Bank Of Georgia Group Regulatory News (BGEO)

3Q23 AND 9M23 FINANCIAL HIGHLIGHTS

2Q23 and thus 9M23 Net other income was adjusted for a one-off GEL 21.1 million other income related to the settlement of an outstanding legacy claim. As a result, ROAE, ROAE, and Cost:income ratios were adjusted for this one-off item as well. Comparisons given in text are with adjusted figures of respective periods. You can see the unadjusted P&L on page 18 and unadjusted ratios on page 19.

CHIEF EXECUTIVE OFFICER'S STATEMENT

We delivered another strong quarter, demonstrating a strong year-on-year operating income and profit growth and a return on equity above 30%. In the first nine months of 2023, profit (adjusted for one-off income) amounted to GEL 1,046.2 million, up 29.8% year-on-year, with ROAE at 31.1%. These figures reflect the Group's consistency in delivering its strategic objectives and the ongoing progress in building our customer franchise.

Our goal is to be relevant in our customers' daily lives, with top-quality services and user experience. Bank of Georgia's Net Promoter Score (NPS) among the population remained broadly stable, at 59, one of the best results worldwide for a universal bank. Throughout the quarter, we remained focused on deepening engagement with our growing customer base across all key segments. Bank of Georgia added more than 41 thousand active Retail customers during the third quarter, and more than 193 thousand over the last twelve months. A lot of work is being put into our retail financial superapp and other digital channels, including our mobile app for businesses. In September 2023, Digital MAU in Retail reached 1.3 million individuals, up 25.6% from a year ago. The daily use (DAU/MAU) of retail mobile app and internet banking was 46.8%, up 1.6 ppts year-on-year - a strong result, when compared with other major global apps. Business Digital MAU stood at 69 thousand customers, up 31.9% year-on-year. Importantly, the share of retail products sold in digital channels in the third quarter increased to 47.1%, up from 37.9% in 3Q22 and 42.5% in 2Q23.

Our payments business continues to grow, with the volume of transactions in Bank of Georgia's acquiring up 46.3% y-o-y in the third quarter, representing a market share of 55.2%, compared with 48.9% a year ago. In September 2023, 1.2 million Retail customers used BOG cards to make a payment at least once, up 24.8% year-on-year. This is a very good result, supported by our top-of-mind loyalty programme, and we see further upside in Georgia as the economy becomes more cashless.

Bank of Georgia maintains a strong balance sheet, with significant buffers above its minimum capital requirements, supported by strong internal capital generation and further balance sheet de-dollarisation, which improves capital efficiency. An interim dividend of GEL 3.06 per ordinary share was paid to ordinary shareholders of the Group on 27 October 2023. The GEL 62 million share buyback and cancellation programme is ongoing.

The Georgian economy has maintained its growth momentum, underpinned by domestic consumption and investment spending. External sector inflows remained solid, supporting economic activity, which has returned to more normal levels following two unusually strong years of economic growth. The estimated year-on-year real GDP growth in the first nine months of 2023 was 6.8%, and full-year real GDP growth is expected at a similar level. In the third quarter of 2023, inflation remained below the central bank's target, and thanks to this improved inflation outlook, the National Bank of Georgia reduced the monetary policy rate by an additional 50 basis points to 10.0% in 3Q23. Increased international reserves and the improved fiscal position cushion the economy from external shocks and support the positive growth outlook.

The good news from last week is that the European Commission recommended that the Council of the European Union grant Georgia candidate status, a decision to be made in December 2023 - a critical step forward for Georgia on its journey to EU membership. I believe this will deepen the country's engagement with the EU and support the positive growth dynamics going forward. Against this macro backdrop, we remain well-positioned to continue to support our customers, and deliver strong growth and high profitability.

Archil Gachechiladze,

CEO, Bank of Georgia Group PLC

13 November 2023

MACROECONOMIC DEVELOPMENTS

Strong economic growth

The Georgian economy maintained its strong recent performance in the first nine months of 2023, driven by robust domestic consumption and investment spending. External demand continued to grow, but at a slower pace. The ongoing recovery in international tourism and gradual exit from tight monetary policy also supported the strong economic performance. According to preliminary data, real GDP growth was 6.8% in 9M23, with main contributions from trade, information and communication, and construction activities. Real GDP growth is expected at 6.8% in 2023 driven by strong domestic spending along with resilient external inflows. Geopolitical instability in the region and tight global financial conditions contribute to downside risks to the outlook. In September 2023, a military conflict unfolded again between Azerbaijan and Nagorno-Karabakh, the contested, majority-Armenian territory within Azerbaijan's internationally recognised borders. Apart from the ensuing human suffering, this conflict was largely contained, and it has not had any major negative impact on the Georgian economy. We believe the risk of further military escalations going forward has reduced significantly.

Resilient external sector

Georgia's international trade in goods slowed in 3Q23 due to last year's high base and falling commodity prices, with exports increasing by 1.6% and imports up 7.9%, year-on-year. However, the amount of trade flows remained solid on the back of strong economic activity. The widening trade deficit was partially offset by robust growth in tourism revenues and solid remittance inflows. In 3Q23, tourism revenues increased by 5.3% year-on-year, while the number of tourist visits recovered to 92.6% of the 2019 level, suggesting room for further growth. Remittances continued to contract from last year's record-high levels. Declining migrant-related inflows were substituted by increased money transfers from the EU and the US leading to a decrease in total remittances of only 15.1% year-on-year in 3Q23. Overall, external inflows are expected to remain robust on the back of strong external demand and diversified income sources.

Healthy bank lending

Total bank lending remained on a sustainable growth path in the third quarter of 2023, increasing by 14.9% on a constant currency basis, following the 13.5% y-o-y growth in the previous quarter. In 3Q23, local and foreign currency lending contributed evenly to bank credit growth, while loan dollarisation stood at a historically low level of 45.0% at 30 September 2023 (45.4% as at September 2022). Importantly, the growth in legal entity lending surpassed the growth in household loans during the third quarter of 2023. This indicates 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 low non-performing loans ratio.

Updated macroprudential policy

On October 18th, the National Bank of Georgia announced several updates to its macroprudential policy. It increased the minimum allowed amount of a foreign currency loan from GEL 200,000 to GEL 300,000, while exempting hedged borrowers (borrowers with incomes in the same currency as the loan currency) from this regulation, starting from the beginning of 2024. In addition, effective from November 1st, the central bank reinstated the maximum maturity on unsecured consumer loans to 4 years, after keeping it at 3 years since August 2022. These amendments are expected to reinforce loan dedollarisation, while ensuring access to finance.

Continued fiscal consolidation

After sizeable improvements in fiscal performance in 2022, the Government of Georgia remains committed to further fiscal consolidation. In 2023, the fiscal deficit is planned to decrease to 2.8% of GDP (from 3.1% of GDP in 2022), and the total public debt to GDP ratio is planned to be reduced to 38.4% (from 39.8% in 2022). The plan is underpinned by demonstrated fiscal discipline and strong economic performance. Thanks to robust economic growth, consolidated budget tax revenues increased by 19.4% year-on-year in the first nine months of 2023. The ongoing consolidation helps strengthen fiscal buffers and ensure fiscal sustainability.

Low inflation

Inflation remained low on the back of reducing domestic price pressures and declining import prices. Headline CPI inflation was 0.8% year-on-year in October 2023, a significant decrease from 9.8% registered at the end of 2022. Inflation is expected to remain below the central bank's 3% target throughout the rest of the year. Nonetheless, upside risks to inflation persist considering the strong domestic economic performance and geopolitical instability in the region. The National Bank of Georgia kept its policy rate unchanged at 10.0% on October 25th, but is expected to continue a gradual exit from tight monetary policy.

Stable GEL

The sustained external inflows continue to support the local currency. Despite some weakening in recent months, GEL remained broadly unchanged against USD in the first ten months of 2023, after a 12.5% appreciation in 2022. In the medium term, GEL is expected to maintain its current position, supported by resilient external inflows and a positive growth outlook.

DELIVERING VALUE IN 3Q23 AND 9M23

The Group's business consists of four key business segments. (1) Retail Banking (RB) operations in Georgia, comprising sub-segments that serve mass retail (Mass Retail), and mass affluent and high-net-worth clients (Premium Banking). (2) SME Banking (SME) operations in Georgia, serving small and medium-sized businesses. (3) Corporate and Investment Banking (CIB) operations in Georgia, serving corporate and institutional customers and providing capital markets and brokerage services through JSC Galt & Taggart. (4) JSC Belarusky Narodny Bank (BNB), serving retail and SME clients in Belarus.

Strategic Review

The following figures are given for JSC Bank of Georgia unless otherwise stated

Strong franchise growth

· Bank of Georgia had 1.7 million monthly active retail clients as at 30 September 2023, up 12.5% y-o-y and up 2.4% q-o-q. Significant growth was recorded in Premium Banking - 38.5% y-o-y and 11.5% q-o-q. In September 2023 the number of active SOLO clients was 116 thousand, and the share of Premium Banking active clients in total Retail Banking active clients stood at 6.8% as at 30 September 2023 vs 5.5% as at 30 September 2022 and 6.2% as at 30 June 2023.

· Monthly active legal entities, that is business clients, were up 21.6% y-o-y and up 5.0% q-o-q to 92 thousand entities. The growth was predominantly driven by small businesses.

· Monthly active digital users among retail clients (Digital MAU) increased by 25.6% y-o-y and by 3.5% q-o-q to 1.3 million users as at 30 September 2023. The share of Digital MAU in monthly active individuals increased to 72.6% as at 30 September 2023, up from 65.0% as at 30 September 2022 and 71.9% as at 30 June 2023, highlighting the extensive adoption of our market-leading financial superapp and internet banking platform.

Financial superapp and other digital channels

· Bank of Georgia is successfully developing its retail financial superapp to tailor product offerings and user experience to customer needs. In October, the Bank launched trivia-style gamification in the app, engaging users in different activities, including those increasing awareness of financial products and services. By answering questions users can accumulate coins during the game and redeem the coins for vouchers at partner merchants. The main goal of this game is to increase engagement with the app and to show a myriad of benefits of using the app. In the third quarter, the Bank also added "Stories" to the retail mobile app, encompassing a variety of content, including lifestyle offers, banking insights, and non-financial information.

· The share of products sold through digital channels stood at 47.1% in 3Q23, compared with 37.9% in 3Q22 and 42.5% in 2Q23. We see improvement opportunities in this area and keep working on designing better product journeys in digital channels.

· In October 2023 Bank of Georgia won several global subcategories at the Global Finance's 2023 World's Best Digital Bank Awards Ceremony in London. The awards included Best Mobile Banking App (Corporate/Institutional) and Best in Lending and Best in Bill Payment & Presentment (Consumer).

· Since the launch of sCoolApp - the first financial mobile application for school students in Georgia - last year, the Bank has deepened its relationships with the youth segment. As of 30 September 2023, we reached the 2023 year-end target of sCoolApp MAU, surpassing the milestone of 70 thousand school students.

Payments

· Bank of Georgia's market share in acquiring increased to 55.2% in September 2023 vs 48.9% in September 2022 and 53.7% in June 2023. The volume of payment transactions executed through BOG's in-store and online terminals was up 46.3% y-o-y and up 16.7% q-o-q in the third quarter of 2023.

· Bank of Georgia's cards were used for payments at least once by 1.2 million individuals in September 2023 (up 24.8% y-o-y and up 3.1% q-o-q) - important progress towards a more cashless economy in Georgia.

Customer satisfaction

· Net Promoter Score (NPS) remained stable in the third quarter, standing at a high level of 59 (60 in 3Q22 and 61 in 2Q23).

Financial Review

2Q23 and thus 9M23 Net other income was adjusted for a one-off GEL 21.1 million other income related to the settlement of an outstanding legacy claim. As a result, ROAE, ROAE, and Cost:income ratios were adjusted for this one-off item as well. Comparisons given in text are with adjusted figures of respective periods. You can see the unadjusted P&L on page 18 and unadjusted ratios on page 19.

Net interest income

· Interest income in 3Q23 was up 23.0% y-o-y and up 6.1% q-o-q to GEL 706.9m. In 9M23, interest income amounted to GEL 2,003.5m, up 21.5% y-o-y. The y-o-y increase in interest income in the periods presented was mostly attributable to increased loan portfolio and higher loan yield (up 100 bps y-o-y in 3Q23 and up 120 bps y-o-y in 9M23). The q-o-q increase is mainly related to loan growth during the quarter.

· Interest expense in 3Q23 was up 2.6% y-o-y and up 6.1% q-o-q to GEL 286.9m. In 9M23, interest expense amounted to GEL 815.7m, up 1.8% y-o-y. Although the deposit portfolio grew strongly y-o-y and the cost of deposits was up in 3Q23 vs 3Q22 and up in 9M23 vs 9M22, the overall funding cost decreased y-o-y in 3Q23 and 9M23, as the share of higher-cost funding sources decreased within interest-bearing liabilities. On a q-o-q basis, the deposit portfolio and the respective cost were up, while the overall cost of funds was 10 bps lower.

· Net interest margin was 6.6% in the third quarter (up 130 bps y-o-y and flat q-o-q). NIM in 9M23 stood at 6.5% (up 120 bps y-o-y).

Net non-interest income

· Net fee and commission income was GEL 118.9m in 3Q23 (up 49.3% y-o-y and up 33.4% q-o-q). Both the y-o-y and the q-o-q increases were mainly driven by net income generated from settlement operations. In addition, in the third quarter the Group amended the accounting model for payment systems charges in line with revisions to charging policy from market participants and adjusted net fee and commission income for a positive net effect of GEL 25.0m. The adjustment was also introduced in respect of certain fees and commissions on a net basis where applicable in accordance with IFRS requirements. The changes were applied prospectively as the effect was not significant to affect prior period results. In 9M23, net fee and commission income amounted to GEL 320.4m, up 45.9% y-o-y, mainly due to settlement operations and advisory services.

· Net foreign currency (FX) gain has broadly normalised, following last year's higher activity levels, and amounted to GEL 97.8m in the third quarter (down 35.1% y-o-y and down 2.2% q-o-q). In the first nine months of 2023, the net foreign currency gain amounted to GEL 268.5m (down 21.2% y-o-y).

· Net other income amounted to GEL 5.7m in 3Q23 (up 5.3x y-o-y and down 93.0% q-o-q). The q-o-q decrease was mainly driven by the higher net gains on the sale of repossessed assets posted in 2Q23. In 9M23 net other income (adjusted for a GEL 21.1m one-off other income related to the settlement of the legacy claim) was GEL 96.5m, up 10.5x y-o-y, driven by the significant net gains on the sale of repossessed assets in 2Q23.

Overall, the Group generated operating income of GEL 642.5m in 3Q23 (up 22.0% y-o-y and down 3.7% q-o-q). The y-o-y increase in 3Q23 was mainly driven by strong net interest income generation, while the q-o-q decrease was due to the significant net other income in the previous quarter. In the first nine months of 2023, the operating income (adjusted for a GEL 21.1m one-off other income) amounted to GEL 1,873.1m, up 32.2% y-o-y, driven by strong income generation across key revenue lines and supported by the significant gains from the sale of repossessed assets in 2Q23.

Operating expenses and efficiency

· Operating expenses amounted to GEL 185.3m in 3Q23 (up 15.2% y-o-y and up 3.3% q-o-q). In 9M23, the operating expenses amounted to GEL 528.8m (up 14.9% y-o-y). The increase in the periods presented was mainly associated with overall business growth and continuing investments in strategic areas.

· The Group's cost to income ratio was 28.8% in 3Q23 (30.6% in 3Q22 and 26.9% in 2Q23). In the first nine months of 2023, the cost to income ratio was 28.2% vs 32.5% in the first nine months of 2022.

Cost of risk 

· The cost of credit risk ratio was 0.6% in 3Q23 (1.0% in 3Q22 and 0.8% in 2Q23). The expected credit loss charge on loans and finance lease receivables posted during the third quarter amounted to GEL 29.2m, mainly driven by the Retail and SME segments. The y-o-y and the q-o-q decrease in cost of credit risk ratio was mainly driven by a reduction in the Retail Banking cost of credit risk. The cost of credit risk ratio was 0.8% in 9M23 (0.8% in 9M22).

Profitability

· The Group's profit was GEL 357.4m in 3Q23 (up 23.1% y-o-y and down 7.8% q-o-q). For 9M23, profit (adjusted for one-off other income) was GEL 1,046.2m (up 29.8% y-o-y). 

· Return on average equity was 30.7% in 3Q23 (32.4% in 3Q22 and 34.6% in 2Q23). For 9M23, adjusted ROAE was 31.1% (32.0% in 9M22).

Loan book

· Net loans and finance lease receivables amounted to GEL 19,010.6m at 30 September 2023, up 17.6% y-o-y and up 4.0% q-o-q in nominal terms. Growth on a constant-currency basis was 19.0% y-o-y and 3.4% q-o-q respectively. On a constant currency basis, each segment recorded a strong growth of loan book: RB - up 13.8% y-o-y and up 3.9% q-o-q; SME - up 13.7% y-o-y and up 1.6% q-o-q, and CIB - up 25.8% y-o-y and up 2.0% q-o-q.

· The de-dollarisation trend continued as the share of GEL-denominated loans increased to 53.8% at 30 September 2023 vs 52.6% at 30 September 2022 and 53.6% at 30 June 2023.

· The NPLs to gross loans ratio stood at 2.4% as at 30 September 2023 (flat both y-o-y and q-o-q). The NPL ratios in Retail and CIB were broadly stable compared with 30 June 2023. A slight increase in the SME NPL ratio was due to a single defaulted borrower.

· The positive asset quality trend is reflected in an improvement in Stage 3 loans to gross loans on a y-o-y basis, to 2.8% at 30 September 2023 vs 3.5% at 30 September 2022. The Stage 3 loans ratio remained flat on a q-o-q basis.

Deposits

· Client deposits and notes amounted to GEL 21,743.5m at 30 September 2023 (up 26.5% y-o-y and up 10.7% q-o-q). On a constant currency basis deposits increased by 29.4% y-o-y and 9.7% q-o-q, reflecting the strength of the Bank's deposit franchise. The growth was particularly strong in individual resident deposits, where our market share increased to 42.4% as at 30 September 2023, from 40.0% as at 30 September 2022 and 40.8% as at 30 June 2023.

· The year-on-year and the quarter-on-quarter growth was driven by both current/demand and time deposits.

· De-dollarisation of deposits increased as the share of GEL-denominated deposits in total deposits stood at 46.1% at 30 September 2023, vs 37.5% at 30 September 2022 and 44.0% at 30 June 2023.

Liquid assets and liquidity position

· Liquid assets amounted to GEL 10,258.1m at 30 September 2023 (up 8.1% y-o-y and up 13.1% q-o-q). The share of liquid assets to total assets stood at 33.3% at 30 September 2023 vs 35.2% at 30 September 2022 and 31.6% at 30 June 2023.

· Bank of Georgia continues to operate with comfortable levels of liquidity. At 30 September 2023 the Bank's IFRS-based Liquidity Coverage Ratio (LCR) stood at 135.7% (121.4% at 30 September 2022 and 111.1% at 30 June 2023), above the minimum requirement of 100%[7]. The increase in LCR was primarily a result of growing deposit portfolio as well as attracting DFI funding to support overall loan growth and liquidity buffers. The Net Stable Funding Ratio also stood at a high level of 134.5% at 30 September 2023 (130.9% at 30 September 2022 and 128.2% at 30 June 2023). The loan-to-deposit ratio was down to 87.4% in 3Q23 vs 94.0% in 3Q22 and 93.1% in 2Q23.

Capital position

· The Bank continues to operate with robust capital adequacy levels. At 30 September 2023, the Bank's Basel III CET1, Tier1, and Total capital ratios stood at 18.5%, 20.4%, and 22.7%, respectively, all comfortably above the minimum requirements of 14.7%, 16.9%, 19.9%, respectively. The movement in capital adequacy ratios in 3Q23 and the potential impact of a 10% devaluation of a local currency is as follows:

· The Bank's minimum capital requirements for December 2023 are expected to be 14.7%, 16.9% and 19.9% for CET 1 ratio, Tier 1 ratio, and Total capital ratio respectively.  

· The full loading of Basel III capital requirements was completed in March 2023.

Capital return

· In August 2023, the Board of Directors declared an interim dividend of GEL 3.06 per ordinary share in respect of the period ended 30 June 2023 to ordinary shareholders of Bank of Georgia Group PLC. The interim dividend was paid on 27 October 2023.

· In addition, the Board announced a further share buyback and cancellation programme totalling GEL 62 million. The Company commenced the share buyback and cancellation programme in October 2023, and as at 31 October 2023 the Company bought back 83,826 ordinary shares at a total cost of GEL 9.2 million, out of which 75,425 shares were cancelled as of 2 November 2023. 

SEGMENT RESULTS[8]

In the first quarter of 2023 we split the SME Banking segment from Retail Banking and transferred the majority of the Micro portfolio, where customers had business-related needs, to SME Banking. The remaining Micro portfolio has been transferred to Mass Retail. The SME segment has grown significantly over the past few years. In addition, the value proposition for business clients has been different from the value proposition for retail customers, leading to our decision to change the segmentation. The comparative figures have been restated accordingly to reflect this change.

RETAIL BANKING (RB)