For the second quarter, which you can also see on this slide, we have a very solid set of results with our profit reaching GEL 513 million in the second quarter, up 19% year-on-year, resulting in the cumulative half-year profit of just north of GEL 1 billion, up 28% year-on-year, with return on equity standing at a very strong 27% and 28% in Q2 and H1 2025 respectively. These results are underpinned by a robust customer franchise and portfolio growth across our core operations in Georgia and Armenia. I am joined today on this call as usual by the Group CEO Archil Gachechiladze, who will share his perspectives on the group's performance. For the first time, we're delighted to have Hovhannes Toroyan on this call. Hovhannes is the Chief Financial Officer of Ameriabank, the group's banking subsidiary in Armenia.
We also have Akaki Liqokeli, our macroeconomist, who will walk through the recent macroeconomic developments across our core markets of Georgia and Armenia. Following the presentation, we'll open the floor for your questions and as a reminder, this call is being recorded. With that, we'll first start with the macro highlights, so I'm handing it over to Akaki to kick off this webinar. Akaki, you can go ahead.
Hello everyone, I will be presenting the macroeconomic update for our core markets, Georgia and Armenia. Let me start with the growth performance. Georgia continues to benefit from a balanced mix of strong external inflows and resilient domestic demand. In Armenia, growth momentum has shifted more toward domestic drivers supported by fiscal stimulus and credit expansion, while actor demand continues to normalize. Preliminary numbers show that both countries performed better than expected in the first half of the year. In Georgia, real GDP growth was 8.3% year-on-year in the first six months, while Armenia posted 6.3% growth. Given the strong numbers and improvements, an improved outlook, especially following the recent signing of Armenia Azerbaijan peace framework, has enabled us to revise our full year real GDP growth forecast upward to 7.5% in Georgia and to 5% in Armenia.
This sustained strong growth performance in recent years has led to sustained increase in per capita income levels in both countries as you can see on the right hand side of the slide. However, these average income levels are still below Central and Eastern European peers, which leaves significant room for further catch up growth in the years to come. Now let me move on to drivers of growth in Georgia. External demand continues to play a major role with traditional inflows from exports, tourism, and remittances increasing steadily. In Armenia, exports continue to normalize from one off spikes from the last year, while other inflows and particularly remittances remained solid. Beyond these traditional inflows, we see strong performance in non travel service exports and particularly IT services, which support hard currency inflows and also generate productivity gains for the wider economy.
All these inflows taken together have also contributed to strengthening local currencies. Georgian Lari and Armenian Dram continued to appreciate in the second quarter even after the U.S. Dollar stabilized against other major currencies. Notably, real exchange rates of Armenian Dram and Georgian Lari are adjusting after significant appreciations in previous years, as you can see on the right hand side chart. This adjustment is taking place through lower inflation relative to trading partners with no pressures on nominal exchange rates. We expect both currencies to remain stable in the medium- term, underpinned by healthy macroeconomic fundamentals and prudent monetary policies. Now, strong exchange rates also supported low and stable inflation in Georgia and Armenia, and these recent upticks that you see in the headline numbers are mostly attributed to price increases.
While core inflations remain well aligned to central bank targets, we therefore expect these food-related pressures to be short lived. Still, given the globally uncertain inflation environment, central banks of Georgia and Armenia maintain a cautious stance, keeping interest rates unchanged, and we don't expect any cuts in the remainder of the year. Beyond price stability, two additional pillars to overall macroeconomic stability are adequate levels of international reserves and prudent fiscal management. In this regard, we have very positive developments in both countries, particularly in Georgia. The central bank has been actively replenishing international reserves, which reached $5 billion at the end of July, which is the highest number since 2023. The interventions, the foreign currency purchases, were particularly high in recent months.
There is also positive development on the Armenian side, where reserves are also increasing, and we expect this trend to continue, improving the resilience of Georgian and Armenian economies. On the fiscal side, we also see both countries maintain discipline. However, the public debts have taken different trajectories. The Georgian government continues to decrease external debt, and this has brought the total government debt to below 36% in mid-2025, which is a significant decline if you compare it to almost 60% back in 2020. On the Armenian side, the government is carefully balancing the current spending needs with longer-term fiscal sustainability objectives. The total government debt to GDP is expected to stabilize at around 56% in the following years, and the fiscal discipline is also supported by ongoing IMF programs. Lastly, the financial sectors in Georgia and Armenia have benefited from favorable macroeconomic conditions while also supporting growth.
We continue to observe robust lending expansion in both countries. While loan dollarizations have decreased significantly in previous years, reducing exposure to exchange rate risk, the balance sheets remained strong with non-performing loans at one of the lowest levels among the peer countries. This concludes my part. Back to you, Nini.
Thank you, Akaki. Now we can move to the group's results, and I would like to ask Archil to share his highlights.
With pleasure. First of all, thank you very much for joining the call. I understand that a lot of our investors may be on location and nevertheless I think attendance is one of the highest that we have seen. As Nini has mentioned, we had very solid numbers. I think what's important is that as the macro economy is doing better than we expected in the beginning of the year, we also see very strong demand in loans. On the balance sheet side, we'll cover the next slides. Growth is very good in Georgia and phenomenal in Armenia. Deposit formation is very strong as well and overall numbers are quite solid.
Operating income grew 9.5% year-over-year in the second quarter, notable that Georgia increased 11.4% and Armenia 8.67%, of which when we dissect it to interest and non-interest, most of the growth came from the interest income, with Georgia delivering 17.5%, Armenia 16.3%, and combined that resulted in 15.8% year-over-year increase in interest. In terms of the non-interest income, it was minus 2.2% and I'll go into details over the next two slides. Net interest margin, as we said on the results call last quarter, we said that there was slight risk on the upside, so increased to 6.46% net interest margin, of which there was a bit of increase from Georgia, mainly coming from the fact that we had extra liquidity deployed, and there was a slight decline in Armenia from a relatively high base.
You do see that we had slight uptick on the loan yield side, but also it was a slight uptick on the cost of prime deposit and notes, mainly coming from the devaluation, especially in Armenia where the attraction of drawn deposit is slightly higher, more expensive than in hard cash. Let's be in commission intel. The NFS was - 17.7%. What's interesting is that last year, second quarter, we had a relatively large item which was down from investment banking fees of about $10 million out of $29 million. If you normalize it for that one large item, and this quarter we didn't have large investment banking fees, they sound rather bumpy. If you didn't have that, you would have 24% increase in net fee and commission income in Armenia. In Georgia, it was relatively small number, probably due to some adjustments.
Even in that case, it would be low double digit if you normalize it for that. That's partly due to increased competition slightly, but also the Visa Mastercard fees that we have seen a little bit uptick there and we negotiated. I don't want to go into details, but going forward things will be better. Net effects, we had rather flattish performance where we had Georgian operations delivering -8%, predominantly based on the fact that it was the client's flow or revenue from client flow was flattish and there was a slight decline in terms of revaluation. Gain in Armenia was -1.9%, also mainly due to the fact that there was a bit less volatility in a second for trading Armenian ground than previously. Last year, operating expenses increased 12.1%, of which Georgian operational is 15.7% and Armenia 3.1%.
We like Armenian cost discipline and in Georgia we are taking into. We're taking certain actions. As we get closer to the end of the year, we'll see some of it coming into the numbers. Cost income ratio summed up to 36.5% for the quarter. Now regarding the balance sheet growth, we had 22.5% constant currency growth, which is very strong, well ahead of our guidance of about 15%. We had 17% constant currency growth in Georgia and 37.6% in Armenia, which is a phenomenal number. What's even more important, I believe, is Q- over- Q number, which is 10.3%, and Hovhannes will dissect it into where this growth is coming from. We also had 4.7% in Georgia Q, which is also very strong performance. There, most of the growth is coming from corporate and mass retail, including consumer and slightly less demand on mortgages and SME.
Overall, very strong performance. Deposit portfolio, we had 26.1% growth constant currency in Armenia and 10.9% in Georgia. In Georgia, we are trying to decrease our market share as we indicated to the market, which we did slightly. Cost of risk, we had 0.5%, which is slightly higher than last quarter, but it's well below our normalized level of 80%- 100% that we got, which still was very good performance. I think this performance will continue like this as the macro economy is doing very well, 50 in a row already, and you can see it in the NPL numbers. The overall 1.9%, which is also very strong. Profitability year-over-year increased 19.4% without the one-offs, which was partly due to the fact that in the second quarter of last year we had a strong reserve associated with the acquisition in Armenia. Overall, very good number.
The return on equity is 27.2% and for the half year it's 27.9%. GFS I think we mostly covered, but if you take on a standalone basis, return on equity was 31.1%. Profitability was $409 million, which was dropped by 7.6%. Loan book growth 17% as I said, and deposit growth of 10%. What makes me quite happy is how our retail digital monthly active users still growing at 15.5% year-over-year, achieving 1.7 million customers in a country of 3.8 million people. There's not going to discuss more here. We are also enjoying very strong growth of our business m obile users growing 22% year-over-year and achieving 100,000 users. We are also growing our digital sales very well. As you can see, we achieved almost 70%, which is very different.
Now also 86% of all loans are fully issued fully digitally, and 73% are phone deposits, and that number is growing very well year-over-year. NPS customer satisfaction, as you know, is a big focus for all of us. At Lion Finance Group in Bank of Georgia, the NPS was reiterated 73, which is a very strong showing for any universal bank. Acquiring volume was growing by 27%, which is also a very strong showing. Also, number of people using our cards increased by 14.3% to go above 1.5 million people in Georgia. L oan portfolio, we covered already, and deposit when we were discussing the overall numbers. Capital position is very strong, as you can see, and liquidity is very strong as well. On this bright note, may I ask our CFO from Ameriabank to join? Let me tell him yourself because I think he can share the presentation. Hovhannes, tell us how are things going in Armenia? We see phenomenal growth. Please tell us more about it.
Thank you, thank you Archil and thank you everyone for joining the call. I am actually pleased to announce our results for Q2 and before I go in there I want to just add a couple of words on the very positive macroeconomic environment that Akaki presented in detailed figures. I'm sure most of you have already heard about the recent U.S. brokered transaction that is expected to de-escalate the geopolitical tensions in the region and the so-called trip corridor to be established. That will assume opening the borders as well and technically will result in the regional integration with greater economic results potential for the country and the region in general. In addition to that I want to note that this has been very positively received both locally in Armenia as well as internationally by investors.
I'm sure you've seen the Armenian Eurobonds yield going down 60-70 basis points over the last one month period and moreover over the last couple of months and over the couple of following months we do anticipate to have several very important and significant developments in Armenia. Namely, if I name a few of them, NVIDIA that has established an office in Armenia more than two years ago has announced that it's going to be partnering with Firebird and the government of Armenia to launch a $500 million project building an AI data center that will really transform not only the overall IT infrastructure in Armenia but overall the region. It's going to have a 100 MW data center as well. Given also the quality of engineers locally, we anticipate it's going to have a significant chain effect on the IT sector and not only in Armenia.
Another large project that was announced a couple of months ago was on natural resources. One of the larger natural resources to be activated and operated soon is estimated to have from 0.6%- 1.5% impact on GDP in the medium term and add another $120 million of tax revenue to support the government. We do anticipate to have another significant transaction in the natural resources sector that will also have positive impact on our development from the baseline scenario that we were discussing and obviously a number of infrastructural projects, south-north corridor, the trip corridor related infrastructure investments. I would say overall there is a very positive sentiment and expectation on the economic developments in the country.
As for the Q results of Ameriabank, we did register $95.8 million GEL profit during Q2 and if we take out the one-off from previous year year-over-year, this would yield into 17.7% growth. Our return on equity in consulted report is 20.1% but if we look also at this standalone report it's going to be 24%. The loan growth and deposit growth figures speak for themselves: 37.6% in constant currency basis for the loan portfolio and 26.1% for deposits. I will talk about these figures a bit later, and obviously huge impact and result on increasing our monthly active users and DAU/MAU that actually grew more than 50% year-over-year. Again, we'll have another slide on that later.
This is to emphasize the importance of our digital transformation, and also here I want to just mention that year-over-year the volume of transactions through our Maya Mary application have gone up more than 68%. Our cash offloading ratio is more than 91% at the end of Q2, so you can see a number of features that are available in our super app and also beyond banking part as well. I'm very happy to mention that we actually launched kids app Miami Star. This was a project that was designed and implemented over a course of three months, and I want to thank all the colleagues engaged in that.
This will give our younger generation not only opportunity to cover their basic needs in terms of the finance but also more importantly this will cover educational aspect, and we really want to emphasize that not only for kids app but also in My Invest where we actually have I think one in a kind in-app built academy where we educate our customers to take advantage of wider financial services offered by Ameriabank locally. There again I just want to mark that our both transactions numbers and volumes have more than doubled year-over-year, and we are very happy to see that 73% of the IMX corporate bond trades are done through our platform. This is to note that our customer base has actually surpassed 700,000 of which 408,000 are monthly active customers. That's 35.8% year-over-year growth, and MAU and DAU grew 54.5% and 52.2% respectively.
Very impressive for us. Actually, we want to note that there is still huge opportunity for further growth, and we aim to improve the absolute number of MAU and DAU significantly through increasing our customer base over 1 million and also improving our digital uptake and engagement ratios over time. Loan portfolio growth and deposits speak for themselves again, 37.6% in constant currency basis growth year-over-year and 10.2% for the quarter. This is actually very diversified in both sectors, retail and corporate. It's actually driven by a very good economic environment and very healthy demand locally as well as very positive brand positioning, risk management, and also digital transformation. Just for your information, 96% actually of consumer loans were issued through our digital platforms, enabling wider coverage and minimizing our underwriting costs. Of course, deposits again very strong year, 22.3% year-over-year.
Here I just want to mention that we have also restarted collaboration with DFIs and given the change of the international rates that are more compatible with local rates now. I'm sure most of you have seen several transactions that we have announced last year, end of last year and beginning of this year: $20 million with IFC, EUR 105 million with EIB, $15 million with EBRD. There are a couple more to come hopefully still this year. This is to show our very positive trend on the market share over the course of the last 12 months. We were able to improve it by 1.3 basis points and 0.9 basis points for the quarter itself for the loans and 1.2% year-over-year and 0.6% for deposits. Again, we are very happy with the organic growth that we're able to achieve.
Our ambition here is to hit 30% market share over time. While we see the trajectory going there, based on the questions that we got previous quarter, I also want to mention that our baseline scenario is organic growth. At the same time, we will seize any non-organic growth opportunities in the local market. Our capital position stood strong. CET1 had 2.9 percentage point buffer. For total capital, we have 0.1 percentage point buffer. I want to highlight that this has been a managerial decision to unleash the local growth opportunities, especially given the fact that we had already signed a subordinated debt that would improve our capital position that was engaged, included into our regulatory equity during the last few days of June, hence did not have much impact on the average capital deposit ratio presented in here. For July, our buffer was 0.3 percentage point.
Now it's even higher. We have actually attracted two more smaller sum debts in end of July and beginning of August. Another one is coming up by the end of the year and we're actually looking forward to finalization of the regulatory changes. Whereas Central Bank of Armenia will be enriching the capital instruments for Armenian banks and we will be looking into improving our Tier 1 capital with that as well. Liquidity positions are again very strong. LCR at 173.8% and NSFR at 117.2%. This is it for the Armenian operations. Thank you.
Thank you, Hovhannes. Now back to Archil for the wrap up. Before we move to the questions, Archil, you are on mute. If you can, please unmute yourself.
Thank you, Nidhi. Thank you. Hello. Very impressive results. Especially balance sheet growth is very impressive. Now just to wrap it up, we have announced AMD 5.1 per share dividend which is for the first half of the year. Also, we announced that we'll be going to quarterly dividend announcements. This AMD 5.1 is for first and second quarter, and then every quarter will be on a quarterly basis going forward. Also, something to note is that we are approving, the board has recommended and approved, AMD 90 million buybacks for the first half of the year which will be happening as well as we speak. It's a buyback and cancellation. Now, in the last few years we've gone from 49.2 million shares to 43.9 million, canceling more than 10% of our shares.
Just to reiterate, our medium-term targets are 50% which is 15% growth which we're overperforming right now, return on equity of 20%+ which we are performing with a large margin, dividend and share buyback payout of 30%- 50%. We told our investors that we'll be on the low side of that as we are deploying all of the profitability that we generate in Armenia there to fund the growth. As you can see, we are looking forward to the regulator approving the framework which will allow us to issue the additional instruments, maybe Tier 1 instrument, which is a good problem to have because if a franchise has gone that 50%+, 37% in this particular case, it's a good problem to have and we'll be dealing with that to deploy more of the capital while the franchise is generating 20%+ return on equity.
There are plenty of good news to look out for in Armenia overall on the macro side which is resulting in many different good news. I think one has been NVIDIA has a back office in Armenia employing above 600 people in the country. Recently, they announced a large data center which will be more than a $500,000 project together with a number of definitive investors. That will be a joint venture where NVIDIA will be provider of the chips and additional know-how, and regionally it will be very, very strong. It's a good project because it will generate more and more data capability and processing power for the whole region. Such projects and there are new, very significant and exciting things happening in Armenia which we look out for. Georgian numbers, as you can see, were very strong.
I'll reiterate, as Akaki said, that seven months of this year National Bank has bought about $1.2 billion on the market, which is about the same as in 2023, which was the highest net buying that we've seen historically. Just in seven months, almost the same as the highest ever in 2023, which not only recouped all the spending which was done last year to stabilize the lighting, the political tools, but also added to it, which is a very good management overall for the National Bank a ll on this fund. O n this bright note should be open for Q&A.
Let's now move to the Q&A. We already have a few raised hands from our analysts. The first on the line is Priya Rathod from Jefferies.
Hi there, can you hear me?
Priya, hi. Yes, we can hear you.
Perfect. Thanks for taking my question and congrats on a strong set of results. I have two areas just to focus on, please. The first is on the net other income, there was a noticeable increase quarter- on- quarter, especially in GFS. Could you just speak to what the drivers were there for the increase, please? The second topic is on the HSBC Malta potential acquisition. A couple questions here, please. I guess the first is what synergies or benefits are you seeing from this acquisition? I guess I'm asking which products or offerings does Malta offer which you don't currently have or where do you see it as enhancing your current offering? Are there any regulatory hurdles or pushbacks you envisage in the process? There's quite a lot of news flow suggesting that there's a preference for a European buyer. Just any thoughts around that? Finally, just generally on the timing of this acquisition because you know, the Ameriabank acquisition only recently closed.
I think maybe. Can you hear me? HSBC Malta has announced that there's a preferred bidder, which is a European one, a good vaccine. It's no longer relevant at this date.
Okay, I guess my only question is the net other income question, please.
Yes, on the net other income, why do you say it's significant? It's just $2 million, $3 million more in the Georgian case for the GFS. It's not a significant uptick. Net other income includes a number of different things, including one-off gains on real estate sales and such. It's not a significant number. For operating income, there was almost GEL 746 million . It was less than GEL 15 million. It's not a significant number. Nini, can you help me with what the goal is?
It did include a sale of one of the assets.
It's not significant. GEL 10 million is not a significant number at the firm.
Great, thank you.
If you look on a half-year basis on page 9 of the results, you can see that last year was GEL 19.5 million for the first half and this year is about GEL 22 million . It's only a 12.8% increase. This number is usually bulkier than this, but it's not, it's nothing particularly significant this quarter. Regarding Malta, yes, it's unfortunate that we definitely were much less aggressive apparently than some of the other interested buyers. In this particular case, there was formal Attica Bank of Greece that was announced as a preferred bidder. We would rather be more disciplined in terms of the buying and sometimes that means that we'll miss out on opportunities, which is unfortunate. What can we get?
Makes sense. Thank you.
Thank you.
Thank you Priya. Sorry, the next raised hand is from Sergej, but I don't see the last name. Let's see who. Hello, can you hear us?
Yes, hi, can you hear me?
Yes, hi, Sergej.
Perfect. Sergej Belozerov from Greyhound Capital. Thank you for giving me the opportunity to ask the question. Very impressive results. You've been growing very impressively as a country and as a bank over the last four years. My question goes to you. You have shown that the remittances and GDP have grown over the last four years. From my understanding, there were over 100,000 immigrants coming from Russia and Belarus over the last four years, and a lot of them operating in IT services, hence generating probably 10x the GDP average. How much do you think has that impacted overall your performance over the last four years? How do you think that could reverse now with potentially the end of the conflict? Thank you.
I will ask Akaki to go into the details, but all in all I can say that in 2022 the inflow was stronger. Some of the people have established themselves, opened all kinds of businesses, bars, restaurants, pet care shops, and I don't know, all kinds of different studios and so forth. People have moved to different countries, including Georgia, and have established themselves. Some of them have moved on. As in the beginning, I think Europe was rather closed for these IT specialists, but then Portugal, Spain, and others rolled out different kinds of programs for IT specialists, including for the Russians, and some moved on. I think you had an uptick in 2022, 2023, but it has normalized much more. Akaki, could you comment on this?
Yes. The significant inflow that we saw after 2022, we see some stabilization, we see some normalization in this inflow. Some people, some freelancers have moved on to other destinations. This IT sector benefited not only by the inflow of migrants, but also by relocation of several international companies from the region. We expect those businesses to stay in the country even after the situation stabilizes. We do not expect any abrupt or sudden outflow. As we see, these businesses are growing, they are expanding their operations in the country and generating significant export revenues as well as productivity gains for the wider economy. We can say that those one-offs have already stabilized and we do not expect any significant or sudden outflows.
Interesting. I can also say that in terms of the transfers from Russia, it's less than 1% now and it's decreasing. In terms of hard currency transfers, other countries are increasing significantly, including the U.S., which is becoming a stronger and stronger source of remittances for Georgia. Also, just to reiterate what an episode, all of these large international outsourcing companies that moved their offices to Georgia and Armenia, they started to hire locally, which created significant competition for our IT resource. We've seen very strong inflation of IT resource over the last four years. On the cost side, we saw that. On the revenue side, obviously it contributed to the overall GDP. All in all, it resulted. Over the last few years, we basically increased our profitability more than 4x . All in all, it's not just this, but it affects all sources of revenue as well as costs.
It's not only the people that migrated, but it's rather the companies that know how to do the outsourcing service for the rest of the world that had to look for a new home, and once they found it, they are here to stay. Like NVIDIA, with 600 people in Armenia, I don't think they'll be going anywhere regardless of the peace that we all expect to come in the region.
Interesting. Thank you very much.
Thank you, Sergej. We don't have raised hands at this point, but we have a few questions in the Q&A chat. From anonymous attendee,
I would suggest, meaning maybe this is the last time we should answer a nonymous.
The person is telling us thank you for keeping the anonymous line open.
One thing we can do is know who's asking the question we're answering, yes.
The first question is if we can clarify which group expenses are allocated to the Armenian segment during consolidation because there is a difference in the expenses between standalone and IFRS. That's the first question. Maybe Archil, will you just quickly.
It is mainly group functions, which includes CEO, CFO, couple other things. There is also a sign-up bonus for the management that we had initially that is being advertised, and it is almost done. That is about it. Another question is are we going to have an investor day? Probably spring of next year we will be having one.
There was a question like what was the rationale for considering the acquisition of HSBC Malta? Do you still consider an entry into the banking sector in Malta now that the other bidder has been the preferred bidder and has been announced, a different acquisition.
Okay, maybe I'll take that question. Our strategy is to be a main bank for our customers and we like larger scale. That means we like to look at acquisition targets which are top three in larger countries, maybe top five. In Malta, the acquisition target was number two with about 20% market share. We thought that it was a franchise that could benefit with the digital offerings that we had significantly, I would say, because HSBC was, looks like, was thinking about exiting that country for a long number of years and had underinvested in the franchise. We thought it was still a strong franchise in a small country but could benefit significantly with the refreshment of the product offering.
We would not be interested in looking at a small player in a small country, let alone, we would not be interested in a small play in any country, let alone a smaller country. In other words, no, we would not be interested in terrain but we'd opportunistically be looking at all of Eastern Europe. Malta was a bit of a stretch but it could have been an interesting opportunity. We are looking at top three, maybe top five if it's a larger country because we believe scale matters and we like the types of acquisition targets where we feel that we can bring value with our ability of bringing the customer care approach. That approach includes a lot of details in it, not just the philosophy but the processes as well as the digital offering. All of this together doesn't happen very often. Don't expect too much activity on our side there.
There was also another question in the chat if there is any current or upcoming debt capital markets initiatives that we're working on or planning.
I think in no uncertain times we said that we are looking forward to the framework of Tier 1 for Armenia, and it's for a reason. I'll say that other than that, probably not.
We have a raised hand from Bruno Katia, so let me allow him to talk. Hi Ronak
Hi Nini, and hi Archil. Congratulations on the results and taking my question, maybe two or three questions. Firstly, on cost of risk in Georgia, we saw sequential pickup Q-on-Q to 0.7%, still below historical levels. Should we gradually see a convergence towards the historical range of 1%, .2% in the next few quarters, or was that just a one-off pickup in Q? Likewise, staying with Georgia, the OpEx run rate, you explained some of the one-off factors driving that. Even excluding that, the run rate, the growth rate is quite strong. Should we expect that growth rate to continue at that level, or are you at a point where you've made all the upfront heavy investments on digitization and we should start to see some leveling off? The final question on [crosstalk] .
The first one is cost of risk slightly higher. That's partly due to the fact that the Lari got slightly weaker versus Euro. There's a small part of Euro portfolio which contributed about 14 basis points, but it would have been 0.5%. Now, 0.5% still is well below our midterm expectations of 80- 100. We don't expect to get close to 100 until we see this above, until we see such a strong macro development. Having said that, as the macro is developing well above the potential long-term 5% that Georgia has, I think we are at stamina 8, 9% and we feel that the credit quality that we look at is very strong overall. Underlying profit, underlying cost of risk, we should not expect getting close to 1% in the short term. We'll see what happens on the market. It will depend on that. The second question was on?
The OpEx growth outlook in Georgia.
What we pay attention to is the operating jaws, and we don't enjoy that being negative. From the fourth quarter, you should materialize at least, and then we'll see where we get to from there. One thing that is not helpful is that overall in the country the salary income levels have been still growing at double digit for a year in a row. That's not helpful. Having said that, the overall franchise has been going, and that should be more than enough to absorb it. We normalize the costs. It has been slightly higher, but it will be under control. Let's say it is under control, but it should translate into a neutral, maybe positive or very strong. If not the third quarter, then the fourth quarter are moved.
The same question on Armenia: the OpEx growth Q-on-Q was flattish. Is that just some synergy benefits that have been realized? I was expecting growth to be slightly stronger as you're starting to make some more digitization investments there. What can we expect in Armenia?
I'll just say one and then maybe Hovhannes says we don't have much synergies there in terms of costs because it's run completely as a separate bank, because the regulatory environment is different. There's almost like requirement to run it separately through the board, et cetera, et cetera. On the bad side, there are no synergies at this point at least. Please.
Just to add on that, while the year-over-year growth on the operating expenses was 2.6% only, there is some so-called seasonality issue because some of the costs were not evenly distributed previous year, and we are going to have this situation change towards the end of the year. The natural growth would be somewhere around 8%, 9%. Slightly short of 10% for the year most probably. I mean, if we continue with the same run rate, it's going to be slightly short of 10%.
Nice.
Understood. Now, that was it from my side. Thanks.
Thank you, Ronak.
Thank you, Ronak. Another raised hand is from Can Ozguzel from Franklin Templeton.
Hi, thank you very much for the presentation and congrats on the results. I have one macro or maybe question regarding Azerbaijan and Armenia. The question is do you expect in the future or when if possible to expect trade barriers of Armenia between Azerbaijan and Turkey to be removed, and in such a scenario what do you think the impact will be in Armenia's economy? Do you think it will be a game changing development or, yeah, initial thoughts maybe on that would be great. Thank you.
Hovhannes, why don't you start since you're closer to it.
Of course it's still a bit early to say what's going to happen, but there are clear talks already that the borders with both neighbors will be opened in a matter of time, actually, and there are already some preliminary assessments that are rather positive, actually, for the economy of Armenia but also for the regional economies as well. There is no very concrete assessment how much additional impact on GDP or international trade it will have. There have been a couple of articles, like Forbes had another one yesterday, actually giving some estimates how much trade could flow through those borders, and overall we anticipate that whenever those borders will be opened, of course it may take some time, but it's going to be really changing the dynamics of the trade in the region and having significant positive impact on the economy overall of Armenia.
Yeah, understood. Thank you.
Akaki anything to add there should have more insight there.
I would just add that opening up this corridor would definitely change the overall situation in the region because that will be beneficial from the diversification perspective, and also that will definitely improve, increase the trade flows in the overall region. I don't have any estimates either, but overall, yeah, we expect this to have a significantly positive impact on the whole region and particularly on Armenia and Georgia.
Thank you.
Thank you, Can. Another raised hand is from Alex. I also don't see the last name .
Hello, can you hear me?
Hello? Yes, we can hear you.
Okay, great. Hello Archil and Nini and the rest of the team. Thank you very much for the call. I have a question on the fees and commission revenue dynamics. You mentioned that you have some increased competition in the fees business as part of t he reason for the softness of t he f ee revenue dynamics. Can you elaborate a little bit on that? What's driving this, and how you see the outlook?
What we see on one side is several system providers like Visa trying to increase the fees, and on the other side we see that with pain market share over the last four years going from 38%- 57%, not all competitors are happy about it and they're spending heavily, I can say, to somehow recoup some of that lost market share. That's part of it. The first one is absolutely curable and we have addressed it. The second one will hurt the attacker much more than the dependent. We expect, I think we said in the results, that we'll be expecting high single digit in the third quarter and low double digit in the fourth quarter. That's being commission income, which is slightly less than the overall business growth. That's what we expect in terms of that's on the Georgia side. On the Armenian side, what we are saying is that in fact, when you remove the one large item which was one year ago, you see 24% year-on-year increase in fee and commission income. We are quite happy on that one.
Okay, understood. Thank you so much.
Thank you, Alex. I see Sergej's hand, but maybe he forgot to put it down. Let me try just to double check. Sergej, do you have further questions or no? I guess not. I don't see any other raised hands at this point.
Since we allowed the exception of anonymous attendees' questions to be answered, let me take them. Anonymous attendee's third question is, how do you see regional geopolitical risks affecting cross-border flows and banking sector stability? One thing we can say is that there has been a decrease of political risk happening. If anything, there are plenty of upsides, and I think Hovhannes did mention that as there's a peace deal between the Azerbaijan and Armenian side, there are plenty of opportunities there in terms of border opening, in terms of perception of stability, and longer-term ability for longer-term planning for a lot of private investors. We, as the leading bank in both countries, are there to provide credit and services to such private investors. If anything, it should be all positive and a good upside.
The same goes for wider, larger problems that we have, especially the war going on in Ukraine. If there's a peace deal, there will be plenty of additional economic activity, reconstruction of Ukraine, and so forth that will assume benefit of all regions, which will be a big positive as well. There's some trade and some of the other services that have been provided from Georgia, and we've done a detailed analysis of that, how it will affect, which is unclear at some point. One thing we can say is that from one side, we do see that it will be negative over the last couple of years. Let's say it could be cumulative about 2%, but then the additional economic activity that will result from the reconstruction will more than most probably could balance it out fully, and in fact, at most rates as well.
Those are the overall assessment. The next one, please. Would you elaborate on the guidance? Are there any changes? There are no changes to the guidance, and the guidance is provided on the last page of our investor presentation. It's 15% growth factors at 15% growth, capital distribution of 30%-50%. And what's the third one? Any.
The third one is if we have any guidance on the cost of risk for the next three years.
No third part of the guidance is 20%+ return on equity. We don't provide guidance on the cost of risk, but up to 1% probably is what we have seen historically. Historically we've seen slightly higher, but I have to say that in 2018, when the national bank introduced additional regulation in terms of responsible lending and so forth, this systemically decreases the cost of risk, especially on the consumer and on mortgages. I think going forward it's safe to assume there will be 20%-30% lower than historic average, 30-40 bps lower.
Do we have any exposure to iGaming?
Not really. Not much. That was not why we were looking at Malta. I think I explained it in one of the questions that people asked. We like major players even in smaller markets, especially where we see that we can improve the offering for the day-to-day clients, which we thought that we could do there.
A question from Nikolai Dimitrov. Do you see a combined Liberty Basis Bank becoming a more formidable competitor in Georgia?
It will be a larger player. We'll still be about a third of where we are. I think they'll take a long time until we consolidate and so forth. I don't know what to answer more than that. Thank you. Anything else, Nini? Are there any raised hands?
We have one raised hand from a person named Valeri Kotishvili. Hello. Maybe it's not a raised hand or it's an accidentally raised hand.
In this case, colleagues are not asking a question but accidentally pushing the button. On this bright note, thank you very much for attending this call. To summarize, we are delivering strong results and continuing to deliver so. What we can say is that the growth opportunities which are coming from the fact that the macroeconomic development in both countries has been very strong, that is providing opportunities for leading banks like Ameriabank, Bank of Georgia, to provide services, to provide credit and resource to the private entrepreneurs and businesses to deploy these resources and capitalize on the opportunities that this strong mapping presents. That's what we expect going forward, especially that we are seeing very positive news in terms of Armenia peace agreement in terms of de-escalating some of the tensions that have been there for decades.
All of this presents very, very significant economic opportunities while on the Georgian side the macroeconomy continues to deliver very strong results. We see deleveraging happening there and the currency reserves growing very strongly. All around are very strong numbers and we are very well positioned to capitalize on it. Thank you very much for your attention and let's look forward to these third quarter results.
Thank you everyone for joining. See you next time. Bye bye.