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Edited Transcript of TBCG.L earnings conference call or presentation 19-Feb-21 2:00pm GMT

·45 min read

Q4 2020 TBC Bank Group PLC Earnings Call LONDON Feb 19, 2021 (Thomson StreetEvents) -- Edited Transcript of TBC Bank Group PLC earnings conference call or presentation Friday, February 19, 2021 at 2:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Anna Romelashvili TBC Bank Group PLC - Head of IR * Giorgi Megrelishvili TBC Bank Group PLC - CFO & Member of Management Board * Vakhtang Butskhrikidze TBC Bank Group PLC - CEO & Executive Director ================================================================================ Conference Call Participants ================================================================================ * Andrew Keeley Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst * Ilan Stermer Renaissance Capital, Research Division - Research Analyst * Jennifer L. Passmoor HSBC Global Asset Management (UK) Limited - Portfolio Manager * Osman Can Demir Wood & Company Financial Services, a.s., Research Division - Equity Analyst * Robert Ian Sage Peel Hunt LLP, Research Division - Analyst * Ronak Gadhia EFG Hermes Holding S.A.E., Research Division - Research Analyst * Simon Nellis Citigroup Inc., Research Division - MD ================================================================================ Presentation -------------------------------------------------------------------------------- Anna Romelashvili, TBC Bank Group PLC - Head of IR [1] -------------------------------------------------------------------------------- Dear ladies and gentlemen, thank you for joining our Fourth Quarter Financial Results Conference Call. I'm Anna Romelashvili, Head of Investor Relations at TBC Bank. Today with me are Vakhtang Butskhrikidze, CEO of the Bank; and Giorgi Megrelishvili, CFO of the bank. We will start today's call with a brief overview of recent political and macro developments, and we'll provide you with an update about our financial and operating results. After the presentation, you'll have the opportunity to ask questions. With that, I'd like to hand over to Vakhtang. -------------------------------------------------------------------------------- Vakhtang Butskhrikidze, TBC Bank Group PLC - CEO & Executive Director [2] -------------------------------------------------------------------------------- Thank you, Anna. Thank you, everybody, for joining our call. I'd like to start today presentation with a brief update about the recent political events. The Prime Minister, Giorgi Gakharia resigned yesterday in connection with the court ruling on the tension of Nika Melia, the Head of the United Nation moving of position party. In (inaudible) with the constitution, the ruling party must nominate a new Prime Minister within 2 weeks and parliament must (inaudible). It is expected that the former Prime Minister Irakli Garibashvili, incumbent Defense Minister will be nominated as the member of the ruling party, current member of the Cabinet and was Prime Minister in 2013-2015. By the way, when TBC made the IPO, Mr. Garibashvili was Prime Minister. And together with us, he was on the London Stock Exchange, when TBC made IPO in 2014. That warrants continuation of the current economic policies, the western integration route and the stability of the country in the short term. It should be noted that given the Georgian dream hold the majority of the seats in the parliament, Irakli Garibashvili's candidates is likely to be approved. And now I will start my presentation with the main highlights for the fourth quarter on Slide #3. As expected, the Georgian economy slowed down 2020 due to the COVID-19 pandemic with the GDP decreasing by 6.1% for the full year, by 4.2% in 2021. On the back of the increasing external inflows, excluding partial recovering tourist and low base effect. In terms of TBC results, we achieved resilient profitability and maintained robust balance sheet despite the pandemic related challenges. For the full 2020, our pre-provision return of equity stood at 24%, supported by our operating income generation (inaudible) and increasing efficiency levels. While our return of equity dropped to 11.7% due to high provision charges related to COVID-19. (inaudible) Capital and the liquidity position throughout the year. The liquidity coverage ratio stood at 134%, and CET 1 capital was 10.4% at the end of the year. During the 2020, we further tractioned our position in the digital channels with our retail offloading ratio as high as 96%, and mobile and internet banking penetration at 50%, up by 2 percentage points year-over-year. Now let's move on the macroeconomic update on the Slide #4. Since the beginning of the pandemic tourist inflow sales remained close to 0, although non-tourism sale demonstrated resilience. For the full year, exports decreased by 12% in dollar terms, while excluding exports, there was actually a 3.5% increase. The decrease in exports was offset by a decline in imports, which drove by 15.9% year-over-year, leading to around $1 billion improvement in the trade of good balance. In addition, remittance inflows increased by 8.8% in 2020, including strong 15.7% year-over-year growth in the fourth quarter. As for the FDI in the third quarter, inflow to GDP ratio stood at solid 7%, including an important contribution of equity investments. Now moving on to Slide 5, which shows supporting fiscal stimulus and cautious monetary policy. The economy was strongly supported by the fiscal stimulus throughout the year. The fiscal deficit was predominantly financed externally and stood at 9.1% of GDP in 2020. This stimulus is expected to remain sizable in 2021 and government external borrowers will remain a major source of finance. In order to support the local currencies in Nation Bank of Georgia, actively intervened on the foreign currency market, selling a total of $873 million during 2020. NBG's international reserves coupled with the additional external borrowings should be sufficient to continue to support the foreign currency to the market if needed. On the other hand, the National Bank of Georgia remains prudent, using the monetary policy rate only gradually from 9% before the pandemic to 8% as the end of December. The monthly dynamics of prices indicate some moderation of inflation by the end of 2020 as prices only went up by 2.4% year-over-year. Now let's move on to Slide #6. The lari exchange rate depreciation was an additional challenge in 2020. The currency was affected not only by the pandemic, but also by the dynamics of the Georgia's major trading partner tariffs. With the Turkish lira depreciating is the mostly against dollar. On average, lari real effective exchange rate depreciated by 7.4% throughout the year. On the same period, the lari weakened by 14% against the dollar and now appears to have stabilized at around exchange rate of 3.3%. The lari real effective exchange rate is likely to undervalued as it [right and churn]. Therefore, we expect to lari to gradually strengthen together with the containment of the virus and the recovery inflows of GDP growth. Now let's move to Slide 8 and discuss our leading digital channels. As digital offerings became a true necessity during the pandemic, we have further increased our digital focus and introduce the new products and services. We have a very positive trend in retail transactions conducted digitally and via self-service terminals, which grew by 26% year-over-year basis. On the same period, our active retail digital users in Internet and mobile banking decreased by 8.6%. As already mentioned on the first slide, our retail offloading ratio stood at 96%, while penetration ratio of mobile and internet banking stood at 50% in the fourth quarter. Moving on to Slide 9. I am pleased to provide an update regarding our international strategy. In 2020, we achieved a significant milestone in our expansion into Uzbekistan despite the challenges caused by the pandemic. In October, we successfully launched our banking services to the public by leveraging our digital banking platform space. By the end of January, we registered around 27,000 users, delivered 12,000 debit cards and lifting up to 1,900 deposit customers and managed to launch our initial lending volume proposition. We already operate around 20 outlets, which are used for customer onboarding and assisted service support. We also have from payment franchise and present [through] Payme, a leading payment company in Uzbekistan, which delivered impressive results last year. I will discuss Payme results in more details on the next slide. I'd also like to update you regarding Azerbaijan. The shareholder agreement with Yelo Bank expired at the end of last year before the merger between TBC Credit and Yelo Bank could be implemented. Our Azeri subsidiary TBC Credit will continue its operations as previously. And for the next 18 months, our international expansion efforts will be focused on Uzbekistan. On this Slide 10, I'd like to provide an update regarding our leading payment businesses in Georgia, and Uzbekistan. We are delighted to maintain the status of the leading payments providers in Georgia, with the market share in commerce and POS of 58% by volume of transactions. Furthermore, the number of volume of payments increased during the year despite the COVID-19 pandemic and grew by 4% and 6% the percent, respectively. [AG] I'd also like to highlight that (inaudible) times. As I already mentioned, I'm also impressed by the results of our Uzbek payment subsidiary, Payme, which is a leading payment providers in the country, selling around 2.9 million users. The company maintained its strong growth during the year in terms of both financial and operating metrics. Transaction volumes grew by 144% during the year. And importantly, the business delivered GEL 8.3 million in net profit for the year. Now I'd like to hand over to Giorgi, who will provide an update on our financial performance in the fourth quarter. -------------------------------------------------------------------------------- Giorgi Megrelishvili, TBC Bank Group PLC - CFO & Member of Management Board [3] -------------------------------------------------------------------------------- Thank you, Vakhtang. I will begin my presentation from Slide 13, and we'll go over the financial performance of the fourth quarter of 2020 in more details. On this slide, you can see the performance of our loan book. On a constant currency basis, our loan book grew by 3% quarter-on-quarter and 8.7% year-on-year. The limited growth was due to the slowdown in economic activities caused by COVID-19. Our market share in loans stood at 39% as of 31st of December. Moving on to Slide 14. I'll discuss our deposit portfolio. On a constant currency basis, our deposit portfolio remained broadly flat quarter-on-quarter and was up by 13.8% year-on-year. The quarterly decrease in corporate deposits was driven by the decrease in Ministry of Finance deposits by around GEL 300 million Q4 2020. Those are short-term installments that we primarily use to manage liquidity interchangeably with NBG funding. Without more deposits, the corporate portfolio would remain broadly stable quarter-on-quarter on a constant currency basis. Our deposit market share stood at 37.2% as of 31st of December. Now turn to Slide 15, that shows our profitability. In full year 2020, we managed to maintain resilient profitability. Driven by increasing in net interest income and effective cost management. As a result, our pre-provision ROE stood at 24.7%. During 2020, our provision charges increased significantly to cover the potential impact of the COVID-19 pandemic on our borrowers. This led to a decrease in our ROE to 11.7%. Q4 profitability was also affected by increased provisions due to the partial lookdown introduced from the end of November. As a result, the ROE for the Q4 was 13.7% and 24% -- 24.6% before provision charges. Now moving to Slide 16, about our Net Interest Margin. In Q4, our NIM was 4.8%, up by 20 bps quarter-on-quarter as expected. This was driven by portfolio mix change with increased share of lari loans and lower cost of funds, partially offset by the negative impact of currency depreciation. For the full year 2020, NIM stood at 4.7%, down by 90 bps year-on-year, mainly due to a decrease in loan yields, increasing lari deposit costs and currency depreciation. Now let's move to Slide 17, to discuss non intrest income. In the first quarter of 2020 our net fee and commission income increased by 9.9% quarter-on-quarter. The growth was visible across most categories due to seasonality, which more than offset negative effects of the restrictive measures in Q4. Our net fee and commission income slightly decreased on a full year basis, mainly due to reduction in card operations, which was partially offset by growth in settlement transactions. The letter was mostly related to our Uzbek subsidiary Payme, which was acquired in mid- '19. The total noninterest income, without net fee and commission income increased by 13.9% quarter-on-quarter. The growth was mainly due to an increase in FX operations, driven by the increased number and volume of transactions across all segments as well as higher margins and increased demand for FX derivative operations. As for full year 2020, total non-interest income without net fee and commission income remained broadly stable. Turning now to Slide 18. I'll discuss our -- hello, I discuss our asset quality. As for COVID-19, impacts continue to materialize. The NPL ratio increased at the end of 2020 and amounted to 4.7% compared to 3.5% at the end of September 2020, in line with our APRA provisions booked in Q1 2020. Consequently, NPL coverage ratio decreased quarter-on-quarter and stood at 86% as of year-end. Year-on-year, fee ratio remained broadly stable. With a slight decline due to the shift of the portfolio mix from unsecured lending to more secured loans per the new regulations. In Q4, cost of risk stood at 2% and increased provisions were mainly driven by worsening macro expectations following the partial lockdown introduced at the end of November. In regards to loan book concentration, (inaudible) and top 10 borrowers to gross loans stood at 12.1% and 7.9%. Also, next Slide 19. I'd like to discuss our high-efficiency levels. In the fourth quarter, our operating expenses remained broadly stable year-on-year. While our cost-to-income ratio improved by 2.1% and stood at 39.7%. On a quarter-on-quarter basis, our operating expenses were up by 12.7%, mainly due to increase in staff and administrative and other expenses attributable to seasonally high cost in Q4. For the full year 2020, our operating cost decreased by 1.6%, thanks to our increased efficiency levels. As a result, our cost-to-income ratio improved by 1.5% year-on-year and amounted to 38.4%, while for the bank standalone, our cost-to-income ratio stood at 32.9%. On to slide 20 about our solid capital levels. As of year-end, we maintained strong capital positions CET 1, Tier 1 and total capital ratios stood at 10.4%, 13% and 17.1%, respectively, and remained comfortably above the eased minimum regulatory requirements by 3%, 3.8% and 3.4% accordingly. I will finalize my presentation with funding and liquidity position on Slide 21. During Q4 2020, our liquidity position remains strong and put us in a good position to support our customers and clients. At the end of Q4, our regulatory liquidity coverage ratio was 134%, well above the regulatory limit of 100%. Our NSFR ratio stood at 126% and net loan-to-deposit plus IFI funding ratio was 101% as of 31st of December. Now I would like to hand back to Vakhtang, who will update you about our future outlook. Please Vakhtang. -------------------------------------------------------------------------------- Vakhtang Butskhrikidze, TBC Bank Group PLC - CEO & Executive Director [4] -------------------------------------------------------------------------------- Thank you, Giorgi. Now -- and I'd like to finish today's presentation by reiterating our medium-term guidance. Return of equity of above 20%, cost-to-income ratio below , loan book growth of around 10% to 15%. In terms of dividends, we are still discussing with National Bank of Georgia the possibility of resuming payments of dividends for the year 2021. A lot of it depends on the macro situation, and we will provide further update in due course. At the same time, our medium-term guidance, our dividend payout ratio remains 25% to 35%. With that, I'd like to invite you to ask the questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Anna Romelashvili, TBC Bank Group PLC - Head of IR [1] -------------------------------------------------------------------------------- Thank you, Vakhtang. Now I'd like to open the floor for Q&A. (Operator Instructions) I'd like to invite Ilan Stermer to ask his question. -------------------------------------------------------------------------------- Ilan Stermer, Renaissance Capital, Research Division - Research Analyst [2] -------------------------------------------------------------------------------- Can you hear me? -------------------------------------------------------------------------------- Vakhtang Butskhrikidze, TBC Bank Group PLC - CEO & Executive Director [3] -------------------------------------------------------------------------------- Yes, we can. -------------------------------------------------------------------------------- Ilan Stermer, Renaissance Capital, Research Division - Research Analyst [4] -------------------------------------------------------------------------------- It's Ilan Stermer from Renaissance Capital. A couple of questions, please, for me, perhaps inevitably starting with the cost of risk because the jump in the Q4 cost of risk charge was obviously quite material, and it came on the back of 2 quarters where the cost of risk charge is very, very low. Now you explained it as macro assumptions changing and so on. But perhaps you can just add a little bit of color in terms of what you're seeing because it all seems to be going well. It all seems to be going according to plan, in a sense, if you can put it that way. So not only we get this spike, if you will, in provisions. So what is driving that? And what does it mean for the 2021 cost of risk charge? What are your expectations? That's the first question. -------------------------------------------------------------------------------- Giorgi Megrelishvili, TBC Bank Group PLC - CFO & Member of Management Board [5] -------------------------------------------------------------------------------- Okay. A very valid question, indeed. So I'll try to go into more details exactly. And if I ask Anna could -- can go to our previous and current macro forecast, I think it will be easier to follow the logic. Okay. So let me start. As you see, we updated the macroeconomic variables used for IFRS 9 modeling in Q4, which was the second lockdown that increased our provision. So as you can, on this slide, I'll just touch base, for example, GDP, our original growth was 5%, and the actually we ended at 6.1%. Also 2021, we have a slight downside. So because of this, actually, we see our IFRS models kind of update -- will result it in to more like impairment charge, just to go into a bit more details. I don't want be too technical, but at high level, actually, the bank expects higher level of defaults in 2021 compared like to our previous forecast, which actually translated into higher business as usual forward looking, let's say, adjustments to our PD. And I just want to stress, it's a forward-looking statement and adjustments. The kind of GDP or, let's say, unemployment are most sensitive variables. Also, another key drives that we strength and look is actual LGD. The bank make the upward adjustments to LGD values of stage exposures to were -- to prolonged of COVID-19 and related like economic decreasing potentially. So here like twofolds the first, we assume for our (inaudible) portfolio that actually recovery rates will slow down and for that we used past statistical approach. Also for a nonsignificant corporate or SME clients, we applied additional haircut. And for collateralized retailer macro clients, we actually extended the time what we need to get out of the recovery bank. So those are kind of major macro parameters. But I would like to highlight and stress 2 things the first 1 is actually forward-looking. And if the economy stays per our baseline, it's kind of uncertainty, and it's quite a grateful job to provide exact guideline. But if that trades in this regard, probably all the downside for 2020 is factored in. And based on this, probably we should be still looking at normalized risk, like about -- between as I mentioned, 1.3% range. But again, that's depending on the macro parameters. Second point, I also want to highlight, this adjustment was solely for IFRS because per ABG regulatory rules that drives our capital ratio and capital requirement. There were no kind of changes or adjustments, say kind of -- we have totally different rule. And in Q1, our workout provisions were much, much higher than IFRS. If you have any follow-up question? -------------------------------------------------------------------------------- Ilan Stermer, Renaissance Capital, Research Division - Research Analyst [6] -------------------------------------------------------------------------------- Sorry, carry on. -------------------------------------------------------------------------------- Giorgi Megrelishvili, TBC Bank Group PLC - CFO & Member of Management Board [7] -------------------------------------------------------------------------------- I pause here, if you have any clarity -- if you need any clarification. -------------------------------------------------------------------------------- Ilan Stermer, Renaissance Capital, Research Division - Research Analyst [8] -------------------------------------------------------------------------------- No, no, I'm happy with that. Perhaps I can move to another expectation. That is on the NIMs and on loan growth. Also, just to understand what are you thinking for next year? If I'm not mistaken, you're looking at -- or you are looking for a number of cuts, 1 to 2 cuts, 25 bps each in the bank rate. And then simultaneously also that the lari is undervalued. So how does that play out in terms of NIMs for this next year? -------------------------------------------------------------------------------- Giorgi Megrelishvili, TBC Bank Group PLC - CFO & Member of Management Board [9] -------------------------------------------------------------------------------- Well, ultimately, so NIM progression is quite like how -- like optimistic. As you can see, we increased compared to Q3, 20 basis points. And actually, we continue this trend to continue slightly, like around again, 10 to 20 bps. So like it being 2021, it can be a bumpy ride, for example, in Q1 because of the pandemic, we might see some slight dip. But let's say, around -- during '21, we are looking somewhere around 5%. So that's driven again like shifting to more like lari lending increasing the lari person into our portfolio, decreasing cost of funds and also what we are looking like increasing the share of the higher yield products. So that's it. -------------------------------------------------------------------------------- Ilan Stermer, Renaissance Capital, Research Division - Research Analyst [10] -------------------------------------------------------------------------------- And loan growth? -------------------------------------------------------------------------------- Giorgi Megrelishvili, TBC Bank Group PLC - CFO & Member of Management Board [11] -------------------------------------------------------------------------------- On loan growth it's kind of again we probably should like the -- on the currently macro economic exemptions. We will be probably at lower -- what we expect at lower end of our medium-term guidance, 10% to 15%. So that will be probably at lower end. -------------------------------------------------------------------------------- Ilan Stermer, Renaissance Capital, Research Division - Research Analyst [12] -------------------------------------------------------------------------------- Okay. Probably with mortgages coming off a little bit following the end of the subsidy program. Giorgi, 1 other question before I let others take over. The management bonuses, the 2020 management bonuses were waived, as I recall, that was one of the comments that was made back in a year ago in the Q1 results. What was the impact on OpEx in 2020? And what happens from here on? Do you start accruing again? And does that put pressure on OpEx growth in 2021? -------------------------------------------------------------------------------- Giorgi Megrelishvili, TBC Bank Group PLC - CFO & Member of Management Board [13] -------------------------------------------------------------------------------- Okay. Thank you. I see we are coming to. Actually, it's also a very valid and good question. So indeed, with the management value bonuses into 2020 and should play it positively.into our cost-to-income ratio on the OpEx. So going forward, how we see the cost, the kind of risk that it normalizes economy, the bonus is to be restart. And also we will see some more pressure on our costs coming from, let's say international expansion. However, and it will be in absolute terms. However, there are kind of other structural changes or the optimizations we are doing for example, moving to, let's say, remote working will allow us potentially to find different optimizations and decrease our efficiency. So to kind of be short, we expect our cost-to-income ratio not to exceed what we had this year, and we at least is the same amount, if not low, and we reconfirm our medium-term target at 35%. And if you look at our paying cost of income, it's already 32.9%. So as our international expansion like flies off, we should be very well positioned to meet our medium term target. -------------------------------------------------------------------------------- Anna Romelashvili, TBC Bank Group PLC - Head of IR [14] -------------------------------------------------------------------------------- The next question comes from Andrew Keeley. -------------------------------------------------------------------------------- Andrew Keeley, Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst [15] -------------------------------------------------------------------------------- Can you hear me? -------------------------------------------------------------------------------- Giorgi Megrelishvili, TBC Bank Group PLC - CFO & Member of Management Board [16] -------------------------------------------------------------------------------- Yes -------------------------------------------------------------------------------- Anna Romelashvili, TBC Bank Group PLC - Head of IR [17] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Andrew Keeley, Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst [18] -------------------------------------------------------------------------------- I guess a couple of kind of follow-ups on previous questions. So in terms of the kind of economic outlook for this year. I'm just trying to understand what your kind of expectations on tourism, kind of what they really imply. So as I see from your -- I think that slide you showed, you had like 82% growth year-on-year, 70% down versus 2019. So what does this kind of mean in terms of when you think tourism is going to kind of open up again and kind of get back to normal? At what stage kind of this year, does that imply? I guess that would be my first question. -------------------------------------------------------------------------------- Vakhtang Butskhrikidze, TBC Bank Group PLC - CEO & Executive Director [19] -------------------------------------------------------------------------------- Okay. So Anna I think we should go Anna (inaudible) macro slide that showed kind of annual increase. Probably. And so okay, myself. So economic outlook, probably as you kind of rightly mentioned, the tourist is the key, let's say, area we should be careful and observe. But we are quite conservative on this side. For example, we don't expect much or any increase during the H1. So let's cover what is factored in our baseline scenario, we will expect to pickup some of missed summer from H2 and compare it to 2019, it's 70% down. So even -- and just to give you some context. If you look like at November or December, it's even during that period, during lockdown and when everything was closed, it was not down by 100%. So we still have 5% compared to 2019. So in this regard, like starting from H2 and being 70% down in the current GDP growth of 4% vaccination starting around the globe seems quite sensible assumption. And once think that specific to Gorgia we should consider is that probably long-term tourist when lock their flights and host will create kind of -- will start more slowly. But short-term tourist will kind of pick up quicker and larger part of Georgian tourist is coming from its neighborhood countries and from the short -- like that's more short-term fall. Did I answer your question? -------------------------------------------------------------------------------- Andrew Keeley, Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst [20] -------------------------------------------------------------------------------- Yes. Yes. I think, I guess also kind of on the kind of economic outlook, I think you talked about this kind of $1.4 billion or so of international multilateral kind of financing support that Gorgia received last year, of which you've got about $300 million left. I mean, again, if we have a fairly tough kind of first half of the year and tourism -- travel doesn't pick up and maybe reliance is a week. What happens if you've only got that -- $300 million left? I mean, is there other kind of -- basically pipelines for further kind of support to come? -------------------------------------------------------------------------------- Vakhtang Butskhrikidze, TBC Bank Group PLC - CEO & Executive Director [21] -------------------------------------------------------------------------------- Yes. You are right, Andrew. So as we already mentioned in our presentation, an extra $300 million from the last year. And in addition, for this year, already government has more than $700 million. So $1 billion for the Georgian economy, it's quite a material money. And that money will be used for the different kind of the project, mainly for the infrastructure. So this gives enough -- some kind of the cushion for the GDP -- for GDP across all for the one hand. On the other hand, this is a good enough in National Reserve to help in National Bank of Georgia for the stability of the local currency as I am showing on this slide. At the end of January National Bank got $4 billion. So that $1 billion, more than $1 billion extra money, which is some mix generally will be very helpful. On the one hand, to healthy growth of the GDP, but on the other hand also for the stability of the local currency. -------------------------------------------------------------------------------- Andrew Keeley, Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst [22] -------------------------------------------------------------------------------- And then the question on -- just on your provisions. So can you just tell us what was the kind of underlying cost? And you may have mentioned -- I might have missed it, what's was the kind of underlying cost of risk in the fourth quarter without the kind of additional macro inputs? And any thoughts on what kind of range of cost of risk you're looking at for this year assming that the economy is going to grow around the 4% mark that you're expecting? -------------------------------------------------------------------------------- Giorgi Megrelishvili, TBC Bank Group PLC - CFO & Member of Management Board [23] -------------------------------------------------------------------------------- Yes. I start with the second question. And like -- as I I highlighted, is that all the kind of nail of this like downside of the second lockdown is already factored in the provisions we took in Q2 on a forward-looking basis. Therefore, based on our kind of current macro assumptions that we show. And again, I would like to highlight that it's very difficult to assume what happens because, for example in this November we hoped that we end up at some places, we ended up in a totally different area because of some changes. But let's assume this -- all this plays. And these assumptions, actually, I would like to stress are quite aligned, like very similar to like international, let's say institutions to NBG and other like macro forecast. They are kind of all on the same page. We expect, as I mentioned, about somewhere 1% and 1.3%. That is our BAU normalized cost. But still, I want to highlight this actual dependent on this macro forecasting out. -------------------------------------------------------------------------------- Andrew Keeley, Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst [24] -------------------------------------------------------------------------------- Okay. And the cost to risk in the fourth quarter. -------------------------------------------------------------------------------- Giorgi Megrelishvili, TBC Bank Group PLC - CFO & Member of Management Board [25] -------------------------------------------------------------------------------- So -- sorry -- so can you repeat... -------------------------------------------------------------------------------- Andrew Keeley, Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst [26] -------------------------------------------------------------------------------- It's just how much was that due to the macro additions? -------------------------------------------------------------------------------- Giorgi Megrelishvili, TBC Bank Group PLC - CFO & Member of Management Board [27] -------------------------------------------------------------------------------- So it's kind of -- we didn't actually -- it's kind of -- we just used the updated macro variables. We didn't do Q -- like from this perspective, like all the new one. But I will check with our (inaudible) that kind of if you can (inaudible) call separately. Anna, you are on mute I think. -------------------------------------------------------------------------------- Anna Romelashvili, TBC Bank Group PLC - Head of IR [28] -------------------------------------------------------------------------------- Excuse me. The next question comes from (inaudible). She has written the question in the Q&A. So I will read this out. What do you see in terms of quality of assets? This is the first question. And the second one is are you provisions enough? Do you expect any reversal of provisions this year? -------------------------------------------------------------------------------- Giorgi Megrelishvili, TBC Bank Group PLC - CFO & Member of Management Board [29] -------------------------------------------------------------------------------- I think we largely covered those questions on constant provisions. And I just kind of like highlighted that we are quite comfortable based on the current macro outlook that our projections are sufficient in a normalized macro economy. -------------------------------------------------------------------------------- Anna Romelashvili, TBC Bank Group PLC - Head of IR [30] -------------------------------------------------------------------------------- The next question comes from Jennifer Passmoor. -------------------------------------------------------------------------------- Jennifer L. Passmoor, HSBC Global Asset Management (UK) Limited - Portfolio Manager [31] -------------------------------------------------------------------------------- Giorgi, I just wanted to quickly ask about your NPL coverage. Does the bank still feel comfortable with the coverage ratio as long as it's above 80%? And I'll follow-on with a few others. -------------------------------------------------------------------------------- Giorgi Megrelishvili, TBC Bank Group PLC - CFO & Member of Management Board [32] -------------------------------------------------------------------------------- Okay. Okay. So first of all, I would like, as you can see, see that (inaudible) our NPL coverage ratio decreased this year, but it's kind of very natural because as you remember, during Q1, we booked very large provisions. It was preemptive provisions, expecting that the delinquency will come at actual along the way and that happened. Therefore, we are provisioned and we see NPLs increasing. And if you compare last year, it's actually not too much lower. And we have a fundamental shift in our portfolio mix. For example, we have much more collateralized loan and less, let's say, unsecured loans. So that also plays a big role how we look. And also, I would like to present highlight it from perspective of how much our collateral coverage, we are standing a 189%, and since it's actually a very, let's say, material factor to highlight the strength of our book. So I think that's -- I wanted to highlight on NPL coverage. -------------------------------------------------------------------------------- Jennifer L. Passmoor, HSBC Global Asset Management (UK) Limited - Portfolio Manager [33] -------------------------------------------------------------------------------- Okay. And with respect to fee income as a percentage of, say, average assets, do you expect it to normalize to sort of previous year's levels as soon as sort of economic activity picks up a little bit? -------------------------------------------------------------------------------- Giorgi Megrelishvili, TBC Bank Group PLC - CFO & Member of Management Board [34] -------------------------------------------------------------------------------- Yes. So kind of -- we have increased our income to growth as it's right. We expect our net interest income to grow. Also we expect our net fee and commission income to grow like around 10% to 15%. In line with our medium term guidance. So we, of course, play a role in terms of increasing the ratio. -------------------------------------------------------------------------------- Jennifer L. Passmoor, HSBC Global Asset Management (UK) Limited - Portfolio Manager [35] -------------------------------------------------------------------------------- Okay. And can you talk a little bit about the -- any -- have there been any more grace period offered on any loans and how is the performance of those loans? -------------------------------------------------------------------------------- Giorgi Megrelishvili, TBC Bank Group PLC - CFO & Member of Management Board [36] -------------------------------------------------------------------------------- Okay. So we don't actually -- we have 2 major grace period loans that happened in March and second one happened in June. So they expired at the end of September. That was to like the major grace periods. In addition, post September, there was the individual restructuring, working with customers on one-to-one basis, impacted customers. And in addition, during the second look down, it was not kind of grace period, but it was support program from the bank to customers who are in financial need and providing them kind of the support and the amount was less than 1% of the book at the end of December. -------------------------------------------------------------------------------- Anna Romelashvili, TBC Bank Group PLC - Head of IR [37] -------------------------------------------------------------------------------- The next question comes from Robert Sage. You are on mute Robert. -------------------------------------------------------------------------------- Robert Ian Sage, Peel Hunt LLP, Research Division - Analyst [38] -------------------------------------------------------------------------------- Okay. Is that better? Can you hear me now? -------------------------------------------------------------------------------- Anna Romelashvili, TBC Bank Group PLC - Head of IR [39] -------------------------------------------------------------------------------- We can. -------------------------------------------------------------------------------- Robert Ian Sage, Peel Hunt LLP, Research Division - Analyst [40] -------------------------------------------------------------------------------- Okay. I've got a couple of questions again on credit quality. The first is looking at the local accounting provisions, not the IFRS 9 one's. And I was wondering, could you please comment on what bands and provisions that you made in Q1 last year are still left unutilized at this stage? And the second question is, there is a reference to a single large corporate which appears to be in the arrears numbers and I was wondering could you quantify how big this one particular corporate might be? And could you also please confirm whether or not there's any anything with respect to this large customer in the provisions charge going through the income statement? -------------------------------------------------------------------------------- Giorgi Megrelishvili, TBC Bank Group PLC - CFO & Member of Management Board [41] -------------------------------------------------------------------------------- Thank you very much. So actually, for -- by local standards, we booked around GEL 410 million in Q1. out of this, actually that was actual general provision and only like GEL 97 million was left by year end and at the end of September it was GEL 60 million -- sorry, at the end of let's say January 2021. Now moving to single man provision. Actually that's was something new. We booked provision for this particular borrower at the end of December. So December '19, so that we're provision we're booked. And NPL was taken in Q3 of this year. So therefore, we have a bit of mismatch and obviously, said -- actual decreased our NPL coverage level this year, but considering that we booked in like 2019, we think we are very well covered for this particular borrower. As for what we expect, actually, we expect like some Q1, Q2 due to the only kind of is incoming months to recover this position. -------------------------------------------------------------------------------- Anna Romelashvili, TBC Bank Group PLC - Head of IR [42] -------------------------------------------------------------------------------- And the next question comes from Ronak Gadhia. -------------------------------------------------------------------------------- Ronak Gadhia, EFG Hermes Holding S.A.E., Research Division - Research Analyst [43] -------------------------------------------------------------------------------- Thanks, Anna. 2 or 3 questions, if I may. Firstly, it's just a follow up on Jennifer's question. You mentioned the proportion of loans that was restructured is fairly small around 1%. So I was just trying to understand why on the back of that, why the modification loss -- loan loss losses were quite significant during the fourth quarter? Why that picked up Q-on-Q? Yes. Maybe you can take that and then I'll follow-on up. -------------------------------------------------------------------------------- Giorgi Megrelishvili, TBC Bank Group PLC - CFO & Member of Management Board [44] -------------------------------------------------------------------------------- Okay. So I made kind of did not express explicitly. This 1% was actually only when we declared like -- and as like support for customers in December. But generally, the restructuring rate was a bit kind of, of course, higher. What we started from September. So restructuring it was -- rate was somewhere like around -- like 9% that's kind of what's the number I can with the top of my head at the moment. -------------------------------------------------------------------------------- Ronak Gadhia, EFG Hermes Holding S.A.E., Research Division - Research Analyst [45] -------------------------------------------------------------------------------- Okay. So in total, it's about 9% of the book that's been? -------------------------------------------------------------------------------- Giorgi Megrelishvili, TBC Bank Group PLC - CFO & Member of Management Board [46] -------------------------------------------------------------------------------- Yes, we kind of -- because we classify, we, let's say, restructuring -- it's kind of high and low and medium risk. And I would say this number is our medium and high risk. So the loans that probably plays around into stage 2 and stage 3. -------------------------------------------------------------------------------- Ronak Gadhia, EFG Hermes Holding S.A.E., Research Division - Research Analyst [47] -------------------------------------------------------------------------------- Okay. Okay. Understood. The other point here is, if I look at your NPL ratio or stage 3 loans ratio, a significant increase in the fourth quarter. Could you just give a bit of guidance into what specific segments who are driving that, the key segments that were driving that deterioration? -------------------------------------------------------------------------------- Giorgi Megrelishvili, TBC Bank Group PLC - CFO & Member of Management Board [48] -------------------------------------------------------------------------------- Yes. So like in major segments are retail, because we restructured quiet a large number of the loans and also kind of it's a micro-driven incorporate, we did not see much increase in NPLs because like they are under -- still under grace period, but it's kind of very shortly retail in macro. -------------------------------------------------------------------------------- Ronak Gadhia, EFG Hermes Holding S.A.E., Research Division - Research Analyst [49] -------------------------------------------------------------------------------- Okay. And on this retail loans, given your updated expectations for your economic growth, given that you're expecting low. Do you expect or what's the real downside scenario here in terms of the deterioration in this portfolio, assuming tourism -- the performance of the tourism sector is worse than you're expecting? -------------------------------------------------------------------------------- Giorgi Megrelishvili, TBC Bank Group PLC - CFO & Member of Management Board [50] -------------------------------------------------------------------------------- Yes. So I think we factor quite a conservative scenario on tourist side. And the best -- probably is downside scenario if we enter in the territory of tourist. That kind of it's in moment when we kind of forecast our provisions, we have 3 scenarios. We are baseline scenario, we have upside scenario and we have downside scenario. So the probability of the (inaudible) scenario is already factored in ,in terms of the forecast. So if Anna can go and show the slide. I think it's the next slide, not this one -- oh this one -- sorry. So we have like already costing the downside scenario. And like the downside, probably if the vaccination doesn't work. I don't want to go into this, let's say, territory actually, hopefully, we won't at be this risk. -------------------------------------------------------------------------------- Ronak Gadhia, EFG Hermes Holding S.A.E., Research Division - Research Analyst [51] -------------------------------------------------------------------------------- Sure. And just a final one. You briefly mentioned the impact on your capital ratio from the transition to IFRS 9. Could you just go through that once again? I didn't pick it up clearly. And what impact does it have on your capital buffers overall? -------------------------------------------------------------------------------- Giorgi Megrelishvili, TBC Bank Group PLC - CFO & Member of Management Board [52] -------------------------------------------------------------------------------- Okay. Thank you. So we expect the NBG like to start transferring to IFRS on a voluntary basis from 2022 and be compulsory in 2023. We expect our capital ratios to increase as our like different like provisions or other aspects comes to IFRS. But the expectation is that it will be only ratio increase. We probably should not expect any release of capital through -- different, let's say, potential filters. So it will be easier for everyone to compare on like-to-like basis because we will be reporting on IFRS basis. But expectation is that the provisional filter won't allow us to release much capital. -------------------------------------------------------------------------------- Ronak Gadhia, EFG Hermes Holding S.A.E., Research Division - Research Analyst [53] -------------------------------------------------------------------------------- Okay. Does that mean the capital buffers under IFRS could -- or the regulatory minimum of IFRS could be higher? -------------------------------------------------------------------------------- Giorgi Megrelishvili, TBC Bank Group PLC - CFO & Member of Management Board [54] -------------------------------------------------------------------------------- As we need to see what the regulator comes with, but kind of the key point is that there are 2 key points: that our ratios will be probably a bit higher to report; and b, we should not incur it -- should not expect the capital release. How exactly that will play out through which technicalities, we still need to see a (inaudible). -------------------------------------------------------------------------------- Vakhtang Butskhrikidze, TBC Bank Group PLC - CEO & Executive Director [55] -------------------------------------------------------------------------------- Yes. (inaudible) from our side, it will be better for us, not only for TBC, but for the Georgian banks to compare our ratios, capital ratios, to the banks in the Eastern Europe and to the other banks worldwide. Because today, it's very difficult to compare how much equity capital be here and how we have it too much capital. So afterwards, when we go to the IFRS, it will be much easier to compare our banking sector capitalization to the other banking centers. -------------------------------------------------------------------------------- Anna Romelashvili, TBC Bank Group PLC - Head of IR [56] -------------------------------------------------------------------------------- And the next question comes from Simon Nellis -------------------------------------------------------------------------------- Simon Nellis, Citigroup Inc., Research Division - MD [57] -------------------------------------------------------------------------------- My question would be actually on capital again. I see that your risk weight density has now been pretty stable at between 80% to 82% of assets. Is that likely to stay constant? Or is there more risk weight optimization from kind of the derisking of the portfolio. That would be my first question here. -------------------------------------------------------------------------------- Giorgi Megrelishvili, TBC Bank Group PLC - CFO & Member of Management Board [58] -------------------------------------------------------------------------------- Do we want to ask it out or... -------------------------------------------------------------------------------- Simon Nellis, Citigroup Inc., Research Division - MD [59] -------------------------------------------------------------------------------- I can ask them. And the other one is just if you can provide an outlook for fees. Fee growth was nicely up quarter-on-quarter, but still down year-on-year. Just wondering what the outlook for fees this year is. And then I mean, related to capital, if you're in a position, I don't think you are to provide any guidance on dividends, restarting dividends. -------------------------------------------------------------------------------- Giorgi Megrelishvili, TBC Bank Group PLC - CFO & Member of Management Board [60] -------------------------------------------------------------------------------- Thank you. So on our RWA side, we use a standardized approach. As you know, parents in local regulatory rules, and we don't expect any major material changes. So we expect like things to play around 80% that's the kind of area probably to make a safe bet. On fee and commission income, like it is we expect as the economy stabilizes and the activities increase plus throughout kind of development in this area to increase somewhere between 10% to 15%, that is consistent with our kind of medium-term guidance. Did I cover? -------------------------------------------------------------------------------- Simon Nellis, Citigroup Inc., Research Division - MD [61] -------------------------------------------------------------------------------- And on dividends, to being restarted. I mean do you see a -- do you have any -- I guess you don't have clarity yet? -------------------------------------------------------------------------------- Giorgi Megrelishvili, TBC Bank Group PLC - CFO & Member of Management Board [62] -------------------------------------------------------------------------------- So it's kind of to summarize yes, but to provide a bit longer as we have to face and to pass uncertainty, which kind of makes it's very difficult to give a straight forward guidance on this topic. It depends exactly the regulatory requirements, what's -- we expect it somewhere like between end of Q1, some beginning of Q2. And of course, how macro also plays, we have a base line scenario, but we actually need the scenario to play, to be kind of to safely assume and start kind of. But at the moment, we just need to sit and wait for those 2 factors, and we will be in a position to provide more guidance is incoming months. -------------------------------------------------------------------------------- Anna Romelashvili, TBC Bank Group PLC - Head of IR [63] -------------------------------------------------------------------------------- And the next question comes from Can Demir. -------------------------------------------------------------------------------- Osman Can Demir, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [64] -------------------------------------------------------------------------------- Hi, everyone. Can you hear me? -------------------------------------------------------------------------------- Giorgi Megrelishvili, TBC Bank Group PLC - CFO & Member of Management Board [65] -------------------------------------------------------------------------------- Yes, we can. -------------------------------------------------------------------------------- Osman Can Demir, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [66] -------------------------------------------------------------------------------- Okay. Great. So Giorgi, I wanted to ask about the NIM in 2021. If you compare this scenario in your mind through the fourth quarter -- NIM, How would it look? Should we expect a stable NIM? Or do you think it could go down a bit or maybe go up, what's the scenario in your mind? -------------------------------------------------------------------------------- Giorgi Megrelishvili, TBC Bank Group PLC - CFO & Member of Management Board [67] -------------------------------------------------------------------------------- Yes. So on a like -- for this kind of maybe bumpy in the starter quarters, for example, next quarter, we might say slight if not material. But overall year an on year because of the lockdown still carrying on. But overall, year-on-year, we are on a good path to continue our kind of positive journey. We still expect it to grow somewhere from 10bps to 20 bps and stabilize around 5%. So it's kind of the area we are thinking we will have an ever settle. -------------------------------------------------------------------------------- Osman Can Demir, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [68] -------------------------------------------------------------------------------- Okay. Got it. And in the presentation on Slide 51, you mentioned that you expect NBG to give you some sort of guidance on the restoration of capital buffers. Could you talk a bit about that? And what does it exactly mean for the shareholders? -------------------------------------------------------------------------------- Giorgi Megrelishvili, TBC Bank Group PLC - CFO & Member of Management Board [69] -------------------------------------------------------------------------------- Yes. So it's kind of exactly the point. I covered during my previous question. It is directly linked to our potential to actually distribute dividends. So at the moment, we are waiting NBG to exactly confirm the buffers they are going to restore and how the original buffers that we are supposed to come into effect before pandemic will play out. At the moment, what all can I say that we are in waiting mode from our regulator. And once we get, of course, we will disclose that information. And consequently, how we are going to play with dividends as well. -------------------------------------------------------------------------------- Osman Can Demir, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [70] -------------------------------------------------------------------------------- N Okay. And the -- will you also consider or incorporate the management buffers in your dividend decision? Or is this going to be about meeting the regulatory requirement? Meaning if you hit the 12% CET1 would you distribute dividends? Or would you rather wait to hit 14% because you have that 2 percentage points? -------------------------------------------------------------------------------- Giorgi Megrelishvili, TBC Bank Group PLC - CFO & Member of Management Board [71] -------------------------------------------------------------------------------- Probablt it;s kind of very prudent to assume that we need to have some management buffer. Particularly in this environment will be the fix filtration and all other headwinds. So kind of like we will assumes that there will be management buffer in place, and we will distribute the dividends above the regulatory requirements and our management buffer. -------------------------------------------------------------------------------- Osman Can Demir, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [72] -------------------------------------------------------------------------------- N Okay. That means the dividend story is maybe medium to long term, right, because... -------------------------------------------------------------------------------- Giorgi Megrelishvili, TBC Bank Group PLC - CFO & Member of Management Board [73] -------------------------------------------------------------------------------- I can't say specifically it can -- it can play anyway. Again, still it's -- we need to wait for the regulator and the market. -------------------------------------------------------------------------------- Osman Can Demir, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [74] -------------------------------------------------------------------------------- Okay. Got it. And in terms of -- we talked about digitalization and the clients and the customers using the digital product more and more, which is great news. But on the flip side, the headcount has been increasing in the bank. So how do you exactly -- so the bank basically is becoming more labor-intensive than ever.So how do you reconcile these 2 things? -------------------------------------------------------------------------------- Vakhtang Butskhrikidze, TBC Bank Group PLC - CEO & Executive Director [75] -------------------------------------------------------------------------------- Yes, I agree (inaudible) that digitalization is very important. And as we have already mentioned today, we have 96% of the transactions in our digital channels, and we are bringing new and more and more digital products. To answer about the FTs. It was major of the beginning of this year before the COVID-19. There was some kind of a slight increase that afterwards it just stopped, but also we have to take in the consolidation that we began our business as Giorgi mentioned in his part of the presentation that on the group's level, we are looking and recently, we began our businesses in Uzbekistan. For example, today, we have in Uzbekistan up to 200 employees, which was also accounted in our group's level. -------------------------------------------------------------------------------- Osman Can Demir, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [76] -------------------------------------------------------------------------------- Okay. Okay. And work done while we're at it, could you also talk a bit about as Azerbaijan and what exactly happed in your partnership with the local partners? -------------------------------------------------------------------------------- Vakhtang Butskhrikidze, TBC Bank Group PLC - CEO & Executive Director [77] -------------------------------------------------------------------------------- Sorry, we didn't get it. Can you repeat the question? -------------------------------------------------------------------------------- Osman Can Demir, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [78] -------------------------------------------------------------------------------- The Azerbaijan venture. So is that going forward? Or did it pause? Or did you stop your partnership all together with the local partners? -------------------------------------------------------------------------------- Vakhtang Butskhrikidze, TBC Bank Group PLC - CEO & Executive Director [79] -------------------------------------------------------------------------------- I'm sorry. I could not hear. Can you once again ask the question ? -------------------------------------------------------------------------------- Osman Can Demir, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [80] -------------------------------------------------------------------------------- Can you hear now,Vakhtang? -------------------------------------------------------------------------------- Vakhtang Butskhrikidze, TBC Bank Group PLC - CEO & Executive Director [81] -------------------------------------------------------------------------------- Yes, now is better. Yes. -------------------------------------------------------------------------------- Osman Can Demir, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [82] -------------------------------------------------------------------------------- Okay. I was asking about Azerbaijan. And what exactly is going on with the venture there? -------------------------------------------------------------------------------- Vakhtang Butskhrikidze, TBC Bank Group PLC - CEO & Executive Director [83] -------------------------------------------------------------------------------- In Azerbaijan? Yes. So as I have already mentioned in today's presentation. So as you remember, we have a shareholders agreement, we -- it expired at the end of the 2020. So now within this year, we are continuing as a TBC trading our operation. This year, as you remember, we have a microfinance institution in Azerbaijan. We are continuing our operations in this market. But once more, next 18 months, our concentration and our efforts will be on the Uzbekistan because we see a lot of upside there. And I think quarterly, we'll upgrade the information. Just in my part of the presentation, I showed the January figures that I mentioned that we have 27,000 downloads, but I check just this morning at we have already more than 50,000 downloads. So we are rocketing there. Customers are increasing, downloads our applications. So our priority in next 18 months Uzbekistan. -------------------------------------------------------------------------------- Anna Romelashvili, TBC Bank Group PLC - Head of IR [84] -------------------------------------------------------------------------------- Thank you. At this point, we don't have any more questions. So please, if you have any questions ,ask them now or we will finish our call. At this point, we don't have any further questions. So thank you, everybody, once again for joining our call. And with that, we would like to close today's presentation. Thank you. -------------------------------------------------------------------------------- Giorgi Megrelishvili, TBC Bank Group PLC - CFO & Member of Management Board [85] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Vakhtang Butskhrikidze, TBC Bank Group PLC - CEO & Executive Director [86] -------------------------------------------------------------------------------- Thank you.