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

Dear ladies and gentlemen, thank you for joining our first quarter 2023 financial results conference call. I'm Anna Romelashvili, Head of Investor Relations at TBC Bank. The presenters today are Vakhtang Butskhrikidze, CEO; and Giorgi Megrelishvili, the CFO. We will start today's call with a short presentation and provide an update about our financial and business performance. We will also briefly discuss the recent macroeconomic development in the country. After the presentation, you'll 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 first quarter results conference call. The first quarter of this year has been successful, and I'd like to take this opportunity to summarize our key achievements. . I will start my presentation on Slide 3, which summarizes the group's position across our 3 core strategic pillars. We are the leading financial institution in Georgia with a market share of around 40% in total loans and deposits and 1.5 million monthly active customers. We also operate to fintechs in Uzbekistan, which already contribute 5% of the group's net profit and serves 3.6 million monthly active customers. In addition, we held the largest digital ecosystem in Georgia, TNET, which reached an annualized GMV of GEL 120 million in the first quarter and which has 1.5 million monthly active customers. The next slide presents our key highlights of the first quarter. In the first quarter, the group generated an excellent return on equity of 25.2%. Our CET1 ratio also remained strong at 17.7% per net IFRS methodology, which is 3.4 percentage points above the minimum regulatory requirements. At the same time, our balance sheet growth was impressive with our loan book portfolio increasing by 17% and deposit rising by 28%, both on the constant currency basis. I'd also like to share that our Uzbek operations have continued to perform exceptionally well, and Uzbek operations' return of equity in the first quarter reached 28.1%. At the same time, the shares of Uzbek [ loans ] in the group's consumer book increased to 14%. Our digital user base also continues to expand with digital monthly active users across the group, reaching 4.4 million marked by an impressive year-on-year growth and daily active users to monthly active usage ratio standing at 32%. While at the same time, in Georgian operations, the daily active users to monthly active users ratio stood even higher at 44%. Moving on to Slide 5. I'd like to briefly go over the financial performance in the first quarter. Our net profit grew by 14% year-on-year, reaching GEL 255 million, while our return on equity stood at 25.2% as mentioned above. The year-over-year slight decrease in return of equity was mainly related to normalization of our cost of risk, which stood at 0.3% a year ago. At the same time, cost-to-income ratio decreased to 34.3%, once again improving our increasing efficiency. Before I review our performance in more detail, let me provide you with a brief update on recent key macro developments in Georgia. In the first quarter, real GDP growth remained strong at 7.2%, while inflation decreased to 2.7% in April. Total inflows grew by an impressive 38%, driven by all types of categories highlighting the resilience and diversity of the Georgian economy. And finally, international reserves have exceeded $5 billion, while the fiscal deficit has narrowed to 2.8%. The next slide further shows the Georgia's solid economic fundamentals. As already mentioned, [indiscernible] growth in the first quarter was driven by a diverse range of inflows, namely exports grew by 25%, [ tourism ] revenue increased by 102%, while remittances increased by 35%. Slide 8 shows the Georgia's inflation keeps cooling and the currency continues to strengthen. As already mentioned, inflation decreased to 2.7%, and we expect it to remain below National Bank of Georgia's target level of 3% in the second half of the year. Also yesterday, National Bank of Georgia cut a refinance rate by 0.5% to 10.5%, and we anticipate a further decrease by around 100 basis points by the end of the year. Despite the recent appreciation of a lari, we believe that it is only the moderate above its long-term trend, and we expect it to stay around the current level during this year. Now let's turn to -- on the Slide 10, and I'm proud to share that our customer base and the digital engagement grew further in the first quarter. The group's retail monthly active users grew by an outstanding 46% year-on-year, reaching 5.1 million across 2 geographies, which once again reflects the success of our customer-centric approach. As for the digital customers, both daily active users and monthly active users demonstrated impressive growth, which resulted in a daily active users to monthly active users ratio at -- of 32% on a group's level, while it stood at 44% in Georgia. Moving on to Slide 11. You can see our leadership position across all major segments in Georgia. In the first quarter, our loan book growth was mainly driven by retail and MSME segments, which grew by 18% and 20%, respectively, on a constant currency basis. At the same time, deposits increased mainly due to CIB and retail segments, which grew by 20% and 40% actually without FX effects. Next slide highlights the strong growth of our payment business in Georgia. In first quarter, merchant acquiring transaction volume grew year-over-year by 19%, driven by both POS and e-commerce transactions. Meanwhile, volume and transactions with TBC cards increased by 33%, with monthly active cards almost reaching almost 1 million. On Slide 13, I'd like to highlight some of the recent developments in our digital ecosystem, TNET. In March, TNET launched the first I was super app in Georgia. This super app will gradually include all TNET platforms as well as many external partners. This will give us a significant competitive edge and expansion opportunities. The next slide dives into a bit more detail on our digital ecosystem. In the first quarter, GMV increased 2x year-over-year, reaching GEL 30 million, the primary contributor to impressive increase are the lifestyle and housing segments. Over the same period, loans disbursed through TNET reached GEL 24 million, accounting for 4% share of TBC retail loan disbursements. Also, it is important to highlight that monthly active users reached 1.5 million, up by 27% year-over-year. As our ecosystem business continues to grow, we expect to increase its positive contribution to the group's fee and commission income and retail on generation. Now it's my pleasure to share more about our fast-growing operations in Uzbekistan. As you know, we operate 2 digital fintech companies in Uzbekistan, a mobile-only consumer bank and digital payment application for both business and individuals. TBC UZ Bank and Payme are now both positive contributor to group's earnings. Their combined net profit share in total group's net profit is 5% and the return of equity was 28.1%, while the monthly active users reached 3.6 million. With such outstanding performance, we are rapidly approaching our medium-term target, which is Uzbek operation to generate 10% to 15% of the group's net earnings. On Slide 16, I'd like to highlight the excellent performance of our payment subsidiary, Payme, the leading payments provider in Uzbekistan. The number of monthly active users grew by 72% year-over-year, reaching 3.1 million, while daily active users increased by 33% to 800,000. Net profit also doubled year-over-year as payment volumes grew by 57% and reached GEL 2.2 billion. Finally, on the Slide 17, let's turn to TBC UZ Bank that has turned profitable on a stand-alone basis since the beginning of the year. Registered and monthly active users have grown by 80% and 66%, respectively. At the same time, TBC UZ Bank continued to grow its market share in both deposits and loans, while revenue grew 8x year-over-year to GEL 26 million and business moved to profitability in the first quarter with net profit at GEL 1 million. Now I'd like to hand over to Giorgi. Giorgi, please.

Thanks, Vakhtang. Now I would like to dive a bit deeper into our financial performance and present the key elements of our strong and very promising start of the year. And I will start from Slide 19. As you can see from this slide, net profit was up by 14% year-on-year, reaching GEL 255 million, supported by strong income generation that was across the board. This translated into an excellent 25.2% ROE, even though our cost of risk actually normalized during this quarter as we had been actually expecting for a while. The quarterly drop in earnings was also related to the moderation of our FX income. But despite these factors, we still delivered 25% plus ROA. Now moving to Slide 20. We would like to share the main drivers of our profitability. In Q1, both net interest and noninterest income continued to display strong year-on-year growth with total revenues up by 29%. Noninterest income grew by 33% year-on-year, driven by an excellent 40% growth in net fee and commission income, primarily led by our payments business. I would also like to highlight that our Uzbek operations accounted for 18% of total net fee and commission revenues in the first quarter and material contribution indeed. Despite, let's say, moderation, FX revenue also contributed significantly to the growth of our noninterest income, and that's the level something we expect to continue and grow. Now let's move on Slide 21 for a look at our margin dynamics. NIM grew by 80 basis points year-on-year to reach a very decent 6.4% in Q1 and was up by 10 basis points on a quarterly basis. The growth was mainly driven by higher loan yields and composition effect now with TBC Uzbekistan contributing 25 basis points, which is very promising to see. On Slide 22, I will discuss our costs in Q1. The year-on-year increase of 21% in operating expenses was mainly due to our business growth, while the quarterly decline of 9% was largely a result of the seasonally high base of Q4 last year. However, the key point is that our income continues to grow at a faster rate resulting in a 2.3 percentage point decrease of our cost-to-income ratio to 34.3% in Q1. I also would like to highlight that our Georgian-based stand-alone cost-to-income ratio stands even lower at a very less impressive 28.8%. Now moving on to Slide 23, which highlights our strong asset quality. Our NPL ratio decreased year-on-year across all segments and stood at 2.2% at quarter end. At the same time, total coverage ratio was 155%, while provision coverage ratio stood at 93%. Our normalized cost of risk for Georgian operation was 1% in Q1 within our expected range that resulted in the group level cost of risk of 1.1%. On the following slide, Slide 24. I would like to share with you the performance of our core base portfolios in Q1. Our loan grew 17% year-on-year on a constant currency basis, the growth that Vakhtang mentioned was mainly due to retail and MSME. And over the same period, deposits grew by 28% without FX effect, mainly driven by CIB and retail. Now moving on to Slide 25, where you can see our very solid capital position. Our capital ratios remained at very prudent levels as of March '23, well above the minimum regulatory requirement for all tiers. In Q1 '23, 17.7% CET1 capital ratio already includes pending dividend payments that will be due in June and completed upcoming group capital, let's say, injections, which were offset mainly by strong income delivery and partially with [ strong alone ]. On Slide 26, I would like to highlight the financial perform of our Uzbek business. That was very strong. I'm proud and delighted to reiterate that our Uzbek operations are not only delivering excellent growth but are doing so very profitably, generating GEL 13 million in net income in Q1 alone despite low seasonally. ROE in the first quarter exceeded 28%, getting close to our target of 30% plus. In terms of financials of TBC UZ Bank, NIM stood at 19.7% for Q1, while cost of risk was 5.6%. I also would like to note that during the first quarter, the total capital debt that actually we injected into TBC was around USD 28 million, out of which TBC PLC share was USD 17 million. I'm also pleased to highlight that the contribution of Uzbek business in group is growing, including 5% share in group net profit, 25 basis point contribution to NIM and 18% to group fee and [ commission ]. And finally, on Slide 27, I would like to highlight a positive outcome of our strong operating performance, our increased capital. And as I already mentioned, like we will pay the final dividend of almost GEL 3 per share on June 30, subject to an AGM approval. This, together with the interim dividend paid in October represents 30% of dividend payout ratio for '22 and is up from 25% last year, while the completed buyback would make it 35%. Now on this note, I would like to thank you and hand it back to Vakhtang for some final notes. Vakhtang, please.

Yes. Thank you, Giorgi. And now before going on our medium-term targets, let me recap the key highlights of the first quarter. Firstly, the backdrop of our excellent results -- sorry, just -- results has been the favorable macro environment in both Georgia and Uzbekistan. Secondly, we continue to maintain strong growth and high profitability. Similarly, our well-capitalized and highly liquid core bank gives us a strong foundation for the future growth and leadership in Georgia. Firstly, we are happy to see our Uzbek operations increasing the share of the group's net profit while bringing more diversification to the group and expansion opportunities. And finally, we are proud to have launched TNET super app, which we believe will drive our ecosystems growth. And now I'd like to wrap up to today's presentation by reiterating our medium-term targets and comparing our performance in first quarter against those targets. Our monthly active users stood at 5.1 million compared to our medium-term target of 7 million. Our Uzbek operations already accounted for 5% of total gross profit versus our target of 10% to 15% in the medium term. Our loan book grew by 17% year-on-year on a constant currency basis against our target of 10% to 15%. Our return on equity was 25.2%, meaningfully above our medium-term target of 20% plus. Our cost on cap ratio was 34.3% lower than our medium-term target of below 35%. And finally, as Giorgi already mentioned, our dividend payout ratio target is 25% to 35%, while the total dividend payout ratio was in 2022, 30% and 35%, including our CapEx. With that, I'd like to invite you to ask questions.

Thank you, Vakhtang. Now I'd like to open the floor for the Q&A. [Operator Instructions] And the first question comes from Ronak Gadhia.

First in light of the move by the [indiscernible].

Sorry Ronak, we can hardly hear you.

Is it better now? Hello?

Yes, it is.

Sorry about that. No, I was just saying in light of the reduction in rates by the NPG yesterday. Could you give us a sense of what you expect on the margins through the rest of the year? Should we see your margins as maybe -- as they peaked maybe in the first quarter, second quarter and [ has ] the new reduction from here? Or how should we see those both? The second question is on your super app strategy. I think the previous conversations we've had, there was a sense that the super app strategy wouldn't really work in Georgia because the regulator wouldn't allow it. Is this something that has changed? And maybe could you just talk about how -- about the potential for that product? Would you see mushrooming like we've seen in some of the other regional countries? And third question, again, related to payments, but this is more on Uzbekistan. Could you maybe just share some thoughts on the structure of the market? What percentage of payments are cash versus digital? What's your market share related to other competitors? And again, what's the specific growth potential for just premium rather than Uzbekistan and Georgia?

So yes, Giorgi will try to answer the first question and second and third question I will try, of course.

[indiscernible] A very good question. But frankly, it doesn't change much for us. We expected this cut for a while and kind of -- that was within our expectation. The cut is not so much hugely material to impact our net interest margin to move the needles. Obviously, if the rate cut continues in the medium term, Georgian margin will have some small impact depending on the quantum of the cut. But for Georgia, like in the short to medium term, we to expect to remain 6% plus net interest margin. And over at a group level, the slight margin squeeze will be compensated by Uzbekistan. Therefore, probably we should expect to stay more or less around levels we are at the moment for short term and medium term, at least.

Thank you once more, Ronak, for this interesting question. So to answer the question about the super app. Nothing was changed from the regulator. It continues. But as you know, super app and our TNET operations, we are developing independently from the bank's operations and this independent business from the bank. And as you know, 100% super app and TNET owned by the -- our holding company from the U.K. company -- holding company we are owning the super app, and we have very ambition plans to grow up our business there. So as we presented today, annualized growth in the super app was around [ 130 ] GMV. But as you know, in the medium term, we are targeting GEL 1 billion minimum GMV. We are looking for that business. But today, maybe it looks pessimistic assumptions which we made last year for this medium growth for that company. But for you to know, it's an open ecosystem we are building. So we are operating the products from this application to the other banks, to the other insurance companies and to the other financial institutions in Georgia. So this is the reality and the regulations which we have in Georgia. To answer your question about the payments in Uzbekistan. So at all times, we are mentioning the last 2 years to investor that the payments and also banking sector is in development stage in Uzbekistan, and we see the potential -- very high growth potential with Uzbekistan and when we are just a quarterly -- we are making presentation to the investors, you see that the in the payment business, annual growth just we are showing 70% or 100%, and we [indiscernible] that could be continued next 3 to 4 years' period. So to summarize and to answer the question, we believe that our Payme business will continue very high growth not only as -- so today, the last 2, 3 years, the growth was in B2B business, but now we see that not only B2B business, but also in the [indiscernible] business, the e-commerce business, we see that next 3, 4 years, it will be new directions for us, and we see the high growth also in that areas.

And just a quick follow-up on the Payme business growth. I guess we saw a bit of an adjustment earlier in 4Q with regards to the acquisition of the minority stake. I'm guessing negotiations are ongoing with the minorities. So could you just maybe give us some broad-level thoughts on what the potential acquisition price would be relative to the adjustment that was made in 4Q? And what impact that would have on financials later in the year?

Maybe I'll...

Process is going on, and we'll inform the matters in due course.