TBC Bank Group Plc (LON:TBCG) is the largest banking group in Georgia, where 99.8% of its business is concentrated, with a 37.4% market share by total assets. It offers retail, corporate, and MSME banking nationwide.
These unaudited financial results are presented for TBC Bank Group PLC, which was incorporated on 26 February 2016 as the ultimate holding company for JSC TBC Bank Georgia. TBC Bank became the parent company of JSC TBC Bank Georgia on 10 August 2016, following the Group’s restructuring. As this was a common ownership transaction, the results have been presented as if the Group existed at the earliest comparative date as allowed under the International Financial Reporting Standards, as adopted by the European Union. TBC Bank successfully listed on the London Stock Exchange’s premium listing segment on 10 August 2016.
TBC Bank Group PLC financial results are prepared in accordance with International Financial Reporting Standards as adopted by the European Union and the Companies Act 2006 applicable to companies reporting under IFRS.
Financial Highlights
1Q 2019 P&L Highlights
§ Net profit amounted to GEL 133.3 million (1Q 2018: GEL 97.5 million; 4Q 2018: GEL 130.1 million)
§ Return on equity (ROE) amounted to 23.8% (1Q 2018 : 21.0%; 4Q 2018: 24.3%)
§ Return on assets (ROA) amounted to 3.6 % (1Q 2018: 3.2%; 4Q 2018: 3.5%)
§ Total operating income amounted to GEL 271.9 million (1Q 2018: GEL 238.7 million; 4Q 2018: GEL 312.3 million)
§ Cost to income was 37.7% (1Q 2018: 38.1%; 4Q 2018: 39.7%)
§ Cost of risk stood at 1.4% (1Q 2018: 1.3%; 4Q 2018: 1.4%)
§ FX adjusted cost of risk stood at 1.4% (1Q 2018: 1.7%; 4Q 2018: 1.3%)
§ Net interest margin (NIM) stood at 6.1% (1Q 2018: 6.9%; 4Q 2018: 6.7%)
§ Risk adjusted net interest margin (NIM) stood at 4.7% (1Q 2018: 5.2%; 4Q 2018: 5.4%)
Balance Sheet Highlights as of 31 March 2019
§ Total assets amounted to GEL 15,172.3 million as of 31 March 2019, up by 22.3% YoY and down by 2.1% QoQ
§ Gross loans and advances to customers stood at GEL 10,366.9 million as of 31 March 2019, up by 22.9% YoY and down by 0.1% QoQ
§ Net loans to deposits + IFI funding stood at 90.5% and Net Stable Funding Ratio (NSFR) stood at 123.8%[1]
§ NPLs were 3.3%, up by 0.2 pp YoY and QoQ
§ NPLs coverage ratios stood at 100.1%, or 210.8% with collateral, on 31 March 2019 compared, to 114.6% or 225.8% with collateral, as of 31 March 2018 and 102.7%, or 216.4% with collateral on 31 December 2018
§ Total customer deposits amounted to GEL 9,166.8 million as of 31 March 2019, up by 20.4% YoY and down by 2.0% QoQ
§ As of 31 March 2019, the Bank’s Basel III tier 1 and total capital adequacy ratios per NBG methodology stood at 13.8% and 19.1% respectively, while minimum requirements amounted to 11.9% and 16.9%
Market Shares[2]
§ Market share by total assets reached 37.4% as of 31 March 2019, up by 2.1pp YoY and down by 0.8pp QoQ
§ Market share by total loans was 38.4% as of 31 March 2019, up by 0.6pp YoY and down by 0.4pp QoQ
§ In terms of individual loans, TBC Bank had a market share of 39.3% as of 31 March 2019, down by 0.3pp YoY and by 0.7pp QoQ. The market share for legal entity loans was 37.4%, up by 1.8pp YoY and stable on QoQ basis
§ Market share of total deposits reached 40.4% as of 31 March 2019, up by 1.5pp YoY and down by 0.8pp QoQ
§ Market share of individual deposits stood at to 39.5%, down by 1.1pp YoY and by 1.7pp on QoQ. In terms of legal entity deposits, TBC Bank holds a market share of 41.4%, up by 4.4pp YoY and up by 0.2pp QoQ.
Recent Developments
Payme – Expansion in Uzbekistan
TBC Bank has acquired 51% stake of LLC Inspired, a leading payment platform in Uzbekistan trading under the Payme brand.
Payme is a leading profitable payment service provider in Uzbekistan supplying high-quality payment solutions to its 1.3 million customers, including a marketplace platform for loans from certain Uzbek banks.
The company has grown rapidly in recent years, increasing its number of clients by around 70% during 2018, while its revenue and net income grew by 41.9% and 24.5% respectively year-on-year. The steady growth also continued in the first quarter 2019 with revenue and net profit growing by 21.9% and 73.0% quarter-on-quarter respectively.
The acquisition of Payme is another important step in our planned expansion into Uzbekistan. It will enable us to gain immediate access to a large customer base in the country and use our core digital strengths in Georgia to innovate the Uzbekistani market. With Payme joining our effort, we intend to further develop the payment business and also use it as a platform to develop new ecosystems in the country.
Awards
§ The Best Bank in Georgia 2019 – For the eighth consecutive year, TBC Bank has been awarded the Best Bank in Georgia 2019 by the prestigious Global Finance magazine, underlining our ongoing commitment to offering the very best banking services to our customers.
§ Special Award for Responsible Capitalism in Adversity – TBC Bank’s CEO Vakhtang Butskhrikidze has won the Special Award for Responsible Capitalism in Adversity from the prestigious FIRST organisation – a multidisciplinary international affairs organization, which aims to enhance dialogue between leaders in industry, finance and government.
§ FMO – In October 2018, TBC Bank signed a loan agreement in the amount of GEL 103 million with FMO, the Dutch Development Bank. The local currency funding was obtained by FMO through a public placement of bonds on the Georgian Stock Exchange. This transaction was selected by EMEA Finance as the Best Local Currency Loan of 2018.
Development of Customer Focused Ecosystems
In order to integrate better with our customers, we started to develop customer focused ecosystems, which are closely linked with our financial products and services and enable us to create synergies with our core banking offerings.
E-commerce
§ In August 2018 we purchased Swoop, Georgia’s well-known online discount and sales company for USD 70,000.
§ We have started developing an e-commerce market place in Georgia through building an innovative digital trading platform, Vendoo.
§ Our estimated investment for the next two years will be around USD 2-3 million.
Progress since acquisition:
§ Assembled a team of experienced professionals in digital business.
§ Designed a brand new cloud technology platform based on open source.
§ Beta version of the platform is already launched with electronics and personal care products on the following web-page: www.vendoo.ge. The launch of the full version is scheduled in May.
Real Estate
§ In January 2019, we acquired 90% shares of the real estate platform Allproperty.ge for USD 225,000.
§ Started developing digital real estate ecosystem, that will offer our customers a wide range of products and services, including finding the suitable real estate, comparing different properties, getting financing, buying furniture, and many more.
§ Our estimated investment for the next two years is set at around USD 2 million.
Progress since acquisition:
§ Strengthened the management team.
§ Designed target agile operating model.
§ Started rebranding through new brand name Livo and developing new platform www.livo.ge.
§ Data mining and lead generation practices have been implemented.
Additional Information Disclosure
Additional historical information for certain P&L, balance sheet and capital items, and on asset quality is disclosed on our Investor Relations website on http://tbcbankgroup.com/ under the Financial Highlights section.
Letter from TBC Bank Chief Executive Officer
I am pleased to present the financial results for the first quarter 2019 and update you on our operating performance as well as provide an overview of the recent macroeconomic developments in Georgia.
Our consolidated net profit for the first quarter of 2019 reached GEL 133.3 million, up by 36.7% year-on-year, while our return on equity was 23.8% and our return on assets stood at 3.6%. Our robust profitability was supported by strong growth in net fee and commission income of 19.7% and other operating income of 16.9% year-on-year, as well as positive operating jaws leading to the reduction of the cost to income ratio by 0.4 percentage points to 37.7%. Over the same period, cost of risk remained at 1.4%.
As anticipated, our net interest margin decreased in the first quarter of 2019 mainly due to the new regulation limiting the banks’ ability to lend money to higher-yield retail customers. The requirement came into force at the beginning of the year leading to the contraction in net interest margin by 0.5 percentage points. A further decrease of 0.1 percentage points was related to our higher than usual liquidity levels resulting in a net interest margin of 6.1% in the reporting period. Over the same period, our effective interest rate on loans decreased by 0.7 percentage points quarter-on-quarter and stood at 11.5% in first quarter 2019 driven by new regulation as well as decrease in NBG refinance rate.
In terms of balance sheet, our loan book expanded by 22.9% year-on-year, supported by growth across all business segments, which resulted in a market share of 38.4%, up by 0.6 percentage points year-on-year. Over the same period, deposits increased by 20.4%, expanding our deposit market share to 40.4%, up by 1.5 percentage points year-on-year.
We continue to operate with solid capital and liquidity levels. As of 31 March 2019, our tier 1 and total capital adequacy ratios (CAR) per Basel III guidelines were 13.8% and 19.1%, respectively, compared to 12.8% and 17.9% as of year-end and well above the corresponding minimum requirements of 11.9% and 16.9%. The increase in capital ratios were mainly related to the net profit generated in the quarter and the optimization of the credit risk weighted assets, as well as decrease in the market risk. As of 31 March 2019, our net loans to deposits + IFI funding ratio stood at 90.5% and the net stable funding ratio (NSFR) was 123.8%[3].
I am also pleased with the results of our insurance subsidiary, TBC Insurance, which continues to generate strong growth and strengthen its position as a leading player in the market. In the first quarter of 2019, its P&C and life insurance market share increased by 3.3 percentage points year-on-year and stood at 22.8%[4], while over the same period its market share in the retail segment amounted to 39.8%[4].
Regarding Georgia’s macro environment, in the first quarter 2019 real GDP growth averaged 4.7% year-on-year, per initial estimates of GeoStat. Over the same period, the growth of exports, tourism and remittance inflows moderated and stood at 9.1% year-on-year. This reflects a slower growth in Georgia’s trading partners and continued economic difficulties in Turkey. The total banking loan portfolio growth continues to moderate, primarily reflecting the regulations on retail lending, and, as of 31 March 2019, it had increased by 14.0% year-on-year, excluding FX effect[5]. From the segments perspective corporate, MSME and retail loans grew respectively by 12.9%, 21.8% and 11.2% year-on-year. It should be also noted, that in April 2019, the international rating company Standard&Poor’s (S&P) improved Georgia’s sovereign rating from stable to positive and confirmed the rating at “BB”. The positive outlook primarily reflects the S&P’s position that Georgia’s economic and external performance has the potential to outperform its current forecast over the next 12 months. It also reflects the country’s continued compliance with the conditions of the existing funded IMF arrangement.
Finally, I would like to update you on our progress towards our strategic priorities:
· Digitalization. In the first quarter of 2019, our offloading ratio in the retail segment reached 91.9%[6], up by 2.9 percentage points year-on-year, while sales conducted through digital channels amounted to 44.7%. Furthermore, our mobile banking penetration increased by 5.7 percentage points year-on-year and amounted to 36.7%, while the mobile or internet banking penetration ratio grew by 3.9 percentage pionts to reach 41.9%.
· Agile transformation. We have also successfully completed the first wave of our agile transformation and established the new organisation structure for our back office operations, which we believe will lead to faster time-to-market, improved productivity and higher employee engagement.
· Ecosystems. We continue to actively develop our e-commerce platform, Vendoo by deploying a brand new cloud technology based on open source. The launch of the marketplace is scheduled in May 2019 with electronics and personal care products. In relation to our real estate platform, we have designed a target agile operating model, implemented data mining and lead generation practices and started the rebranding process.
· International expansion:
o Uzbekistan. In April 2019, we acquired a 51% stake in Payme, a leading payment platform in Uzbekistan, for a consideration of USD 5.5 million. Payme supplies high-quality payment solutions to its 1.3 million customers through facilitating utility payments, P2P transfers, loan repayments, mPOS for QR-based payments and e-commerce purchases. It also provides a marketplace platform for loans from selected Uzbek banks. Payme has grown rapidly in recent years, increasing the number of clients by around 70% during 2018, while during the same period its revenue and net profit grew by 41.9% and 24.5% respectively. The steady growth also continued in the first quarter 2019 with revenue and net profit growing by 21.9% and 73.0% quarter-on-quarter respectively. The acquisition of Payme is another important step in our planned expansion into Uzbekistan. It will enable us to gain immediate access to a large customer base in the country and use our core digital strengths in Georgia to innovate in the Uzbek market. With Payme joining our effort, we intend to further develop the payment business and also use it as a platform to develop new ecosystems in the country.
o Azerbaijan. I am proud to report that our joint efforts with Nikoil Bank’s management continue to pay off. The bank has generated a net profit of USD 1.8 million in the first quarter 2019 on the back of improved income generation and cost efficiency.
Overall, I am delighted with our first quarter financial and operating results and I feel confident that we are well-positioned to achieve sustainable growth and to deliver high returns to our shareholders. Therefore, we would like to reiterate our medium-term targets: ROE of above 20%, cost to income ratio below 35%, dividend pay-out ratio of 25-35% and loan book growth of 10-15%.
Economic Overview[7]
Economic growth
Economic growth remained strong in 2018, despite the higher volatility in Georgia’s economic partners and the contractionary fiscal stance domestically GDP increased by 4.7% the 4.8% of 2017. The growth was broad-based across almost all sectors, with trade and repairs (+5.9% YoY), transport and communications (+8.2% YoY), real estate (+12.1% YoY), and manufacturing (+3.4% YoY), as major drivers in 2018. Almost all other sectors posted growth rates. Construction declined by 3.1% YoY mostly due to the finalisation of the BP’s SCPX project and underperformance in the public infrastructure spending, while the development of residential and non-residential buildings maintained solid growth. In 1Q 2019 real GDP growth averaged 4.7% YoY, per initial estimates of GeoStat.
Positive tendency of the CA balance improvement continued in 4Q 2018 as well with CA deficit to GDP ratio at 7.7% in 2018 compared to 8.8% in 2017. This is mostly due to the robust growth of tourism, exports and remittance inflows as well as the narrower income account deficit for 2018. FDI inflows, representing a major source of financing for the CA deficit, declined by 34.9% YoY and came in at still solid 7.9% of GDP in 2018 – this is a normalised level following the above trend inflows over 2014-17. The reduction mostly reflected the finalisation of the BP’s SCPX project and the change of ownership of non-resident companies to residents as well as repayment of some FDI related debt.
Growth of exports, tourism and remittance inflows moderated and stood at 9.1% YoY in 1Q 2019, reflecting the normalisation of growth in Georgia’s economic partners and continued economic difficulties in Turkey. Also, the effect of stronger USD should be considered as when measured in EUR and GEL, better reflecting the underlying value of assets in the country, growth of inflows stood at 18.1% and 17.2% YoY, respectively.
Imports of goods further declined by 4.7% YoY, due to the retail lending regulations, lower oil prices, high base effect in the previous year reflecting some one-off imports in 1Q 2018 and a stronger USD. As a result, balance of trade in goods improved by a solid 14.2% YoY.
The National Bank of Georgia continued to refill reserves and purchased sizeable USD 186 million – an estimated 7% of 1Q 2019 GDP. As of the end of March, the NBG’s gross international reserves stood at USD 3.5 billion, up by 15.2% YoY. The estimated net international reserves exceeded the lower threshold for June 2019 as defined at USD 1.456 billion for June 2019 as defined in the agreement with the IMF by around USD 200 million.
Growth of bank loan portfolio continues to moderate, primarily reflecting regulations on retail lending. As of 1Q 2019 the total bank loan portfolio increased by 14.0% YoY, excluding the FX effect[8]. From a segment perspective, corporate, MSME and retail loans increased by 12.9%, 21.8% and 11.2% YoY, respectively. Excluding one-offs in corporate segment, total loan portfolio growth would have stood at an estimated 15.3% YoY with corporate segment up by 17.0%. Overall, even taking into account one-offs, slower growth of the loan portfolio is still evident driven by retail lending regulations on the one hand and normalizing growth rates in business credit following cyclical pick up in 2018 on the other. Bank loans-to-GDP ratio stood at 64.7% in 2018, up by 5.8 pp from end 2017, driven by the higher credit growth and the exchange rate weakening. When measured in constant currency terms, the bank loans-to-GDP ratio remains close to its long-term trend, indicating that there are no signs of excessive lending growth.
Following the contractionary stance in 2018, budget spending accelerated since the beginning of 2019. In Q1 2019 the total government spending went up by 15.5% YoY. The budget deficit stood at an estimated 0.2% of GDP, compared to surplus of 1.9% over the same period last year. Stronger fiscal spending, coupled with sizeable advance payments by the end of 2018, is expected to provide significant growth stimulus in the coming months.
Annual inflation stood at 3.7% as of March 2019, mostly driven by an higher excise tax on tobacco, increased prices on travel and a low base effect. Excluding the one-off impact of excise taxes, CPI inflation remained somewhat below the NBG’s 3% target. Low inflation, relatively lower risks to inflation stemming from the external sector, and likely weak demand side pressures on prices, led the NBG to cut the policy rate twice, from 7% at the end of 2018 to 6.5%. During their latest meeting on the 1st of May monetary policy committee left the policy rate unchanged at 6.5%.
As of the end of March 2019, the USD/GEL exchange rate depreciated by 11.5% YoY, while the EUR/GEL exchange rate depreciated by a more modest 1.5% YoY. Over the same period, the GEL real effective exchange rate was almost unchanged, depreciating by only 0.1% YoY.
Resilience of Georgia’s economy have been confirmed by the S&P as the agency improved the outlook to Georgia’s credit rating from stable to positive. According to the rating commentary, demonstrated economic resilience amid turbulent region over 2014-18, efforts to widen the exports and foreign investment geography along with the continued investments in infrastructure, country’s its strong institutional framework compared to region economies in the wider region, stable public debt levels and prudent policymaking all remain supportive to the country’s credit rating.
Going forward
Georgia continues to position itself as an attractive business environment with structural reforms and high GDP growth potential. According to the IMF’s recently published World Economic Outlook[9], Georgian economy is projected to increase at 4.6% in 2019 and 5.0% in 2020. Thereafter, over 2021-2024 the economy is expected to expand at 5.2%.
