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Edited Transcript of TBCG.L earnings conference call or presentation 20-May-20 1:00pm GMT

Q1 2020 TBC Bank Group PLC Earnings Call

LONDON May 20, 2020 (Thomson StreetEvents) -- Edited Transcript of TBC Bank Group PLC earnings conference call or presentation Wednesday, May 20, 2020 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

* Nino Masurashvili

JSC TBC Bank - Deputy CEO, Chief Risk Officer & Member of Management Board

* Otar Nadaraia

TBC Bank Group PLC - Chief Economist

* Vakhtang Butskhrikidze

TBC Bank Group PLC - CEO & Executive Director

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Conference Call Participants

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* Andrew Keeley

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

* Jennifer L. Passmoor

HSBC Global Asset Management (UK) Limited - Portfolio Manager

* Papuna Lezhava

National Bank of Georgia - Member of the Council

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Presentation

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Vakhtang Butskhrikidze, TBC Bank Group PLC - CEO & Executive Director [1]

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Dear, ladies and gentlemen. Thank you for joining our First Quarter Financial Results Call. I hope everyone is safe and in good health during these difficult times.

Today, I'd like to update you on the measures that we have taken to adjust to the new environment and to address the challenges caused by the COVID-19. We will also present our financial and operating results for the first quarter of 2020. We will provide you with detailed information about our disciplined risk management approach, and we'll briefly discuss Georgia's macroeconomic outlook. Finally, we will also talk about government's actions to mitigate the negative impact of pandemic.

We are delighted to have with us today Papuna Lezhava, Vice Governor of the National Bank of Georgia, who will update you on the government and National Bank of Georgia's response on COVID-19. He will be followed by Otar Nadaraia, our Chief Economist, who will discuss the macroeconomic environment and outlook. I will then provide you with a strategic and operating review, followed by the financial review presented by Giorgi Shagidze, our CFO. Finally, Nino Masurashvili, our CRO, will talk about risk management. After the presentations, you will have an opportunity to ask questions.

As you can see from this slide, Georgia has been fighting COVID-19 more effectively compared to many other countries, thanks to the strict measures taken by the government at a very early stage of the pandemic. As a result, Georgia only has around 700 cases, of which 432 patients have recovered. Fortunately, the deaths are also comparably low in Georgia. In total, amount of external financial support for private and public sector is expected to be around USD 3.1 billion.

In terms of TBC's results, our pre-provision return of equity stood at 28.7%, while our cost-to-income ratio stood at 36.5%. Over the same period, our capital and liquidity positions remain strong, with LCR ratio was at 107%, and Tier 1 and total capital were at 12% and 16%, respectively.

With this, I'd like to hand over to the Deputy Governor.

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Papuna Lezhava, National Bank of Georgia - Member of the Council [2]

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Thank you, Vakhtang. Let me share the screen. Hi, everyone. I will be presenting today the view of -- macroeconomic of view Central Bank about the current pandemic. And of course, I will not be able to skip the epidemiological impact of the crisis in the beginning. Then I can present, in a high level, what is the government strategy on combating the crisis. I will also talk about international support the country is receiving, then a few words about the banking sector and regulatory responses from the National Bank.

To start with, let me give you a quick snapshot of where Georgia stands in terms of the -- fighting against the pandemic. Georgia, as Vakhtang rightly mentioned, started to combat the challenges quite early. January 28 was the first step when the government created the task force to combat the crisis. By then, we did not have any single confirmed case in Georgia. The first confirmed case in Georgia was February 26, after which different measures have been taken and, ultimately, has culminated into state of emergency declaration by March 21. And in about a month's time from then, we saw almost complete lockdown on April 17. And in about 10 days, the government was already able to start easing measures from the lockdown. And in 2 days, the day after tomorrow, we already expect the emergency state to end, after which the restrictions will be lifted in several stages. And by July 1, we already expect all restrictions to be lifted, including the restart of international travel to specific countries and regions for dealing with the crisis comparatively well like Georgia.

In terms of statistics, on the bottom-right chart, you will see the snapshot of performance of Georgia against neighboring countries. And you will see that in per capita terms, the debt rate in Georgia is very low, and it stands at 3 per million people. In total, we had only 12 cases -- lethal cases in Georgia. In terms of total cases, Georgia is also leading. This is 171 cases per million population. And it's comparatively well compared to the neighbors. So from this, the obvious question about testing may arise if we're doing substantial testing. So we also have the dotted bars presented in this chart, which represents cases per 100 tests. And with this measure, Georgia is also doing quite well. We have 2 cases per tested measures. The only country in the neighborhood who has better result with these majorities is Azerbaijan, as they are performing aggressive testing. Though because the social distancing measures that were imposed in Georgia were much stricter than in Azerbaijan, what Azerbaijan saw, and you can see on the left chart, was a second wave of development of the virus. And currently, this wave is still ongoing while Georgia is on a decreasing trend.

As of now, we only have 239 cases and active cases. And overall, the active cases has not surpassed 400, while Georgia's capacity to deal with what was impacted was much higher, around 1,500 cases. We hope we will not reach that number at all.

Now what impact this pandemic has on the macro economy, of course, Georgia is a small open economy. And the virus is global. It's impacting our trade partners. So even though Georgia is doing relatively well, this does not mean that we will not see economic hit. It will be strong in Georgia, but we also expect strong recovery after the world also starts the recovery process. And I think Georgia will be in a much better position by then to take the wave of recovery compared to other countries, given that we have tackled the virus part of this crisis quite well. So starting point for Georgia will be quite strong.

Now in terms of macroeconomic figures, what we expect is a budget deficit increase to 8.5%. The previous estimate was 2.5%. We expect credit growth to be around 0., and this is excluding the exchange rate impact. And we expect GDP to fall to minus 4% compared to the 5% growth target that we've had before the crisis. As I said, we also expect relatively quick recovery. And in this projection, IMF is also in line with us. On the top-right chart, you see real GDP projections. It will be falling to minus 4% in 2020, but will already be recovering in 2021 to plus 4% and plus 6% in 2022.

In terms of balance of payment, key figures. What we expect is a 60% drop in tourism revenues for the year. Remittances will drop about 30%. Imports will also drop by 30%, and this will be partially netted off by a reduction in export of minus 20%. And finally, FDI will fall proportionately by around 25%. So all this together sums up to minus GEL 1.4 billion net impact, which is 9% of GDP. But on the other hand, we were able to more quickly mobilize funding from IFIs, including IMF and others, on which I will talk in more details later. And this funding in total amounts to GEL 1.6 billion. And so having this confidence, we expect that exchange rate adjustment that we have already seen up to now should be sufficient to absorb the shock together with international support that we expect.

To be more specific, we have seen about 14% depreciation of local currency starting from the beginning of this year. And this is around the range that we've seen from our main trade partners. Ruble and Turkish lira have depreciated a little bit more. Ukrainian hryvnia was around the same range. And Azerbaijani manat and Armenian dram are doing a little bit better.

So in terms of the support that we expect, to drill down there a little bit. So I mentioned GEL 1.6 billion in the previous slide. This is only the public funding that Georgia expects. In addition to that, the IFIs have committed to fund the private sector as well, mostly in the banking sector. And in aggregate, we expect GEL 3 billion funding, which is about 20% of GDP. And this is additional marginal funding that we expect in addition to pre-crisis expectation.

So what helped us in generating this large package was existing fund program, existing IMF program. And actually, Georgia was the first country to augment the existing fund program. So there were other countries who received financing before Georgia, but those financing were rapid financing instruments without existing fund program. Comparatively, what existing client program helps us to do is: one, to mobilize the funding from other DFIs much quickly as there is confidence in macro framework of Georgia; and second, in case the scenario turns out to be more pessimistic than we, together with IMF, currently expect, we have flexibility to adjust the program much quicker and obtain additional financing if needed.

Now to drill down a little bit how this financing is composed, half of this is public funding and half is private sector. In terms of public funding, GEL 1.5 billion will be in the form of long-term credit and GEL 0.1 billion or GEL 100 million will be in the form of grants. As for the real sector, we expect GEL 1.3 billion funding for the financial sector and GEL 100 million funding for the real sector. And these are the amounts of which we already know of, so the amounts that are either committed or at the final stage of negotiation to be committed. Of course, especially to the private sector, there may be more in the form of the project data in the pipeline and a little bit later months of the year.

As for public lending, this is the amount that we expect, and we will not be increasing this amount, unless there is a more pessimistic scenario because -- while filling up the gap from balance of payment, and, at the same time, we want to maintain a good balance of sustainable debt level for the country.

So how this impacts our international reserves, we currently stand at GEL 3.2 billion -- $2 billion, which represents about 100% of ARA metric. This is the reserve adequacy metric that IMF uses to assess the level of international reserves. And by the end of the year, we expect to have around the same amount. Of course, the amount that will account for budget support and balance of payment needs will all go through international reserves. But part of it will be standard to provide foreign currency liquidity to the market. So at the end of the year, we expect around same amount of reserves.

So in terms of fiscal and monetary policy, in the fiscal policy, we expect to be measured but expansionary. It -- clearly, with the first glance, it looks quite expansionary given 6% increase in expected budget deficit. But this budget deficit is planned on conservative budget estimates on the revenue side. And in case the economy turns out to be more positive than planned for the budget purposes, the expenditures will be kept and will not provide additional stimulus to the economy, meaning budget deficit could go lower by the end of the year.

In terms of monetary policy, we've met -- we've started this crisis with relatively high inflation, so the monetary policy was quite tight at around 9%, while we think that long-term amount neutral rate stands at around 5.5%, 6%. So current level of 8%, 8.5%, the monetary policy is quite tight, but over the course of the year, we expect easing trajectory. And by the beginning of 2021, as inflation projections reach 3%, we expect to have easing monetary policy and coming back to our market's neutral level.

Central Bank will also be using more frequent foreign currency interventions for 2 purposes: one, to curb the volatility of exchange rate; and second, to provide sufficient liquidity to the market for price observation purposes. And for this purpose, we have also added several instruments to provide liquidity in local currency as well, and these were at the fore of extending the rep operations with accepting different types of collateral and also introducing the swap instrument, USD-GEL swap instrument that we're doing with banks and for finance institutions and some of the international financial organizations.

Now a few words about the government strategy, and I will allow myself to talk about this since we work close with the government and the measures were well coordinated with us. So I would structure the government strategy in 3 stages. So first stage was clearly socially motivated, and it was targeted at those who were most severely impacted by the crisis and lost immediate income. Second stage is economic recovery measures, which will help, hopefully, Georgia to have quicker recovery. And finally, we will be discussing structural reform measures that should position Georgia in the world competitive environment better, taking into account expected changes from this pandemic. Now a little bit more details about the pandemic very quick. As for social measures, there was GEL 700 million in the subsidy for those who lost income. The government increased the coverage of social assistance. That was GEL 42 million, which is 0.1% of GDP. There were other direct transfers to the households of about GEL 112 million. And finally, there were the utility payment assistances of about GEL 65 million.

In terms of economic recovery, the -- one of the first measures that was introduced was scaling up the guarantee scheme to GEL 300 million, which was previously only GEL 30 million. There were certain tax reliefs and tax breaks. There is in the pipeline, GEL 600 million long-term funding for the banking sector, and there were also several sectorial measures, primarily in hospitality sector, real estate development sector, and agricultural sector. So these are the systemic sectors that have been impacted from the crisis. And most of the measures that will be introduced will go through the banking sector. And of course, even though it's not mentioned here in the slide, banking sectors because certainly is one of the strategic sectors that government is leveraging on to tackle this crisis.

And in terms of the future and a little bit more medium to long term, statural reforms will be addressed at -- to the vision that the world will change to some extent. The digital services, including corporate services, will be used more actively. There may be some globalization of labor market through distance hirings. And there will be changes in supply chains, where we expect the construction market to try to relocate their supply channels to geographically closer regions. Now where Georgia stands in this environment is we have several advantages. This is cheap labor. This is low and simple tax environment. This is strategic geolocation. And we have pre-trade agreements with the EU, most of CIS and China, which represents in total 1.2 billion population.

The next slide is about banking sector overview. So in a nutshell, we have met this crisis in the best possible shape that the banking sector could have. Over the past several years, the banking sector was quite profitable. Return on equity was averaging 18%, 19%. And this allowed us, as a regulator as well as banks, to build capital buffers and improve quantity as well as quality of the capital and, of course, liquidity requirements. Now based on liquidity coverage ratio, we're quite comfortable at 132%.

Now how this pandemic has impacted the banking sector over the past 2 months or so? In the initial stages, we did see some volatility in the deposits. It was about last 2 weeks of the March, where there were some worries among depositors, but this faded out quite quickly. And in April, we already saw April's back. There was 3 months payment holiday on loans, which also added to liquidity worries. The worries that did not eventually materialize but has increased the market interest rate, and this was the primary reason Central Bank had to introduce some liquidity support initiatives in the -- that I mentioned in the previous slide, but there was GEL 1.1 billion general loss reserves recognized in March. And this is for the full cycle of the crisis. As a result, the first quarter loss was GEL 750 million, even though banking sector has remained still profitable as measured based on trailing 12 months. Our loan portfolio has almost not grown, excluding the exchange rate impact, and capital buffers have been maintained quite strong regardless of losses. And of course, to the extent -- to some extent that you don't buy capital releases that I will talk about.

Now so here are all the measures that we, as a regulator, have taken as a countercyclical approach. So I will not go into every one of them, having -- being mindful of time, but probably the key measure that should be outlined, this is relating to capital requirements. So we have released a capital conservation buffer of 2.5%, reduced the hedge credit risk or buffer by 1.2% of risk-weighted assets, and we have postponed phase-in of a great buffer and concentration buffer to Tier 1 and common equity Tier 1. This was 0.7% impact. Overall, as of March, and this is after booking the provisions, banking sector has 4.7% in buffer above the minimum requirements. We have committed to release additional capital if needed going forward. But as of now, we don't see the need as we expect that the reserves that have been booked should cover the full extent of the crisis.

The other important initiative that I will mention here is moratorium on regulatory reforms. So we have committed that no major reform will be implemented over the period of next year because we want the banking sector as well as our supervisors to focus on managing the crisis, on assessing the impact and finding the solutions. The 3 reform measures that will remain in place is: one, banking resolution framework; second, the digitalization efforts that are very tight in this at this time of pandemic; and the IFRS transition, which we expect by 2021, as some banks will be allowed to transition in the beginning of 2021, those that are ready. But end of 2021 will be the mandatory deadline.

Now a few words how Georgia spent compared to Europe and the U.S. in terms of addressing this crisis, and that will take the lens of expected credit loss. In the first chart on the left, you see how year-to-date reserve balances have increased in Georgia versus other countries. So in Georgia, we saw about 88% increase, which is more or less in line to what U.S. banks are doing. Some banks in the U.S. have higher increase. But on average, in the U.S., we saw about 70% increase in reserve balances. In the U.K. and the EU, the banks seem to be taking more slow and careful approach. What this will lead to, we will see going forward. But our strategy initially was to book all the expected losses in the beginning, so that we are able to measure what's the higher power of the banks in terms of capital to continue lend investment as -- active lending as soon as economy starts to recover. And of course, this 88% increase has to be taken with a grain of salt. Overall level of reserves in Georgia was quite high compared to other countries, including the U.S.

So as of now, in the second chart, you will see that the reserves stand about 7.2%, which is almost double of the next bank, which is UniCredit. And a few key differences that we are seeing in these numbers compared to IFRS and U.S. GAAP are the following. So loss recognition in Georgia happened very proactively. So in the first quarter, the banking sector has already moved, booked the reserves that are expected for the full cycle. While IFRS 9 in Europe has been possible for 5 more years. And second important difference is that even though these reserves were booked as a general reserve, which we expect to be substituted by specific reserves over time, general reserves are not added back to common equity Tier 1. While in most European jurisdictions, general reserves are a bit back.

So what could change to better or worse the downside? There may be a risk of second wave in fall. We could see prolonged recovery in our major trading partners than previously expected, and travel restrictions could last for longer. This may create downside risks on the credit quality of the borrowers. But of course, there are some promising upside factors as well. This is, one, government support programs that are mostly announced after the reserves were booked. So if the government support programs are attractive, we could see possible reversals. Release of local list restrictions could be quicker and have stronger impact on domestic demand. And of course, if we see faster oil recovery, it will impact Georgia as a small and open economy as well.

So this is where I will finish, and I will be here during the remainder of the call to answer any questions.

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

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Thank you, Papuna. So thank you, Papuna, on your presentation.

Now I'd like to start my presentation on the Slide #6. And to discuss what we have done to support our customers and then the -- in order to keep our employees safe, we have introduced a number of additional security and infection prevention measure in our branch network. We also introduced remote working practices for most of our head office and back-office units. As a result, today, 95% of our head office and back-office staff, including call center, are working from home. We obviously have not decreased the productivity of all employees, and it even has been held in some cases. In order to support our customers in this difficult scenario, in March, we introduced a 3-month grace period of principal and interest payments for all...

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

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Vakhtang, we are hearing with a disruption.

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

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Now it's better? It's better?

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

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Yes, yes.

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Vakhtang Butskhrikidze, TBC Bank Group PLC - CEO & Executive Director [7]

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Yes. Yes, I will continue now. In order to support our customers during this difficult period in March, we introduced a 3-months grace period on principal and interest payments for our individual and SME customers. We also offered grace periods to those corporate customers whose businesses are most exposed in the current situation. The customer per segment is 32% in corporate, 59% of MSME, and 77% of retail customers took advantage of this offer. We also provided additional incentives to our customers to use our market-leading digital banking platform, such as temporary waiver of fees and money transfers and utility payments. Although total number of digital transactions grew by 19% total year-on-year, mainly driven by the increased number of transactions from mobile banking. The off-loading ratio amounted to 94%, while mobile banking penetration ratios stood at 44%, which are by up 5.1 percentage points year-on-year in the first quarter of this year.

Next slide. Slide deals with costs and the effects of the COVID-19. Due to COVID-19, we're having for a net modification loss in the amount of GEL 30 million to reflect the decrease in the present value of the cash flows, resulting from the 3-months grace period granted to borrowers. We also created extra, front-loaded credit loss allowances in the amount of GEL 215 million with IFRS 9 to prepare for the potential impact of COVID-19. This resulted in an additional 1.7% cost of risk for the first quarter. Excluding this additional provision, the annualized cost of risk stood at 0.9%. According to local...

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Giorgi Shagidze, TBC Bank Group PLC - CFO, Deputy CEO & Executive Director [8]

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Too grainy.

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Vakhtang Butskhrikidze, TBC Bank Group PLC - CEO & Executive Director [9]

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Hello? Now it's better? It's better now? According to the local accounting standards, this additional credit loss allowance stood at 3.1% of the loan book. And as a result, our CET1 ratio decreased by 2.19% as at the end of the March.

Now let's move to the Slide #8. Do you hear me? And I'd like to highlight our current focus on this slide. In order to withstand the impact of the COVID-19, we will focus on our capital and liquidity positions. In terms of liquidity, we attracted a number of new borrowings in the amount of USD 154 million and GEL 92 million during March and April and have built a strong pipeline of the rest of the year in the total amount of USD 450 million.

To support our capital position, the Board of Directors have decided not to recommend the payment of dividends at the upcoming AGM. We are leveraging on robust risk management systems to closely monitor and proactively manage asset quality. In parallel, we will be focusing on cost optimization with the aim to keeping the bank's cost-to-income ratio flat for 2020 compared to 2019 and achieve a comfortable profitability level despite pressure on revenues and currency depreciation. In this regard, management has decided to forgo their entire bonuses for 2020 and LTIP grants for 2020 cycle.

Now let's move to the next slide. And this slide is about Uzbekistan. As you know, in April of this year, we got our banking license, which is a significant achievement. This will allow us to start our operations this June. As you know, our strategy is to establish a greenfield next-generation bank for the retail and MSME customers, while the primary focus on digital will be on digital. Given the current operating environment and the impact of the COVID-19, we have further optimized our business model with enhanced focus on asset-light and cost-efficient operations. We have already invested around USD 12 million into the capital of our Uzbek Bank, and we expect to invest additional $9 million by the end of this year.

Potential new shareholders, EBRD, IFC and Uzbek-Oman Investment Company have also expressed their interest in participating in digital capital increase now with our bank in Uzbekistan. However, we are the majority shareholder with 51% shareholding. In terms of financial targets, breakeven is planned to be at the end of 2022, and our medium-term targets are return on equity in the range of TBC Group's target and our loan book up to $700 million in the medium term.

And finally, I'd like to reiterate our strategic priorities in midterm on the Slide 10. In light of the COVID-19, we have refreshed our strategic priorities for the next 3 years. While the main themes have not changed, we have prioritized digital channels, customer centricity, data analytics and international expansion. And this crisis has provided a strong validation of our digital strategy. And I feel confident that we are well positioned to achieve sustainable growth and to deliver superior results for our shareholders in the medium term despite the short-term challenges of the COVID-19. Therefore, I'd like to reiterate our medium-term targets return of equity above 20%, cost-to-income ratio below 35% and dividend payout ratio of 25% to 35%, and loan book growth in the range of around 15%.

Now I want to hand over to Giorgi. Please, Giorgi.

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Giorgi Shagidze, TBC Bank Group PLC - CFO, Deputy CEO & Executive Director [10]

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Thank you, Vakhtang.

I'll start my presentation from Slide 13, and you can see the slide on the screen, and we'll go in financial performance in more detail. As you can see from this slide, our loan book grew by about 20% year-on-year if you take it in constant currency rate. However, quarter-over-quarter basis, the loan book remained broadly stable at constant currency rate. As a result, our market share stood at 39.4% as of March 31, 2020.

If I move on to the next slide, this shows the deposit portfolio. The deposit portfolio increased by 7.8% year-on-year and, again, remained broadly stable with slight increase on constant currency rate in quarter-over-quarter. As a result, our market share stood at 39.8% as of 31st March 2020.

Slide 15 is our profitability metrics. And as Vakhtang already mentioned, in quarter 1 2020, we encountered the following COVID-19-related nonrecurring charges. The first is the net modification loss in the amount of GEL 30.6 million. These are related to the grace period that we have provided to our customers. The second one is the additional credit loss allowance in the amount of GEL 215 million. This is our proactive approach to create the IFRS provisioning. Nino will elaborate on this more. As a result, our above-mentioned nonrecurring charges, we recorded net loss about GEL 57 million in quarter 1 2020. Now if you take out those losses and calculate our return on equity and returned, our profit would have been around GEL 152 million. Our return on equity and return on assets would have been 22.4% and 3.3%, respectively.

Slide 16, it is about our net interest margin. In the first quarter, our NIM was about 5.1%, down by 20 basis points quarter-over-quarter and down by 1.1 percentage points year-on-year. Our decrease was driven by responsible lending -- the annual decrease was driven by responsible lending regulations introduced at beginning of 2019. And quarter-over-quarter decrease is the start of further pressure that we are seeing on the NIM related to effect of COVID-19. Quarter-over-quarter -- and this basically includes some pressure on cost of funding in local currency as well as, to some extent, the LIBOR rate decrease. We could see further NIM pressure in quarter 2. However, it should stabilize in quarter 3 and quarter 4 mostly.

Next slide. This is related to our noninterest income. Net fee and commission income amounted to GEL 43.6 million in quarter 1 2020, and it remained broadly stable year-on-year. Quarter-over-quarter decrease of 20.4% was mainly attributable to seasonally high fee and commissioning income in quarter 4 as well as in reduced economic activity in March due to COVID-19 effect. In the first quarter 2020, our total noninterest income without FX -- F&C income increased by 33.9% year-on-year, mainly due to higher FX operations across all segments as well as increased spread due to higher volatility and number of transactions. While our quarter-over-quarter basis growth -- net F&C other operating income remained broadly stable.

Asset quality is on the next page. You can see that our cost of risk without COVID effect stood at around 0.9% increasing by 1.1 percentage points quarter-over-quarter. And this increase was due to lower impairment charges in quarter 4, pretty much across all the segments. Year-on-year decrease of about 50 basis points is driven by retail and MSME segment. Again, these are the numbers without the COVID effect. The COVID-19-related additional provisions could be translated into 1.7% of additional cost of risk. Now it's important that this 1.7% is not annualized. And it is as a one-off 1.7% as -- of our book. The COVID-19 impact in NPLs, obviously, has not been yet reflected. As a result, NPLs remained broadly stable quarter-over-quarter at 2.9%. In terms of loan book concentration, no big changes. Top 20 and top 10 borrowers to gross loans were at 12.9% and 8.7%, respectively, while related party to gross loan ratio remained stable at 0.1%.

Efficiency and cost-to-income in the first quarter 2020, our total operating expenses remained broadly stable year-on-year due to increased focus on efficiency. And this happened on the back of currency depreciation, which was further challenging to remain at this level. The quarter-over-quarter decrease of 16.8% is actually related to more seasonality, whereby we have higher cost in quarter 4. As a result, our cost-to-income ratio decreased by 1.2 percentage point year-on-year and stood at 36.5% as of 31st March 2020. Over the same period, stand-alone bank's cost to income stood at 31.5%, down by 3.3 percentage points year-on-year.

The capital is presented on Slide 20, and you can see it on your screens, a supportive action followed the outbreak of the pandemic, NBG allowed banks to decrease the -- reduce the conservation buffer or decrease the consideration buffer and decreased the 2/3 of the currency induced credit risk buffer, which led to the reduction of the capital -- minimum capital adequacy requirement. As of 31st March 2020, our CET 1, Tier 1 and total capital per Basel III stood at 9.1%, 12% and 16.7%, respectively, well above the respective eased minimum requirements of 6.9%, 8.8% and 13.3%. Now I need to highlight that our capital buffer on our CET1 is around 2.2%, and this already includes provisions that were created by around 3.1% per NBG, and Nino will elaborate more, and currency devaluation, which happened in quarter 1. So at this level, it is a quite significant buffer on top of the minimum. Again, it is 9.1% versus 6.9%, respectively.

Last slide from my presentation, this is regarding funding and the liquidity position of the bank. As you can see from this slide, we have a well-balanced funding structure with around 72.7% of liabilities coming from client deposits and debt securities. Now net loan-to-deposit ratio plus IFI funding ratio stood at 102%. We maintain a quite consistent strong liquidity position. In April, liquidity coverage ratio stood at 117% above the minimum limit of 100%, while our LCR stood at 119% in dollar terms, quite respectively above the 100% minimum limit. And again, as highlighted by Vakhtang, we have pipeline of about GEL 450 million loans from our partners, which puts us in a very comfortable position in terms of funding.

This is it from my side. I'll now stop sharing, and Otar will continue the macro before we go to final part of the presentation by Nino.

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Otar Nadaraia, TBC Bank Group PLC - Chief Economist [11]

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Thank you, Giorgi.

Let me briefly share with you our macro projections. For our subscribers, as you know, last week, TBC Capital has released a larger version of the presentation, including epidemiologic scenarios, macro projections as well as sectorial medium-term projections. So very briefly -- sorry, yes. Very briefly about global projections. As you know, the outlook was deteriorating. However, we see some stabilizing signs at the moment. Also for Georgia, our growth projection for 2020 is around minus 4.5% -- minus 5.5%. But as you can see, and as also the deputy governor argued, probably consensus projection is something like minus 4%, minus 5%.

Very briefly about 2021, where IMF projection is really promising. And as you can see from this chart, only in 2025, Georgia returns to its so-called trend growth rate, which is 5.2%. And before that period, we have projected higher growth also. And that basically indicates that this shock is more temporary rather than permanent. So it is not really like shift in trend rather than probably predominantly temporary. It's temporary -- a temporary deviation from the trend. And I also shared with you as well as the views that while the immediate impact should be really severe, the cumulative impact is likely to be lesser compared with 2008. Also you can see projections from -- for other countries of TBC's Capital Group operations. Uzbekistan is really a promising country in this. And other regards very briefly about 2 reasons. So we have -- in digital structure, around 75% arrived with land. Of course, they spend less. But still, it is probably fair to argue that this is promising in terms of relatively quick recovery of touring sector. Also, we have a high share of repeated visits as well as aging structure is somewhat promising because we have very low share of visitors with really high -- really which are really 71% plus, et cetera.

So now our projections. Very briefly about tourism, we have 3 scenarios. In baseline scenario, we assume around 65% drop for the full year 2020, that would be 73% in March-December and also larger drop taking into account the Russian flight ban in 2019. And you can see here the projection on a monthly basis.

Our growth outlook according to the TBC Capital model. As you can see in baseline scenario, as I mentioned, we have around minus 4.5%, minus 5.5% and a recovery of around 4%, 5% in baseline scenario in 2021. We do project slightly higher fiscal deficit. Also, we do project positive credit growth on the back of healthy banking sector as well as some government initiatives. We believe that retail should start recovery first, and, thereafter, business credit should also recover. And by the way, in our first coming publications, you will see so-called quick indicators. And in many sectors, recovery's already there.

So some initial data. Again, March drop of GDP was minus 2.7%. And probably, it is fair to say that this is not as large as many were expecting. Also, I would discuss your remittances. We have quite a large drop in April. However, if you look at weekly data, which is not on this chart, but which is published in our weekly indicators, you already have recovery by end of April and beginning of May. Also, the share of non-residents in the GEL treasury securities are quite stable.

I think deputy governor already mentioned about the net shortage in inflows. So broadly speaking, we have around same number or probably exactly the same number. We do have differences in exports, tourism, remittances. And again, already you know that external financing is sufficient to compensate for the shortage.

Very briefly about exchange rate. This is real effective exchange rate compared to its medium-term average. And as you can see, one can argue that it's still more undervalued rather than overvalued. Again, take into account the balance of inflows, also inflation of around 5% by the end of the year and the Central Bank's monetary policy stance, we also do not see really sharp depreciation throughout the year. And of course, depending on other currencies, which is euro, Turkish lira, ruble, et cetera, we -- in our baseline scenario, we -- for dollar-gel, we have around 3.1% for the end of 2020.

So very briefly also to compare 2008 and 2020. And as you can see from this chart, which is on real estate market, while one should argue that in 2020 there was a bubble -- I mean there were no signs of bubble in 2019. That basically is very important for the recovery and also how severe would be the impact. Also here, you can see prices for major comparable capitals for TBC compared to the trend. Also, prices were up in 2008, and they were stable recently, and some other housing market indicators which are rental price ratio, et cetera. Also other macro financial indicators like credit to GDP gap is very important and often used as a -- to assess whether the credit growth was sustainable. And as you can see, in 2009, 2008 stories, there were clear signs of vulnerabilities, while recently our credit growth was close or even below its trend.

So with this, I would like to thank you very much, and I would like to ask Nino to present on risk management.

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Nino Masurashvili, JSC TBC Bank - Deputy CEO, Chief Risk Officer & Member of Management Board [12]

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Thank you, Otar.

Now I will share my presentation. 2 minutes, please. Thank you.

I will start with the emphasizing that we have entered the crisis with very solid risk profile, which is reflected in a low NPL standing at 2.9%, low-cost of risk without COVID effect in quarter 1 amounting to 0.9%, very prudent underwriting standards with strong LTVs, conservative PTIs, FX buffers and also very well-diversified portfolio. If we talk about the capital debt, we see, at the same time, we have a solid capital adequacy ratio by the end of 2019, and also very strong after the COVID effect with CET1 ratio spending at 9.1%, while the minimum requirement is 6.9%. Net stable funding ratio and liquidity cover ratio are also at a comfortable level. And in our bank, we're using a stress testing instrument for risk management.

Now, once again, a few words, what type of actions we have taken so far. So as Vakhtang already mentioned, we have introduced 3-months payment holidays on a principal interest. And the overall -- the take-up rate in different sectors were different, while, in total, 55% of the total portfolio was used in the grace period. COVID-19-related credit loss provisions according to IFRS was GEL 210 million, which has translated in a 1.7% cost of risk. According to local standard, the amount was 3.1% of the total portfolio. As quickly as the COVID situation started, we have changed and restricted our underwriting criterias, and all this also rebuilding the low volumes of origination in April -- in March and April. We have conducted very thorough monitoring of our top 20 borrowers. We have done sector analysis and also the strategy according to the sectors, taking into account the government support programs when Papuna and Vakhtang also mentioned.

On this slide, a few words about the COVID impact on provisions in more detail. As already said, credit provisions in quarter 1 was amounted to GEL 241 million, out of which COVID-related was GEL 211 million. The key provisions are coming from the retail segment, then followed by the MSME and the corporate. In retail, the main drivers were our unsecured cash loans. The low provisioning in corporate is mainly explained by the small maturities and very good LTVs in vulnerable sectors. As for the stages, the main impact come from the Stage 2 loans, which is itself driven by the worsened macroeconomic situation and low collateral level in consumer loans and also creation of low provisions on a lifetime basis.

On this slide, we see the distribution and also the movement of the stages from one stage to another. Here, the main thing we can see that the share of the Stage 2 loans increased and the amount also increased, which is -- primarily were driven by the retail sector you can see here, and also the MSME sector. The Stage 3 loans have not increased yet because it's a little bit early to see the real effect.

Now I would like to explain the principles used to create provisions. So we have developed 2 macro scenarios: baseline and downside stress scenarios. And the projections were based on 3-year horizon, and we assigned probability of 80% to the baseline and 20% to the stress scenario, and the weighted average were used to estimate expected credit losses. Here on the right, you can see the baseline scenario and a downside scenario, and the key parameters were used here. And then since the unusual nature of COVID-19, we decided not to use existing macro models. Rather we have leverage stress test results. In corporate segment, we performed individual assessment of our vulnerable borrowers and assigned to them individual provisions. While assessing the financial spending, we took into account the future projections based on the macro assumptions. In estimating LGD, we applied 30% liquidation haircut to real estate collateral value before discounting it to workout period. We did not automatically move the loans with the grace period, which we already mentioned, so Stage 1 to Stage 2, only the exposures which were observed that could not withstand one-off significantly increased risk criteria were -- after the grace period were moved to the Stage 2.

Here, I would like to talk about our -- about the vulnerable sectors in our corporate and our business book. We have designed the vulnerable sectors at hotels, western and catering, real estate management and also real estate development. And overall, these 3 sectors comprises 17% in our total corporate book. The hotel share is 8%, and this sector has a very low LTV standing in 41%. And also, NPLs are quite low, which is standing at 2.0%, which is very good. The remaining maturity here is 7.7 years, which is quite low compared to the industry standard, and also gives the possibility to prolong the maturities when and where needed. The real estate management, this portfolio has 6% in our corporate book. Here, the situation is like the same. The LTVs are quite low standing at 48% and NPLs standing at 2.73%. The remaining maturity is a little bit more compared to hotels, but also comfortably low, with 8.3% remaining maturity, which is also low compared to industry standard. This also gives our possibility to prolong maturities when and where needed.

Last, the vulnerable sector is a 3% share with the corporate book within, and this is a real estate development. What we need to mention here, which Otar already explained, that we see no bubble in the housing market. And still, the potential in the growth of the mortgage loss is quite strong. What else here? The LTV ratio is quite low, 29%, and NPL ratio is 1.1%. And remaining maturities is very, very low, which is 4 years. And also, it gives us very good flexibility in order to prolong the maturities.

Papuna already talked about the government support, I would like only to mention those which are related to these sectors. So for the hotels, one very important program that was initiated by the government that already are launched, this is government is paying the part of the interest expense of the hotels for the small and the medium hotels. And also, there is tax holidays and release on the hospitality sector, which is also very important. The new one, which is also -- makes sense to mention here is the stimulating of the new mortgages in a primary market, and the government will subsidize the part of the annual nominal interest rate for those loans who are issued in a GEL. And also, there will be the guarantees for the newly issued mortgages. And one also of the important part that the government will initiate the program of procurement of new apartment from the real estate developers, this has really helped the developers in very vulnerable time in 2020.

Now a few words about the retail exposures. Here, we can see that the mortgage loan share in the total retail portfolio is 64%. So this share increased in 2019, started to increase in 2019 after the NBG's responsible lending regulation. What we have in the mortgage loans, here we have a very moderate portfolio growth in 2019 at constant currency rate. Low PTIs for ForEx currency loans. LTVs here is also quite good, 49%. And NPLs is standing at 2.1%. The remaining maturity here is up to 11 years. For the consumer loans, last year, in 2019, we had a shrinkage of the portfolios at a constant rate. NPLs are 4.3%. And what's needed to mention here that the 77% of the whole non-mortgage portfolio is denominated in GEL, which is very good and comfortable for the customers once the GEL rate devaluate. And maybe it's worth also to mention here that we have created quite a good provision -- provisions, both for the -- according to IFRS and local standards.

Giorgi talked quite a lot about our very strong capital positions. We can see that -- we can see here that the CET ratio, CET1 decrease from the 12% by the end of December to 9.1% by the end of the March, and the main decrease was attributable to the FX changes and also the provisions made by the local standard. Papuna talked about the changes in capital requirements according to recent regulation, which was effective in March. And here, we can see that the minimum requirement decreased already by 3.5%. And if they're needed, Pillar 2 ratios also can be used if there is any necessity.

And maybe this is our last -- one more is left. So Giorgi talked about the strong liquidity and funding spending compass. In quarter 1, we had a very good -- we attracted quite a lot of the new borrowers, and we have a very good pipeline as well for 2020 if they need it. By the end of the April, we have very comfortable net stable funding and LCR ratios, which have stood at 128% net stable funding ratio and LCR, 117%. What measures have we -- was done? Papuna told about that. So there was a decrease of the -- so the NBG has removed LCR requirements for 1 year in GEL and also introduced the swaps with unlimited amount for the banks if there is a necessity to use them. And also, this is a new -- business loans can also be pledged in NBG for the liquidity support if needed.

The last slide I wanted to mention. So as you know that globally, the cyber risks have been increased after the remote working habits were introduced, and this type of risk also increased in our bank. We already moved 3,000 employees from the working from home, and this triggers some system and behavior risks. So however, we have a very strong team when we made quite a significant steps towards the risk mitigation. So what we have done, we have implemented the multifactor authentification for all remote users, which are working from home. And also, we have the video recording of all remote sessions once employees are entering to the systems that sessions are recording and we can control and monitor, so what they are doing in that regard. And also, we have implemented a real-time monitoring rules for remote channels as well. And what is most important, we intensified the awareness campaign, awareness program, both for our employees and for our clients, in order to strengthen their ability to differentiate between the different hacker attacks.

So this is what we want -- what I wanted to say about the risk. So this is the end of the presentation, and I would be ready to answer the question after that.

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Questions and Answers

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Anna Romelashvili, TBC Bank Group PLC - Head of IR [1]

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Thank you, Nino. Now I would like to open the floor for the Q&A. Just as a reminder, if you are using the Zoom application, please use the raise hand function. (Operator Instructions) Currently, we have 2 questions. We received 2 questions in our Q&A, and I'll read them out from Katy.

What is the forecast for the restructured portfolio of the moratorium ends, how it translates into end-of-year result, level of restructured portfolio? This is one question. And the second one is, please share your view on real estate price development in the upcoming period.

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Giorgi Shagidze, TBC Bank Group PLC - CFO, Deputy CEO & Executive Director [2]

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So I will go ahead with the real estate question. So we expect around a 10% drop in prices in U.S. dollar terms in 2020, again, on the back of very strong fundamentals, nonexistence of bubble, also postponing demand, very good share for the banking system, under-penetration of mortgages, state support, et cetera. And again, the price, take into account the fundamentals and strong growth rate of Georgian economy. Price should go up in the medium term.

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Nino Masurashvili, JSC TBC Bank - Deputy CEO, Chief Risk Officer & Member of Management Board [3]

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And then new to -- yes. May I answer the question there? Yes. So right away, it's quite early to talk about the restructuring portfolio because right away, we're looking at the -- how the -- after the grace period, the situation will develop. So probably on a later stage, it would be more which to disclose the information about the restructuring portfolio.

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Anna Romelashvili, TBC Bank Group PLC - Head of IR [4]

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And the next question comes from Jennifer Passmoor. Please, Jennifer, ask your question.

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Jennifer L. Passmoor, HSBC Global Asset Management (UK) Limited - Portfolio Manager [5]

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Hello there. Can you hear me?

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Anna Romelashvili, TBC Bank Group PLC - Head of IR [6]

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Yes, we do.

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Jennifer L. Passmoor, HSBC Global Asset Management (UK) Limited - Portfolio Manager [7]

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Great. I just wanted to ask for a little bit of clarity. On Slide 6, the take-up in the grace period of the moratorium, this is obviously not 77% of all retail lends, but of those affected. What proportion are those affected per section? I mean, for corporate, I assumed, Nino, from your slide, it was 17% of the total corporate book. 32% of those have taken up the moratorium. So about 5% of total corporate. Is that correct on the interpretation? And secondly, I just wanted to ask about the breakdown of the tax impact on the first quarter and the effect on the effective tax for the full year.

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Nino Masurashvili, JSC TBC Bank - Deputy CEO, Chief Risk Officer & Member of Management Board [8]

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Okay. So the question about the grace period. So just to repeat once again, in a corporate, 32% of the clients use that base period. In MSME, the figure was 59% and retail, 77%. So what's needed to mention here, so we offered the grace period for all clients, and they were allowed to use if they need it. And many clients, who do not have the problems, also used that because they wanted to maintain the liquidity while the situation was very unknown at that stage. But now what we see, many clients, who use the grace period, they are just -- they have the income, their ordinary income, and they are not in a vulnerable sector. So the figures which are provided does not mean that they all are vulnerable. The part only are vulnerable out of these figures.

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Papuna Lezhava, National Bank of Georgia - Member of the Council [9]

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On the tax question, I think a couple of things we need to note. Firstly, for the tax accounting, we use local standard, where the provisions were much higher. If you remember, we said that it is 3.1% provisions per local standard versus the 2-point -- sorry, 1.7% of provisions for the IFRS. So that creates additional loss for local standard.

Second thing to note is that there is a quite big income from securities of the assisted bills certificate of the deposits and so on, which are exempt from the profit tax purposes. So basically for base tax income growth even more negative. Wherever you apply 15%, then you come up with the number which is shown here, which is negative GEL 93 million for the quarter. Now obviously, we expect this year to be comfortable, profitable IFRS. Plus, the other quarters per NBG should be also decreased. And we should see this negative number being decreased to some extent or increase to the positive during the year. Perhaps you would see half of it end of the year, but that depends on so many assumptions that committing any of this at this point will be quite difficult.

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Anna Romelashvili, TBC Bank Group PLC - Head of IR [10]

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And the next question comes from the phone number. I can't see the name, so I'll just unmute to participant, and please introduce yourself.

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

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This is Andrew Keeley from Sberbank. Thank you for the detailed presentations. I have a few questions. First, for the deputy governor maybe of the National Bank, could you just clarify what the GEL 1.3 billion that's earmarked in terms of financial sector, IFI, support includes? And how much of that has kind of already been distributed? And is this separate to the government's GEL 600 million long-term funding to the banking system? And if so, what does that include?

And then the second question is, are there any plans or need for the government to borrow either on the local market or through Eurobonds this year to cover the budget deficit? Or does all of this international financing make that not necessary? And I guess, then I'll ask some questions for Giorgi.

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Papuna Lezhava, National Bank of Georgia - Member of the Council [12]

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Thank you for the questions. So the GEL 1.3 billion that was mentioned is additional financing from IFIs that the banking sector will receive, and this is in addition to what was already planned. The IFIs ramped up their efforts to support Georgian economy and demand that overall package, they assume GEL 1.3 billion additional financing to the banking sector. So some of these funds could -- this is gross financing. So some of these funds may be used to repay maturing borrowings, but some of it may be used to extend lending to the economy or to make the financing structure more longer term.

In terms of GEL 600 million local currency instrument, so this is maturity expansion instruments, where our treasury issues the bonds and places those bonds in long-term deposits for the banks. And banks will have this long-term funding, but also they'll be able to use treasuries for rev operations from Central Bank. And whether there is any plan for Eurobonds, no, because all the funding needs that the budget was here, but have already met through IFI financing. So there is no plan to issue Eurobonds.

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Andrew Keeley, Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst [13]

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I mean do you have any brief kind of idea in terms of how much of this kind of GEL $1.3 billion, albeit gross financing, has kind of already been kind of allocated or not?

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Papuna Lezhava, National Bank of Georgia - Member of the Council [14]

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So I may have a little dated information, but we -- so when we receive these messages from IFIs, the expectation was that most of this would be disbursed in next 6 months. So I don't have current status what part of this is disbursed. But as of beginning of April, we expected that most of these amounts to be dispersed in the next 6 months.

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Andrew Keeley, Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst [15]

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Okay. And I guess just a question for -- maybe for yourself and for Otar. In terms of your kind of GDP assumptions, what are the assumptions about tourism in the second half of the year kind of underpinning or included in your kind of base economic outlook? Obviously, there's a chart, I think, in Otar's presentation which shows tourism revenues in dollar terms down 97% in April. Just wondering what kind of expectation you have for any recovery in tourism in the second half of the year.

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Otar Nadaraia, TBC Bank Group PLC - Chief Economist [16]

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Yes. Thank you, Andrew. So in our baseline scenario, we have 65% drop for the full year. This is Slide #5. In April, May, June, this is basically almost a 100% drop. And thereafter, we have gradual recovery. So again, in July, it's a minus 75% drop, around close to 70% in August, et cetera, and it's around 50% in December. So December-to-December. And of course, we have also an upside scenario, which is quick recovery. But for the baseline scenario, that's basically the market distributed.

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Andrew Keeley, Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst [17]

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Okay. That's helpful. I have a couple of questions for Giorgi. First of all, in terms of your ecosystem, could you -- maybe you get back to me, but could you talk a little bit about what's doing well or kind of badly in the kind of current environment? And any comments on the kind of revenue contribution of this?

I see you have included TBC Pay, I don't know if you have kind of -- without that. And then I think Slide 23 shows your mobile banking users, and that suggests that your main peer bank has pretty much closed the gap on you in terms of mobile banking users, even including space. And I'm just wondering if you could comment on that. Is that a concern?

And then when do you kind of expect Space to break even and start making money? I see it's kind of still posting a loss. And then another question is basically in terms of your risk costs kind of outlook, what would be needed in terms of kind of changing your macro outlook to start potentially releasing some of the COVID-19-related provisions? That would be helpful.

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

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Okay. So Andrew, thanks for the questions. The -- regarding whether we are concerned about the percentages of other bank being not different from us, I guess we have our strategy in addition to the penetration of our existing customers, digital transactions into total transaction. We are also looking to how successful we are in space, how successful we are in ecosystems, what we do in Uzbekistan, and then the other areas as well. And clearly, we have our strategy and superiority there. Whether it is 94% or 93%, that does not change the strategy.

In terms of the Space numbers, we are quite close to pre-provisioned breakeven in quarter 1. And to be honest, before the COVID-19, the Space would have become breakeven this year. Obviously, we need to see how the loan book evolves, and then we can guide you how -- what will be the Space new breakeven target after provisions. But what we also need to note, and this is very important, is that last year, pretty much, it was next to impossible to increase the book on consumer loans across the banking sector, whereas Space still was very successful in growing the book. And then imagine, when all this is over, and then the Space is putting the position to basically start the operation from new rebates, then we'll see quite different numbers.

In terms of the ecosystems, I mean, this time, we made a specific focus on -- obviously, on the core financial and core banking operations, given that the -- after pandemic, this is important. Clearly, we have good -- we will have good momentum in Vendoo, given the delivery services. And some other ecosystems might get hit during the lockdown. But in terms of the number, if you take all the numbers, and this is given in the appendix of our presentations, the revenue grew by 56%, whereas net profit grew by 26%. So that's -- these are the numbers. But in the longer term, they have different -- we'll have different contribution, of course.

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Vakhtang Butskhrikidze, TBC Bank Group PLC - CEO & Executive Director [19]

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To add the answer on this question, I think digitalization is very important for us. And last 2, 3 years, we have very good results. And as you remember, 2, 3 years, so our digital just even 2 years ago was around 90%. So we are on a cap at 94%. And we could not increase more, and only 6% of the transactions we are doing in the branches. Maybe indirectly, I will answer the question, which is coming now that we have a moderate number of the branches. So we have not a special branches for our retail customers. We haven't not special branches for our SME individuals, which is very helpful. After the coronavirus, we believe that we will not change a number of our operators. We will modernize all, and we will continue our strategy for the digitalization.

And on the transactions, as I already mentioned, we could not increase one part. We have a potential in sales because there is a room, and now we are trying to bring within this year and also, especially in 2021, more products to sell in the digital channels, not only in mobile bank, but in other remote channels, and we have a plan how to do it. There really, we have ambitions, and we have plans what to do and how to do. And potentially, in the medium term, that will influence our efficiency. An also, in the medium term, it's also influenced our cost inflation.

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Giorgi Shagidze, TBC Bank Group PLC - CFO, Deputy CEO & Executive Director [20]

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And on the final part, Andrew, about the releasing the provisions, I think it's very early for now to comment on it. The only thing which we could comment and where we feel comfortable reiterating is that we try to preload the provisions, both in terms of IFRS and making sure that whatever information we've had we had already reflected into the provisioning.

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Andrew Keeley, Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst [21]

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And if I can just ask a quick final question. The fee income growth was positive in the first quarter still. How much of a hit do you expect to take in the second quarter?

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Vakhtang Butskhrikidze, TBC Bank Group PLC - CEO & Executive Director [22]

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Well, thanks. I mean, obviously, this has the very good momentum of the first 2 months. So March was already under pressure, and we'll see some pressure in the second quarter. But overall, if you take entire year -- I mean, getting the flat fee will be a good result. And let's see how it progresses.

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Anna Romelashvili, TBC Bank Group PLC - Head of IR [23]

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And the next question comes from Tolu Alamutu. I noticed that we have this question touched, so I will read them out, and then feel free to add something.

So the first question is, in Uzbekistan, would you consider acquiring the state-owned lenders that may come up for sale? What is the idle percentage of profit or revenues you expect Uzbekistan to account for? Let's take question-by-question since we have 5 of them.

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Giorgi Shagidze, TBC Bank Group PLC - CFO, Deputy CEO & Executive Director [24]

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Thank you for this question. And as we have mentioned in our presentation, we are beginning our business in Uzbekistan in banking greenfields. So we are beginning this business now. From June, we'll begin our operation there. We are forecasting just acquiring any bank from Uzbekistan. We feel that it -- we think that it's the right strategy for us.

To give some kind of flavor in the medium term, we forecast to have a portfolio around $700 million in our Uzbek bank. And on the profit side, it's very difficult to make today's assumptions, but we forecast in the medium-term to contribute our Uzbek bank to the group around 10% to 15% profits.

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Nino Masurashvili, JSC TBC Bank - Deputy CEO, Chief Risk Officer & Member of Management Board [25]

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That's fine. We can go to the next question, if that's okay. Thank you.

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Anna Romelashvili, TBC Bank Group PLC - Head of IR [26]

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So the second question is regarding the USD 450 million you expect to secure, please, can you give more details on what terms, such as maturity, you expect and when you expect to conclude these arrangements?

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Giorgi Shagidze, TBC Bank Group PLC - CFO, Deputy CEO & Executive Director [27]

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So I mean the first thing to highlight is that we operate on very high liquidity, even before this $450 million. And then it seems that the high liquidity increase is even higher, and there is no confidence crisis, which would strengthen the liquidity. So from that perspective, I mean, again, we are at a very good position before this $450 million. The terms vary between 2 and 7 years. And they are dedicated, in some cases, towards a specific portfolio. In some cases, they are just for general purposes. And usually, these our partner IFIs. I mean you know the list, people like EBRD, ADB, Proparco and so on and so on.

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Anna Romelashvili, TBC Bank Group PLC - Head of IR [28]

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And the third question is on the AT1 instrument, what are the bank's current thinking on coupon payments?

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Vakhtang Butskhrikidze, TBC Bank Group PLC - CEO & Executive Director [29]

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Deputy governor, do you want to comment on this question?

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Papuna Lezhava, National Bank of Georgia - Member of the Council [30]

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Yes, I can share our vision. So I'll give a little bit of a longer answer to also talk a little bit about the background. So the A-Tier 1 instruments were created not long ago or were created that right after the financial crisis in 2007, 2008, and their purpose is to help our bank's capital during the crisis times. And I think this crisis is a good test whether these instruments can really be used for its purpose. The whole world is struggling with how to treat this instrument. And what we can commit to is that Georgia will not be taking any -- the proactive measures until we see what is the international practice. At the same time, as of now, we don't see immediate need to hold the coupon payments as banks I've met describes this with significant buffer portion of which we have already released. But in case of need, we have more buffers from a regulatory perspective, but also internal capital buffers to be released. We, of course, recognize that the commitment of the investors in such instrument, which is very much appreciated by Georgia, and we will do everything in our hands to prevent using the collapse option of these instruments. And if we see a downside scenario takeout, we will use other measures to try to conserve capital before the collapse option is enacted.

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Anna Romelashvili, TBC Bank Group PLC - Head of IR [31]

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Thank you. And the fourth question is would TBC Bank consider buying back outstanding Eurobonds given current valuations?

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Vakhtang Butskhrikidze, TBC Bank Group PLC - CEO & Executive Director [32]

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No, we are not considering buying back the Eurobond. We will never -- I mean, we never say never, but at the current book, no.

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Anna Romelashvili, TBC Bank Group PLC - Head of IR [33]

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Thank you. And the fifth question is, there are baseline and downside scenarios in your macro assumptions. Is there any upside scenario that you consider in some ways?

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Nino Masurashvili, JSC TBC Bank - Deputy CEO, Chief Risk Officer & Member of Management Board [34]

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I will answer this question. In one calculating and estimating the credit loss provisions, we use only the baseline and the downsized scenarios. As told, we have awaited -- assigned 80% of the baselines and 20% to the stress. So we consider the baseline scenario as very realistic, and we do not think that there was a necessity to put the upside scenario. So we only use these 2. However, when Otar was talking about the macro scenarios in his presentation, his part there was upside scenarios as well.

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Jennifer L. Passmoor, HSBC Global Asset Management (UK) Limited - Portfolio Manager [35]

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Your responses, that's very, very helpful. Just 2 tiny follow-ups. First, on Uzbekistan, can you just confirm whether the transaction with EBRD has gone ahead already or whether that's something that we still have to look forward to?

And secondly, on the baseline and downside scenarios, I understand that, obviously, in your ECL calculations, you're only using those 2 at the moment. What I was sort of trying to get at was whether, in your broader strategy, there is an upside scenario with not such negative GDP growth this year, for instance, that we can start to think about.

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Vakhtang Butskhrikidze, TBC Bank Group PLC - CEO & Executive Director [36]

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Well, thanks. I mean, I think the EBRD and TBC are very specific what we can say to the public, and then the IR news that we have released have been approved by them. And unfortunately, I cannot go off from the script. But again, in EBRD and TBC have big, specific plans. And our plan is to fill up the $14 million investment with our partners this year.

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Nino Masurashvili, JSC TBC Bank - Deputy CEO, Chief Risk Officer & Member of Management Board [37]

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Regarding the second questions, regarding the scenario. So when calculating this year, we've taken a conservative approach. So we used only these 2 scenarios. We need to just look and watch and monitor after the lockdown is lifted and the company's businesses started to operate. So what we'll have a result, and then we can like say that whether we need to change these scenarios or not. We expect that for the next year -- next year, 2020, will be recovery. But this year, we think that this approach is conservative and comfortable for us.

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Anna Romelashvili, TBC Bank Group PLC - Head of IR [38]

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The next question comes from David Shapiro, and I will read them out. Assuming your weighted average reserving case is correct, how much should capital ratio roughly improve on a quarterly basis going forward? This is the first one.

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Giorgi Shagidze, TBC Bank Group PLC - CFO, Deputy CEO & Executive Director [39]

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Well, assuming -- I mean, it's difficult to tell you. Assuming everything is correct, and, let's say, the -- there is -- the conservatism that Nino is basically describing it becoming valid, we should be above 10% end of the year. But again, David, I mean, I gave it first of all. Again, it's very difficult to commit to any number and especially guide to quarter-over-quarter.

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Anna Romelashvili, TBC Bank Group PLC - Head of IR [40]

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And the second question is, are there any plans post-crisis to accelerate cost restricting and closing branches, given population having to become more used to using online banking channels? So would you like to add something, Vakhtang?

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Vakhtang Butskhrikidze, TBC Bank Group PLC - CEO & Executive Director [41]

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Yes. Thank you for this question. So as we have mentioned already in our presentation, so we are pushing more on the digital vote. But on the other hand, we have a moderate number of the branches. So we are not forecasting to decrease number of the branches within 2020 and potentially in 2021 we'll keep. So even as our strategy in the digitalization was last 3, 4 years, our strategy was not to increase number of the branches last 4, 5 years. And today, compared with any of the Georgian banks, our assets, deposits or loans per branch, we are doing very well compared with the regional players or with the Georgian peer banks in Georgia.

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Anna Romelashvili, TBC Bank Group PLC - Head of IR [42]

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And the third question is assuming worst-case assumption materializes, how much lower our capital adequacy ratio is expected to drop, just roughly?

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Vakhtang Butskhrikidze, TBC Bank Group PLC - CEO & Executive Director [43]

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So we have the minimum to severe stress scenario. And the severe stress is really, really severe. I mean, you can see the numbers. We expect 80% -- around 80%, which means that there is still a buffer on top of minimum. And again, I need to highlight that our numbers on capital on top of minimum is 9.1% versus the 6.9%, which is required. So we are very well positioned on minimum capital as you could expect in this environment. Furthermore, as the deputy governor mentioned, if there is a significant acceleration of further prices, NBG is prepared to discuss releasing other Pillar 2 buffers. So I think this also needs to be taken into account.

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Anna Romelashvili, TBC Bank Group PLC - Head of IR [44]

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Thank you. And we have a question from James Hamilton. Could you tell us what is your ECL provision would have been using the IMF macro forecast and what your ECL provision would be if you had 100% weighting towards your downside scenario?

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Nino Masurashvili, JSC TBC Bank - Deputy CEO, Chief Risk Officer & Member of Management Board [45]

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So overall, we think that our cost of range will be from 2% to 3%. So based on the -- like a different scenario, that is the way that we can talk and disclose right away.

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Anna Romelashvili, TBC Bank Group PLC - Head of IR [46]

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Thank you, Nino. And we have one question from the telephone. So I will allow you to talk, and please ask your question. Hello?

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Andrew Keeley, Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst [47]

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Hi. I think I've already asked questions.

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Anna Romelashvili, TBC Bank Group PLC - Head of IR [48]

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Oh, sorry, Andrew. Back to you. Okay. Thank you.

So at this moment, we don't have any more questions. Please, if you have any additional questions, feel free to ask. We are here.

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Vakhtang Butskhrikidze, TBC Bank Group PLC - CEO & Executive Director [49]

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We are also -- we have also scheduled one-to-one meetings in the next 2 weeks with many of the investors. Please drop us an e-mail if you have any further questions. We can follow up with an answers or with a meeting.

Yes. If there are no questions. So thank you for the participating. Thank you, deputy governor, for participating on our call. It was very important to your participating for that. Thank you.

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Giorgi Shagidze, TBC Bank Group PLC - CFO, Deputy CEO & Executive Director [50]

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Thank you, everyone.

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Otar Nadaraia, TBC Bank Group PLC - Chief Economist [51]

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Thank you.

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Nino Masurashvili, JSC TBC Bank - Deputy CEO, Chief Risk Officer & Member of Management Board [52]

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Thank you.