closing comments to wrap up with, that would be great.

Yes. Thank you, first of all, for the interest to our company. And just to wrap up, so 2022 was very successful year for TBC for the profitability, for the growth and also to expand our business for -- in Uzbekistan. And we will continue our business in that range, so we believe that, in the medium term, as we see on our slide here just to -- we will continue to be very profitable. We will continue to pay dividends. And all time, what we are saying, I don't remember any year that we don't perform what we are telling to our investors, and we believe that we will perform very well also in 2023.

Vakhtang, that's great, and thank you very much indeed for updating investors this afternoon. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order that the management team can better understand your views and expectations? It's going to take a few moments to complete, but I'm sure it will be 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. That now concludes today's session. So good afternoon to you all.

Thank you.

Thank you.