Welcome everybody to Bank of Georgia Group PLC's Third Quarter and the First Nine Months of 2021 Financial Results Conference Call. My name is Natia Kalandarishvili. I'm Head of Investor Relations at Bank of Georgia, and today I'll be moderating the call. Please be advised that this call is being recorded. Our session will be organized in two parts. During the first part, Bank of Georgia CEO, Archil Gachechiladze, will be presenting financial results overview. During the second part, he will be able to ask questions as part of Q&A session. With that, I'll hand over to Archil.
Thank you, Natia. Welcome to third quarter investor call, where we will summarize the results which you may have seen already, and then we'll open it up for Q&A. As you may have already seen, the third quarter results were very positive in every way you can look at it. I'm very glad to report very strong third quarter. It's historic high in many different measures. We would start with the fact that we have delivered a very strong growth in our payments business, where, in acquiring business, POS acquiring business, our number of transactions have grown by 45% almost, and volume by 70%.
In our mobile transactions, mobile phone transactions, mobile bank transactions, in fact, the volume's up by 69% and the number of payments up by almost 70% and volume is up by 105%. We remain as a top-of-mind bank and most trusted bank in the country. With all of this, I would also highlight the fact that the Net Promoter Score has grown, and the most recent one was 47% from a recent dip to 43%. That's back to the positive trend. Our employee NPS is also slightly up to 61% to all-time high. We measure the engagement there as well, and all of this is up.
Why I underline this is because I believe that all of these measures represent the overall strength of the franchise that then results in the numbers, and the numbers you have already seen. In terms of the numbers, you have seen net interest margin growing to 5% from the previous quarter, 4.8, and year-on-year also 30 basis points up. Also you have seen net interest income growing by 19.2%. We have seen particularly impressive growth of net fee and commission income year-on-year of 37.2% and quarter-over-quarter of 9.2%.
We also had a pretty strong net FX gain up by 73.9% and back to there roughly GEL 30+ million lari where we used to be and slightly more in fact in third quarter. We had other income also kind of flattish. Overall, all of this resulted in our revenue growing by 25.8% on an annual basis, 3.8% Q-over-Q. Well, we had slightly less growth in expenses, but still on the high side of 24.7%. All of this resulted in pre-cost-of-risk growth of 26.4%, which is impressive, I guess, by any measure.
What's nice is that basically all the lines of revenue have grown, which are sustainable growth lines. Which is the net interest income, net fee and commission income, predominantly coming from the acquiring business strength as well as the FX fee income. Overall, this has all resulted in a pretty strong delivery in the numbers. In terms of the quality of our book, we also had a significant improvement in the NPL ratio coming down to 2.6%. That was mainly due to the fact that we had seen our retail clients paying consistently since the payment holiday expired.
It has been more than six months that they have paid consistently, and more and more people have been reclassified as normal loans from Stage 2 loans to Stage 1. That has basically resulted in our NPL ratios in retail dropping significantly. At the same time as that happens, our coverage ratio increasing to a very healthy level of 90+% . With the adjusted discounted value of collateral, it's more than 114% . Two other things to highlight as well was that we had a very good growth in the third quarter. In terms of the loans issued, on a constant currency basis, it was 6.5% . On a nominal basis was 5.3% .
On an annual basis it was 14.3%, and on a constant currency basis was 17.7%. That was due to the fact that we had slight strengthening of the currency. On top, we had, regardless of such a strong growth in the quarter, at the same time we had pretty good capital ratios. With all of this, I think that was an overview. We can in fact dive into the presentation, but I will try to not bore you too much with it and go very quickly through it. Couple words on COVID. Basically, we are experiencing a pretty high number of COVID cases like some of the European countries. But at the same time, somehow the country got used to these very high cases.
Unfortunately, the number of vaccinated is not very high. It's 33%. Single dose vaccination is 37%. We are heading towards, let's say 40, mid-40s maybe by the end of the year. But it would be short of the 60% target that the government had by the end of the year. Having said that, I think something very positive was that the government announced a so-called green passport acceptance from the first of December. In public spaces, in restaurants and so forth, only the vaccinated will be allowed. I think that will provide a significant motivation for a lot of people to get vaccinated. Let's see, well, what the pickup will be later on.
There was also an announcement that the government would provide a GEL 200 payment for the elderly, 60+ years old, whoever was not vaccinated and will get vaccinated. That has apparently caused some enthusiasm, especially in the regions, which is also helpful. Let's see how positive that will be and how significant. In terms of the economic growth, we have been surprised a number of times, and we have updated just recently from 9.5% to 10.5%, the overall expectation for the full year.
We have provided here the comparison not only to 2020, which itself was quite a volatile year and had reflected some of the base effect, especially in the second quarter, but also versus 2019. That's also telling kind of to highlight how the growth was happening versus a pretty high 2019 level. In terms of where the growth is coming from, as you can see, not only the remittances have been very strong, and that has provided a pretty good growth impetus to the economy. Also the regional demand, which is reflected in the exports, has been pretty good as well.
In terms of the tourist revenue, in the last few months, we've seen that it has achieved about 50% of 2019 level, which by itself was a peak. Next year we hope to get back to close to 2019 level to about 75%-80% of it, and I think there's some upside there as well. We'll see how that goes. In terms of the national reserves, we are at the all-time high of $4.1 billion, which is up year over year of 8.3%. Inflation is still running high at 12.8%. Although it's worth noting that the core inflation is 6.2%, which is still high. The target rate is 3%.
National Bank and ourselves as well, we predict that it will come down in the mid of 2022 to slightly higher than the target rate, but closer to the target rate over the next few quarters. In terms of the refinancing rate, it has been raised a couple of times, and it's running at 10%, which is relatively high for the Georgian reality. We hope that will be enough for the inflation to come back to the target rate over the next few quarters. In terms of the economic growth, we expect 5%, although the state just issued a budget for 2022, and they expect close to 6% growth next year.
Let's see how the next year will play out. I think there's significant upsides on the tourist side, and let's hope that can play out well for us. In terms of the franchise, I would like to highlight one more time that we are leading payments in the country, representing about one in every two transactions in the country, in fact. We have a mobile application that is the leading financial application in the country. 96% of all the payments that happen and transactions happen through digital channels.
We represent 40% of all the deposits of individuals and almost 40% of loans on the retail side, and most trusted bank and top-of-mind bank, as I said. We do all of this by, and at the same time we are delivering 20%+ return on equity. We have been doing it consistently, other than one quarter, which was last year first quarter, when we provisioned up front for the full expected cycle for COVID, which we all remember. In terms of the strategy, how we define our strategy is that we focus on leadership in mobile application, in payments and loyalty, and we define that as the core things with which we make sure that our retail clients are attached to our franchise.
We do it through making relentless focus on our customer satisfaction, employee empowerment, as well as developing data-driven decision-making and focusing on the strengths of the franchise. All of this is done by focusing on profitability. While we make sure that we have the leadership in all of this, then we can offer different products that the customers require and provide profitability to our stakeholders, to our shareholders as well. Now, something that I mentioned a couple of times already is our mobile bank strength. There, again, we have resumed the growth of our number of active users, and that has grown by 4.5% last quarter, and that was very good to see. In terms of the number of transactions, it has grown by 65%.
When you look at it on a two-year basis, let's say here, if you notice the number of transactions overall, let's say over a two-year period, has grown from 48.8 to 61.7. Last year growth was 18.8% of the overall transactions. When you see the mobile transactions, it has gone from 10.8 million, which was 22% of overall transactions, to about 30.2 million, which is almost half of all the transactions. That basically shows you the major transformation that is happening over the last couple of years and has been happening over the last, let's say 2, 3 years, in terms of how people do banking and how people do their daily banking and transactions and so forth.
There I think that's why we underline the leadership in this. That's why we think it's very significant to have that trend, and we will be focusing on that going forward as well. Now the next step there, we mentioned it previous few quarters as well, was our ability to sell more and more products through our digital channels. We started it with about 20%. Last couple of quarters we had started from 21 and we were targeting 36% over the next 12 to 18 months. I'm glad to report that we are well on the way to reaching the target and currently delivering 31% in terms of the offloading rate.
That has been helped significantly with our redesign of our consumer credit, which is going very well as well. Similar kind of trends you can see in the number of received remittances, where we also have done a number of integration with different providers of payment services, cross-border payment services, and they are fully integrated now in our mobile bank. Through providing number, you can get directly to your Bank of Georgia account, and you don't need to do extra steps there. That has basically resulted in almost every second payment done through that automated way. It's more comfortable for our clients. Our number or the percentage of the market share of the receiving side has also grown to 35%.
I think other than banks, also the micro credit organizations also are competing in that side. I think it's important for us because for us it provides a lot of information for the receiving side as well as sending side where we can provide additional products and services to these customers. In terms of payments, I mentioned it in the beginning of the presentation, something that makes us pretty happy is the number of transactions growing by about 45% year-over-year. In terms of the volume growing by 70%. Q-over-Q is also quite significant. As you can see it's 15% and 25% to round up the numbers, which is significant.
that this franchise is very important to us, and we'll be adding additional capabilities on that side, and we are working hard on it. Next year, we'll be rolling out a number of different initiatives on this side. Also something that is important is our business mobile bank customers, which is becoming more and more popular with our micro customers or micro business customers. There also we had 8.7% Q-over-Q growth in terms of number of users to 45,000. Here we believe that there's still a lot of upside there because a lot of our micro borrowers or small business borrowers are still using cash, and they are still using our branches.
We believe there's a significant upside in terms of next upside in terms of offloading from the branches as well as providing more services. I believe here, and we are developing our products here quite actively. The customer satisfaction score, which is internal score that we measure, so it's difficult to compare to anything else other than our own measure in the past. We started about a year ago with 40% and have. Last quarter was 62% or 64%, and now it's increased to 73%. We like to see it closer to 90%. That, that's what we are getting to, and that's how we measure what customers are requiring and how comfortable they find our different channels.
With NPS, as I mentioned also in the beginning of our conference call, we have returned it to a positive trend. This dip of 43%, where a lot of unhappy customers with their interest payment becoming higher because of the refinancing rate going up. Overall, I think we are paying a lot of attention to the satisfaction of our customers. Overall, the trend is very positive over the last few years, and you see it vividly here. In terms of the employee engagement also, it's a slight improvement from the previous measure.
What makes us quite happy is that another measure is the employee engagement, which also was slightly below the high-performing organization benchmark developed by Kincentric, and we have improved it there as well. Which provides an environment where the innovation flourishes and new product rollout becomes faster and overall, it serves us all well. I think on all of these numbers, we have already focused, and we have delivered consistently more than 20% return on equity since our first quarter last year when the upfront provisioning was done for the full expected full cycle impact. The operating income year-on-year has grown by 25.8%, and for the nine months is about the same.
The non-interest income growth was quite significant, in fact, and was very nice in terms of 44.7%. When you look at the net fee and commission income, that was up by 37.2%. The overall number was that. Something to highlight here is that the net interest income growth, these two quarters here, to be fair, the fourth quarter 2020 and the first quarter 2021, were relatively low in terms of the activity, and that does impact the NIM as well. There was slight pickup in activity in the first quarter of 2021, and then improvement in 2022.
Now we are seeing an increase in NIM, which is predominantly deployment of liquidity that we have highlighted that there was an upside there. I think that is pretty healthy overall for the business. Cost-to-income wise, I think we are committed to a medium-term guidance of 35%. We had a positive operating jaws, slightly positive, but still, which is very nice to have, especially in the inflationary environment that we are seeing today. We are committed to this target, and we will deliver it in the medium term. With the cost of risk, I think we already mentioned, and the 2.6% NPL ratio is a significant improvement, and we hope that we can see further improvements of this ratio.
Here you can see that pre-pandemic, all-time low for us was 2.1%, NPL ratio, and I hope that we can soon beat this. A lot will depend on the economy, obviously, and the strength of the Georgian economy, which has surprised us well over the year, how it has been performing. Loan portfolio growth, as I mentioned, was very healthy, including on a quarterly basis. Deposit portfolio, in fact, on the retail side has been fine. On the corporate side, we've managed the liquidity through the corporate side. Overall liquidity was healthy, and we are okay with that. In terms of here you can see the liquidity levels.
In terms of the capital ratios, we are well above the capital ratios. Let's say the Core Tier 1 is 11%, and we are at 12.8%. Let me highlight one thing here, that we have paid out the dividends, and that is reflected here because it was already committed in the third quarter, and the commitment is directly deducted from it. As well as we've grown more than we were expected to grow or budgeted to grow. Regardless of higher than expected growth and dividend payout, I think the capital ratios are still very strong, and that is how we like to see it.
Here you can see the contribution overall, let's say, of how the profitability, how strong the profitability provides capital buildup, because overall, our strong profitability provides a very strong capital formation internally, and it's more than enough, not only to finance the business growth, but also to provide the dividends. This is what we have seen here. We provide some measures of what we can expect in case devaluation happens. As you can see, we have very healthy margins there for us to continue growing. We have highlighted a number of times that our capital stress does not fully represent the IFRS numbers.
If we were accounting in IFRS, we believe that we would have higher, even higher capital ratios by at least 200 basis points, if not more. That basically sums it up for us. We think that we had a pretty very positive quarter, reflected not only in numbers, but also in the underlying strength of the franchise, be it with the number of digital customers, number of payments in POS terminals or mobile application, increase in margin, increase of portfolio higher than expected, as well as profitability and revenue lines in each and every side. With that, I would like to open it up for Q&A. Natia?
Yeah. Just a reminder, those of you who are joined via webinar, you can use raise hand button at the bottom of the screen to ask question. Those of you who are connected via phone, you can press star nine to ask the question. Please don't forget to introduce and unmute yourself before asking that question. First question comes from Ilan Stermer. Ilan, please.
Hi. Good afternoon. Thank you very much for the presentation. Well done on the results. I have a few questions from me, first of all, on the fees and comms. Obviously very good growth there. Just wondering how sustainable that growth rate is in fees and comms, and maybe a little bit of insight also into the FX translation gains that came through in the quarter and whether or not we can expect that to continue. That's the first question.
Yes. I think our strength in our franchise, in terms of the payment franchise, which we have been highlighting for a long period of time, is what you see in the net fee and commission income. Is it sustainable? We hope so. We'll see. There's still a very large cash economy in the country, and we are very thoughtfully developing products. Our biggest competitor is not our bank or another bank. Our biggest competitor is cash, and that's how we are approaching it. We are rolling out little by little different types of products and incentives and so forth to really win more business away from cash economy. It's working.
Next year, in spring next year, March, maybe April, probably, we are going to have a demo day where we will tell you more about the products that we are rolling out, as well as tell you more about the calculation and potential that we see in different directions, including in payments.
On the FX.
Yeah. On the FX, there's nothing particular to highlight other than the fact that there was slight volatility, and volatility helps us in our FX business because it's a fee business. It's not a position. We don't keep large positions on our books. But volatility helps and there was slight volatility, and that has helped us. Overall, we are developing and scrutinizing that business so that to make sure that we can deliver good service to our customers and our business as well.
Thank you. Next question on corporate deposits. You mentioned you obviously had quite a high level of deployment of liquidity and so on. The quarterly movement in corporate deposits, in lari deposits, there was quite a significant drop. Is that part and parcel of this deployment of liquidity, or is there something else in there?
There's mainly liquidity, but then there's also some volatility. I mean, that's the most volatile part of the business. In fact, this is the corporate deposits, and we use it for the liquidity management, and other banks also use it for liquidity management. Sometimes for other banks, it's more justified to overpay for it for whatever reasons. We allow it to happen because it's a liquidity management exercise and nothing else. It's
It's a bit to be appreciation value.
Yes.
That's the pressure valve. Okay. Thanks, Archil. The last question from me on maybe more of a medium-term question on lending growth and margins. On the lending side, the target is to exceed 10%. Now you're well above that already, and we hopefully will be moving into a reducing rate environment. How do we square that circle of more than. Are you happy that. Shall I put it differently? Are you comfortable with the thought that we're going to have more than 10% growth pretty much for the foreseeable future with a reducing rate, a rate dropping rate environment over the next few years?
Yes. First is that when we provided the guidance of 10%, about 10% growth, we lowered it from 15%. We highlighted the fact that this year we expect that it would be higher. I, you know, higher than 15%, in fact. If you remember that. Basically, that we are well on that route of having higher than 10%. And where that 10% is coming from roughly is that as you have banking assets to GDP of roughly 70% or 72, whatever, it's, you know, it's not high, but it's not 30% anymore either.
While there's a significant growth potential, and that growth may be coming from mortgages and other different directions, it will be happening as the interest rates come down. You know, our expectation is that that penetration will not significantly grow. It will grow somewhat, but not significantly. As the economy is growing real rate of 5% and the inflation is running around 4% or so, nominal growth in this economy, you know, is close to 10%. A couple percentage points here and there, and we are talking about 10%+ without growing the banking asset penetration in the economy. You know, it could change. There could be some pickup there as well.
You know, do I expect growth of 10%+ for the future until Georgia GDP catches up with the Eastern European levels, which is like 3-4 times more? Yes, I do. That could be a very long time. If, you know, for some people, 10%+ growth is not exciting, and I hear that. We grow in other directions, which is something to do with our fee business. There, I think, there's more growth opportunities.
Thank you. Last question from me is on margins. Your the 5% you've spoken to before. What happens next year, again, directionally with interest rates hopefully coming down?
I think what we expect in terms of the margins are broad stability. I mean, sometimes we'll be slightly up, sometimes slightly down, but overall broad stability. The reason for that is the way the capital requirements are formed in this country. We entered, due to regulation, into a lower risk environment where the consumer lending is limited in many ways in terms of the payment to income. A lot of microcredit organizations have gone out of the market and paid their loans, et cetera, et cetera, do not exist anymore. With all of that and with Basel III coming in now, over the next two years, we will see slightly more capital requirements, but which we are already meeting.
That means that a lot of capital decreased leverage and low cost environment means that especially decreased leverage means that, you know, with margins, if you, if you decrease the margins, your overall profitability will decrease. You know, that doesn't seem to be profitable for either for large banks or small banks, in fact. I mean, if for us, we don't like to see less than 20% return on equity, imagine how it is for smaller banks, right? I mean, in terms of the scale that we have. I think a lot of people were expecting that scale to be less important. As the time has proven, for smaller countries especially, you know, if you're subscale, it doesn't make sense. You know, if competition I don't think competition will be pressing it down. It
I think I expect broad stability in the margins.
Thank you. Much appreciated.
Thank you very much.
Thank you. Next question comes from Ronak Gadhia. Rona, please.
Thank you, Archil Gachechiladze, for the presentation.
Oops.
Just a moment.
Natia, I think Ilan was left in and Ronak was-
Hi. Hi, can you hear me?
Yes.
Yes. I think there was a slight problem. Yes.
Okay. Sorry about that. Well, thanks for taking my questions. Just as a follow-up, maybe a couple of follow-ups from Ilan's questions. Firstly, on the payment side, is it possible to give a bit more breakdown in terms of, you know, the transactions you're doing? Can you categorize them into P2P, B2B or, you know, any such categorizations? Also maybe just share, you know, how the take rate is evolving as you know, move from your traditional channels to more digital channels.
Yes.
That's the first question.
Yes. I don't think we provide at this stage any more breakdown. I mean, majority of the fees are coming from the acquiring business. Acquiring business is pretty simple. It's through the POS terminals. In terms of the other fee and commission income, we don't provide this breakdown at this stage, and we will consider doing that in the future.
Okay. Understood. Then, the second one also so somewhat of a follow-up to last questions. You mentioned, you know, growth should be slightly above 10% or so. Could you highlight what segments you think will be driving that? Would it be more retail or more... It'll be more balanced between retail and corporate?
I think it will be well balanced throughout, in fact. Last year we saw a lot of growth in corporate and mortgages, in fact, in the second half, obviously. This year we are seeing consumer micro and SME growing, and I believe those three segments have more firepower left in them because there's a fundamental demand and growth maybe coming from that. Looking out, although mortgages have slightly slowed this year versus last year, I believe that fundamentally this country still has a lot to go in terms of mortgages. You know, everywhere you look there's growth opportunity, which all translates into so far 5% expected growth for the country which, you know, has some upside there as well.
Yeah. I mean, the reason I ask that is if I look at your breakdown, it seems, you know, your NIMs on the corporate side are higher compared to the retail side.
That is temporary, in fact. That's well noted, Ronak. When you look at it, basically the year-on-year, historically that has not been the case, basically.
Right.
The corporate sub-segment sells lari deposits to our retail sub-segment. In retail, people save mostly in dollars and they borrow in lari because of regulation. Retail franchise is a net borrower of lari. As lari have become expensive, retail margins have suffered, but then corporate has benefited. Too much detail probably, Ronak. To assume that NIM is higher in corporate, that would just be wrong. It's relatively temporary. As the refinancing rates will come down, it will correct itself.
Yeah. I was gonna ask about that because when you look at the asset yields cost of funding, it seems retail is doing better, but the NIMs seem to be reversed. That didn't add up.
The reason is that in retail basically retail has a bunch of fixed lari portfolio. Let's say consumer, some mortgages as well for first one or two years is fixed lari. As the lari rates go up, retail margins suffer short term. Their cost of funding goes up faster than the income side. That's what you are seeing. Overall, I think the profitability is still pretty good. On corporate side it's vice versa because it's benefiting from the current accounts that it has the lari on. That's why you see it slightly higher. Basically there's some skewing in profitability there, but overall profitability is something to focus on.
Noted. Last question on your potential write backs. As you noted, the NPL cover is still quite high. Should we expect any more significant write backs in 4Q or maybe 2022?
Not from that. I mean, not because we think 90% is high per se, but as you see the NPLs coming down, you will naturally see higher coverage ratio. The reason for that is that, let's say Stage 1 loans have a general provision on it, right? So yes, NPLs will come down. You know, if they came down to 0.1%, you would have 300% coverage, right? Or more. You know, so basically, you know, general provision rate changes. You know, there could be, but nothing in our sleeves right now. But, you know, we have seen some things that we had fully provisioned, you know, becoming some recoveries, etc. That is helping our cost of risk.
You know, there could be in the next quarter or two, but overall I think we will be getting closer to the normal cost of risk in the next few quarters.
Yeah. There's been no change in modeling for Stage 1, Stage 2 provisions because of the rising COVID rates?
Not really. Because what we have seen is that unlike the first wave when the country was shocked and you know what's going on, etc. Right now we have high rates. Having said that, the hospitalization rates are slightly lower because you have more and more people vaccinated or who have had COVID once. That's one. The second thing is that somehow the country adjusted to this new reality. This is the new reality. The government has been very decisive on the fact that since vaccines are widely available, the government does not intend to go into hard lockdowns one way or the other. If that's not happening, then the economy is not impacted in a major way either.
Unfortunately, people are, you know, dying, obviously, the ones that contracted. Overall, in terms of the economic impact, it's less so because the lockdowns is not something that the government is considering. Having said that, I think this green passport thing will push up the vaccination significantly. 'Cause it will create discomfort for people going into restaurants and bars, et cetera, the ones that are not vaccinated. 'Cause the younger population does now want to get vaccinated, and, you know, I think if they don't get into the bars, they will get vaccinated to get in. They'll do anything to get into the bar.
Thanks. Thanks for your response.
Thank you.
Thank you. Next question comes from Simon Clements.
Oh, hi. Thanks very much. I have a few questions. Yeah, the first one would just be on the non-credit related risk costs. Can you tell us why that's still coming through? I thought that was related to legal cases which were done. I was surprised to see continued non-credit related risk costs coming through. That'd be my first one. Maybe we can go one by one.
Yeah. Yes. I mean, this quarter we had number of different things. Impairment of assets held for sale. There was some legal costs. There was about half of it, slightly more coming from impairment of leasing assets. That's what we had probably something to speak of on the larger side. Yeah.
Yeah, looking at the outlook.
The outlook, I don't know. I thought that GEL 5 million was not very significant number for that.
Okay.
You know, yeah, I don't expect any major thing coming through, but if there will be GEL 2 million or GEL 3 million, our normal cost of risk of GEL 30 million-GEL 40 million, you know, there could be.
Okay. Just on the dividend, it's good that you've restarted the dividends. Can you just give us an idea of what you're thinking about going forward? Are you committed now back to being at interim, so twice a year?
Yeah.
What kind of level? What kind of payout? Thank you.
We upgraded our policy and basically have guided the market that we'll be paying out 35%-50%. Over the next two years, and we announced it a few months ago. Over the next few couple of years, we expect 35%-40% payout ratio. That's what we are guiding. It will be a mix of dividend and share buyback.
Mm-hmm.
Two-thirds, one-third, roughly, but you know, with slight changes here and there. We've done an interim, so that will be followed by the dividend early next year. Probably we will announce, and there will be some buybacks as well.
What was the split between the two?
We don't have a strong guidance there.
Mm-hmm.
Two-thirds, one-third, roughly.
Two-thirds, one-third. Okay. Then just two more questions. One is just on deposit growth, which has, you know, been relatively subdued and your loan deposit ratio has been going up. Are you gonna look to rebalance that and drive faster deposit growth going forward?
In terms of loans to deposit ratio, we are very comfortable because we see that as well as the long-term financing that we get from the IFIs is pretty stable source of funds. We're not concerned about that. We will be attracting as much funding as we'll see the economy is ready to absorb.
Mm-hmm.
We will not be rebalancing it because we are concerned about it. We will be growing and borrowing and doing whatever is needed for our asset side.
Okay. Just last, I was hoping to get an update on your marketplace business. How's that going, the Extra.ge e-commerce site?
Yeah. Extra.ge is in fact not doing so badly. It's increasing its number of sales, et cetera, but still loss-making. Because it's not significant, I don't spend too much of your time on it. It's an experiment that's continuing, but you know, if there's any significant success, we'll report to you.
Okay. How many active users do they have?
I don't remember, in fact, the active users.
You don't?
They've had close to 400,000, in fact, if I'm not mistaken. They had two marketplaces. One was for the reselling, so like an intermediary between the two.
Mm-hmm.
Then another one that is a marketplace for new things, for shops selling to the customers, so B2C. And basically, I think that part is the one that we are developing actively, and we have seen over the last couple of quarters a significant pick-up there. It's becoming a leading place. Having said that, I just got a message from the head of that business that we have 300,000 active users there. And basically the e-commerce development in Georgia is still very early days. Only 1.1% of all retail sales is done through e-commerce. So far, no exciting numbers or figures, but I think position wise, it's good to have it.
We'll see where that goes because I think, the team here has done some significant improvements and, you know, we'll see where that goes.
Who are the largest competitors, if you don't mind me asking? I don't know the space that well.
The largest competitor is our competing banks.
Mm.
similar project, which is called Randeu. Extra is leading in some ways. Basically there are two types of activities that Extra is involved in. One is, let's say, an intermediary C2C. In C2C, there's one very large player, the Mymarket. B2C is something that we think is more interesting. In B2C, I think, you know, we are leading and offline stores are the biggest competitor because as I said, it's 1.1% of total retail sales.
Yeah.
Which is nothing to speak of. It has a potential to grow significantly, but we'll see.
Super. Thank you very much.
Cool.
While we're waiting for more questions, we have one question in Q&A box. Do you have a view on US dollar GEL moving forward?
I see broad stability with some upside based on tourism. Basically, over the last nine months, we only had insignificant participation by the National Bank of Georgia to support lari. It was just once or twice, but it was like less than $60 million. $60 million throughout the year. It was nothing to really speak of in terms of the overall amount. You have seen the stability in lari. I think there's some upside there. Next year, as we see tourism coming back, and if it comes back strongly, then there's upside there. If it doesn't, then we see the stability.
Thank you. The next question comes from Svetlana Shelamova.
Yes, hello. Thank you very much. I have a follow-up question on the cost of risk. Given that now you answered one of my questions that you expect stable a fixed rate, could you please you know put probably more details on your outlook on cost of risk in the next few quarters versus full year 2022? When you're talking about normalized rate, what would it be in the next quarters?
I think we, you know, may have a quarter or two of some recoveries. You know, after that, I think we should be getting back to the normal cost of risk, which is, you know, our current guidance is 1%-1.2%.
Okay. You know, also, I have a question. Probably I got it wrong, but I noticed that with the outflow from the corporate accounts you borrowed from the banks, and that was more expensive. Shall we assume a less pronounced positive effect on NIM in coming quarters due to more expensive funding? Or you expect NIM to slightly improve or stay stable, as you already said?
Broad stability.
Broad stability.
I don't expect it worsening, but, you know, broad stability. 20 basis points up or down, we'll see. Overall, we expect broad stability. Our consumer franchise has helped us a bit. Our leadership in deposit, retail deposit franchise is also helping. Most trusted bank status is also helping. Overall, I think we are in a very good position.
Super. Thank you. The very last question. Am I right that you expect no further movements in the refinancing rate, in the policy rate by the National Bank? No further-
Our expectation is no further changes.
No further increases, I mean.
It's very hard to predict. I would say my expectation is no further increase, and from next year, let's say a second quarter of next year, slight, you know, starting to decrease. Having said that, you know, inflation's running at 12.8%, so, you know, I cannot. It's not definitive. Obviously, the National Bank may raise it further. I would say that in terms of balancing out, given the fact that we are running at core inflation close to 6%, which is, you know, significantly lower than the headline inflation, I think 10% refinancing rate gives it some justice, and it should come down. You know, having said that, you know, headline inflation is also important, so we'll see. My current expectation is no growth.
Okay. Thank you very much.
Welcome.
We have one question regarding, so you flagged in the statement some political instability around regional elections. Can you please elaborate?
Yes. I mean, we have had elections where the Georgian Dream got 46% proportional votes, which was important to demonstrate more than 43% for historic reasons, you may remember. After that, we've had our third President Saakashvili returning from Ukraine, going to jail. There's some noise around it. Other than that, only one small region where the UNM won the mayor's portfolio. In others, there were a number of second rounds, but we have lost it. So overall, I think there was a lot of, let's say, opposition, excitement, and discussion and so forth, but you know, it's always some kind of noise. That's all I can say at this stage. We don't expect the changes to happen of any kind.
You know, there will be noise, but it's no news to Georgia to have some noise.
Thank you. Next one comes from Can Ozguzel.
Hi. Hi, Archil. Hi, Natia.
Hi, Can.
Thanks for the presentation, and congratulations on the results, particularly in the payment side of the business. I think it's very impressive. I wanted to ask a question about e-commerce. You mentioned the e-commerce penetration is not exciting, but I think 1% is actually a very exciting number in terms of penetration. There's a lot to do there. Given what's going on in the world, because COVID was a big bump in the e-commerce penetration, apparently not in Georgia, but would you consider flowing capital into customer acquisition in e-commerce or any other fields where you see the penetration, you know, as abnormally low in Georgia rather than returning it to the shareholders through dividends or buybacks?
Yeah. I mean, all I can say is that our Extra.ge franchise is a leader in what it's doing. It's just so small right now that, you know, it's not attracting much attention. Having said that, on top, our regulator makes it clear that they want to see that banking and e-commerce and other activities are fully separated. Whatever success that Extra.ge demonstrates, it should be also open for other banks to participate in. We are looking at it as a separate business and are looking at it as a separate profitability. Obviously it's not profitable at this stage, but it's leading its category. If you check it out, you'll see that it's developing and the customer acquisition's pretty nice and the returning churn, this that. You know, they're doing their job.
In terms of going in other directions, in fact, we are very much focused on banking and the marketplace, like Extra.ge, more or less. I mean, there's one other thing that we're looking at, which is MIS provider for the small and medium businesses called Optimo, which we also think brings a lot of value to its customers. But it may in fact be not just Georgia play, but going outside as well. We'll see. We are not looking at a lot of other things.
Okay. The regulator is relatively conservative. Is that your message on that?
On that side, very much so, yes. Let's say when you look at models like you see in Kazakhstan, you wouldn't see it here.
Mm-hmm.
Because the regulator is very clear about it, they don't want to see that. As a separate business, the marketplace could be exciting and that is happening and we'll see it happen probably.
So-
It's an upside. It's a free option.
What I'm trying to understand is in Georgia it's also separate. If we're talking about Kaspi.kz, it's a separate business, and Kaspi.kz is actually a sort of a holding company, right? Is that okay to do in Georgia? You know, the PLC being the mothership for the bank and the e-commerce company, and then the bank lets the e-commerce company use its balance sheet for e-commerce.
Yeah. Probably it's doable. What the regulator wants to make sure is that whatever is done, it's done on an arm's length basis, and it's available to other participants in the market as well.
Okay. It cannot be an exclusive like deal between your companies. Okay, got it. Thanks very much, Archil.
Thank you. We have one question. One of the attendees is asking if you could repeat the guidance about the dividend and related to number of payments during year and their size.
One second. 35-50. Natia, am I right there? Is it 25-50 or 35-50? Because I'm focused on the upper side of it, but please check.
30-50.
It's 30-50. I apologize. From 30-50 total capital return to the shareholders. Over the next two years, we expect 35%-40%, given the fact that the growth we expect this year and next year slightly above the medium-term guidance of 10%. As well as the capital build-up given the full loading of Basel III requirements. Then we'll have some dividends, which will be probably roughly two-thirds, but you know, that is not a hard guidance. And the rest will be in share buybacks.
Thank you. At this point, we don't have any more questions. Oh, sorry. We have one just coming in. Please.
Yes. Hi, Archil. This is Petr Grishin from VTB Capital. Can I ask you a question about something that's not necessarily Bank of Georgia related, but wider macro-related thing for Georgia. We've lived through this period of interest rate hikes by the National Bank. If you compare this period with previous hiking cycles and given that now you see the reaction of the depositors from the bank. Is there any difference? Is the transmission mechanism in monetary policy terms in Georgia. Transmission, I mean, how the refinancing rates gets transmitted to other rates that you as the bank set. Is there any difference from previous episodes?
Is the system evolving or is basically reacting in a similar fashion to what you saw or what you could expect in previous hiking cycles? Thank you.
That's a very insightful question, in fact. I will have to show you a slide to highlight what point that I would like to make. One second here. 63, is it? Natia, the slide that had the overall banking-
Um, it's in-
Organization.
It's in-
In the big pack, right? I have the big pack open in front of me, and I only see the RB loans. Here you go. Peter and Natia will look for the overall. You can see here, this is the retail loans. You see that the loans in lari have gone up over the last, let's say, 3 years, from roughly 49% to almost 60%.
Yes.
When you look at the new issuance, it's even more, it's like 80% or 75% issued in lari terms, right? You see more and more, almost two-thirds of the loans outstanding to retail now is in lari. That mechanism, the monetary mechanism that the National Bank has, I think, is becoming more powerful. You know, some years ago, let's say, it was less significant, and there were a bunch of fixed interest rate as well. We have gone to, let's say, we've gone to variable rate as well as lari lending. As you know that, the regulator has limited the banks to issue only in local currency below 200,000 GEL, which is the majority of all the lending in any case.
That basically has made that impact more powerful on the economy. That's why I think that 10% raise, which is significant, right? From the normalized rate of longer-term rate, which should be, you know, closer to 5-6%, is quite significant, and it is having an impact. Overall, the demand is pretty strong still because the economy is doing so well. What I think next year, especially as we go into a slightly lower economic activity because we are growing at 10% now, we are expecting 5% next year. It will have a significant impact, and it should be more than enough to offset those inflation pressures.
All right. Thank you. Thank you very much.
Okay. We don't have any more questions.
Well, it was plenty of questions. I would like to thank you for that because it lasted for more than 40 minutes, the Q&A question. Thank you for your time, understanding that you are very busy with a lot of different earnings coming out and a lot of different companies to look at. I would like to congratulate our team with very strong set of numbers and with any dimension you look at, starting from the revenue to balance sheets, to the margins, to that fee and commission income, to the number of digital users, to the number of payments in through POS terminals. In fact, Jen has reminded us to focus on Extra.ge as well, where we have gained leadership there.
So far, it's the numbers are not huge, and we are not highlighting those all the time. Thank you very much for attending, for your time, and for very good questions. Bye-bye.