Bank of Georgia Group PLC continues to deliver on its strategic priorities and posts 1Q24 adjusted profit of GEL 369.1

1Q24 adjusted profit was up 22.5% y-o-y to GEL 369.1 million, with adjusted return on average equity standing at 27.7%

·      The acquisition of Ameriabank completed as of end of March 2024, with the balance sheet consolidated at 31 March 2024.  A bargain purchase negative goodwill of GEL 685.9m arising from the acquisition has been recognised in the period. No income statement was consolidated in these financial results due to the closing date of the acquisition being 31 March 2024.

·      Net interest income strong, up 17.7% y-o-y to GEL 437.8 million, with net interest margin (NIM) at 6.4%.

·      Adjusted operating income before cost of risk up 14.1% y-o-y to GEL 456.0 million.

·      Cost of credit risk ratio down to 0.3% as portfolio quality was strong across all business sub-segments in Georgian Financial Services (GFS).

·      Few highlights on Georgian Financial Services: 1) Increase of 166,000 monthly active retail customers during the past twelve months to 1.8 million individuals; 2) Retail Digital MAU up 19.7% y-o-y to 1.4 million in March 2024; 3) customer deposits y-o-y growth of 19.3% and net loan y-o-y growth of 22.6%.  

CEO statement

We started this year on a strong footing, with favourable macro conditions and continued growth momentum in Georgia and with the acquisition of Ameriabank, which completed successfully at the end of March 2024. You are now seeing the Group's balance sheet in its new shape, with assets close to US$ 16 billion at the end of March, comprising two leading, top-of-mind universal banks in Georgia and Armenia. Our book value per share increased to GEL 135.96 (up 38.0% y-o-y and up 18.6% q-o-q), and we delivered strong bottom-line growth and high profitability in the first quarter.

In Georgia, the economy maintained its positive dynamics during the first quarter, with an estimated 7.8% y-o-y real GDP growth, delivered with low inflation. Unfortunately, uncertainty has increased recently as we have seen political turmoil during the last few weeks. I have mentioned previously that the majority of the Georgian population aspires to EU membership. Some volatility in the economic and geo-political environment, while not helpful, is likely to be our backdrop until the upcoming parliamentary elections in October 2024. We monitor the situation as it unfolds. The Georgian economy has shown resilience during prior periods of political uncertainty and tensions and we hope this continues. Solid international reserves and ample fiscal space support the resilience of the economy against possible shocks. Tourism may be negatively affected this summer, but at the moment, we do not project a major negative impact on the economy and currently expect a 6.0% y-o-y real GDP growth for the full year.

Our banking business in Georgia maintains strong capital and liquidity positions, and we continue to make progress on our strategic priorities, increasing digitalisation, growing payments, and maintaining high customer satisfaction. In Georgian Financial Services, loan growth was robust at 22.6% y-o-y in the first quarter of 2024 (20.0% on a constant currency basis), with the loan book quality at very healthy levels. Customer deposit growth was also strong at 19.3% y-o-y during the first quarter (16.2% y-o-y on a constant currency basis). In April 2024, Bank of Georgia issued $300 million 9.5% Additional Tier 1 capital notes, and few days ago issued a notice regarding the full redemption of the 2019 $100 million 11.125% Additional Tier 1 capital notes at the upcoming first call date. The recent issuance with a reduced coupon rate, in an environment with a significantly higher risk-free rate, highlights increased investor trust and confidence in Bank of Georgia's financial strength.   

In Armenia, we see strong momentum both in the economy and at Ameriabank. Real GDP growth was 9.2% y-o-y in 1Q24, and the expected y-o-y real GDP growth in Armenia this year is 6.0%, according to the IMF. The strong growth outlook is supported by sound and prudent macroeconomic management. Ameriabank has continued to deliver strong performance during the first quarter, growing the loan book by around 30% y-o-y and delivering high profitability with ROE at 25%. We are now focused on working with the team in Armenia to start unlocking further growth opportunities.

As a result of the Group's strong capital position, the Board has recommended a final dividend for 2023 of GEL 4.94 per share, which is subject to shareholder approval at the upcoming Annual General Meeting in June. In addition, we are continuing our share buyback and cancellation programme which, at 24 May 2024, had c. GEL 53 million outstanding to be completed. Overall, the Group remains well-positioned to deliver strong growth and high profitability in its key geographies. Following the acquisition of Ameriabank, we increased the Group's medium-term target for annual loan book growth to c.15%. We maintain our profitability target of a 20%+ ROE, and capital distribution policy of 30-50% of annual profits via dividends and share buyback and cancellation. The teams across the Group are committed to driving strong results and success going forward.

Macroeconomic developments: Georgia

Strong economic growth

The Georgian economy continued to grow strongly in 1Q24, with an estimated 7.8% y-o-y real GDP expansion. Manufacturing, information and communication, and services sectors were the primary contributors to growth. Amid slowing external sector inflows from last year's high base, consumption and investment activities have become the main drivers of growth. Improving labour market conditions, increasing real wages, and reducing local currency interest rates have supported the continued strong economic performance. The economic activity is expected to remain robust, with real GDP growth forecasted at 6.0% in 2024, and 5.5% in 2025. Sustained geopolitical instability in the region, tight global financial conditions, and pre-election local political tensions pose downside risks. However, increased fiscal space and replenished international reserves cushion the economy from possible shocks.

Resilient external sector

External merchandise trade continued to contract y-o-y in 1Q24, with exports and imports decreasing by 9.3% and 3.5%, respectively. The decline was due to slowing re-exports from last year's high base and the continued fall in commodity prices, while exports of domestically originated goods continued to grow. As the adjustment in total import volumes was larger than that in exports, the trade deficit decreased in 1Q24. Decreasing export proceeds were partially offset by resilient tourism revenues and solid increases in other service exports, including IT and transportation services. In 1Q24, tourism revenues increased modestly by 1.5% y-o-y due to last year's high base, while the number of tourist visits exceeded the 2019 level for the first time since the COVID pandemic. Remittances remained solid despite a continued contraction from last year's high levels. The decline in migrant-related inflows was partially offset by steadily increasing money transfers from the US and EU countries leading to a 35.8% y-o-y decrease in total transfers in 1Q24. Overall, external sector inflows are expected to remain sound on the back of resilient and diversified income sources.

Healthy bank lending

Bank lending remained robust in 1Q24, increasing by 17.4% y-o-y on a constant currency basis, following the 17.1% y-o-y growth in the previous quarter. Credit growth was driven by local currency lending, leading to a continued decline in loan dollarisation to 44.8% at the end of March 2024 (-0.4 ppts q-o-q). The growth in legal entity lending has continued to be higher than in household loans since mid-2023, indicating a more productive allocation of funds with favourable effects on medium-term economic growth prospects. The quality of the banking sector's credit portfolio remained sound, with the non-performing loans ratio, according to the IMF, at 1.6% at the end of March 2024.

Strong fiscal discipline

The Government of Georgia remains committed to fiscal consolidation. In 2023, the fiscal deficit was reduced to 2.4% of GDP (-0.6 ppts year-on-year), which was below the budgeted level of 2.8% due to overperformance in tax revenues. The public debt stood at 39.0% of GDP (-0.2 ppts year-on-year). In 2024, the Government plans to maintain the fiscal deficit at 2.5% of GDP and further reduce the public debt to 38.0% of GDP. The plan is underpinned by demonstrated fiscal discipline.

Low inflation and declining local currency interest rates

Inflation remained low due to continued easing of domestic price pressures despite a moderate pick-up in import prices in 1Q24. Headline CPI was up 1.5% y-o-y in April 2024, a slight increase from 0.4% registered in December 2023. Inflation is expected to remain close to the central bank's 3% target in 2024. However, upside risks to inflation exist, considering persistent geopolitical tensions and the recent weakening of GEL. Steady improvements in the inflation outlook enabled the National Bank of Georgia (NBG) to cut its policy rate by a total of 1.50 ppts to 8.0% since January 2024, on top of the 1.50 ppts reduction in 2023.

Stable GEL

GEL remained stable in the first four months of 2024, backed by sustained external sector inflows and strong economic performance. In mid-May, the local currency weakened amid domestic political tensions. The NBG intervened by selling US$ 60m to calm the market. As a result, GEL recovered somewhat and registered a 2.9% depreciation against the US dollar year-to-date as at 27 May 2024. In the medium term, resilient external sector inflows and healthy macroeconomic fundamentals are expected to support the local currency.

Macroeconomic developments: Armenia

Robust economic growth

After a solid 8.7% real GDP growth in 2023, the Armenian economy maintained strong momentum in 1Q24, delivering 9.2% growth y-o-y. Economic activity was driven by manufacturing, trade, and construction sectors. The IMF projects a robust, 6.0% real GDP growth in Armenia in 2024, fuelled by consumption and public capital expenditure. Geopolitical tensions and growth prospects in the trading partners pose downside risks to the outlook, while stronger-than-expected exports create upside opportunities. Fiscal and monetary policies remain prudent and contribute to the resilience of the Armenian economy.

The booming external sector and strong dram

Exports of goods soared in the first three months of 2024, up 171.9% y-o-y due to a 14-fold rise in exports of gold and jewellery. In the same period, money transfers declined by 23.2% y-o-y, driven by falling inflows from Russia. The marked improvement in trade balance and overall solid inflows contributed to the strengthening of the dram by 3.9% versus the US dollar in the first four months of 2024.

Low inflation and easing monetary policy

During the first four months of 2024, inflation remained in the negative territory due to decreasing food prices, strong dram, and delayed effects of previously tight monetary policy. Headline CPI was down 0.7% y-o-y in April 2024, close to the 0.6% y-o-y deflation in December 2023. The Central Bank of Armenia (CBA) gradually eased monetary policy, cutting the refinancing rate by 1 ppt in the first four months of 2024 after a cumulative 1.5 ppts reduction in 2023.

Sound banking sector

The banking sector in Armenia remains sound, with strong capital and liquidity buffers, high profitability, and decent asset quality. According to the CBA, bank lending growth was 17.4% y-o-y on a constant currency basis in 1Q24, after a 21.2% y-o-y growth in the previous quarter. Lending growth was driven by local currency loans, contributing to the decreasing dollarisation level (33.9% at the end of March 2024, -1.7 ppts q-o-q).

Delivering on our strategic priorities in 1Q24

Non-financial data in this section is presented for Bank of Georgia standalone, unless otherwise noted.

The main bank

Being the main bank in customers' daily lives by leveraging the digital and payments ecosystems.

In the first quarter of 2024, Bank of Georgia continued to attract new retail customers, further develop its retail financial superapp (BOG APP) and other digital channels, and grow the payments business. As a result:

·      The share of Digital MAU in monthly active retail customers increased to 76.5% as of March 2024, up from 70.3% as of March 2023 and 75.0% as of December 2023, highlighting the extensive adoption of our market-leading financial superapp and internet banking platform.

·      Product sales in digital in the prior quarter were boosted by a gamification campaign, which helped increase awareness of the functionalities of BOG APP among our customers and supported digital sales.

·      The growth in legal entities was predominantly driven by small businesses.

·      The volume of payment transactions in Bank of Georgia's in-store/online POS terminals was up 33.7% y-o-y and down 10.2% q-o-q in the first quarter of 2024 to GEL 4.0bn.

Excellent customer experience

Anticipating customer needs and wants and providing relevant products and services.

Bank of Georgia's Net Promoter Score (NPS) stood at a high level of 61 in 1Q24 (58 in 1Q23 and 59 in 4Q23).          

Profitable growth

Growing the balance sheet profitably and focusing on segments with high growth potential.

Georgian Financial Services loan book grew 22.6% y-o-y and 3.2% q-o-q, amounting to GEL 20,159.5 million as of 31 March 2024. Growth on a constant currency basis was 20.0% y-o-y and 3.5% q-o-q.

Consolidated loan book was GEL 27,698.8 as of 31 March 2024, up 63.0% y-o-y and up 36.9% q-o-q as a result of the first-time consolidation of Ameriabank's balance sheet as of end of March 2024.

Our key targets are for the medium term are:

·      c.15% annual growth of the Group's loan book (the target was revised up from c.10% following the acquisition of Ameriabank in March 2024)

·      20%+ return on average equity

·      30-50% annual capital distribution ratio (dividends and share buyback and cancellation programme)

1Q24 Consolidated Results

Net interest income                                                                                                                                                                                       

·      Interest income in 1Q24 was up 21.5% y-o-y and up 2.8% q-o-q to GEL 765.8m. The y-o-y and q-o-q increase in interest income was mostly attributable to higher interest income from loans driven by strong loan portfolio growth.

·      Interest expense in 1Q24 was up 27.0% y-o-y and up 3.4% q-o-q to GEL 328.0m. The y-o-y increase in interest expense in 1Q24 was mainly driven by increased expense on the deposit portfolio driven by growth coupled with a higher cost of funds (up 50 bps y-o-y).

·      Net interest margin was 6.4% in 1Q24 (flat y-o-y and up 10 bps q-o-q).

Net non-interest income

·    Net fee and commission income was GEL 107.8m in 1Q24 (down 4.0% y-o-y and down 5.5% q-o-q). The y-o-y decrease was due to a significant (GEL 27m) income from advisory services booked in 1Q23, while the q-o-q decrease is mainly attributable to normal seasonality.

·      Net foreign currency (FX) gain amounted to GEL 90.5m in 1Q24 (up 28.1% y-o-y and down 6.9% q-o-q).

·      Net other income amounted to GEL 7.8m in 1Q24 (down 10.0% y-o-y and down 57.3% q-o-q).

Overall, the Group generated operating income of GEL 644.0m in 1Q24 (up 14.3% y-o-y and down 2.0% q-o-q). The y-o-y increase in 1Q24 was mainly driven by strong net interest income generation and increased net foreign currency gain, partly offset by lower net fee and commission income.

Operating expenses and efficiency

·      Operating expenses amounted to GEL 188.0m in 1Q24 (up 14.5% y-o-y and down 16.5% q-o-q). The y-o-y rise in operating expenses in 1Q24 was primarily related to overall business growth and ongoing investments in strategic areas. The q-o-q decrease was mainly attributable to seasonal impacts.

·      The Group's cost to income ratio was 29.2% in 1Q24 (29.1% in 1Q23 and 34.3% in 4Q23).

Cost of risk 

·    The cost of credit risk ratio was 0.3% in 1Q24 (1.0% in 1Q23 and 0.4% in 4Q23). All sub-segments of GFS performed strongly, see page 11.  

One-off items

·    As a result of the acquisition of Ameriabank, the one-off gain on bargain purchase (the difference between the fair value of identifiable net assets of Ameriabank acquired and total purchase consideration) amounted to GEL 685.9m, and acquisition-related costs amounted to GEL 17.1m, resulting in the total one-off of GEL 668.8m.

Profitability

·      The Group's profit (adjusted for one-off items) was GEL 369.1m in 1Q24 (up 22.5% y-o-y and up 12.3% q-o-q).

·      Return on average equity (adjusted for one-off items) was 27.7% in 1Q24 (27.9% in 1Q23 and 26.7% in 4Q23).

Loan book

·      Net loans and finance lease receivables amounted to GEL 27,698.8m at 31 March 2024, up 63.0% y-o-y and up 36.9% q-o-q in nominal terms. The significant increase is attributable to the Ameriabank acquisition, as well as the 22.6% growth in the GFS' balance sheet.

·      The NPLs to gross loans ratio reduced to 1.9% as at 31 March 2024 (down 50 bps y-o-y and down 40 bps q-o-q). The decrease was mainly driven by Ameriabank acquisition. Additionally, a decrease was recorded in GFS to 2.1% as at 31 March 2024 (down 30 bps y-o-y and down 10 bps q-o-q).

·    The Group-level and the Armenian Financial Services ('AFS') NPL coverage ratios in the table below have been adjusted to include the NPLs and respective ECL of standalone Ameriabank. The adjusted NPL coverage ratios have been broadly stable. The unadjusted NPL coverage ratio stood at 59.3% as at 31 March 2024 on the consolidated level as Ameriabank's loan book was consolidated at fair value, which implies including pre-acquisition ECL in initial gross balance of the loan portfolio recognised at consolidation, thus impacting the NPL coverage ratio.

Deposits

·      Client deposits and notes amounted to GEL 28,330.5m as at 31 March 2024 (up 54.7% y-o-y and up 38.0% q-o-q). The growth was driven by deposit growth in GFS (see page 10) as well as the Ameriabank acquisition.

Capital return

·      Bank of Georgia Group PLC has confirmed that the final dividend of GEL 4.94 per ordinary share will be put to shareholder approval at the AGM on 17 June 2024. If the final dividend of GEL 4.94 per ordinary share is approved by shareholders at the AGM, the following dividend timetable will apply:

o  Ex-dividend date: 4 July 2024

o  Record date: 5 July 2024

o  Currency conversion date: 5 July 2024

o  Payment date: 19 July 2024

·      The share buyback and cancellation programme is ongoing. As of 26 May 2024, the total number of shares cancelled since the launch of the Buyback Programme in August 2023 was 718,792. As of 26 May 2024, c. GEL 53 million of the existing buyback and cancellation programme remained to be completed.

Segment Results  

Following the acquisition of Ameriabank in March 2024, the Group changed its segmentation. The Group currently has three segments: 1) Georgian Financial Services ('GFS'), 2) Armenian Financial Services ('AFS'), and 3) Other Businesses.

Georgia Financial Services (GFS)

Georgian Financial Services ('GFS') mainly comprises JSC Bank of Georgia and investment bank JSC Galt and Taggart.

Performance highlights

·      The Group's performance in 1Q24, as discussed on pages 8 to 9, was predominantly driven by Georgian Financial Services.

Portfolio highlights  

From 1Q24 the Corporate Center was separated as a new sub-segment of GFS. The Corporate Center mainly includes treasury and custody operations. Previously, the Corporate Center's income and expenses were allocated to the Retail, SME, and CIB segments. The previous figures for the Retail, SME, and CIB segments have been restated.

·      GFS's net loans and finance lease receivables stood at GEL 20,159.5m (up 22.6% y-o-y and up 3.2% q-o-q) as at 31 March 2024. Both, the y-o-y and the q-o-q growth was mainly driven by CIB, followed by Retail and SME. On a constant currency basis, the loan book increased by 20.0% y-o-y and by 3.5% q-o-q.

·      55.8% of the loan book was denominated in GEL at 31 March 2024 vs 55.3% at 31 March 2023 and 55.5% at 31 December 2023.

·      Client deposits and notes stood at GEL 20,743.7m at 31 March 2024 (up 19.3% y-o-y and up 6.2% q-o-q). On a constant currency basis, deposits increased by 16.2% y-o-y and by 6.4% q-o-q. The strong y-o-y increase in deposits was mainly driven by time deposits, followed by current accounts and demand deposits.

·      The share of GEL-denominated client deposits increased to 46.8% as at 31 March 2024 vs 42.8% at 31 March 2023 and 45.5% at 31 December 2023.

Liquidity

·      Bank of Georgia has maintained a strong liquidity position, with IFRS-based NBG liquidity coverage ratio at 122.2% as at 31 March 2024 (129.8% as at 31 March 2023 and 125.2% as at 31 December 2023), and IFRS-based NBG net stable funding ratio at 125.7% as at 31 March 2024 (130.1% as at 31 March 2023 and 130.4% as at 31 December 2023).

Capital position

·    Bank of Georgia continues to operate with robust capital adequacy levels. At 31 March 2024, the Bank's Basel III CET1, Tier1, and Total capital ratios stood at 16.8%, 18.4%, and 21.2%, respectively, all comfortably above the minimum requirements of 14.6%, 16.8%, 19.7%, respectively. The movement in capital adequacy ratios in 1Q24 and the potential impact of a 10% devaluation of GEL is as follows: 

·      On 9 April 2024, JSC Bank of Georgia successfully priced a US$ 300,000,000 offering of 9.5% perpetual subordinated callable additional tier 1 notes. On 22 March 2024, JSC Bank of Georgia issued a notice that it will redeem all of aggregate principal amount of the outstanding AT1 Notes issued in 2019 equal to US$ 100,000,000 on 28 June 2024. The net effect of the redemption of the outstanding US$ 100,000,000 notes and the issuance of new US$ 300,000,000 notes is positive 2.3 ppts on Tier 1 and Total capital ratios.

·    In March 2023, the Financial Stability Committee at the NBG announced plans to set the cycle-neutral countercyclical capital buffer (base rate) to, 1%. As planned, since 15 March 2024 the neutral countercyclical buffer was set at 0.25%. The buffer will increase according the following schedule: 0.5% by 15 March 2025; 0.75% by 15 March 2026; 1% by 15 March 2027.

·      Bank of Georgia's minimum capital requirements for December 2024 are expected to be 14.6%, 16.8% and 19.7% for CET 1 ratio, Tier 1 ratio, and Total capital ratio respectively.

Armenian Financial Services (AFS)

Armenian Financial Services (AFS) includes CJSC Ameriabank

Performance highlights

·    Ameriabank was consolidated for the first time as of end of March 2024. Their full income statement and performance ratios will be available from 2Q24 onwards. No income statement was consolidated in these financial results due to the closing date of the acquisition being 31 March 2024.

Portfolio highlights          

·      As at 31 March 2024, AFS had GEL 10,053.5m of total assets, GEL 8,621.0m of total liabilities, and GEL 1,432.5m of total equity.

·      Net loans and finance lease receivables stood at GEL 6,832.9m as at 31 March 2024. 58.1% of loan book was denominated in Armenian Drams.

·      Client deposits and notes stood at GEL 6,522.8m as at 31 March 2024. 47.9% of client deposits and notes were denominated in Armenian Drams.    

Liquidity

·      Ameriabank has a strong liquidity position, having LCR of 270.4% and NSFR of 129.8% as at 31 March 2024, well above the minimum regulatory requirements of 100%. Notably, the LCR and NSFR ratios are based on Central Bank of Armenia's accounting policies and are not IFRS-based.

Capital position

·      At 31 March 2024, Ameriabank's Basel III CET1, Tier1, and Total capital ratios stood at 14.9%, 14.9%, and 17.6%, respectively, all above the minimum requirements of 11.7%, 13.8%, 16.5%, respectively.  

Ameriabank: standalone financial information (not included in consolidated results)

The following table is presented for information purposes only to show the performance of Ameriabank in the first quarter of 2024. It has been prepared consistently with the accounting policies adopted by the Group in preparing its consolidated financial statements.

·      Operating income in 1Q24 amounted to GEL 190.4m (up 16.2% y-o-y and down 5.7% q-o-q). The y-o-y growth was mainly driven by strong net interest income generation, while the q-o-q decrease was mainly attributable to the seasonally slower first quarter.  

·      Operating expenses in 1Q24 were up 26.4% y-o-y and down 5.1% q-o-q to GEL 87.0m. The y-o-y increase in operating expenses was mainly driven by business growth, resulting in higher staff count and investments in business development.

·      Cost of credit risk ratio improved during the first quarter, driven by improved customer default statistics and upgraded macroeconomic forecasts.