Hello everyone, and welcome to Bank of Georgia Group PLC third quarter results conference call. My name is Nini Arshakuni, and I'm Head of Investor Relations, and I'll moderate today's call. We'll start with the presentation, and Group CEO Archil Gachechiladze will discuss the results and the key developments of the quarter, and then we'll open the floor to questions. Now I'm handing over to Archil, and he will take it from there. Archil, you are on mute, so that you know, and we can't hear you.
Can I wave hands being on mute? Probably not, right. Hello. Thank you for joining the call. I'll cover a number of different things and then probably move to the presentation. We had a very strong quarter regardless of very challenging regional situation, geopolitical war ongoing in Ukraine. Nevertheless, I think Georgia is going through a very positive economic trends and that is reflected on the bank. We've done slightly better in terms of not just the economy, but overall, I think our profitability and numbers are very good and the franchise has done very well. Let me share the presentation. I will try to cover it quickly. Here you go.
Our profit is GEL 290 million, which is a record for a quarter. It's up by 56% year-on-year. Return on equity was 32.4%, which I think is a record as well. Cost-to-income is 30.6, which is record low. NPS is all-time high, which is also record of 60, which brings me the most joy, quite frankly, out of all these numbers. The monthly active users of our mobile and internet bank has gone up more than 1 million, which was almost an unachievable number one year ago, so 31% year-on-year growth. Overall I think those represent very strong numbers in terms of profitability, cost control, as well as the franchise trends, as you can see in NPS and monthly active user growth.
Now, a few words on the economy. As I mentioned, the Georgian economy is doing very well. Nine months numbers were 10.2% real growth, and that is on top of last year, 10.4%. We raised the expectation for the full year to 10.2% again, as well, because of nine months, 10.2%. And overall the numbers are very strong. They are driven by strong export growth, strong remittances, tourism full recovery. We use comparison to 2019 number, which was pre-COVID and was a record tourism inflow number. We use that in dollar terms as a comparison.
We have achieved more than that, although in numbers, there's still a lot of upsides for next year. Next year we expect, as I said, for the full year, the expectation is that the growth will continue at the same pace. After more than 10% growth for two years, next year and some global slowdown, we expect 4.8% growth. Still we see a lot of tourism and as well as large projects starting because of Georgia becoming very important corridor given the current geopolitical developments. On the monetary side, inflation remains the challenge.
Although as you can see over the last few months, let's say there's a trend downwards and the last showing was 10.6%, still high, much higher than the 3% target. That is the reason why the National Bank is maintaining tight monetary policy with 11% refinancing rate, which has been there, and we don't expect that number to come down for next quarter and probably somewhere from spring we should see that number decreasing gradually. Also, the National Bank has a few months ago limited the maximum length of consumer loan and made the payment-to-income ratio stricter, thus limiting the availability of consumer loans to slow down the expansion of money.
Lari, as a result of all the regional trends, has strengthened from the beginning of the year by 9.5%, which is very nice. That is happening while the national reserves are at all-time high above $4 billion. The National Bank has been buying U.S. dollars since the military conflict or the war that started, every month after March, basically. Nevertheless, lari is getting stronger and, you know, is strong. At the same time, what we are seeing is that dollarization on the bank asset side, on the loan side, is at historic low at 45%.
The measures that National Bank have introduced in terms of basically dollar loans subsidizing lari loans. Basically, but just asking for more capital on dollar loans than lari is working very well. I think it's definitely less of an issue, if at all. What we are seeing is that loan to legal entities that SMEs and corporates year-on-year growth has dropped to 8.5%, largely due to uncertainties as well as much higher cost of borrowing in U.S. dollars. Households have continued to borrow mainly on the consumer side and some mortgages.
You can see that as the economy, the real growth is at more than 10% and inflation is more than 10%. Nominal growth is 20%, and in dollar terms, there's some appreciation of lari. Basically, there's a major deleveraging going on in the country. As you can see, banking sector loan to GDP basically has come down to 62%, which is, that's pre-pandemic level basically. As well as the national debt, public debt is expected to hit below 40%, which is pre-pandemic level as well. That I don't think many countries can say that, countries without natural resources that is.
We are experiencing a rapid deleveraging. I don't have it here, but the fiscal discipline is there. They updated the budget to a budget deficit of 3.2% from the original 4.2% this year. Probably we expect the actual performance to be at around 3% budget deficit, which is already quite an improvement after the COVID expansionary period. A few words about banking now. You do remember that our strategy is to be best in mobile payments and loyalty, and do it through focusing on customer satisfaction, employee empowerment, and strength of franchise and good data capabilities while doing it all profitably.
This is important because we want to remain relevant to our customers on a daily basis. We pay a lot of attention to that, and I think we've been delivering quite well there. Those are some of the numbers, as a result of our focus. This middle line here shows the monthly active users, the digital monthly active users. I mentioned it already, we are up by 31% year-on-year. Also what is interesting and I think quite notable is that our monthly active user, which includes digital as well, non-digital total, is at more than 1.5 million. It's 18.7% higher versus last year. In October, we added another 50,000, which is an incredible number.
I think more and more people are using Bank of Georgia services. There are some double users obviously there with other bank users also using Bank of Georgia. There's still plenty of cash economy in the country and more and more people are using our services, which makes us quite happy. There's plenty of upselling opportunities on these customers and that is good. Daily active users to monthly active users, the ratio is 45%. Year-on-year is up by 4%, which more and more people are using it on a daily basis. What this means basically is that 450,000 people on a daily basis use our services. Every day, 450,000, almost half a million people.
65% of our total customers are digital right now. This includes some people that are digital, but also are using non-digital other channels. There's plenty of opportunity to also offload our services to digital channels there. In terms of number of transactions, we are growing and 96.7% is done in non-branch transactions and an increasing proportion, which is almost 56% now is done through our mobile and internet bank, mainly it's mobile. Our product offloading is 34%, and we would like to increase that further. There are certain products where it's 70%, other products that are 20%. We'd like to increase that and there will be a lot of focus there. On that front.
In terms of monthly active users on our business digital channels, it's up by 34.7%, and the Q-over-Q is up by 11.8%. It's number of transactions through those channels are up by 40%. This is very important channel, and we would like to have more and more capabilities added to it. We are rolling out different products and services for our legal entities, including on mobile app for businesses. In acquiring business, our franchise is growing. Our market share is up by 7.6% year-on-year, which is an incredible number, and we like to see that. 48.8% in all acquiring in Georgia is done through our acquiring services.
In physical costs, we have larger market share at 54%, but I think we should look at combined version. The volume is up by 45% year-on-year. This one is the one that I think I love to look at. Net promoter score going up from last quarter of 52 to 60%. That is an incredible result of a lot of work by the whole team that is of Bank of Georgia delivering products, services, listening to our customers, incorporating their feedback in our product development and services. All of this have resulted in 60% net promoter score. Again, that is done by third party, and it's done with random citizens. It's not testing our customers.
It's basically everybody on the street. It's a high number for any universal bank. Now, in terms of results, you have seen it, so I'm not gonna dwell on it. Operating income up by 15.1%. For nine months, up by 43.7%. Profit GEL 219 million, which equates to roughly GBP 2 per share in one quarter of net profit. Cost of risk at 1%, which is more normalized level where we are. Deposit growth has been very strong, and I'll cover that. Capital growth and capital buffers are at all-time high, with around 2% buffers at all levels.
Share of non-interest income, which we monitor closely, is at a record 44%. That may come down a little bit after normalization, but still it's high. The rest of the numbers I think we covered. Liquidity is at an incredible high level. Deposit franchise is very strong. We have always been quite strong, but I think it's becoming more and more important, given the place in the cycle. We are going into a high interest rate environment and deposit franchise is, I think, more and more important, especially in emerging markets. Operating income, I think we mentioned, 51% up nine months, 43% up. Net non-interest income is up year-on-year 121%.
That is, as you can see, a big increase in the NII, but also net fee and commission income has increased quite well, which is very nice. Net other income, by the way, we had a negative effect of bond buyback that we implemented in the third quarter as well of roughly GEL 7 million and that's why we have a very low number here in terms of net other income. Operating expenses were up year-on-year 25.7%. As you know, we are in a inflationary environment, so we have experienced high cost increase. Luckily, that is still way below our revenue numbers.
As you can see, cost income ratio has come down to 30.6%, which is historic low and 32.5% for nine months. Loan portfolio growth, we look at the constant currency basis because that's what really represents the business activity. There we are at 12.9%, year-on-year. As you remember, we guide around 10% growth. Now we're slightly higher than that, and we probably expect to be slightly higher next year as well. Deposits grew incredibly 40% on nominal terms that was 29%. Basically, there's been a lot of liquidity that came in.
Some of it, about a quarter of that growth, is coming from the non-resident Russians, but three-quarters are from the residents. That three-quarters could probably have benefited from the capital flows into the country because when migrants come in, they buy apartments and they spend money in shops and so forth. All of that money comes in from residents. Overall, capital flows has benefited quite a bit from recent trends. In terms of net interest margin, we have kept it flat this quarter versus last quarter. We increased the investment in the tradable securities in T-bills and treasuries and so forth, which have much lower NIM.
As you can see on the balance sheet, basically all the growth in nominal terms in interest-bearing assets have been in treasuries, which have much lower NIM, but still accretive. If that increase did not happen, it would be probably 20-30 basis points higher. We expect next quarter two a slight increase, probably more than 20-30 basis points. But broadly stable, slightly higher. Basically, that's the expectation. Loan yields, you can see cost of client deposits is flattish, but also we should see a slight uptick there in the future. Cost of risk, as I mentioned, it's a more normalized level of 1%.
We are seeing the NPLs coming down slightly, and the NPL coverage roughly the same at 90%. Profit we mentioned already, up by 56% year-over-year for nine months, up by 53%. Return we covered already, so I will not dwell here. This is also very good that all of this is done while maintaining very strong buffers above the minimum requirement. They are quite well above the minimum requirements of fully loading expected ratios, which will be in one year's time, in December 2023. Just a reminder that if we were reporting in IFRS, our ratios would be higher by 2%-2.3%, which we will be showing probably from next year because National Bank is working.
I think if all banks are ready, then we should start reporting National Bank as well as IFRS standards from next year. You'll be kind of National Bank old standard and National Bank new standard, which will be under IFRS rules, and you'll see both of these numbers and even higher capital ratios. Liquidity is very high, and as you can see, the loan demand is not as much as the deposit inflows, which is a good thing. We'll be deploying that liquidity in liquid instruments or loans, depending on the demand. This is the summary slide. Basically, we are delivering well above our midterm guidance of 20+% return on equity, above the loan book growth of 10%.
We think we'll be above both of these, all else being equal, that is, for next year. Capital distribution of 30%-50%. We have done interim dividend and share buyback, where the first part of last year's share buyback, some GEL 3 million is done. Right now, GEL 40 million share buyback will be going on. It's only a small part of that 40 that is done. I think 30+, it will be used for buyback. I think I'll stop here. It's a record quarter by all measures, and I'm happy to answer your questions.
We'll be taking the questions, and you can type your questions in the Q&A chat or use the raise hand feature here, or if you're calling from phone, just press star nine and we'll see your hand in Zoom. We have actually the first question from, I think, James Hamilton.
Thank you, and congratulations on a great set of results. I'm sure all the UK banks will be getting 32% ROEs in Q3. I'm interested in the FX, obviously a fantastic result.
What I'm interested in is if you could talk a little bit about where the inflows into lari are coming from, where they're going to, and what the outlook is for the lari and FX revenues, if we get to a point where some of the migration unwinds maybe with the resolution in Ukraine at some point, and how you feel about where FX revenues are and where the lari is relative to what you would maybe expect in a more normal environment.
Hi, James. In terms of FX, it's anybody's guess, but I think I would say that the current income, about one-third is probably extraordinary and at some point will go away. So far we are seeing good activity there still. Slight decrease in FX on the peak, but still good numbers. In terms of lari, we are seeing not only like a temporary inflow of people coming in and doing something here, but we are seeing tens of thousands of people setting up their businesses here, working from here for their IT customers worldwide, buying apartments and so forth. It's, you know, part of it is temporary, but part is not.
Also, what's interesting is that when you look at what has happened, regardless of the resolution, which we would all like to see sooner rather than later, I think the taking of sanctions from Russia will take some time. Okay. Iran is sanctioned heavily, and Russia is now heavily sanctioned. Central Asian countries, transportation route for them, basically, the South Caucasian corridor is becoming more and more important and for the West as well, for Europe, for U.S. I think a lot of different projects are being discussed right now in logistics, on railways, in energy corridor, ports. Th ere's so many big projects being revised at an unprecedented speed that I think there's.
Yes, there's some downside that some people may leave, but some upsides that we are seeing is incredible. I think there will be developments, but I think Georgia is becoming more and more important for a quite large region as a corridor. That corridor is not just for goods, but for services. There are companies that are being set up, regional international offices being set up for the region in Georgia that covers, let's say, not only Caucasus, but some Central Asian countries. Those are some of the trends that we are seeing.
That 10% increase in real growth that you are seeing against challenging environment in the world in most places is a result of these large movements that are happening. Those large movements I don't think they'll disappear regardless of let's say several dozen thousand Russians going back.
Okay. Thank you. May I have a second? On capital, I mean, clearly CET1 ratio of 14.8% is great. It's very, very strong. You have significant surplus there. You know, is there a hard ceiling that you have in terms of where you think it's in shareholders' best interests not to see the CET1 ratio rise above, or are you happy for it to continue to move higher ad infinitum?
I think we've been throughout our history, we've demonstrated that we are careful with capital, and we distribute it to our shareholders, other than the COVID year, obviously. That's what we intend to do. Right now. Although we are in a very profitable times, at the same time, it's a very volatile time. There's still a conflict not too far from you know, from where we are. I would like to keep slightly higher buffers until we see that those uncertainties coming down. Having said that, there's plenty to distribute, and we will be distributing in dividends as well as share buybacks. A s we said, 50%-50% payout ratio will be respected.
Given the high numbers that you are seeing t hose will happen. If there's more capital, there could be extraordinary distribution as well. Basically that, we'll be careful with capital.
Okay. Thank you.
Thank you, James. Now we have the next question from Ronak. Ronak Gadhia.
Thank you for the presentation and taking my questions. I guess my first question could just be maybe a follow-up on James. You talked about the FX trading income and how sustainable that may be in the medium term. Could you also talk a little about the same on fees and commission income? We've seen a pretty strong growth for a while now. How much of that could be due to exceptional transaction volumes, and how does that play out?
I would say, it's not an exact science. I would say 90%+ is sustainable.
Sure.
That 90 will grow. I don't see it decreasing substantially. Obviously, it's the overall macro situation affects it. Yeah. I mean, most of it is sustainable, 90+.
Okay. Understood. The second question, I guess, is on your margins. We've seen a year-on-year improvement, which is positive, but there's a bit of a contrast now compared to what your competitor is reporting. Could you maybe just touch on your thoughts on what's causing the difference between your numbers and theirs? Why are we seeing a persistent upward trend there whereas yours have flatlined?
Yeah. I would not be the best person to ask about their margin. We can talk about ours and expectation of slight increase over the next quarter or two. I would just note that we are talking about consolidating numbers, and they have other things to consolidate, and we have other things to consolidate. On the national NBG numbers, we don't see such a big divergence.
Okay. You're saying this just because of, maybe from an IFRS perspective at a group level?
I would not be the best person to ask about their numbers. Please refer to them. We can talk about our numbers. In our numbers, we will see a slight increase in NBG as well as IFRS reporting over the fourth quarter and the next one.
Okay. Just as a sort of, again, following up on that theme of exceptional growth, something that you highlighted, you've had very strong deposit growth, a lot of liquidity coming in. A lot of that has gone into government securities. How do you manage your balance sheet, or how are you thinking of managing your balance sheet over the next six months? Do you think some of that liquidity could reverse, and then we start to see slightly more normalized balance sheet, or how should we see that progressing?
Certainly. We wouldn't like to see such high liquidity, and we want to deploy it. It will be deployed in profitable ways, basically.
Okay.
If not, then we decrease the rates and push some money out. Right now, I think it's a good problem to have given where the rest of the emerging markets are.
Are you seeing loan appetite pick up after, like, in the third quarter, it had moderated a bit because of regulatory reasons or and whatnot, but is that starting to turn around?
I mean, this is some seasonal activity. Fall usually is pretty good, but I wouldn't say that the loan demand is picking up in a major way. We see slightly more activity on the corporate side, but people are still not too aggressive. Also, what you see is that dollar loans are becoming even for the best corporates double digit now, and lari are also expensive given the high refinancing rate. C entral banks are doing everything globally as well as locally for people to slow down borrowing, and it's working. Same in Georgia. Plus you have this regional instability. T heir economy's growth is so strong that there are plenty of opportunities. Companies are having very high profitability recently.
There are some business activity happening, but will it be a huge boom of borrowing? I don't see it, not at this rates.
Understood. Thank you.
Thank you, Ron. Okay. We have two questions in the Q&A chat. One is about buybacks. Is there a valuation level at which the company feels that buybacks will no longer be a prudent use of the bank's capital? That's the first question.
We are nowhere close to it, Stephen. Steve, sorry. Right now, I think we are grossly undervalued. I mean, we're trading at 3.5x P/E, even at these levels of capital. You know, probably, I mean, finance theory tells us that it shouldn't matter as much, but right now, do we think that we are undervalued? I think we are grossly undervalued.
Johan Muller, congratulations on another great quarter. Thank you. Why did the risk-weighted assets go up so much in Q3?
Some of it is. We can ask our CFO to join if that is easy. Would that be possible, Nini?
Right. Yes.
Some of it is.
Yes.
Something to do with.
I'll unmute our CFO .
With investments in securities. Sulkhan Gvalia, CFO, will answer. Also, CRO is on standby at any point.
Yeah, he's joining.
Okay. Finally joined. Yeah. Thank you, Nini. The main reason for the increase we keep reported minimum reserves for the deposits in foreign currency in National Bank of Georgia on increased deposits in foreign currency. These reserves are weighted 100%. This was the main reason for risk-weighted assets growth.
It's maybe obvious, but basically, when we deposit 25% or more, 25 mainly, of our U.S. dollar and euro deposits with National Bank, those are treated as 100% risk-weighted assets because it's not in the same currency as the National Bank, as the printing machine. They consider it quite risky. This is just one hidden capital pocket. There are many. There's plenty of capital in the system.
Ronak has his hand up, but I think he just forgot to. No, he doesn't have the hand up anymore.
All right. Let me wait for about 30 seconds, and if there are no more questions, that would be it. But please, if you have questions. One, two, three. Well, if there are no more questions, then I would like to say thank you for your attention. It's very volatile times. But having said that, I think, the economy, Georgia, as well as Bank of Georgia, is doing much better than we expected in the beginning of the year when this war started.
It looks like there are some downsides as well as some upsides, but I would say that the upsides are very significant, based on the fact that Georgia is becoming more and more important for a larger region as a transport corridor and almost, I wanna say exclusive, but almost, let's say the main corridor for a very large region. That is important in terms of energy safety for Europe. I think all of that is translating into a very significant project being discussed for the South Caucasian region in rail, in energy, gas, in oil. Some of this will take time. Ports, there are energy projects in Georgia being revived at an unprecedented speed. There will be medium-term positive things happening for sure.
Now, negative may happen as well, but those things are quite good. I think we, as a franchise, are getting stronger. These two things combined, I think means that Bank of Georgia should benefit, disproportionately well, given that our franchise is getting stronger and also the country is doing very well. That's what we are looking forward to, and we will continue focusing on our task and what our customers want, making sure our employees are empowered and motivated to deliver good results. Thank you very much. Bye-bye.
Thank you. Bye. Take care.