Hello, everyone. Welcome to Bank of Georgia Group PLC's conference call. Today, we're presenting the consolidated results for the first quarter of 2024. My name is Nini Arshakuni. I'm Head of Investor Relations, and I'll be moderating today's call. I'm joined on this call by the Group CEO, Archil Gachechiladze, and we'll start, as always, with a brief overview of the key developments and the results, and then you'll be able to ask questions. Please note that this call is also being recorded, and I'm handing over to Archil.
Thank you, Nini. I'm glad to report very good numbers, pretty good set. Basically, it's the first quarter where we are reporting our consolidated balance sheet, but I would like to highlight that this income statement is not consolidated. So this income that you see here is on a standalone basis, only the balance sheet end of March is consolidated with Ameriabank. 'Cause as you know, we completed the transaction at the end of March. So our result was GEL 369 million, which was up 22.5%, delivering 27.7% return on equity and shy of 30% cost income. So a few words on the economy. The economy is doing pretty well. In fact, 2024 is forecasted to grow by 6%.
The first quarter was 7.8%. So if not the political turmoil that we are experiencing right now, we will probably be updating this number, the 6%. But right now, in fact, given the fact that probably tourism will experience some hit, as well as maybe some other things like small investments, we're not, we're not increasing the expected growth. Having said that, the impact we don't think will be significant enough on the economy to decrease that. Obviously, the risks remain. In terms of the refinancing rate, has been lowered to 8% just recently. The last quarter percentage point was just a few days ago.
The inflation remains under 3%, which is a target rate of 4.1 and a half is the headline, with the core inflation closer to the target rate. So, we think that, well, with this decrease, I think we don't expect further decrease until the end of the year, and then we will see, given the volatility, a lot remains to be seen. Export of goods was lower by 9.3%, from 1 year ago, which was a pretty high base. Import of goods has decreased as well, and the imbalances have normalized. Having said that, I think the export of services have remained pretty strong, including tourists.
But, also on top of that is the IT export, IT services export, transport and logistics export, as well as education services export. All of that remained pretty strong, and that's what's driving alongside the investments, the growth in the economy. So in the first quarter, we've seen National Bank of Georgia buying the U.S. dollar from the market, so you see 214 net buying, although the net reserves slightly decreased because of the large repayments of the national debt. Having said that, buying that $214 million in the first quarter is pretty remarkable, because the first quarter is seasonally the period of time when Georgia imports energy, gas because of for heating, for household heating, as well as electricity production.
So usually, there's a little bit of a pressure on the currency, and at least, if not that, then it's not usually the time to buy hard currency because the tourism is relatively low at that point. It's a low season for tourists. Then on the other side, you have this energy import. Nevertheless, I think National Bank has been buying above $200 million for the quarter. So that's why when we see some people ask what is our expectation regarding the currency, we've seen a few percentage points of weakness as a result of the demonstrations and the volatility on the market.
We don't expect significant changes there unless there are other moves because of the overall pressure on appreciation that we have seen until now. So, we've seen the loan and deposit dollarization in Georgia basically stabilize about 50 and 45, roughly. The bank credit growth in constant currency has been about 17, and we've grown slightly more than that. Non-performing loans are at healthy level in both countries. Georgia is slightly better, 1.5%. So Armenian economy is doing very well, in fact, slightly ahead of Georgia in 9.2% estimate for GDP growth in the first quarter.
The refinancing rate is very similar, 20.5 basis points higher, and inflation is below 0%, so there's a little bit more room to cut rates here. Expected growth is similar to Georgia's at 6%. So it's a pretty strong economic situation in Armenia. In terms of the external exports and imports, we see strong growth. In fact, I spent a little bit of time at EBRD AGM in Armenia and stayed there and met a number of businesses there, and I was very impressed in terms of the energy, the technology, and mobilization of the main driving force behind Armenian economy. I was pretty excited about, in fact, about the tendencies and the energy that I saw there.
Bank loan growth is similar to Georgia's, in fact, it's 17.4%. And bank loan dollarization is at 33.9%, which is very healthy levels. You have seen overall stability, slight depreciation on Georgian side, and for about 3% and about 4% strengthening of Armenian dram. Now a few things about the bank and how we do. As you can see now, the bank comprises of the Georgian entity, which is about three quarters of the assets, and about one quarter is Armenian business, and other business, about 3% that includes Belarus. We think Armenian business will be growing faster, so you'll see more of rebalancing of this split.
But basically, we are operating two leading banks in Georgia and Armenia in terms of top of mind, a very strong brand in both countries. And very good high growth economies in both cases. So we are. As a result of this investment, you may have noticed that in April, we raised our guidance for growth from 10% to 15%. That's constant currency balance sheet, and income statement should be growing about the same. And in terms of the profitability, we guide 20%+, and the dividend and share buyback will be 30-50%. So that's-- we're not changing that.
Having said that, given the expected high growth in Armenia of 20%+ over the next few years, we rely less on dividends from Armenia at this point, but are counting on profitable growth, and that's why we'll probably be on the lower end of this range over the next few years. In Georgia, we have seen our number of monthly active users grow by 10%. On the digital front, though, it has been just shy of 20%, which is very good. Right now, about 76% of all our users are also digital users. That's on retail side, and 49% of them use it daily. So almost 700,000 people open our retail application on a daily basis, which is a pretty remarkable engagement for any financial app.
More than 70% of transactions are digital, and then most of the rest is basically ATMs and the BOG pay terminals, and about 1% of overall transactions is in the branches. We have had significant progress in terms of the digital sales. Now, about 56% of all our sales are done through the digital channels. You may remember that over the last year or two, we have been talking about increasing this number to 60 plus at the sustainable level, maybe even at 70. Last quarter, we had a very big one, because we had a very big trivia game that included some encouraging people to learn how to do different operations on their banking app, and that's hence the large number.
But this has normalized now at about 56, which is pretty nice. On the internet and mobile app for our businesses, we are experiencing incredible growth of 29% year-on-year. So from 60,000 customers to 78,000 customers, that's monthly active digital users. Number of transactions are up 25%. So this is seasonal in terms of transactions, but overall yearly growth is pretty nice in fact. What we are seeing is our payment acquiring business is growing nicely as well, at 33% volume growth. We are at 55% market share, which is pretty nice. On the issuing side, number of people that use our cards, monthly active users, are up by 18%. These are incredible numbers in terms of the fundamental business growth.
That's what underpinning the strength of our franchise. And all of this is based on our customer satisfaction scores. The NPS is just one quick one that we measure. We measure many other things, including by channel and by product, and you can see that we are around 60, up from around 30s, about five years ago. So that's what underpins the strength of the franchise. In Armenia, there's plenty of upside. So while the bank is a leading one on the corporate side, it has plenty of upside on the retail side. So we only have 188,000 monthly active digital users on the retail side, while the country has 80% of population of what Georgia has, so around 3 million.
So if we were running about the same numbers, we should be looking at 1.1 million monthly active users for digital. So there's plenty of upside there. In terms of the market position, we are number 1 in loans and number 2 in deposits. And as I said, on the corporate side, the leadership is pretty strong, and there's plenty to do on the retail. In terms of the numbers, we've had an incredible growth of our net loans and deposits because of the acquisition and the consolidation, as we said. 63% and 50, shy of 55%. Now, if you carve out that and you look at the constant currency of Georgian operation, with 20% then and shy of 16%, so pretty strong growth.
Cost of risk was pretty benign at 0.3%. Cost income we mentioned already. Operating income up by 14%. Non-interest income was up by only 7.6% because of high base in fees of around GEL 27 million last year. But if you look at the fundamental growth of the net income, commission income, it's up by about 25%. Operating expenses up 14.5%, so cost income is less than 30. Loan portfolio up on a constant currency basis, 20%, which is pretty nice. Deposit portfolio up by 16%, shy of 16%. We've been able to maintain the net interest margin at 6.4%.
Having said that, next quarter will probably be impacted by the fact that we raised Tier 1 $300 million of Tier 1 instrument. Pretty strong interest from the investor side there. We have seen a margin above the risk-free rate for five-year decrease. From the previous time we raised it was 8.6, and this time was 5.6. It shows pretty big trust in the Georgian banking as well as Bank of Georgia Group from the investors, which we appreciate. Cost of risk, we've seen very good performance, probably also caused by the fact that the economy is doing very well.
We also have experienced a one-off gain from the difference between the fair value, as assessed by the PwC and the price that we paid for the Armenian acquisition. Return on assets remained high at 4.7%. In terms of the capital ratios, you see, this is end of March. You see the capital ratios here, which is slightly less than we've seen previously. Having said that, this does not include the Tier 1 instrument that we raised in April, and we just also used the option to call the previous $100 million Tier 1, which will be redeemed in June.
So as a result of this, net of these two transactions, the increase on the Tier 1 in total will be extra 2.3%, plus the retained earnings and so forth. So it's very healthy levels right now. It's, that's close to 5% margins there. On a very event, you see slightly less buffers, but you'll see that the business is generating strong earnings, and we will be deploying these earnings in building up the buffers and to deploy for the growth of the business. Liquidity is pretty strong in both banks, as you can see. And we discussed the dividends, and you know this number is pretty well. So I'll stop here. This has been 15, 16 minutes, so it's a new record.
So on that, I'll open up for the questions. So we have the first question from Mark Webster: What, what do the opinion polls currently show for the elections in October? Do you have any additional comments?
So we've not seen the latest opinion polls. We'll probably have those over the next few weeks. I think it's obvious that the Georgian Dream would experience lower popularity as a result of the recent developments. Having said that, we cannot assess at this point how large those will be. So everybody's waiting for the opinion polls. I think one thing I can say is that there's you've seen a lot of people on the streets, but right now, everybody's getting ready for the elections. So that's the sentiment.
And so overall, I think that's one thing to look out for, which is in end of October.
This is the first time I'm not seeing raised hands now, so if you-
That means that even in 15 minutes, I've been able to preempt all the questions. That would be another record. No? Well, maybe not. Alexander, although without the last name, what are the potential risks of Georgia exclusion from EU member candidates for the bank? Do you have a stress test scenario for the prolonged political crisis? Is that going to impact your deposit loan growth? Yes to all of them. So if we are excluded or our candidate member status is stopped, there would be an unfortunate news. Having said that, it will not have a direct impact on the economy because we are, for years now, enjoying the free trade agreement with the EU. And other than the trade part of the EU candidacy, we've not been getting any other benefits from it.
Nothing to speak of at this point. The real benefits start from investments in infrastructure when one goes to the negotiation stage, which we're not yet. So it will be an unfortunate loss of the upside, rather than a direct impact. Having said that, I think sentiment will be negative, so that will be unfortunate. In terms of growth, so it will be basically reflected in the overall economic growth and hence in Georgia. Bank of Georgia balance sheet is a fortress balance sheet, to use a word from one of the CEOs of one of the largest banks in the world.
Use this, say it has plenty of capital and plenty of liquidity, and we intend to keep that, especially in terms of increased volatility. How did you maintain NIM with lower rates? That's Firebird. The trick there is that NBG reduced slightly, on average, about 2-2.5%, the mandatory reserves on the US dollar deposits. So that was the positive side. So maintenance was there, but that was the positive side there. There are also protests in Armenia. What is your opinion about the situation there? That's George Jnanyan. In Armenia, what we are seeing is that the ruling party is pretty popular. And we understand that there are demonstrations there, but we don't expect any major changes.
But, you know, we will, we will monitor the situation there. Overall, I have to say that the Armenian economy and the businesses there firsthand coming across them and spending time with them are pretty impressive, and I'm very, very positive about the prospects in Armenia. Obviously, the political activity has an impact, but it's going in the right direction in many ways. Firebird , will referendum on law occur? If so, and popular vote goes against the law, would GD reconsider it? So far, we're not hearing that the referendum is planned on the law. The biggest vote on the law will be the elections. The law is passed as of yesterday, and I think, you know, so we will see what happens on the elections.
If that really impacted the popularity or not, we'll see in October. With all the statements that come from our Western partners, so that is the package. Will it have the effect or not, that lot of people expect?
We have the first raised hand from Ian Hague from Firebird Management.
Hey, Archil. There's talk of sanctions. Depending on what is in such a package, how might the bank be affected? Are there a lot of individuals that are likely to be targeted as clients?
Yeah. So there's talk about it. If that becomes a reality, it'll be unfortunate. But basically, what we are hearing is that there are talks of travel sanctions or rather, visa bans. So visa ban is different from travel sanctions, from that it's private, so only the individual knows about it. So the visas will be revoked for people that are on that list, but they will not be made public. So that doesn't have a direct impact on financial system. Having said that, I think the next stage may be that they put some people who have been identified as being obstructing to democracy and so forth, as well as helping Russia one way or the other.
So if there are people on that list, we will have to freeze the assets for them if we are either lending to them or they are depositors. We went through a high-risk list. You know, it will have an impact, but it will be easily absorbed by our profitability if we have to provision for such accounts. But we will follow U.S., U.K., and E.U. sanctions fully.
Okay, thanks.
Thank you, Ian. The next question is from Can Demir from Wood & Company.
Yes. Thank you, Nini, and thank you for this presentation as well. I wanted to ask you, Archil, about the GDP growth number that you have, which is 6%, as far as I can tell. I mean, how confident do you feel on that, given the slowdown on imports and exports? I mean, isn't that a telltale sign that the economy is slowing down a bit? So that's my first question.
Yes. I can understand why you may think so when you look at that, but one thing that we should start reporting, in fact, we will, is the export of services, which is, you know, which is doing very well. And that plus investments is what's driving the growth. So those numbers are very strong. Investment, the location of businesses through Georgia, be it, you know, increasing the Heineken production or starting the Red Bull for the full Red Bull bottling for the wider region... setting up a lot of new logistics centers and so forth, and this is just now starting. It will need years to increase the capacity of this corridor to really be able to service the wider Central Asian region, let alone the Chinese goods.
So there's plenty of investment that needs to go into the corridor to increase the capacity. So on that one side, we are seeing only the first signs of that, as well as the educational sector, where the medical schools have received multiple times the students from India and Pakistan and other Middle Eastern countries that used to go to Moscow and Kiev and Tbilisi, but now it's only Tbilisi, as well as IT. And on the IT side, by the way, I was blown away by what I've seen in Armenia. Armenian IT system is really booming, so it's another growth area there. But Georgia is pretty strong as well.
Okay, fair enough. And on the cost of risk side of things, maybe your base case in terms of macro outlook remains the same, but maybe I'm thinking you could have a slower worst case scenario, and maybe you could increase the probability of that scenario as well, given the backdrop. Is. Would first of all, do you consider that kind of measure? And should we expect a higher cost of risk in the remainder of quarters on the back of that?
From what we are seeing right now, probably not. I mean, it could be a slight pickup, but the volatility is big. So when the volatility is big, I mean, anything can happen. But, you know, right now, what we expect is 6% growth, a slight slowdown in tourists, but nothing major. Having said that, a lot depends on how the government will react to the feedback from the Western side coming. Will there be a negotiation like last year? Will there be strong positions and not real negotiation? All of that depends on that. So, if things don't get worse, then, you know, it will be pretty strong growth and probably cost of risk will be within our range. If things get worse, then they will be higher.
If things get better, it will be lower.
But there is no... You, you don't plan to do macro overlays at this point?
We run all kinds of scenarios.
Mm-hmm.
It's part of our job as a bank to run all different kind of scenario and make sure that we are strong regardless of the outcomes. And believe me, the scenarios that we run, I will not be covering them here, but are all kinds, and this happens every year.
Got it.
We survive every single time.
Of course. And maybe one last question on the fees, which slowed down considerably, at least in the Georgian business, as far as I can tell. Maybe can you talk about that a little bit?
Yeah. I mean, you may have seen that, last year we had a... I wouldn't call it a one-off, but a particularly large investment banking fee of GEL 27 million, which doesn't happen every quarter. So if you exclude that, you see a growth of 20+% on our main part of our fee information income. That's, that's number of things, but big part of it is our payments acquiring business, which is growing very, very well. So-
Understood.
Not much concern there, Can.
Super. Thanks, Archil. That's very helpful.
Thank you.
Thank you.
Nini, do you want to read out the two questions that have come in?
We have just one by Raise Hand from Stephen Barrett, from Cavendish Capital Markets. Let him speak first, and then we can take the other questions.
Sure.
Hi, Stephen.
Hi. Hi, good evening. Hi, I was wondering if you could give more color or commentary around the loan growth within Armenia. So obviously, the very high rates we saw last year have been sustained into 2024. And I was just wondering if you could give any more guidance around that as we look forward.
Yes. So in Armenia, bank loans to GDP is about 10 points lower than Georgia's, so there's more growth overall in the economy, slightly more growth in the overall economy, slight pickup in that ratio. So the loan growth are higher, and then we expect, and we've already seen in 2023, the market share gain, and we expect to see more of that.
Understood.
So in fact, in fact, our expectation is that the growth over the next three years should be 20+% in Armenia, 10+% here. So that's the. So we are raising our guidance to 15%. That's it.
Thank you.
Thank you, Stephen. So we have two questions in the Q&A chat, and they're actually similar in nature, basically asking, during the past months, if we've seen any impact on the business, especially on the payments or transactions, any slowdown in international business transactions, and also any sign of the polarization of deposits?
We have not seen any slowdown in the payments business, so we watch it weekly, in fact, just to make sure to have it. Because we are 55% of all payments acquiring in the country, so we get a pretty good idea of the activity. And we also look at the mortgages. So we had about 10 days. During 10 days, there were like slowdown in the mortgage disbursement, but then it picked up again. Over the last 2 weeks, we've seen pretty strong pick up in mortgage disbursement. So when we had very large demonstrations, people did not take out a mortgage for a few days, but once it subsided, the normal life continued. So so far, the impact has not been significant.
What we have heard is that some of the hotels have complained about the cancellations of the bookings, especially from Europe, but it should not be significant, should be manageable. I think Ian has a raised hand. Do you see that, Nini?
Yes, but well, I'll try to ask him.
Okay. In addition to the law on transparency, in quotes, the parliament also passed a law that appears to legalize asset transfers into Georgia without a lot of oversight. What is the... How is the bank reacting to that? What are your policies going to be? Are they gonna stay the same or change?
Yes, Ian, that law has nothing to do about the oversight. So our policies of AML and transparency and the source of funds, et cetera, are strict. It's probably one of the strictest anywhere in the world, and will remain so. So although on that law, there was coverage, that there's nothing. So it has something to do about the taxes of some assets moving from there to Georgia, has nothing to do about the source of funds or the like. I hope that answers your question.
Yeah.
Are there any other questions? Maybe there's one more questions that I see from the anonymous. Maybe I should have a policy of not answering, not taking any anonymous questions. But due to the recent political situations in Georgia, have there been any run on the bank in the past week? The president of NBG mentioned something similar in one of her interviews recently. Not really. What we have seen is, in one day, we have seen slight increase in the disbursements from the ATMs, but it was just for a few hours, and it was, you know, nothing to speak of. So when you look at the daily disbursements, you don't really, really see any pickup. So, not, not really.
What we have seen is more like the exchange rate moving from 2.7-2.8, and then dropping and finding that new place. So that was the biggest move in terms of the sentiment. Nikolai Dimitrov, do you expect the business community in Georgia and Bank of Georgia in particular to take any active stance on the new legislation, given the negative consequences for Georgia? Bank of Georgia is a systemic bank. Making political statements or having an active stance on it is none of our business. Anthony - anonymous attendee, if the individual sanctions are imposed on the government officials, do you expect pressure on BoG executives by government agencies?
No particular reason to expect such pressures, because we've made very clear that we'll be following the U.S., E.U., and U.K. sanctions, and the NBG knows that, and everybody knows that. So, we will make sure that that is communicated further, at any point.
There is one raised hand from Georgina Brittain, and I'll let her talk.
Please, Georgina.
Thank you very much, and good afternoon to you. So quick question for me. We've obviously seen... So I love your reference to Jamie Dimon, by the way. That was very good on the fortress balance sheet. So, clearly we've seen with your large competitor, TBC, we've seen various bits of management buying shares because we think they're very, or they think they're very, very cheap indeed. So I was wondering if we're gonna, if we're likely to see any of that, and/or where are we on the buyback? And obviously, you've just done the Armenia acquisition with cash. But any thoughts on buybacks, given your valuation?
Hi, Georgina. So I have a huge respect for, for Jamie Dimon, and, and read all of his, letters and interviews. It's, very interesting that. In terms of the, in terms of the buybacks, so we have, still about GEL 50 million left, and it's an ongoing process on a daily basis. So we'll probably look at further buybacks as part of the overall interim dividend and capital return, policy, when we get to it, and we may consider some more. But, basically, all, all... Right now, there's an ongoing buyback program happening.
Mm-hmm.
In terms of the, in terms of the management buying, you know, I, I don't know. If, if anybody sees the opportunity and wants to buy, they're, they're happy to buy. If you're asking me if, if I'll buy or not. 90% of my compensation, fixed and variable, is in shares, and I've not sold a single share. I've in fact bought over the last five years. So that's the natural buying that I do every year.
Yeah. No, that's, that's fair enough. That's fair enough. Great. Thank you very much for that, and really interesting presentation. Thank you.
Thank you, Georgina. Thank you. No more raised hands.
On this bright note, it has been a real pleasure. Thank you very much for your support. I think the bank is doing very well in terms of delivering the results. I understand the volatility, which has had a negative effect on the share price, unfortunately. I hope that is temporary, and we'll experience a comeback. As you have seen, our net income was GEL 369 million, and on a standalone basis, Ameriabank delivered GEL 84 million. So if you were looking at a pro forma consolidated, you would be looking at north of GEL 450 million net income. So that should be on a run rate basis, what we are looking at.
So the number that you are seeing now, obviously, does not include the Ameriabank, and if it did, then it would be above GEL 450 million, which is a strong delivery that we'll see. And in the second quarter, we should see the consolidated number, and we will explain what it would mean in terms of the tangible book value and then the overall book value. And going forward, we'll probably continue reporting on the overall book value, which will include the one-off in terms of negative goodwill that you see in the book now. And which, you know, we should be well above our mid target or midterm target of 20%. So we've been delivering well above that.
So on that bright note, thank you very much for your attention, and until next time.
Thank you. Thank you. See you next time. Bye.