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Edited Transcript of TBCG.L earnings conference call or presentation 29-Jul-19 1:00pm GMT

Half Year 2019 TBC Bank Group PLC Earnings Call

LONDON Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of TBC Bank Group PLC earnings conference call or presentation Monday, July 29, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anna Romelashvili

TBC Bank Group PLC - Head of IR

* Giorgi Shagidze

TBC Bank Group PLC - CFO, Deputy CEO & Executive Director

* Vakhtang Butskhrikidze

TBC Bank Group PLC - CEO & Executive Director

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Conference Call Participants

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* Anthony Da-Costa

Peel Hunt LLP, Research Division - Analyst

* Ivan Kachkovski

Renaissance Capital, Research Division - Research Analyst

* Osman Can Demir

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

* Tolu Alamutu

Tellimer Research - Director & Credit Analyst of Financials

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Presentation

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Operator [1]

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Hello, and welcome to the 2019 second quarter financial results call. My name is Lydia, and I will be your coordinator for today's event. Please note this conference is being recorded. (Operator Instructions)

I will now hand you over to your host, Anna Romelashvili, to begin today's conference. Thank you.

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Anna Romelashvili, TBC Bank Group PLC - Head of IR [2]

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Good afternoon, ladies and gentlemen. Thank you for joining our second quarter 2019 preliminary financial results conference call. I am Anna Romelashvili, Head of Investor Relations at TBC Bank. Today, with me are Nikoloz Enukidze, the Chairman of TBC PLC Board of Directors; Vakhtang Butskhrikidze, CEO of the bank; and Giorgi Shagidze, Deputy CEO and CFO of the bank.

We will start with a overview of our financial results, which will be followed by the Q&A session.

With that, I'd like to hand over to Vakhtang to start the presentation.

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Vakhtang Butskhrikidze, TBC Bank Group PLC - CEO & Executive Director [3]

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Thank you, Anna. I'd like to start today's call with an update about the recent Board changes. As we announced last week, due to recent developments regarding historic transactions that took place in 2007 and 2008, the Chairman and Deputy Chairman have decided to step down from the Board of TBC Bank Group PLC with immediate effect. They have both arrived at this decision after careful consideration in order to ensure that the allegations made against them do not affect the Group. Following this resignation, the Board has appointed with immediate effect Senior Independent Director, Nikoloz Enukidze, to serve as the Chairman of TBC Bank Group PLC.

I'd like to thank both the Chairman and Deputy Chairman for their invaluable contribution to the bank, and welcome the appointment of Mr. Enukidze with whom we have enjoyed the excellent working relationship over the past 6 years.

Despite recent Board changes, we continue to operate in our usual manner, capitalizing on our leading market share, strong capital and liquidity positions and operational excellency for the benefit of our shareholders.

I welcome supporting statements made by Nation Bank of Georgia, EBRD and IFC, in support of TBC. In light of our strong financial position and current share price, we have initiated a share buyback program approved by the Board yet to be.

Now I am pleased to present our financial results for the second quarter 2019. In the second quarter, we achieved an underlying consolidated net profit of GEL 125 million, up by 4.3% year-on-year. The growth was mainly driven by increasing net fee and commission income and other operating income.

Over the same period, provision expenses decreased by 4.9%, resulting in cost of risk of 1.1%, driven by decreasing share of high yield and high risk loans and improved performance across all segments.

In the second quarter, net interest margin decreased by 0.5 percentage points quarter-on-quarter and stood at 5.6%. This was driven by the continued impact from the recent regulation, the increase in minimum reserve requirements for in-currency funds as well as competition in the interest rates.

Finally, our underlying return-of-equity reached 21.5%, while the underlying return-of-assets was 3.1%.

Regarding balance sheet growth, our loan book increased by 25.2% year-on-year or by 14.7% at constant currency rate. As a result, our market share increased to 38.5%, up by 0.2 percentage points year-on-year.

I am pleased to report that in June, TBC Bank successfully issued its first senior Eurobond in the amount of USD 300 million with a 5-year maturity and 6% yield. And in July 2019, TBC Bank also issued USD 125 million additional Tier 1 capital perpetual subordinated notes at 10.75% yield.

Regarding Georgia's macro environment, real GDP increased by 4.9% in the 5 months of 2019. While credit growth has moderated, external inflows were reasonably strong. And unlike in 2018, fiscal stance was exceptional. Also, the current account debts, it has narrowed in the first quarter and the tendency is likely to be sustained in the second quarter, driven by the improved trade balance and the growth in tourism and remittances inflows.

Going forward, the recent decease of flights from Russia to Georgia will help substantially cap on tourist inflows. However, according to TBC Research, taking into account the increase in tourist inflows from other destinations and strengthening external balance, the growth will be still positive. GDP is expected to increase by more than 4% in 2019.

I'd also like to update you on the progress that we've made in development of our ecosystems. Vendoo, e-commerce marketplace. The full launch of the platform took place in May and during the second quarter, Vendoo focused on developing its various internal systems. In addition, Vendoo enriched its existing product offerings with gardening and housing, toys and household chemistry and is already selling up to 15,000 different items.

Livo Housing Ecosystem. We completed the rebranding process and launched the better version of the platform in May, which already reached around 9,000 users daily. The full launch is planned in October 2019. We have introduced the first real estate valuation service in Georgia, which provides an independent valuation certificate within 24 hours.

We have also developed a premier agent service for brokers, which will allow them to enhance their value proposition and launched a customer contact center.

We have also made progress in our international ventures. In Azerbaijan, Nikoil Bank is in process of significant reorganization, which includes rebranding and chief to digitalization. It has also opened 4 new branches during the second quarter.

In Uzbekistan, before the license is granted, we are working on core banking implementation, team formation and branch concept. At the same time, our newly acquired payment company, PayMe, continue to grow rapidly, increasing its number of customers by 10.9% quarter-on-quarter and reached 1.4 million, while its revenue increased by 19.7% over the same quarter and amounted to around USD 700,000.

Now I'd like to hand over to Giorgi.

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Giorgi Shagidze, TBC Bank Group PLC - CFO, Deputy CEO & Executive Director [4]

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Thank you, Vakhtang. I'll start my presentation from Slide 16, and as usual, we'll go over financial performance of the second quarter 2019.

As you can see from this slide, we delivered robust profitability in the second quarter 2019. In quarter 2, underlying net profit amounted to GEL 125 million, up by 4.3% year-on-year and down by 6.2% quarter-over-quarter. Quarter-over-quarter decrease was mainly driven by lower effective tax rate in quarter 1 2019. As a result, in quarter 2 2019, our underlying return-on-equity and return-on-assets stood at 21.5% and 3.1%, respectively.

On the next slide, Slide 17, I'd like to present our net interest margin. In the second quarter 2019, our NIM stood at 5.6%, down by 50 basis point quarter-over-quarter. The decrease was mainly driven by the decline in loan yields related to the recent regulation, the increase in mandatory reserve requirements as well as by the competition. According to our estimate, the regulation and competition impact on NIM was around 36 percentage point quarter-over-quarter, while mandatory reserve requirement impact was 0.15 percentage point.

Over the same period, our cost of funding and cost of deposit remained broadly stable.

Moving on to the Slide 18, I'd like to present our performance in noninterest income. In quarter 2 2019, our net fee and commission income increased by 11% year-on-year. The growth was mainly driven by increase in net fee and commission income from guarantees and letter of credits related to the growth in the respective portfolio as well as increase in other fee income.

In the second quarter 2019, our total noninterest income without fee and commission income increased by 23.5% year-on-year and by 15.4% quarter-over-quarter, mainly driven by higher income from FX operations.

Our next slide is about sound asset quality. Foreign currency adjusted cost of risk decreased by 60 basis point quarter-over-quarter and 90 basis point year-on-year, driven by portfolio mix change and the improved performance across all segments. Over this same period, our NPL ratio remained stable year-on-year and decreased by 20 basis point quarter-over-quarter basis. This was mainly driven by corporate and MSME segments.

In terms of loan book concentration, the top 20 and top 10 borrowers to gross loans stood at 12.6% and 8.6%, respectively. Related party to gross loan ratio remained low, standing at 0.1%.

Now I'd like to move on to our operating costs. In the second quarter 2019, our underlying operating expenses increased by 12.7% year-on-year. This was related to staff costs increase in relation to increase in the 3 -- in the share price over this 3-year period for the purpose of top and mid-management share-based bonuses. I can elaborate on this if there are questions.

In the second quarter 2019, one-off administrative expenses amounted to GEL 5.9 million. This expense related to the consulting fees in relation to the recent event about TBC Bank.

Over the same period, our underlying cost to income ratio stood at 38.1%.

Next slide is about our solid capital levels. As of 30th of June 2019, regulatory Tier 1 and total capital per Basel III stood at 12.4% and 17.4%, respectively, very well above the respective minimum requirements of 11.1% and 16. 9%.

The proceeds from issuance of AT1 bonds in the amount of GEL 125 million will be reflected in the capital in July only, increasing our Tier 1 capital and total capital by about 2.5 percentage point. If we apply this effect to June, the total and Tier 1 capital ratios would be 19.9% and 14.9%, respectively.

Now I'll discuss our strong funding and liquidity position. As you can see from this slide, Slide #22, we have a well-balanced funding structure. IFI funding stood at around GEL 2.3 billion as of 30th of June, which accounts for around 15% of our liabilities, while our newly issued senior bond in the amount of $300 million amounted to 5.7% of our liabilities.

Over the same period, our liquidity position stood strong with the regulatory liquidity coverage ratio at 126%, above the regulatory limit of 100%, which will further increase to 138% after the AT1 bond issuance.

Over the same period, our net stable funding ratio stood at 130% and net loans-to-deposit, plus IFI funding ratio was at 91%.

Slide 23 is about TBC Insurance. From the second quarter 2019, TBC Insurance entered the health insurance market with the focus of premium segment. Our strategy is to focus on affluent individual and to capture the affluent market by leveraging our strong brand name using digital capabilities as well as cross-selling opportunities with payroll customers.

Without health insurance, in quarter 2 2019, net profit increased by 8.2% quarter-over-quarter and decreased by 10%, if we include health insurance losses. Net combined ratio decreased by 30 basis points year-on-year and 150 basis points quarter-on-quarter, due to increased efficiency of the business and stood at 81.3% or 76.6% without health insurance in quarter 2.

Now I'd like to hand over to Vakhtang.

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Vakhtang Butskhrikidze, TBC Bank Group PLC - CEO & Executive Director [5]

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Yes. Thank you, Giorgi. I'd like to finish today's presentation by reiterating our medium-term targets. Loan book growth in the range of 10% to 15%, return-of-equity of about 20%, cost to income ratio below 35% and dividend payout ratio of 25% to 35%.

With this, I'd like to invite you to ask your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have our first question from the line of Ivan.

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Ivan Kachkovski, Renaissance Capital, Research Division - Research Analyst [2]

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Yes. I have two questions on the numbers. First on the NIM. If you could please describe some drivers behind the decline in the second quarter, like what part of the decline was the loan mix shift and what part was lari weakening, what part was some other drivers? And also, if you could give us the outlook -- update us on the outlook for the rest of the year and on -- of use on where NIM could go beyond this year? That would be very helpful.

My second question would be on your cost to income. So just as Vakhtang pointed just a few seconds ago, a midterm target is below 35%. But if we look at this quarter, even if adjusted for one-off costs, cost income is at 38%. So what's your outlook for cost to income for this year, in particular?

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Giorgi Shagidze, TBC Bank Group PLC - CFO, Deputy CEO & Executive Director [3]

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Ivan. And thanks for the questions. The -- if I start with the drivers of NIM, the competition plus January regulation effect is about 35 basis point, whereas, the minimum reserve requirement is about 15 basis point. The effect from the currency devaluation is not there because technically, it applies only to small part of the period. But you remember the -- this scenario where 10% -- or 1 year basically has an effect of about 20 basis point.

With regards to the outlook, we anticipate about 30 to 50 basis points further dropping NIM in quarter 3. The reason here is the effect of the regulation, plus competition, plus the AT1 and bond issuance before we deploy them. And in quarter 4, we anticipate this to be stable and towards increasing trend.

With regards to the cost-to-income ratio, I think the NIM decrease from the perspective of operating income was the main reason for a rebasing of the cost-to-income ratio. We -- as Vakhtang reiterated, we are not changing our target for the cost-to-income for the year -- sorry, for the medium term. We -- this year, it's difficult to tell you, but it will be between the current level and 30%, 35% target.

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Operator [4]

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We have a second question from the line of Tolu.

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Tolu Alamutu, Tellimer Research - Director & Credit Analyst of Financials [5]

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Apologies, I joined a little late, so if you've addressed this, I may have missed it. First on the changes from last week. Can you maybe give us some idea of how long the cases might go on for? And do you expect them to be resolved this year? Or is it something that might take a little bit longer?

Secondly, on the share buyback that you announced this morning, can you maybe give us a bit more detail on the rationale for that? And whether you think you will stop at the GBP 20 million or you could raise that? Also, have you talked about the impact of that on your capital ratios, please?

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Giorgi Shagidze, TBC Bank Group PLC - CFO, Deputy CEO & Executive Director [6]

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Thank you. The -- I mean it's difficult to tell you the accurate assessment of the time line. We expect the first instant court to take about 3 to 6 month. And the entire process, it could take up to 2 years. But again, it's a very initial high-level assessment.

With regards to the share buyback program, the reason was as follows: so last week after the announcement of the prosecution office, our share price dropped roughly 15%. And given the performance, we think that the -- that it was not reflecting the real value of the share, so we strongly believe that it was undervalued. Plus, we do have -- in the -- we did have in the pipeline to buy certain shares for the employee ownership plan anyways. That's why we speeded up the process and we started -- we are starting by -- share buyback program. From today, we are -- we don't have any intention to go above GBP 20 million.

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Operator [7]

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We currently have no more questions in the queue. (Operator Instructions) We have another question from the line of [Sergey].

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Unidentified Analyst, [8]

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[Sergey], Finance in Motion. I had a question regarding Nikoil Bank announcement that they break the envisaged M&A deal with TBC Credit. Could you please comment on that?

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Giorgi Shagidze, TBC Bank Group PLC - CFO, Deputy CEO & Executive Director [9]

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We haven't seen such announcement. In fact, we continue in the, yes, idle.

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Vakhtang Butskhrikidze, TBC Bank Group PLC - CEO & Executive Director [10]

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Yes. I was in the core recently last week, so we had a discussions saying the -- we discussed the strategy of the Nikoil Bank. And we haven't -- we have not heard anything about that.

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Operator [11]

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Our next question comes from the line of Anthony Da-Costa.

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Anthony Da-Costa, Peel Hunt LLP, Research Division - Analyst [12]

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Two questions, if I may. The first is in terms of a bank strategy, for example, the CASCO's expansion, is this uninterrupted despite the Board changes?

And the second question is how is the banking license going with Uzbekistan?

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Giorgi Shagidze, TBC Bank Group PLC - CFO, Deputy CEO & Executive Director [13]

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Anthony, thanks for the question. With regard to the bank strategy, I mean, we have quite strong governance on both Board level, and each strategy initiative has its own person who is executing it. And I don't want to diminish the founder's role there. But it's -- the strategy will not be affected and we will be continuing as planned and as communicated to the market.

With regards to the license in Uzbekistan, due to the recent matter, it might have some further complication, but we expect it -- the price -- prelicense this year. In fact, we continue the 3 work stream in Uzbekistan -- 3 work streams in Uzbekistan, which is the implementation of space platform, the branch concept and the formation of the team. So they are unaffected, and we are continuing as planned. And you might have also seeing very strong results of our -- the Uzbek platform, PayMe, which is strongly increasing customer numbers. And our net income, half year, is already higher than the net income that we had full year 2018.

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Operator [14]

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Our next question comes from the line of [Sergei] (inaudible).

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Unidentified Analyst, [15]

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A couple of questions from my side. First on this -- recent changes last week. Just to make sure, would it be correct to say that -- currently that Mamuka and Badri have stepped down from the Board? All the legal issues that they may face would be strictly their matter as individuals and not affect TBC Bank. And if you could confirm that there are no pending outstanding matters between TBC Bank and the regulator, the NBG, National Bank of Georgia. So that's the first question.

And then the second I wanted to ask about your space bank. In terms -- it looks like its gaining traction. Can you tell me how many active users you guys have on a monthly basis? And how -- what's the contribution so far in terms of loans, net income, deposits? So just some metrics around that, just from the space would be helpful.

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Giorgi Shagidze, TBC Bank Group PLC - CFO, Deputy CEO & Executive Director [16]

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Thanks for the questions. So with regards to Mamuka Khazaradze and Badri Japaridze, they stepped down from the Board of TBC Bank Group PLC. But you may remember that they left the Board of TBC Bank, the bank operations in April this year. The allegations are against them as individuals.

The -- with NBG, there was a joint statement in February confirming that NBG considers this -- that matter closed. In fact, on Friday, NBG made a supportive statement towards the bank. We have this statement in Page #5 of the deck that we sent today. So this is pretty much closed.

With regards to the numbers, in space, you are right. We are having very good increase. We already reached 365,000 downloads, that still matters when you want to sell additional products. We have 133,000 registered customers, and the growth loans have reached to GEL 22 million. This is important. I think this is even more important where we think from the perspective of how it is scalable in the new markets that we are entering. And you may remember that we are entering with the assets -- mostly asset-light approach. And yes, -- so -- and then the population in the 2 new markets is about 10x more than that of Georgia.

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Unidentified Analyst, [17]

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Great. And just to clarify, so 133 registered customers, but are these -- what's considered an active customer? Someone who has done a transaction, let's say, in the last 90 days in -- or some -- however you measure it. Can you tell me how many active customers you have?

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Giorgi Shagidze, TBC Bank Group PLC - CFO, Deputy CEO & Executive Director [18]

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No. The active customers who's done the transaction is usually below 50% of the registered customers. I don't have the exact active customers here, but that would be how it is applied. But this is quite consistent across the similar startup.

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Operator [19]

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Our next question comes from the line of [Martin].

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Unidentified Analyst, [20]

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(technical difficulty)

For a next few years given your recent month's strength

(technical difficulty)

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Giorgi Shagidze, TBC Bank Group PLC - CFO, Deputy CEO & Executive Director [21]

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Martin, we are not hearing you. The voice is breaking up. If you can repeat, or try to.

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Unidentified Analyst, [22]

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Can you hear me now?

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Giorgi Shagidze, TBC Bank Group PLC - CFO, Deputy CEO & Executive Director [23]

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Yes.

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Unidentified Analyst, [24]

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I'll send you an e-mail. That's okay. I'll send you an e-mail.

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Giorgi Shagidze, TBC Bank Group PLC - CFO, Deputy CEO & Executive Director [25]

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We can hear now if you want.

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Operator [26]

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Our next question comes from the line of Can Demir.

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Osman Can Demir, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [27]

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It's [John]. So on your ROE numbers, the run rate ROE, so if I think about your margin in the second half of this year, it will probably be something around 5.2%. If I take the midpoint of the guidance, let's say, the margin comes off by another 40 bps. That actually corresponds to almost 200 bps NIM decline versus the third quarter of last year. I mean how does that impact your ROE assumptions as a run rate? Because it's a big change.

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Giorgi Shagidze, TBC Bank Group PLC - CFO, Deputy CEO & Executive Director [28]

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Yes. John, the -- there is a change, but the level is, especially quarter 1, the profitability level was high. So in the -- within the context of margin decline, we expect the fee and commission income or rather operating income to continue growth, plus cost of risk this year specifically, we expect it to be very close or maybe even below our -- the range of the guidance. So for the profitability target, we are not revising it. But margin is something that is pretty much an ROE goal.

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Osman Can Demir, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [29]

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Okay. Understood. Then in terms of run rate cost of risk, I understand this quarter was 80 bps, which is, to me, in a regional context, it's a bit low. Do you think that's sustainable? Or should we assume it slightly, perhaps higher number as a run rate in our estimates?

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Giorgi Shagidze, TBC Bank Group PLC - CFO, Deputy CEO & Executive Director [30]

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Slightly higher number, perhaps. Because this quarter, it does have a small recovery in corporate segment. So you would not otherwise assume it. But it will still a little bit lower-- low number than the numbers that we are used to see.

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Osman Can Demir, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [31]

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All right. And In terms of, let's say, the GDP stays around 4%, 5% -- or GDP growth, I should say. Where would you see your cost of risk in the near route?

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Giorgi Shagidze, TBC Bank Group PLC - CFO, Deputy CEO & Executive Director [32]

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I think we said 1.2% to 1.6%. But again, we, this year, specifically expect very low end or might be even below that. Overall, if you go to the medium term, cost-of-risk tends to decrease given the decrease in the growth rate of higher yield, higher risk consumer loans. Over time, we'll try to update the guidance.

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Operator [33]

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We have no further questions at the moment. I'll now return over to your host to conclude today's conference.

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Vakhtang Butskhrikidze, TBC Bank Group PLC - CEO & Executive Director [34]

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Okay. Then thank you very much for the call, everyone. Appreciate the call with the short notice. We will be releasing all digit numbers on 15th, obviously, we don't expect any material changes. This will be on the 15th. And we will be planning roadshows, usually starting from the beginning of September, we will be in touch. But of course, meanwhile, we are available for the calls and questions as you might need. So thank you, again.

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Giorgi Shagidze, TBC Bank Group PLC - CFO, Deputy CEO & Executive Director [35]

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Thank you.

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Operator [36]

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Thank you for joining today's conference call. Host, please stay connected.