U.S. Markets open in 3 hrs 49 mins

Edited Transcript of BGEO.L earnings conference call or presentation 7-Nov-19 1:00pm GMT

Q3 2019 Bank of Georgia Group PLC Earnings Call

Nov 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Bank of Georgia Group PLC earnings conference call or presentation Thursday, November 7, 2019 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Archil Gachechiladze

Bank of Georgia Group PLC - CEO & Director

================================================================================

Conference Call Participants

================================================================================

* Andrew Keeley

Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst

* Andrey Mikhailov

Sova Capital Limited, Research Division - Research Analyst

* Janna Anikina

BCP Securities, LLC, Research Division - Former Research Analyst

* Osman Can Demir

Wood & Company Financial Services, a.s., Research Division - Equity Analyst

* Simon Nellis

Citigroup Inc, Research Division - MD and Director

* Svetlana Aslanova

VTB Capital, Research Division - Equities Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by, and welcome to the Bank of Georgia Group PLC Third Quarter and 9 Months Results. (Operator Instructions)

Also, I must advise that the call is being recorded today, Thursday, the 7th of November 2019. And without any further delay, I would now like to hand over the call to your speaker today, Archil Gachechiladze.

--------------------------------------------------------------------------------

Archil Gachechiladze, Bank of Georgia Group PLC - CEO & Director [2]

--------------------------------------------------------------------------------

Hello. Welcome, everybody. Thank you for joining the call. By the way, this was an operator that pronounced my name right, first time ever, I think, but -- which is refreshing.

So in terms of this quarter, I think we have 2 main messages, as I outlined in the CEO statement. Basically, the first thing is that there is a completely new regulatory environment that kicked in from the beginning of the year, and I think it's -- we are seeing the full year results of it. And in this new regulatory environment, I think we are fully adjusted and are delivering pretty strong results with good growth and good profitability.

The second is that we have had significant changes in the management of this -- of the company. Out of 14 top management members, 7 are new from this year, let's say. And what we are seeing is that the management have come together now, and are starting to help each other and really deliver very impressive results. And we are seeing it in many different directions. It's the growth. It's the profitability, the market share gains that we have never focused on, quite frankly. And it's the digital capabilities that we are deepening and are investing in.

So in this new regulatory environment, what we are seeing is that the high-yield, high-risk portfolio that we used to have is -- has largely matured out of our balance sheet, more than 90%, in fact. And that has had an impact on a number of things. We've lost certain type of net interest revenue, but we have more than replaced it with new types of revenue, which are larger in terms of the -- each loan and also lower in terms of the NIM. Having said that, we have succeeded -- unlike the second quarter, the third quarter we have shown the positive improvement in terms of the net interest income. But what's more impressive and what makes me quite happy is the net fee and commission income and the FX income. So these are the commission revenue, which are growing 20-plus percent, and which shows the strong franchise and strength of the franchise.

So as you know, in net fee and commission income, about GEL 40 million or GEL 39 million out of GEL 48 million is retail, which is predominantly coming from the payments business, and that is up by almost 20%, 19.7%. And the corporate side, which is roughly GEL 9 million is also up 36% by itself, it's a smaller proportion, but it's also up, and that is result of a good activity on the corporate side, especially on the guarantees business, of the letter of guarantees, et cetera.

So the business overall is doing very well. What we have focused on over this quarter is the definition of our new mission and we have defined the new mission, is to help people achieve more of their potential. We are focused on that. We have redefined our CSR to focus on 3 main pillars, which is: education; employment; and the development of small and medium businesses. And this is what we are going to focus on going forward. Also, there has been an increased focus on the customer satisfaction as well as the employee engagement. So on both of these, we are seeing an increased -- an encouraging signs of higher Net Promoter Score as well as the internal measure of the customer satisfaction system, as well as employee Net Promoter Scores, and we'll be reporting in the following quarters on the new results that are just coming in now.

The portfolio growth is delivering also very good results. I mean there are 3 main drivers in our portfolio of growth and that is corporate banking, SME and mortgages. We have had a reassignment of SME, part of the SME has been reassigned to corporate banking, so net of that and net of the currency adjustment, so on a constant currency basis, the corporate banking has been growing 26.8% year-on-year. SME is delivering a very strong and very encouraging result, and that is 31.5% and mortgages have been growing almost 22% year-on-year.

Now part of the corporate and SME growth is caused by the fact that 2 years ago, the new profit tax reform has been introduced. As a result of which, the reinvested profits are not taxed, and that provides an extra GEL 600 million or GEL 700 million of extra equity to the most profitable Georgian businesses, by definition, because it was a profit tax. And that is extra equity that can be leveraged. And that's what has been happening last year and this year. So it has been -- SME and corporate have been growing throughout the system in a very strong way. And that is very healthy for the economy. And we have been growing a little bit more than the market.

Talking of which, in terms of the total loan book growth, we have seen a nominal growth of 29.4% year-on-year of the total book. But on a constant currency basis, that's 20.7%. And -- 20.6%, I'm sorry. While the market has been growing also constant currency basis, 13.1%. So we are growing faster than the market in every direction you look at, and I mean every direction, in corporate as well as SME as well as the retail, loans as well as deposits on the retail side.

Year-to-date, we are -- we have grown 20.7%, on a constant currency basis, 13.3%, which is ahead of our expectations. And the -- I'm sorry, we are growing 20.7% and 14% is real year-to-date, while the market has grown 7.4%. So on a constant currency basis, we've grown almost double the market. And that growth is good but we are focused on profitability. And while we are focused on profitability, growing at this level is very good news.

Now going forward and strategically, what we are focused on is growing our digital capability. Right now, we are investing in our digital and product capabilities. We have decided to double our staff that is focused on digital and product development. And that process has started. Part of that is reflected in the cost as well. OpEx is growing 11%. But what's interesting and what is very encouraging is the trend of our mobile transactions, which we think is going to be the dominant channel for our banking transactions. And there, we have more than doubled our transactions from 4.1 million transactions per quarter 1 year ago to 9.5 million. And most importantly, the trajectory of such transactions is very encouraging. And when I mean trajectory, what I mean is the fact that customers are demanding new features all the time and the ability to incorporate such new features in a very fast manner is what really creates this good trajectory of growth of mobile transactions, and I believe that we will be able to keep that trajectory going forward.

Now a few words about the economy. The economy-- second -- third quarter has started with a little bit of negative expectations by Russia banning the flights to Georgia end of June, and that has caused -- the negative expectations have caused a devaluation of Georgian lari by 6%. And that has by itself caused a little bit of hike in inflation to 6.4% at the end of September.

Having said that, the numbers that have come in over the last few months have basically demonstrated that the impact that the market expected from the Russian ban of our flights, direct flights, has not been as significant as the market expected. So we can say now that the market overreacted a little bit. And overall the export growth has been strong. The tourists growth continued -- tourists continued to grow even after the direct flights have been banned because other -- tourists from other destinations have continued to grow. And the growth, although it was smaller than it would be otherwise, it was still a positive territory. The imports continue to be decreasing on the back of subdued consumer credit growth. So overall, that is resulting in the current account deficit shrinking below 5% this year, which is what we're expecting. That is especially positive news on the back of very high current account deficit that we used to run over the last few years. So for example 2016, which was a peak was 13.1% current account deficit. And rightly so, the investors have been concerned about it. Now below 5% is already getting to healthy levels, which is fully compensated by the FDI that is coming in.

The budget performance, fiscal performance is pretty strong. We are well below 3% deficit. And the spending is well balanced and is focused on CapEx growth. And for many years, we have been running the positive operating balance.

So with all of that, then the National Bank raised the refinancing rates from 6.5% to 8.5% to curb the inflation that was caused by the devaluation that I just described, and we will see part of that impact over the next 6 to -- let's say, 3 to 6 months. But when we look at the core inflation, we don't believe that more is needed. So hopefully, that will be what we see.

Having said that, this will have a little bit impact on the mortgage growth, and which we expect to slow down a little bit, but we still believe it will be double-digit, but it will no longer be 20%. So overall, we remain very positive on the Georgian economy. The third quarter, everything that I described, all the negatives that have happened, still resulted in a growth more than 5%. In fact, the growth has been -- the recent estimates by the statistics department has been 5.7% real growth in the third quarter, which in nominal terms is quite significant. So the economy is doing very well. That was partly one of the reasons, which have been based for our lower cost of risk, which we have seen this quarter, 0.5%. Now that is lower than what we have estimated medium term, given the current mix of the portfolio. This mix historically has shown a cost of risk of roughly 1.2%, which is more or less what we expect going forward.

So we remain very positive. And this quarter, I think we have shown that we have fully adjusted to the new environment, and the whole management team have come together in this new regulatory environment and have delivered pretty strong results, and we hope to do so going in the future as well.

I will stop here, and I will take questions now.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) So our first question is from the line of Andrey Mikhailov.

--------------------------------------------------------------------------------

Andrey Mikhailov, Sova Capital Limited, Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

My question is on NIM in particular. What income do you see from the recent National Bank of Georgia's rate hike? And maybe possibly future rate hikes on the NIM?

--------------------------------------------------------------------------------

Archil Gachechiladze, Bank of Georgia Group PLC - CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, Andrey. So we have double impact. On one side, we have a negative impact on the hike that has happened in the last quarter of this year. But that is almost fully offset by the regulatory change that has happened on the mandatory reserves, liquidity requirements from 30% to 25%. So in the third quarter, we had the full impact of this increase. It went from 25% to 30% in May this year. And just recently been reduced back from 30% to 25% to release a little bit of hard currency into the economy as there's tightened local currency. So this double impact has -- is close to 0%.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

The next question is from the line of Andrew Keeley.

--------------------------------------------------------------------------------

Andrew Keeley, Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst [5]

--------------------------------------------------------------------------------

A couple of questions. First of all, in terms of your growth outlook for next year. It was interesting, your comments on corporate lending that you've kind of been seeing the, kind of, positive impacts of the corporate taxation changes in terms of, kind of, demand from the best companies. Would you say that, that's more or less kind of played out now? That 2020 should see quite a strong slowdown on your corporate lending side? And I suppose also, as you pointed to the higher interest rates is also going to pressure your mortgage growth. So should we be thinking that there will actually be quite a slowdown in your loan growth next year? And I've got another question afterwards.

--------------------------------------------------------------------------------

Archil Gachechiladze, Bank of Georgia Group PLC - CEO & Director [6]

--------------------------------------------------------------------------------

There will be somewhat -- some slowdown, but let's go one by one. So on corporate and SME, which are more or less delivering the similar kind of growth, what we are seeing is that -- so first of all, I mean, the top line growth that you see in corporate banking of 44% is not really 44%, right? So as in the CEO statement, I said, when you adjust for the reclassification of SME towards corporate, plus you adjust for the currency, you are really looking at 26.8% year-on-year, which is almost double the market, which is growing half of that, a little bit more. So when you look at how the market is growing, that could be sustainable. So let's say, the corporate is growing roughly 15%. Currency adjusted, let's say, 10% to 15%. But we have been able to grow more than the market. And we do that in the future? I don't know, that we'll see. But the market will probably continue to grow for the SME and corporate in the -- at these levels roughly, given all the positives that I described, which are there to stay.

On the mortgages, you are absolutely right, as we basically said, this hike in the local currency will have a slowdown on the mortgage growth, which has been roughly 22%, and it will come down. But there's a demand in the economy overall for small apartments, et cetera, et cetera. So it will not go away. From 22% we may go down to 15%, but it will not go to 0%. And that's what we are seeing, in fact, in the business that there's some slowdown.

Having said that, that inflation is coming from the supply side. It's coming from the devaluation rather than the demand side. So what we are saying is, it will probably go away very soon, let's say, 3 to 6 months. So we expect that the inflation will come down to the target levels of roughly 3% over the next 6 months, and that should be followed by the -- by lowering -- followed by the National Bank lowering the refinancing rate. So there will be somewhat slowdown over the next 6 months, but I think it will go away sooner than it looks right now.

Inflation is not that high. So it -- and plus the hard currency income into the country is growing. So there is a lot of pressure now to appreciate, and I believe it will appreciate -- the lari will appreciate. And the moment it appreciates, it will take a few more months to adjust for the inflation, plus these higher refinancing rates should all cause the inflation to go back to normal. And then the National Bank will lower the rate. Those are our expectations.

--------------------------------------------------------------------------------

Andrew Keeley, Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst [7]

--------------------------------------------------------------------------------

And I mean, your thoughts on the lari, I mean, even you think that it would appreciate, even though in a typically -- in a winter and kind of early spring are seasonally when the lari comes under most pressure. Perhaps you don't think that's going to be kind of repeated this year?

--------------------------------------------------------------------------------

Archil Gachechiladze, Bank of Georgia Group PLC - CEO & Director [8]

--------------------------------------------------------------------------------

You're absolutely right that seasonality-wise there will be supply of -- there will be a seasonal pressure, let's say, but more or less, the market has adjusted for such seasonal changes already. So people are expecting it. Some people are doing hedges, et cetera, et cetera. Overall, when you look at the real effective exchange rate, nominal for sure, but even real with this high inflation when you adjust for it, you should be somewhere between GEL 2.7 to GEL 2.8 versus USD 1, depending on the starting date that you take. So there's definitely a pressure on lari to appreciate, but it's the expectations that have created this gap. And sometimes the expectations stay there for longer. Sometimes, they adjust pretty quickly. So we'll see how that goes. But from the trade side, from the external side of the country or fundamentals, let's say, it's very strong and hard currency is coming in and pushing the lari to appreciate. So yes, I expect it to appreciate, maybe not as significantly as the real effective exchange rate suggests, but towards GEL 2.8 pretty soon, probably.

--------------------------------------------------------------------------------

Andrew Keeley, Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst [9]

--------------------------------------------------------------------------------

Okay. That's helpful. And then second question is on your margin. I think after the second quarter call that you mentioned that you thought the kind of downward pressure that we've been seeing on NIM was kind of close to kind of ending, and I think you mentioned something like maybe 10, 15 bps of margin decline. Now obviously, that's been, kind of, stronger in the third quarter. I mean do you kind of feel, say, more confident that NIM at this kind of 5.1% level is really kind of troughing out and it's -- there won't be further negative pressure in the fourth quarter and beyond?

--------------------------------------------------------------------------------

Archil Gachechiladze, Bank of Georgia Group PLC - CEO & Director [10]

--------------------------------------------------------------------------------

Yes. So what we said in terms of the guidance, basically, after that, what we have seen is a bit of devaluation that we did not quite expect. So that -- we thought it would go back. And this is having a bit of an impact on the mix. So the dollar portfolio has been -- has a higher weighting now because of the devaluation, and that has had roughly 10 bps. So -- but we expect it to be around 5% going forward. So I think we're almost there. And when you look in the new presentation, we have given a breakdown of the NIM, which is Page 16, I believe. So when you have a chance to look at it, it gives quite an explanation why the NIM has declined and what is it composed of. So most of the decline has been due to 2 things: one is the high-yielding portfolio, which is largely matured out of the balance sheet; and the second thing is that we've done some euro loans, which we hedged with dollars. And we've done the FX swaps. And that is recognized as the FX income and -- while the euro loans are lower. So when you adjust for it, let's say, the loan portfolio NIM with the currency FX swap adjustment, it's pretty constant. In fact, it's not a significant decline.

--------------------------------------------------------------------------------

Andrew Keeley, Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst [11]

--------------------------------------------------------------------------------

Okay. That's helpful. And just final question on your costs. You talked about doubling your kind of IT, digital headcount, and you started that process. How much in terms of the, kind of, cost impact to that, do you expect to be in 2019 and, say, the second half of this year relative to next year?

--------------------------------------------------------------------------------

Archil Gachechiladze, Bank of Georgia Group PLC - CEO & Director [12]

--------------------------------------------------------------------------------

So we expect that we will be investing in the business. So you are seeing a little bit higher increase in OpEx but that's what we are doing, is basically investing in the business. And it's not just the digital side, we are investing in the customer satisfaction capabilities. We are investing in marketing and branding, the CSR and last but not least is the SME, where we are totally changing the coverage model and just doing interesting things. So we are investing overall in the business. You saw 11%. Going forward probably we should be expecting high single-digit, low double-digit growth of OpEx, which should not scare us because the revenue top line should be growing more than that. Because this year, the revenue has not been growing much because of the adjustment of the new environment. But going forward, our balance sheet growth should translate into proportional growth of our top line on the revenue line, and that should be -- that should deliver positive operating leverage going forward. So for 1 year or so, 10 plus/minus percent of OpEx growth is what we should expect. And after that, it will be fully reflective of all these investments that we are doing in the business.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

The next question is from the line of Svetlana Aslanova.

--------------------------------------------------------------------------------

Svetlana Aslanova, VTB Capital, Research Division - Equities Analyst [14]

--------------------------------------------------------------------------------

Yes. I have 2 follow-up questions. First of all, on the fee and commission income. You said that in the third quarter, the spectacular increase in fee and commission income kind of offset some losses in NII. So looking forward, shall we expect that this would be the run rate for the line, for the fee and commission income, so you will put more attention on this line in the core income? And a follow-up question, I will ask later.

--------------------------------------------------------------------------------

Archil Gachechiladze, Bank of Georgia Group PLC - CEO & Director [15]

--------------------------------------------------------------------------------

So I will just repeat the question, if I understood right. So you said that the net fee and commission income, which we had a very strong growth. Should we expect this kind of growth going forward or not, given the loan...

--------------------------------------------------------------------------------

Svetlana Aslanova, VTB Capital, Research Division - Equities Analyst [16]

--------------------------------------------------------------------------------

Yes, yes.

--------------------------------------------------------------------------------

Archil Gachechiladze, Bank of Georgia Group PLC - CEO & Director [17]

--------------------------------------------------------------------------------

Okay. First of all, net interest income growth being low is evident because of the new regulatory environment. So we are completely -- this is -- we have changed the portfolio where we are issuing mortgages in lari, which have a risk weighting of 35% instead of consumer loans with 100-plus percent effective interest rates. So it's a completely new environment. So how we adjusted in this completely new environment was very important. And that adjustment, the third quarter is evidence of how we adjusted to this new environment. So going forward, our growth of, let's say, 15%, which we expect in nominal terms should translate more or less proportionally in the net interest income growth going forward. Because we are in a new pay risk year, and we -- after the end of this year, we would say that we're fully adjusted and going forward, it will grow like that.

Now in terms of the fee income, can we say that we should expect 20-plus percent? That's tough to say. I mean we have had a stronger growth than we expected, which is partly due to the fact that our customer satisfaction and employee engagement -- I mean the signs and the scores are looking up and has translated into very good fee and commission income. 21%, 22%. Can we expect that? It's hard to say. I mean what we see is that we expect the business to grow roughly 15%. More than that, I cannot say.

--------------------------------------------------------------------------------

Svetlana Aslanova, VTB Capital, Research Division - Equities Analyst [18]

--------------------------------------------------------------------------------

Okay. So basically, shall we expect that this growth rate will be around 15%, somewhere around -- along with the business growth? Is that the right...

--------------------------------------------------------------------------------

Archil Gachechiladze, Bank of Georgia Group PLC - CEO & Director [19]

--------------------------------------------------------------------------------

More or less, that's a fair assumption, and I hope there will be more, but who knows? Yes.

--------------------------------------------------------------------------------

Svetlana Aslanova, VTB Capital, Research Division - Equities Analyst [20]

--------------------------------------------------------------------------------

Okay. Okay. And my second question will be then on the cost of risk. You said that the run rate you see, this 1.2% of the risk. Still if you look at the retail and corporate side, do you see -- what kind of trends do you see for the coming quarters, given the change in the loan mix and the rapid growth in the -- on the corporate side?

--------------------------------------------------------------------------------

Archil Gachechiladze, Bank of Georgia Group PLC - CEO & Director [21]

--------------------------------------------------------------------------------

I think 1.2% is what we have seen historically on the mix that we have currently. So that pretty much gives you the main figure. In the medium term, it won't -- I don't expect something completely off of that. But what we have seen is pretty strong recoveries and that we may have a couple of quarters of good recoveries. We'll see. But overall, I mean, 1.2% is what we have seen on this current mix that we have currently. Historically, when you look at the available period of time, 1.2% is what we are seeing. So we'll see. That is more or less a good indication of what we should expect.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

Our next question is from the line of Can Demir.

--------------------------------------------------------------------------------

Osman Can Demir, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [23]

--------------------------------------------------------------------------------

Just a couple of questions. The first one is, I'm trying to wrap my head around this cost of risk this quarter. So I was wondering how do you reconcile the exceptional low-cost of risk this quarter, relative to the current backdrop, i.e., if you look at the currencies depreciating, the economy is expected to slow down. I mean wouldn't this call for a higher cost of risk in third quarter in a IFRS 9 logic? This is the first question.

The second question is how resilient your CET1 would be in a shock scenario, by, let's say, if the currency depreciates by another 10%, 15%, how it would look like versus the regulatory threshold?

And the third question is, the currency depreciation and how would they play out in 2020? Do you have many costs denominated in U.S. dollars or in hard currencies that could affect 2020 OpEx growth? So that's a lot.

--------------------------------------------------------------------------------

Archil Gachechiladze, Bank of Georgia Group PLC - CEO & Director [24]

--------------------------------------------------------------------------------

Can, thank you for the questions. So first, let's start with the cost of risk. As I outlined, basically, optically, it may look like things are not looking that good, but reality is that the economy is doing pretty well. I mean the real growth in the third quarter after all the effects that we have seen, after the devaluation and everything else, has been 5.7%. So now you may say that the economy is getting back, but in our view, it is doing pretty well. The core inflation is close to 4%, which is not that far from the target inflation. So the headline inflation is high, and that will be adjusted. That's the reason why the National Bank hiked the rates. But we don't expect worse than, let's say, credit environment for sure. Because what we have seen is that the importers and the retailers have adjusted the price, hence, the top line inflation. But it has translated in the overall -- the economy is doing so well that even with that kind of high inflation, the real growth is still above 5%. So we don't expect a higher cost of risk because of that. In fact, we expect that the inflation will moderate quite soon, in fact, because of this higher refinancing rate. And the country will continue a pretty strong growth.

The second question -- third one was CET1. The second question was, yes, on the OpEx cost. So we -- what I described, basically that we are investing in the capabilities, in the digital as well as SME, customer satisfaction, marketing and so forth. All of that is roughly, more or less, high single-digit, low double-digit growth in OpEx, including whatever the FX we have seen. Now if you expect another shock of higher currency, which I don't think you asked about or you did, in fact, what would happen. So without further devaluation, this is -- more or less captures that expectations of the OpEx growth, captures the reality. Now going forward, with 15%, what would happen if there was a 15% devaluation in lari? We would -- it would have an effect of -- on CET1 of roughly 100 basis points.

--------------------------------------------------------------------------------

Osman Can Demir, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [25]

--------------------------------------------------------------------------------

Got it. And where would your CET1 stand versus the regulatory thresholds? What -- I mean what kind of buffer you would have?

--------------------------------------------------------------------------------

Archil Gachechiladze, Bank of Georgia Group PLC - CEO & Director [26]

--------------------------------------------------------------------------------

We would have a lower buffer. So right now, our buffer is, what, roughly, 13.4 so it would be close to it, but it would not be 2% as we are guiding, but it would be less. And then we will take time to build it up. But it will be still above. So what we are -- so what we have is we have a pretty strong profitable machine that is generating internal capital. And even with the current payout ratio, we have a strong capital generation. If we feel that there's not enough capital, we need to build up the buffer again, we can slow down growth and build up the capital.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

No further questions at this moment, sir. Please continue.

--------------------------------------------------------------------------------

Archil Gachechiladze, Bank of Georgia Group PLC - CEO & Director [28]

--------------------------------------------------------------------------------

Yes. Let's wait for a minute or 2, if there are a couple more questions coming in.

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

(Operator Instructions) And your next question is from the line of Simon Nellis.

--------------------------------------------------------------------------------

Simon Nellis, Citigroup Inc, Research Division - MD and Director [30]

--------------------------------------------------------------------------------

Maybe if I could ask you just to elaborate just a bit more on the risk cost outlook going forward into next year. So you're saying that 1.2% is the cost of risk that you see on the existing book, but do you still have any legacy issues that are -- would keep the cost of risk a bit higher next year? Or do you think 1.2% is kind of where you settle pretty quickly?

--------------------------------------------------------------------------------

Archil Gachechiladze, Bank of Georgia Group PLC - CEO & Director [31]

--------------------------------------------------------------------------------

Simon, so what we have is the current mix of the portfolio, we have had cost of risk on a similar or this kind of -- so not the high-yielding portfolio, which is out of our balance sheet, but the current mix, if you apply the cost of risk segment-by-segment, it suggests that we should be experiencing 1.2% cost of risk. Are there more than that? I cannot say. I mean there are some upsides and downsides to this but there are quite a few upsides as well. So what we are seeing is that this quarter, we've had strong recoveries. We may have a few more strong quarters as well of recovery, and we may not, we'll see. But as a result of the 2015 devaluation, we had a higher cost of risk, if you may remember, a few years ago because of the regional devaluation. Now some of those recoveries because of higher cost of risk have just come in, could be more coming in, but it may not be, right? So we'll see. 1.2% is the number to focus on and there are some upsides and downsides to it, but this is the number we are focusing on.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

Next question is from the line of Janna Anikina

--------------------------------------------------------------------------------

Janna Anikina, BCP Securities, LLC, Research Division - Former Research Analyst [33]

--------------------------------------------------------------------------------

Could you please remind us what is the -- according to Central Bank's -- of Georgia requirement for the CET1 capital level?

--------------------------------------------------------------------------------

Archil Gachechiladze, Bank of Georgia Group PLC - CEO & Director [34]

--------------------------------------------------------------------------------

It's 9.5%. Which page is this? In the -- sorry, Page 22 in the presentation, it has a detailed table basically, which outlines the requirement. So right now, it's 9.5%, and it's going up to 10.4% end of this year with a Basel III fully loading going on over the next couple of years. But Page 22 provides a much more detailed breakdown of CET and Tier 1 and total capital requirements and how they are increasing year-over-year. And where we're standing vis-à-vis the requirements, and we're comfortably above them.

--------------------------------------------------------------------------------

Operator [35]

--------------------------------------------------------------------------------

No further questions, sir. (Operator Instructions)

No further questions at this moment. Sir, please continue.

--------------------------------------------------------------------------------

Archil Gachechiladze, Bank of Georgia Group PLC - CEO & Director [36]

--------------------------------------------------------------------------------

Thank you for joining the call. And if there are further questions, our IR remains available for any questions, and we'll be happy to provide more information. You would have noted in the new presentation that we have added more information about the NIM and cost of risk on Page 16 and 20. And that should answer a lot of questions about the NIM and cost of risk because the regulatory environment has changed. Quite a few changes have happened. So that I think provides more information and more light on that.

If there are further questions, we'll be happy to provide those. And we are quite upbeat about the fourth quarter and looking forward to the next call. Thank you. Bye-bye.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

So that does conclude our conference for today. Thank you all for participating. You may all disconnect.