Bank of Georgia Group PLC (LON:BGEO) announced the Group’s first quarter 2019 consolidated results. Unless otherwise noted, numbers in this announcement are for 1Q19 and comparisons are with 1Q18. The results are based on International Financial Reporting Standards (“IFRS”) as adopted by the European Union, are unaudited and derived from management accounts. This results announcement is also available on the Group’s website at www.bankofgeorgiagroup.com.
KEY RESULTS HIGHLIGHTS
§ Strong quarterly performance. Profit adjusted for one-off termination costs of the former CEO and executive management totalled GEL 112.2mln in 1Q19, with profitability remaining high at 24.5%5 ROAE
§ Solid Asset quality. NPLs to gross loans ratio was 3.3% at 31 March 2019, while the NPL coverage ratio was 92.2% and the NPL coverage ratio adjusted for discounted value of collateral increased to 132.6%. The cost of credit risk ratio stood at 1.7% in 1Q19, down 10bps y-o-y and up 60bps q-o-q. The q-o-q increase reflected normal seasonality, as well as recent regulatory changes on unsecured consumer lending
§ Loan book growth was 22.4% y-o-y and 1.8% q-o-q at 31 March 2019. Growth on a constant-currency basis was 14.7% y-o-y and 1.5% q-o-q. Retail Banking loan book share in the total loan portfolio was 70.0% at 31 March 2019 (69.5% at 31 March 2018 and 69.8% at 31 December 2018)
§ Strong capital position. Basel III Tier 1 and Total Capital Adequacy ratios stood at 12.7% and 17.1%, respectively, as of 31 March 2019, both above the minimum required level of 11.6% and 16.1%, respectively. Common Equity Tier 1 (CET1) ratio stood at 12.7%, compared to a 9.6% minimum requirement at 31 March 2019 and already above the estimated fully-loaded Basel III CET1 requirement for 2021
§ In 1Q19, JSC Bank of Georgia issued an inaugural US$100 million 11.125% Additional Tier 1 Capital Perpetual Subordinated Notes. Regulatory approval on the classification of these securities as Additional Tier 1 instruments was received in April 2019, therefore, the AT1 instruments were not reflected in the capital ratios reported as of 31 March 2019. This issuance has added approximately 230 basis points to the Bank’s Tier 1 capital ratio, which is also now above the estimated fully-loaded Basel III Tier 1 capital requirement for 2021
§ Retail Banking (“RB”) continued to deliver solid growth. RB’s operating income reached GEL 178.8mln in 1Q19, up 5.8% y-o-y and down 5.1% q-o-q. The Retail Banking net loan book reached GEL 6,389.6mln at 31 March 2019, up 23.2% y-o-y and up 2.0% q-o-q. The growth was predominantly driven by mortgage and micro and SME lending. At the same time, the RB client deposits increased to GEL 4,520.5mln at 31 March 2019, up 36.8% y-o-y and 4.2% q-o-q
§ Corporate Investment Banking (“CIB”) demonstrated strong growth in 1Q19, generating solid net interest income and net fee and commission income during the period, coupled with operating efficiencies and improved asset quality. CIB’s net loan book reached GEL 2,652.8mln at 31 March 2019, up 19.4% y-o-y and up 1.3% q-o-q. The growth on a constant-currency basis was 9.2% y-o-y and 0.8% q-o-q. The top 10 CIB client concentration was 9.1% at the end of 1Q19 (10.3% at 31 March 2018 and 9.8% at 31 December 2018)
§ Assets Under Management (“AUM”) within the Group’s Investment Management business, increased to GEL 2,371.0mln in 1Q19, up 29.1% y-o-y and up 4.4% q-o-q, reflecting an increase in client assets and bond issuances at Galt & Taggart, our brokerage subsidiary
§ De-dollarisation of the loan book and client deposits. Loan book in local currency accounted for 39.3% of the total book at 31 March 2019 (41.2% a year ago and 38.3% in the previous quarter). Client deposits in local currency represented 32.9% of the total deposit portfolio at 31 March 2019 (33.8% a year ago and 32.5% in previous quarter)
§ Remote channels. We have actively continued the further development of our digital strategy:
§ The Bank continued introducing new features to both our mobile banking application and our internet bank and introducing dedicated digital spaces in our branches to increase client penetration and incentivise offloading client activity to digital channels. As a result, the number of active internet and mobile banking users in 1Q19 reached 277,960 (up 16.5% y-o-y) and 382,152 (up 84.2% y-o-y), respectively. Both the number and volume of transactions through our mobile and internet banking continued to expand in 1Q19. In total, c.82% of daily banking transactions were executed through remote channels during first quarter of 2019
§ In 1Q19, the Bank released a brand new business internet banking platform (Business iBank) for MSME and corporate clients, which comes with many features designed to make its use an intuitive and smooth experience. We focused our efforts on making the Business iBank even more useful for business transactions, accounting, payments, money transfers, administration, which should further incentivise offloading client activity to digital channels
§ In 1Q19, the Group launched a cutting-edge full-service real estate digital platform that is unique in doing business in the Georgian real estate market. The platform offers a single space for the more convenient, timely and efficient interaction and information exchange to all stakeholders involved in buying, selling, renting, developing real estate in Georgia. We believe it is the most up-to-date, comprehensive and reliable offering in the Georgian real estate market and is the first platform to be fully integrated with the Bank to provide its users a “one-click” live credit limit appraisal and mortgage application experience. The Group aims to boost its mortgage portfolio by gaining access to and serving a new clientèle, and simultaneously offering value-added services to real estate developers and agencies
CHIEF EXECUTIVE OFFICER’S STATEMENT
In the first quarter of 2019, the Group delivered another period of good balance sheet and fee income growth, in the seasonally quiet first quarter of the year, combined with continued superior profitability. In addition, we have continued to build our fully integrated digital capacity; we improved our already strong capital position with the issuance of US$100 million Additional Tier 1 capital, and announced the strengthening of our executive management team. At the same time, the Bank has adopted a significant tranche of local regulatory changes and the Georgian economy has continued to achieve strong macro-economic growth.
Net profit for the quarter totalled GEL 102.0 million, despite the impact of GEL 10.2 million of one-off employee costs (net of income tax) related to termination benefits of former CEO and executive management members. Adjusting for these costs, net profit increased by 10.4% y-o-y to GEL 112.2 million, and the return on average equity was 24.5%. During the quarter, the Group delivered operating income of GEL 258.7 million, up 10.2% year-on-year, reflecting both customer lending growth and particularly strong levels of fee and commission income. Customer lending increased 22.4% over the last twelve months, and by 1.8% during the quarter, and we continue to expect c.15% customer lending growth for 2019.
During the quarter we actively continued the further development of our fully integrated digital strategy, an important focus for us as we seek to digitise our full banking platforms:
§ Introducing new features to both our mobile banking application and our internet bank and introducing dedicated digital spaces in our branches. As a result, the number of active internet and mobile banking users in 1Q19 reached 277,960 (up 16.5% y-o-y) and 382,152 (up 84.2% y-o-y), respectively;
§ Releasing a brand new business internet banking platform (Business iBank) for our MSME and corporate clients; and
§ Launching a cutting-edge full-service real estate digital platform that is unique in doing business in the Georgian real estate market. This is the first platform to be fully integrated with the Bank to provide users with a “one-click” live credit limit appraisal and mortgage application experience.
From a macro-economic perspective, the economy continued to perform well, with Georgia’s real GDP growth at 4.7% in 1Q19. External pressures continued to ease as goods exports, remittances and tourism all posted increases while imports declined. In the first three months of the year, inflation remained close to the National Bank of Georgia’s 3% target, and at 3.7% in March 2019. With subdued inflation expectations, the NBG cut the policy rate to 6.5% in 1Q19. Continued growth in external inflows enabled the NBG to purchase US$186 million in 1Q19. This lifted international reserves to US$3.5 billion as of 31 March 2019. Despite these FX purchases, the Georgian Lari remained relatively stable against US$ throughout the quarter. Notably, Georgia’s macro fundamentals remain strong with its track record of resilience to negative external developments. This was acknowledged by a one-notch sovereign credit rating upgrade from Fitch Ratings in February 2019 and an improved rating outlook from S&P in April 2019. Georgia’s economic resilience continues to be underpinned by its diversified economic base and external economic linkages, as well as prudent economic policy-making and a healthy banking sector.
Whilst individual product loan yields have remained broadly stable, our increasing focus on lending in the mortgage segment and to finer margin corporate and SME clients, has led to a negative mix effect on the net interest margin, which reduced by 20 basis points quarter-on-quarter to 5.8% at the Group level, and by 30 basis points in the Retail Bank. This shift in product mix, which we expect to continue at a slower rate during 2019, improves asset quality and, particularly in the case of the mortgage portfolio, reduces the risk-asset and capital intensity of our lending growth. Costs remain well controlled and, adjusting for impact of the one-off employee termination costs, the Group delivered positive operating leverage of 5.0 percentage points y-o-y, and improved its cost/income ratio to 35.5%.
Asset quality continues to be extremely robust, reflecting our good lending discipline and the ongoing strength of the economy. The annualised cost of risk ratio in the quarter was 1.7%, broadly reflecting a very strong performance in CIB (annualised cost of risk of 0.1%), which offset the impact of first quarter seasonality and the new regulatory changes in the Retail Bank (annualised cost of risk of 2.4%), as we have reduced our Express lending portfolio significantly. This process has now been largely completed, and we expect the Retail Bank cost of risk to return to more normal levels over the next few quarters. The NPLs to gross loans ratio was stable at 3.3% during the quarter, 20 basis points lower than a year ago and flat q-o-q. Provisions coverage ratios improved during the quarter, and we continue to expect asset quality and credit metrics to remain strong over the medium-term.
The Retail Bank continues to deliver strong franchise growth. Customer lending increased 2.0% during the traditionally quietest quarter of the year, and 23.2% over the last 12 months, at a time when we have been integrating significant regulatory changes to income verification procedures, and payment-to-income and loan-to-value ratios targeted to refocus retail lending towards the high quality secured mortgage portfolio and MSME lending. MSME lending in the quarter was particularly strong, supported by the strength of the Georgian economy, growing by 4.7% in the quarter. Going forward, the Retail Bank’s clear focus will be on capturing the significant growth opportunities in the mortgage and MSME portfolios. The overall impact of the regulatory changes has been the reduction of the net interest margin of the Retail Bank and, temporarily while the higher margin Express loan portfolio has been substantially run down, increase in the retail cost of credit risk ratio. Importantly however, the capital efficiency of this portfolio shift remains strong and the Retail Bank continues to deliver a very strong return on equity – 25.3% in the first quarter.
The Retail Bank now has almost 2.5 million customers, an increase of more than 4% over the last 12 months. Our fully transformed, user-friendly, multi-feature mobile banking application, mBank, continues to see significant growth in the number of digital transaction, growing 21.6% over the last three months alone. In addition, we have now comfortably exceeded our targeted 40,000 Solo clients by the end of 2018, with over 47,000 clients now benefiting from Solo’s concierge-style banking proposition.
Corporate Investment Banking (CIB) performed particularly strongly during the quarter. Customer lending in CIB grew 1.3% quarter-on-quarter, while the net interest margin increased by 20 basis points to 3.4%. This strong performance in CIB was driven by a 31.5% y-o-y (17.5% q-o-q) growth in net fees and commission, and an increase of 26.8% in operating income y-o-y, that led to 52.3% y-o-y growth in profit (adjusted for one-off employee costs related to termination benefits of former CEO and executive management).
The Group’s capital and funding position remains strong, and our issuance of US$100 million Additional Tier 1 capital in March 2019 has improved the efficiency of our capital structure, introduced a natural hedge against dollarisation in the economy and built in significant headroom over the fully-loaded Basel III capital requirements for 2021 that are currently being introduced. This Additional Tier 1 capital received regulatory approval in April 2019 and will therefore add approximately 230 basis points to our Tier 1 capital ratio with immediate effect. During April 2019, we took the opportunity to repay US$65 million of Tier 2 capital, and this will substantially reduce the carry-cost of the new Additional Tier 1 capital issuance. In addition, we continue to generate high levels of internal capital as a result of both the Group’s high return on equity, and the improved risk asset intensity of our current and expected lending growth.
Over the last 12 months, the banking sector in Georgia has been in a significant transition period following the implementation of a number of regulatory changes, particularly affecting lending guidelines in the retail banking sector. Following the introduction, in January 2019, of the increase in the GEL 100,000 limit, to GEL 200,000, below which lending must be issued to individuals in GEL, we are not aware of any further significant new regulatory changes over the foreseeable future. Looking forward, we expect that banks will see a shift towards lending to corporates and the MSME sector, and in the mortgage sector, improving the overall quality of banking balance sheets, and driving further progress in the dedollarisation of the banking sector. This is expected to support increased capital efficiency, and continuing strong profitability for Bank of Georgia.
Having taken over as Chief Executive of the Bank during the quarter, I have been impressed by the strength of the Bank’s customer franchise, and undisputed brand strength. We have considerably strengthened the executive management team and I look forward to working with the whole management team and colleagues to ensure we capture the many opportunities available in the Georgian financial services sector to develop more digital, efficient and modern financial services throughout Georgia.
CEO, Bank of Georgia Group PLC