Hi and welcome all to Bank of Georgia Group PLC's first quarter of 2023 results call. My name is Nini Arshakuni. I'm Head of Investor Relations at Bank of Georgia, and I'll moderate today's call. First, we'll start with our presentation. Then we'll have the Q&A session, during which you'll be able to ask questions by either raising your hand here or typing them in the chat or pressing star 9 if you're dialing in from phone. For your information, this call is being recorded. Now I'm joined by the Group CEO, Archil Gachechiladze, who will discuss the business performance as well as the macroeconomic developments. Archil, you can go ahead now.
Thank you very much, Nini. I will jump into the presentation. Thank you very much for joining the call, and we'll go through the presentation very quickly so that we can allocate more time for Q&A, which is usually the most interesting part of the call. We had a very strong performance in the first quarter of this year, which continued very strong last year's performance. The profit was GEL 300 million, up 25%, return on equity of just shy of 28%, cost-income 29.1%. This is the first quarter after the three quarters where return on equity was higher than cost-income, but it unfortunately reversed, but only slightly.
NPS of 58% with digital monthly active users up on an annual basis of 31.6% to 1.2 million, which is extraordinary given the small size of the country. Now, a few words about the macro because that has a very big effect on us as a large player here. After two years of above 10% real economic growth, we had a first quarter, which had a real growth of 7.2%. There's some monthly numbers, but quarterly is what really matters. It was driven by the strong external flows and overall very good performance.
You see here that there's a healthy growth in exports as well as imports, a healthy growth in remittances and the tourism, which is a very important part of our country's economy, is up by 38% versus the 2019 numbers, which were the peak before COVID, obviously. In terms of the number of tourists, we're still at 80% versus the peak. We expect very, very strong performance this year because we're just starting the year, and that will have some good results for the country. Apologies.
Going forward, the next two years, the projection for this year is to a 5.8%, which Galt & Taggart, our investment bank subsidiary, is projecting 5.8% and next year 5%. That is an upgrade from the initial 4%, and the upgrade comes from very strong start of the year. macro numbers are very strong in the beginning of the year. What's even more exciting is the fact that the inflation is under 3%. 2.7% is the last reading at the end of April. Although core inflation still remains slightly elevated at 4.7%, but this is much, much lower than some of the regional comparable comparisons.
This allows the National Bank to lower the refinancing rate, which has been lowered by 50 basis points just recently, a week ago. That I think creates more room to lower it further to by another 100 basis points that we are projecting by the end of the year and further after that. Lari has got stronger by 7.6% by end of April from the beginning of the year. This is on top of about 12% strengthening versus U.S. dollar last year. Overall, very strong performance by regional comparables. Obviously, the external flows have been helping Georgian Lari get stronger. This has been happening regardless of the fact that the National Bank has been buying very strongly.
You can see on the right chart here all the buying that the bank has been, National Bank has been doing. The reserves are at the all-time high at around $5 billion, and have built up very good buffers for bad times. Also on the loan growth side, it has slightly picked up on a nominal basis on, in the constant currency terms at 13.8%, slightly shy of the nominal growth of GDP, where it has been below nominal growth of GDP over the last two and a half years and has resulted in deleveraging, and we'll see it in the next slide. In nominal terms, it's much less. It's 3.6%.
That's due to strengthening of Lari because about 40%, 44% of bank loans are in U.S. dollar terms. Which is at the historic minimum. As you can see, it has come down strongly from the sixties level over the last, let's say, seven, eight years down to 44%. The non-performing loans is low by regional standards, and the system is reported about 1.5%. This is the deleveraging that I mentioned. The economy had a very strong growth and a lot of gotten stronger. Bank loans to GDP came down to 60.7%, which is at roughly 2018 levels. That creates more room for growth going forward.
Also the national debt to GDP is below 40% at the end of 2022 and is projected to further decrease towards 36% over the next two years. That's briefly about the macro. Now a few words about the bank. We are FTSE 250 company, as you know. A strong leader in digital banking in the country, and top of mind and most trusted bank. Delivering more than 20% return on equity and high standards of corporate governance and strong focus on ESG. We'll cover some points going forward. We have about 45% of our portfolio is retail. We have strong SME and corporate banking, which is distributed almost equally.
We are focused on mobile payments, mobile application, payments and loyalty going forward. The main focus is being relevant for our customers on a daily basis, and that's through the mobile applications for payments. We've achieved significant progress in those, and how we achieve it is by focusing on customer satisfaction and centricity religiously almost. Focusing on our people and the culture within the organization, the strength of our brand. Use data and AI in decision-making increasingly, and focusing on risk culture on all levels, first line, second line, and third line. We are delivering more than 20% return on equity.
We're distributing 30%-50% of our net income, and with a growth of 10+%, which we've been beating, these ratios. Going forward, I think we've discussed briefly that our mobile application is a financial super app. It's not a super app in a sense that you cannot find all kinds of things on the application, but it's a financial super app where you find most of the things from a financial point of view that you can be looking for in this application. The number of products and abilities are increasing of this application constantly.
We are also monitoring the user experience on a constant basis and modifying it to increase the satisfaction of the clients. These are the results. Over the last 12 months, our number of retail clients have grown by almost 70%. But the digital users have grown by 31.6%. You may say how that is possible. That is possible by increasing the number of mobile application users in total customers from 62% to 70%. While the number of customers increased from 1.4 million - 1.7 million, roughly rounding it, the number of mobile users increased from 900,000 to 1. almost 2 million. More importantly, more and more people are using it on a daily basis.
47% of our users are using it on a daily basis. When you look at and think about our financial app, more than half a million people open it on a daily basis. This is probably after Facebook, the most, the most, let's say popular and used application in Georgia. Definitely a financial application, but in other ones, not all stats are available, but it's a very popular media. In terms of number of transactions, mobile is becoming larger and larger with internet banking, but it's predominantly mobile. It's now 60% of all transactions. As you can see, in terms of product offloading, we have come a long way, but still 44% versus all the other products that are sold through branches or otherwise.
ty of upside here. We are selling more and more through our mobile application. In terms of our business offering, digital monthly active users are up by 40%. That also underlies the basis of number of transactions also going up by almost 38%. Very strong growth here and very good customer satisfaction there that we strive to have more than 80% usually customer satisfaction score. Here we have very good progress. In terms of our merchant acquiring business, our volumes are up by 55% on an annual basis. That represents market share of almost 52%.
We have almost 1.1 million people using our cards to make payments. Monthly active users of our cards is up by 33% in 1 year, which is also significant. This is less to do about digitalization and more to do with our integrated approach to payments and loyalty, and it's working very well. In terms of customer satisfaction, you're all used to this that we are religiously focused on this. We are about in the range of 60%, 58 over the last few quarters. We are focused on increasing the quality of our services as well as removing some of the unhappiness with number of different services, and we're doing it channel by channel.
We'll be striving to achieve more here. In terms of results now, in the numbers, return on equity, just shy of 28%, cost of risk of 1%, and our range is 1%-1.2%. You may remember cost-income of 29.1%. Very strong capital position, 500 basis points above the minimum requirement at 19.5%. Loans up by, in a constant currency terms, by 15.1% on an annual basis and 3% on quarter over quarter, which is a good start for the first quarter. Similarly, in deposits, our deposits are up by 3.3% Q over Q, but on an annual basis, very strong growth of 42%.
In terms of income, our operating income is up by 42%. Net non-interest income is up by 54%. There you can see more normalization of FX, as you can see. In the net fee and commission income, we had a chunky advisory fee of GEL 27 million in the first quarter, but without that, I think the growth was north of 50% even on all the other types of fees as well. Very strong growth overall. The operating expenses have grown by 18.7% on an annual basis, resulting in the improvement, significant improvement, I could say, of cost-income ratio from 35% on an annual basis to 29.1%.
Loan portfolio growth, I think I touched on, 15% on an annual basis and 42% in deposits. Very similar comparable numbers in loans of 3.3% and 3.3%. Very strong funding overall. As you can see, we have about GEL 17 billion of loans and GEL 18.3 billion of deposits. Very strong growth here. What's very interesting here is that we have managed to increase the loan yield given the high interest rate environment, and in some cases, repricing of loans because they're variable. We've managed to keep the deposits and notes at a relatively low rate and the uptick here is lower.
Moreover, because we had strong growth in deposits, we've been able to replace the other wholesale funding with our deposits, and that has overall resulted in the cost of funding coming down to 4.5%. The result is net interest margin, which is very strong growth, up to 6.4% year-on-year basis. It's 110 basis points. A lot of people may be asking, "Is this sustainable or not?" Long term, probably not sustainable. Short to medium term, looks pretty good. As we go forward on the next few quarters, we expect these numbers to stay relatively flat. At some point, it will probably come down as we will be paying more for our deposits, in high interest rate environment.
Cost of risk is at 1% on the lower end of our medium-term guidance of 1-1.2. We had improvement in the NPL ratios, coming down to 2.4%, resulting in a slight improvement in the, in the coverage, at 73%. That was mainly in the corporate side. So we're pretty happy with the quality of the portfolio. So all in all, profit resulted in 25% uptick. What we are paying more and more attention to is return on assets, which is roughly 4.4%, which is very strong by any standard for financial institutions. We have very strong capital ratios. I think the next page here summarizes well the buffers that we have.
A core Tier 1 is 5%, Tier 1 is 4.6%. Slightly less on the total capital because we're gonna have to borrow that money, but we will as if need be. The risk weighting, slight drop in risk weighting assets is caused by less dollarization. Dollarization happening in deposits as well as in loans. Very strong capital position. This capital position obviously will be reduced by about 200 basis points by the issuance of the dividends and the share buyback that is ongoing. Nevertheless, capital generation is such that it will build up very strongly, very quickly. Liquidity ratios are also very high at around 130 basis points.
It's 130%. As I said, the funding of our loans with our deposits is also strong and below 100%. All in all, to summarize, basically, you see that our profits have over the last few years have gone from GEL 514 million - GEL 1.1 billion last year. We've put some other numbers here, the qualitative numbers, which is digital monthly active users alongside. You can see they're very close. This is coincidence, but there could be some causality there as well. As well as the net promoter score, which shows our customer satisfaction. It's all interrelated.
Not a direct relationship obviously, but it's interrelated and over the last few years, our focus on digitalization, the culture in the organization and the customer satisfaction have resulted in very strong numbers. Overall, the loan book growth, we have beat our 10% constant currency growth guidance over the last couple of years. First quarter is strong as well. We are returning more and more of our capital to our shareholders because we are in a very strong position to do so. We will continue going forward, being very diligent about our capital.
We also wanted to show here the number of shares that, due to the buyback and cancellation that is happening, we are reducing the number of shares, and you can see the numbers here, and that's an ongoing process. Thank you very much. That was probably the shortest presentation I've ever had, so that's 20 minutes. Nini, I am happy to answer the questions that our investors might have.
Just a quick reminder, you can raise your hand in Zoom, or you can use the Q&A chat if you want to type your questions. If you're dialing in, please press star 9 and we'll see you in the Q&A queue. We have couple of hands, actually. The first question is from Robert Sage.
Yes. Hi there, thanks very much for the presentation. I've got a couple of questions, actually. I think you were alluding to this, wondering how you would encourage us to think about your capital ratios. I mean, even given the fact that, I appreciate the dividends and buybacks will reduce at a longer equities. You do appear to be generating more capital than I'm expecting with the reduction in risk in asset intensity. Do you think that the central ratios expect further share buybacks over and above the $148 million that you've already announced for this year? Would you actually sort of see the levels remaining at a significantly higher level than your minimum requirement? I've also got a second and unrelated question related to costs.
Now you've sort of shown us how the inflation numbers seem to be reducing quite significantly within Georgia. I was wondering if you could sort of look forward in terms of how you think your costs could progress through the course of this year, particularly because you're running with very positive operating jaws in the first quarter, in terms of cost growth significantly below the level of income growth.
Thank you, Robert. On the first one, this year, regardless of the fact that the macro numbers are very strong, et cetera, et cetera, we would like to have higher capital ratios than we usually have. We will be running high capital ratios this year. Having said that, I will not exclude further capital distributions, obviously. But you know, in general, we'll be having higher capital ratios than we would in more calm environments, let's say. There's still a war going on and there's some political turbulence around this region. That's on capital. You know, do we foresee further buybacks? We may, but you know, we will let you know if and when we decide.
Otherwise, I'm in no position to guide on further buybacks at this point. Regarding the costs, we are seeing some cooldown, let's say, in inflation, but this is relatively new and we'll be seeing how that has an impact on further expenses. So far we've been able to grow to have operating jaws positive and we'll try to have that going forward.
Thank you.
I cannot provide more guidance in terms of the exact amount of exact, let's say, growth. All I can say is that it will be higher than the inflation, our OpEx growth, obviously because our businesses are growing. We are hiring more people in the back office, and our numbers are growing, but we have been able to grow the business much faster than our costs and number of people. That results in a cost-income of now below 30. Thank you, Robert.
Thank you. I think Robert is done asking questions.
I think the connection was.
Yeah
... was patchy.
Okay.
Yes.
The next question is from Ron Acadia.
Yes. Good afternoon, Archil Thanks for the presentation and congratulations on the results as well. Great numbers again. Maybe the first one is a follow-up question to Robert. On the capital side, you said you'd like to maintain a slightly higher capital ratio this year. Any particular reason for that?
Well, small war going on in the region if you've heard, so that's the reason.
Okay. It's really just the geopolitics that you're being cautious about?
Yes.
Okay. Okay. Understood. Second question on NIMs. A bit surprised by the increase in lending rates, in particular, in the first quarter. It seems to be coming quite late in the rate hike cycle. You know, the NBG rate has been at 11% for quite a while. Like, while, you know, LIBOR rates have been relatively elevated but flattish for a few months as well. If you could just help us understand, you know, why we saw a significant increase in lending rates during the quarter.
and SME as well as some cases in the mortgages as well, it is common to have a first year fixed rate, which basically as the rates go up, those fixed rates do not go up in the first or second year. And that is why I think, you know, Whenever it comes, whenever the fixed period expires, then the hike happens. And that is what has been happening over the last, let us say, six months. So it is not, it is not a real time. When the rates go up, it is not repriced on a monthly basis. It is repriced
Right
... in some cases on a quarterly basis, in other cases on a semi-annual basis. There's, on top, I think the high interest rates kick in slightly late because of the fixed rates that some of the clients were enjoying for one or two years on their multi-year credits.
Okay. Understood. Just a final one from me on the fee income side. Again, kudos on the strong growth we're seeing. Could you maybe just help us understand on the monetization of the digital payments revenue? Could you share some, I don't know, information on, you know, the revenue per transaction or take rate or any of that sort? Anything of that sort?
Yeah. Not at this stage. We'll be separating out more numbers on the payments business as it has become a significant business. Overall, I think, you know, on the margin side, we have been able to maintain the margin on our payments business, especially with lower cost provider of services on mixed debit specifically. We have been passing back the loyalty points to our customers for that, and that has been working very well for us. All in all, I think the margins and numbers we'll provide later on, but it's more than 100 basis points net margin on acquiring business.
Okay. The momentum that we have seen in the past couple of quarters, you think you can sustain it at those levels, excluding the, obviously, the investment banking fees?
We will see. I mean, last year was very strong year, right? I mean, when you look at the second and third quarters last year, obviously the FX was outsized and we pointed out that those will be coming down. You have seen somewhat reduction in the fourth quarter, and then in the first quarter you are seeing more normalized levels. That, I think, will probably continue at those levels roughly, so it's not gonna go back to those higher levels unless other things change. The business itself and the macroeconomy is doing well, so other parts of the business I think will do well. I don't know, Ronak, if that answers your question.
No, it does. It does. Thanks. Thanks for that, and thanks once again for your time.
Thank you, Ronak. The next question is from James Hamilton.
Hi, James. Just to add to Ronak's question. I would say that in the merchant acquiring business, our main competitor is not other players in the market, but rather cash. We have to also realize that even people that are actively using their cards, they only spend about 40% of what they receive on their cards as salaries or otherwise, electronically, and they withdraw about 60% of all the money from their cards and spend it as cash. When we are talking about acquiring business, what we are trying to do is basically incentivize our customers as well as merchants to spend through their, with their cards instead of withdrawing cash and spending with cash. That is our main competitor, and there's plenty to grow and do there.
I think we will be attacking cash, let's say, over the next few years there. Thank you, James. I apologize, and, I'm all ears.
Two if I may. Firstly, given where inflation is and where central bank base rates are, what's your outlook for base rates at the National Bank of Georgia? Following on from that, if you expect them to decline from here, which I'm assuming you do, what are the NIM implications of that over... What sort of timeframe do you see before base rates were to get to a sort of a normal level? Apologies, that's an analyst one question. The second question is more sort of strategic. You've talked a lot about digitization of the business.
What I'm wondering is, as you look through over the next sort of two, three, five years, as digitization penetration gets higher and higher, will you get to a point where you can start to, you know, shrinking your physical infrastructure? If you can shrink the physical infrastructure and digitize more, what are the where do you think the cost benefit can get to?
Got it. Thanks, James. The first question, at the end of the year, we expect, our current expectation is 9.5%. From the current 10.5%, let's say couple reductions to the refinancing rate, further going down to 8%, in over the next 12 months after that. End of 2014. Let's say, using the economist's favorite phrase, all else being equal, we'll be seeing reduction to 8%, by the end of 2024. Implications on NIM are not significant because we will be also reducing the. Slight reduction will happen as a result of that, but it's not as significant as you may think.
Obviously, the funding that we have from current accounts will be deployed at less than that, it doesn't affect the consumer. It only affects really the really mortgages and lower margin business, it's part of it. You know, you may have, I don't know, 20, 30 base points reduction over that period of time on a lot of portfolio, which is about, let's say, two-thirds, slightly less of the total portfolio. Let's say, just off the top of my head, around 20 base point reduction, not significant. Regarding the, what was the second question?
Digitization and the implications.
The digitization, yes.
... for NIM and physical-
And, and the-
Physical infrastructure.
Yeah. Yeah. In Bank of Georgia, we have several types, but mainly there are two types. One is larger type of full service branches. We have smaller branches, so-called express branches. I think what we are doing now is that it looks like express branches, which we initially focused on transactions for people to do more and more and so electronic channels for people to start banking, let's say. It was for unbanked population to have easy access. That strategy worked very well, and we also issued a lot of consumer loans, high interest margin consumer loans through this network.
I think that network is maturing, let's say, and some of it will be closed down and others will be transformed into a smaller scale but full-fledged branches. All in all, I think over the next, let's say, 3-5 years, we'll be seeing reduction in branches, and getting larger format, but less branches so that people go there for major things and they don't go there for transactions. We are seeing that movement towards that. In terms of the costs, what does that mean for our costs going forward?
It doesn't change much because as we close down a small branch and save a little bit of money on few operators, we're actually employing more and more digital staff that we pay several times more, be it user experience or customer satisfaction people or coders or others. Testers and so forth. You know, all in all, I know it looks very good to see the branches shut down and you think, "Okay, we'll save a lot of money," and, you know, this Excel works very well, but it doesn't work like this. We will be shutting down branches, but we'll be employing more people in the back office.
All in all, I think what we are trying to do is maintain positive operating jaws, as long as the business doesn't suffer. If the business requires more, we will spend more like we did four or five years ago. Right now, we are able to maintain positive operating jaws and, by in fact increasing the quality of our offering. I think if, as long as we continue that, there will be ups and downs in different parts of the business, including in branches and back office.
Could I have sort of one more? That is.
I know it didn't answer your question, it just confused you. It was not by design. This is the real world.
I mean, clearly you're the dominant merchant acquirer in Georgia and I'm sure you'll have seen what's happening at Network International. I mean, all of the UK banks divested their merchant acquiring operations a long time ago. They're complete standalone units, non-capital intensive and extremely valuable. To contextualize this, I haven't got your numbers, but I have asked for them. To contextualize this, if you look at someone like a Bank of Cyprus, if you apply the Network International multiple to their JCC business, it, a part of the group that is 3% of profits is worth 33% of the market capitalization. I suspect it may be a very similar story for yourselves. I was just sort of wondering strategically, how do you view merchant acquiring?
We view it as a very valuable business. We view it as a fee business, low capital intensity, and high growth as well. As I outlined, I think it is clear that the ability to grow business there is much higher than in the other parts of the business, including in balance sheet business. Balance sheet, you cannot grow much higher than the nominal growth of the economy, although the short to medium term that may be possible given the deleveraging that has happened. In the payments business, we've been growing, let's say 40%-50% over the last few years now. Is it possible to continue at those rates? Maybe not at those rates, but definitely higher than 20%, probably higher than 30%.
That is possible because of still larger part of the cash usage in the country. Our position there, I would say let's... You called it the dominant position. I think it's very valuable to our investors, and at some point, if we have to spin it out, we may have to monetize the value. Hopefully, investors can see through that. It's not very complex. It's payment business and bank.
Thank you.
Thank you, James. Next we'll have a question from Craig Matherill, and I'll allow him to talk.
Thank you, Archil, congrats on the results as well. I did step away, apologies if this has been asked. Just around cost of risk, at a group level, it's normalized, you're still seeing recoveries in the CRB business. Can you just talk me through the dynamics there and perhaps how much longer you expect that to happen, or when will cost of risk for corporate and the corporate and investment bank normalize and what that might do to the group cost of risk? Will it push you significantly higher than your through the cycle target that you have? Thanks.
Well, very good question. We expect the cost of risk to normalize, probably... I mean, there's not much more to recover, right? I mean, we had some strong recoveries over the last few years. Having said that, cost of risk in corporate is, let's say it's much less than retail. When it will play into the normalized overall cost of risk, we expect our cost of risk to remain between 1% and 1.2%. This is what we are kind of what we expect medium term.
In terms of other things that play into it, we had cost of retail risk relatively high historically over the last 18 months, and we are seeing it come down slightly and that, there are a lot of things going on in the background for that, with a lot of activities in the risk department, in data and so forth, and that is going very well. All in all, we expect our cost of risk to remain between, let's say 1% and 1.2%, with that is with normalized cost of risk in corporate.
Okay, thanks.
Thank you. I don't see any questions in the chat. Well...
Let's wait for one more minute or two more minutes. If there are no more questions, we can wrap it up. Thank you very much for your interest and for being on the call and interesting questions. As the second quarter is progressing, we are already thinking how it's gonna go and we'll be reporting, we'll be talking to you in about three months time and talk to you then. Bye-bye.