TBC Bank Group Regulatory News (TBCG)

TBC BANK GROUP PLC ("TBC Bank")

3Q AND 9M 2020 UNAUDITED CONSOLIDATED FINANCIAL RESULTS  

Forward-Looking Statements

This document contains forward-looking statements; such forward-looking statements contain known and unknown risks, uncertainties and other important factors, which may cause the actual results, performance or achievements of TBC Bank Group PLC ("the Bank" or the "Group") to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements are based on numerous assumptions regarding the Bank's present and future business strategies and the environment in which the Bank will operate in the future. Important factors that, in the view of the Bank, could cause actual results to differ materially from those discussed in the forward-looking statements include, among others, the achievement of anticipated levels of profitability, growth, cost and recent acquisitions, the impact of competitive pricing, the ability to obtain necessary regulatory approvals and licenses, the impact of developments in the Georgian economic, the impact of COVID-19, the political and legal environment, financial risk management and the impact of general business and global economic conditions.

None of the future projections, expectations, estimates or prospects in this document should be taken as forecasts or promises nor should they be taken as implying any indication, assurance or guarantee that the assumptions on which such future projections, expectations, estimates or prospects are based are accurate or exhaustive or, in the case of the assumptions, entirely covered in the document. These forward-looking statements speak only as of the date they are made, and subject to compliance with applicable law and regulation the Bank expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained in the document to reflect actual results, changes in assumptions or changes in factors affecting those statements.

Certain financial information contained in this presentation, which is prepared on the basis of the Group's accounting policies applied consistently from year to year, has been extracted from the Group's unaudited management's accounts and financial statements. The areas in which the management's accounts might differ from the International Financial Reporting Standards and/or U.S. generally accepted accounting principles could be significant; you should consult your own professional advisors and/or conduct your own due diligence for a complete and detailed understanding of such differences and any implications they might have on the relevant financial information contained in this presentation. Some numerical figures included in this report have been subjected to rounding adjustments. Accordingly, the numerical figures shown as totals in certain tables might not be an arithmetic aggregation of the figures that preceded them.

Third Quarter and Nine months of 2020 Unaudited Consolidated Financial Results Conference Call

TBC Bank Group PLC ("TBC PLC") publishes its unaudited consolidated financial results for the third quarter and the first nine months of 2020 on Wednesday, 18 November 2020 at 7.00 am GMT (11.00 am GET), while the results call will be held at 14.00 (GMT) / 15.00 (CET) / 9.00 (EST).

Please click the link below to join the webinar:

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Webinar ID: 933 3485 2476

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Or, use the following dial-ins:

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· United Kingdom: 0 800 031 5717 (Toll Free) or 0 800 260 5801 (Toll Free) or 0 800 358 2817 (Toll Free)

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Other international numbers available at: https://tbc.zoom.us/u/afRUs7Io5

The call will be held in two parts. The first part will be comprised of presentations and during the second part of the call, you will have the opportunity to ask questions. All participants will be muted throughout the webinar.

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Contacts

Table of Contents

3Q AND 9M 2020 Results Announcement

TBC Bank - Background

Financial Highlights

Letter from the Chief Executive Officer

Economic Overview

Unaudited Consolidated Financial Results Overview for 3Q 2020

Unaudited Consolidated Financial Results Overview for 9M 2020

Additional Disclosures

1) Subsidiaries of TBC Bank Group PLC

2) Our Ecosystems

3) TBC Insurance

4) Current state of matters with TBC Kredit

5) Loan book breakdown by stages according IFRS 9

TBC Bank Group PLC ("TBC Bank")

TBC Bank Announces Unaudited 3Q AND 9M 2020 Consolidated Financial Results:

Net Profit for 3Q 2020 up by 20.4% YoY to GEL 152.6 million

 European Union Market Abuse Regulation EU 596/2014 requires TBC Bank Group PLC to disclose that this announcement contains Inside Information, as defined in that Regulation.

TBC Bank - Background

TBC Bank is the largest banking group in Georgia, where 99.5% of its business is concentrated, with a 38.6% market share by total assets. It offers retail, corporate, and MSME banking nationwide.

These unaudited financial results are presented for TBC Bank Group PLC ("TBC Bank" or "the Group"), 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 ("IFRS"), 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's financial results are prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU") and the Companies Act 2006 applicable to companies reporting under IFRS.

Changes in accounting policies, IAS 16

In 2Q 2020, the accounting policy in relation to subsequent measurement of land, buildings and construction in progress was changed from the revaluation model to the cost model. This led to the restatement of appropriate balance sheet amounts in 3Q 2019, while no material impact was recorded in the income statement.

Financial Highlights

3Q 2020 P&L Highlights 

o Profit for the period amounted to GEL 152.6 million (3Q 2019: GEL 126.8 million)

o Return on average equity (ROE) stood at 22.0% (3Q 2019: 20.8%[1])

o Return on average assets (ROA) stood at 2.9% (3Q 2019: 2.8%1)

o Cost to income of TBC Bank Group PLC stood at 38.7% (3Q 2019: 39.9%)

o Standalone cost to income ratio of the Bank[2] was 33.5% (3Q 2019: 36.8%)

o Cost of risk stood at 0.2% (3Q 2019: 0.7%)

o Net interest margin (NIM) stood at 4.6% (3Q 2019: 5.1%)

o Basic earnings per share stood at 2.77 (3Q 2019: 2.28)

o Diluted earnings per share stood at 2.76 (3Q 2019: 2.27)

9M 2020 P&L Highlights 

o Profit for the period amounted to GEL 221.8 million (9M 2019: GEL 380.3 million)

o Return on average equity (ROE) stood at 11.0% (9M 2019: 22.1%[3])

o Return on average assets (ROA) stood at 1.5% (9M 2019: 3.1%4)

o Cost to income of TBC Bank Group PLC stood at 37.9% (9M 2019: 39.3%)

o Standalone cost to income ratio of the Bank2 was 32.4% (9M 2019: 35.6%)

o Cost of risk stood at 2.0%[4] (9M 2019: 1.1%)

o Net interest margin (NIM) stood at 4.7% (9M 2019: 5.7%)

o Basic earnings per share stood at 4.01 (9M 2019: 6.92)

o Diluted earnings per share stood at 3.98 (9M 2019: 6.88)

Balance Sheet Highlights as of 30 September 2020

o Total assets amounted to GEL 21,867.0 million, up by 20.7% YoY

o Gross loans and advances to customers stood at GEL 14,590.8 million, up by 24.9% YoY or at 15.2% on a constant currency basis

o Net loans to deposits + IFI[5] funding stood at 97.5%, up by 0.6 pp YoY, and Regulatory Net Stable Funding Ratio (NSFR), effective from 30 September 2019, stood at 127.0%

o NPLs were 3.5%, up by 0.6 pp YoY

o NPLs coverage ratios stood at 104.6%, or 215.8% with collateral, on 30 September 2020 compared to 97.7% or 209.9% with collateral, as of 30 September 2019

o Total customer deposits amounted to GEL 12,343.4 million, up by 24.7% YoY or at 16.0% on constant currency basis

o The Bank's Basel III CET 1, Tier 1 and Total Capital Adequacy Ratios per NBG methodology stood at 9.9%, 12.7%, and 17.1%, respectively, while minimum eased regulatory requirements amounted to of 6.9%, 8.7%, and 13.2%, respectively.

Market Shares as of September 2020[6]

o Market share by total assets reached 38.6%, down by 0.1 pp YoY

o Market share by total loans was 39.3%, up by 0.6 pp YoY

o Market share of total deposits reached 38.3%, down by 1.0 pp YoY

3Q 2020 operating highlights

o The number of affluent customers reached 93.6 thousand as of 30 September 2020, up by 36% YoY

o 95% of all transactions were conducted through digital channels (3Q 2019: 92%)

o The penetration ratio for internet or mobile banking[7] stood at 50% for 3Q 2020 (3Q 2019: 45%)

o The penetration ratio for mobile banking[8] stood at 47% for 3Q 2020 (3Q 2019: 41%)

* Certain amounts do not correspond to the 2019 consolidated financial statement as they reflect the change in accounting policy for PPE from the revaluation model to the cost method in 2Q 2020

* Prior to the change in PPE accounting policy from the revaluation model to the cost method, ROE stood at 20.4% and 21.6% for 3Q 2019 and 9M 2019, respectively, while ROA remained unchanged for both periods

** Prior to the change in PPE accounting policy from revaluation model to cost method, leverage stood at 7.3x for 3Q 2019 and 9M 2019

Letter from the Chief Executive Officer

I would like to present our financial and operating results for the third quarter 2020 and update you on recent economic developments in the country. I am delighted to see that the Georgian economy has embarked on a path towards recovery from the negative impacts of the pandemic as people and businesses are adjusting to the new reality. 

The economy continued to recover in the third quarter of the year with GDP declining by only 3.8% year-on-year during the quarter, compared with a 12.3% year-on-year drop in the second quarter. The recovery was particularly visible in September, with GDP decreasing only by 0.7%. While the return of tourism to its normal levels is unlikely before the second half of 2021, the recovery in other inflows has been strong: remittances grew 25.5% year-on-year in the third quarter and the drop in exports during the quarter moderated to 5.0% year-on-year, compared with a 24.7% decline in the second quarter. On the back of increasing domestic demand, imports also recovered, although at a slower pace than exports, which is positive for the trade balance. These trends highlight the resilience of the economy and its growth potential as fiscal stimulus is not the only driver behind the recovery. The banking sector continues to maintain strong capital and liquidity buffers and has started to support the growth of various sectors of the economy. There is a visible rebound in retail loan demand both for mortgage and non-mortgage products, with the former category being partially supported by the government's interest rate subsidy program. There are similar promising trends in the MSME segment. Loan growth in the corporate segment, however, will likely to take longer to return to its pre-pandemic levels.

It is important to highlight that despite the number of challenges, broader macroeconomic stability was also maintained during the quarter. The NBG managed to bring the inflation close to its target by maintaining a prudent key policy rate stance and supporting the GEL through regular interventions on the currency market. The annual inflation rate was 3.8% at the end of September, compared with 6.1% at the end of June. Despite the sizable interventions, the central bank's net international reserves remained broadly at the same level throughout the year as it utilized additional external financing raised by the government.

Unfortunately, the second wave of the pandemic, which started at the beginning of September, together with the regional conflict between Armenia and Azerbaijan, is putting downward pressure on the economic recovery. At the same time, significant progress is made in terms of vaccine development and the regional conflict appears to be settled through the peace agreement. Therefore, in the light of the given developments and stronger-than-expected recovery, we maintain our growth projection for 2020 at around -5.0%. As for 2021, we expect the economy to substantially recover to its 2019 level with projected year-on-year growth of around 4.5%. Our projection is broadly consistent with the most recent forecasts by the IMF with -5.0% drop in 2020 and 4.3% recovery in 2021.

Our results take place against the backdrop of Georgia's national parliamentary elections, which were held on 31 October. At this point, results from the Central Election Commission suggest the ruling Georgian Dream party will likely retain a majority of seats, although the opposition is challenging these results. TBC expects no material changes in the country's long-term vision and pro-market approach, as well as continued business friendly environment.

Strong financial performance

We recorded strong financial results in the third quarter 2020. Our net profit amounted to GEL 152.6 million, up by 20.4% year-on-year, mainly driven by an increase in net interest income and a decrease in credit loss allowances. Over the same period, due to our increased focus on cost efficiency, we managed to keep our operating expenses almost flat, which resulted in a cost-to-income ratio of 38.7%, down by 1.2 percentage points year-on-year. In addition, the Bank's standalone cost-to-income ratio[11] stood at 33.5% in the third quarter 2020, compared with 36.8% a year ago. As a result, in the third quarter 2020 the Group delivered a return on equity of 22.0% and return on assets of 2.9%.

In line with our expectations communicated in August, our net interest margin in the third quarter increased by 0.3 percentage points quarter-on-quarter and amounted to 4.6%, primarily driven by an increase in interest rates on GEL retail loans and a decrease in cost of funding resulting from the continuing easing of pressure on GEL funding. In addition, net fee and commission income demonstrated strong growth QoQ and increased by 20.3%, driven by revival of economic activities.

Also, as expected, our non-performing loan (NPL) ratio increased in the third quarter as the impact of COVID-19 started to materialize, and amounted to 3.5% compared with 2.9% at the end of the previous quarter. However, our NPLs remain well covered both with provisions and collateral: our NPL coverage ratios with and without collateral stood at 216% and 105% respectively. At the same time, given limited new loan disbursements and the fact that we continue to view the front-loaded provisions created in the first quarter 2020 as sufficient to cover any COVID-19 related losses, our cost of risk ratio in the third quarter remained low at 0.2%, or at -0.2% on constant currency terms.

Our loan book remained broadly stable on a quarter-on-quarter basis, growing by 1.4% on constant currency terms, which translated into 39.3% market share. Over the quarter, deposits increased by 12.7% on constant currency terms. As a result, our market share in total deposits amounted to 38.3% as of 30 September 2020.

Our liquidity and capital positions remain strong. As of 30 September 2020, our net stable funding (NSFR) and liquidity coverage (LCR) ratios stood at 127% and 124% respectively. Our capital ratios remained broadly stable quarter-on-quarter as GEL depreciation offset the effect of net income generation. CET1, Tier 1 and total capital ratios stood at 9.9%, 12.7% and 17.1%, respectively, and remained comfortably above the eased minimum regulatory requirements by 3.0%, 3.9% and 3.8%, respectively.

Operating performance and recent developments

We continue to fine-tune our offerings to make them more tailored to our customers' needs. In this regard, we have launched two new products in our retail segment:

In addition, in August, we rebranded our private banking, formerly known as TBC Status, to TBC Concept and introduced a new private banking service proposition based on subscription model. This will allow TBC private banking to become more flexible and tailored to the specific needs of our customers. Furthermore, in October, we opened an entirely different, multi-functional space for our private banking customers, that will enable our guests to receive banking services and financial consultation with maximum comfort. I am delighted that in recognition of our efforts, TBC Bank was named the Best Private Bank in Georgia 2021 by Global Finance Magazine.

On the MSME side, we are introducing a brand new mobile banking app for businesses. The app, launched both for iOS and Android platforms, offers the same features and capabilities as our internet banking, while being more flexible and giving our clients the ability to use our services on-the-go. Our business app has a similar interface to our award-winning retail mobile banking application, which makes it familiar and easy to use, while it also features specifically created upgrades to meet the needs of business owners.

In July, our subsidiary, TBC Capital, acted as co-manager on the US$ 250 million green bond issue of Georgian Global Utilities (GGU). This notable transaction is Georgia's first green bond issuance, listed on the Irish Stock Exchange and led by a number of leading international investment banks.

I would also like to update you on our progress in relation to our international expansion initiatives in Uzbekistan and Germany:

· We have successfully rolled out the digital banking platform in Uzbekistan. As of 12 October, we completed 'friends and family' testing and the platform became available to the public in live beta mode. The Space app, which has been published on PlayMarket and the Appstore, is branded in Uzbekistan as TBC UZ and has already attracted more than 1,800 downloads and around 1,200 registered customers. Currently, our customers can open an account, order a debit card and make payments and transfers. Our service proposition will be gradually enriched by savings, lending and other products in line with our go-to-market approach. As we are a digital bank, we are operating a 'bricks & clicks' distribution model whereby the primary focus is on assisted onboarding service. We have also opened a second branch in Tashkent. At the same time, our Uzbek payments business, Payme, continued its rapid growth in the third quarter, increasing its revenue by 23% quarter-on-quarter, up to USD 1.5 million, and the number of users by 11%, up to 2.5 million over the same period.

· In light of the COVID-19 pandemic, we have decided to postpone our plans of launching our Space neobank in Germany.

Another important news for our shareholders is inclusion of TBC Bank Group PLC into the MSCI United Kingdom Small Cap Index as announced on 10 November 2020 by MSCI. The inclusion will be implemented at the close of Monday, November 30, 2020 and will take effect from the start of trading on Tuesday, December 1, 2020.

I am also delighted to inform you that we have recently published our first Sustainability Report, which provides comprehensive information about our impact on the economy, environment and society. As the largest banking group in the country, we are aware of our responsibility towards all our stakeholders and strive to serve as a role model for other companies by promoting the importance of ESG maters.

Finally, I would like to welcome our new CFO, Giorgi Megrelishvili, and wish him success in his new role. Giorgi joined the bank in March this year and, given his very valuable skills and experience, has already become a great addition to our team and the company. We look forward to having a long and successful journey together. I would also like to thank Giorgi Shagidze for his tremendous contribution towards the development of our company over the past 10 years and wish him all the very best with his future endeavors.

Outlook

In the post-COVID-19 reality, when the need for remote solutions has soared, our strong focus on digitalization has become ever more relevant. Thus, we remain committed to our vision of making people's life easier by creating customer centric, digital financial solutions, integrated with other products and services used by our clients on a daily basis. In doing so, we are leveraging our strong digital capabilities and advanced data analytics.

In the medium term, we remain committed to our guidance: ROE of above 20%, a cost to income ratio below 35%, a dividend pay-out ratio of 25-35% and loan book growth of around 10-15%.

Economic Overview

Economic growth

After a sharp 12.3% YoY GDP decrease in the second quarter of 2020, the economy started to recover with GDP drop coming in at -5.5% in July, -5.3% in August and only -0.7% YoY in September. Accordingly, the Georgian economy dropped by 3.8% YoY in Q3 and by 5.0% YoY in the first nine months of 2020 per initial estimates of Geostat. Strong rebound mostly reflects improving performance of non-tourism economy supported by the better-than-expected performance of remittance and exports inflows as well as solid fiscal stimulus. According to TBC Capital estimates, in the baseline scenario the GDP drop is expected to be around 5.0% before recovering by around 4.5% in 2021.

External sector

With effectively closed borders since mid-March, the tourism industry has been hit the hardest as tourism inflows went down by an estimated 96.2%YoY in 3Q 2020, following 96.7% YoY and 26.1% YoY drops in 2Q 2020 and 1Q 2020, respectively. With the resurgence of infection rates globally and in Georgia since September 2020, there is unlikely to be any meaningful recovery in the remaining months of 2020. At the same time, significant progress has been made in development of vaccine candidates and potentially its broader availability starting from 1H 2021 should support the gradual recovery of tourism inflows from the second half of 2021.

Unlike tourism, remittances and exports of goods have performed strongly since the lows of Q2 2020. Following a 24.7% YoY drop in Q2 2020, the decline in exports moderated to 5.0% YoY in Q3 2020 with growth even turning to a positive 8.6% YoY in September 2020. Traditional export commodities such as wines (-5.5% YoY in Q3) and mineral waters (-1.7% YoY in Q3) stayed somewhat resilient, while hazelnuts (+81.8% YoY in Q3) increased notably. Re-exports of copper ores also contributed positively (+23.8% YoY in Q3) to the overall exports dynamics. At the same time, re-exports of cars (-40.5% YoY in Q3) and medicaments (-28.4% YoY in Q3) remained among the most affected export commodities.

As domestic demand recovered compared to the beginning of the COVID-19 crisis, the decline in imports of goods also moderated in Q3 2020 to 12.8% YoY, compared to a 30.2% decline in Q2. Imports of industrial supplies (+3.3% YoY in Q3) turned positive, mostly on the back of copper ores. Foods and beverages (-9.3% YoY in Q3) and consumer goods (-14.1% YoY in Q3) also contributed to the recovering dynamics of imports. On the other hand, fuel (-32.1% YoY in Q3) and transport equipment (-25.6% YoY in Q3) declined sharply. As the recovery in exports is stronger than in imports, the balance of trade in goods continues to improve, although at a more moderate pace than at the beginning of the crisis.

At the same time, remittance inflows, which make up around 20% of household disposable income in Georgia, continue stronger-than-expected performance. Specifically, after a 9.8% drop in the second quarter, a quick recovery was apparent in the third quarter and remittance inflows posted 25.5% YoY increase. While some of the recovery in digital transfers was likely due to the restrictions of physical travel, there has still been an overall increase, as in the previous years the share of physical travel was not large.

FDI inflows in Georgia increased marginally by 0.5% YoY to USD 237.8 million in 2Q 2020. The reinvestment of earnings contributed positively (+63.5% YoY in Q2), while equity and debt inflows declined considerably.

Important to note that military conflicted in the region between Armenia and Azerbaijan, that posed downside risks for the Georgia , seems to be resolved with the peace agreement between the two sides.

Fiscal stimulus 

Fiscal spending has strongly supported the economic recovery in 3Q 2020. The budget deficit amounted to an estimated 8.1% of GDP in 9m, compared to 1.6% in the same period a year ago. Overall, the budget deficit for 2020 is planned at 8.7% of GDP, largely to be financed by additional external government borrowings. Fiscal stimulus is expected to stay sizeable in 2021 as well, with deficit projected at 7.6% of GDP - supporting the economy until the tourism inflows start to recover.

Credit growth

Bank credit growth weakened to 12.0% YoY on FX adjusted terms by the end of September 2020, compared to 13.9% YoY growth by the end of 2Q 2020. In terms of the segments, corporate lending slowed to 12.6%, while MSME loan book growth was somewhat higher at +15.3% YoY compared to +14.1% YoY in June. At the same time, retail lending, with 9.3% YoY growth by the end of August 2020 continued to recover on the back of strong mortgage demand, which was also backed by the state mortgage subsidy scheme. The latest indicators also show a strong recovery in non-mortgage lending.

Inflation, monetary policy and the exchange rate

Following an uptick in inflation in April and May 2020, mostly reflecting the increase of food prices, annual inflation retreated to 3.8% in September 2020 on the back of declining food and energy prices as well as the high base effect. Despite declining inflation, the NBG remained cautious as elevated FX volatility, coupled with strong fiscal support and recovering domestic demand, still keep the inflationary risks considerable. Together with a cautious interest rate policy, the central bank actively pursed its FX interventions to channel government borrowing on the FX market. Since the beginning of 2020, the NBG has supplied around 750 mln USD to the FX market while its net international reserves even increased somewhat, reinforced by the additional government borrowing.

As of the end of September 2020, the USD/GEL exchange rate of GEL depreciated by 11.3% YoY, while the EUR/GEL exchange rate depreciated by 19.0% YoY. The real effective exchange rate (REER) of the GEL weakened by 0.7% YoY in September 2020.

Going forward

According to the latest IMF mission statement[12], the Georgian economy is expected to drop by 5.0% in 2020 and recover by 4.3% in 2021. The projection is broadly consistent with TBC Capital's projection of around 5.0% decline and a 4.5% recovery. Notably, according to the IMF, Georgia maintains one of the highest long-term growth projections at 5.2% among its economic partners.

More information on the Georgian economy and financial sector can be found at www.tbccapital.ge.

Unaudited Consolidated Financial Results Overview for 3Q 2020

This statement provides a summary of the unaudited business and financial trends for 3Q 2020 for TBC Bank Group plc and its subsidiaries. The quarterly financial information and trends are unaudited.

TBC Bank Group PLC financial results are prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU") and the Companies Act 2006 applicable to companies reporting under IFRS.

Please note, that there might be slight differences in previous periods' figures due to rounding.

Changes in accounting policies, IAS 16

In 2Q 2020, the accounting policy in relation to subsequent measurement of land, buildings and construction in progress was changed from the revaluation model to the cost model. This led to the restatement of appropriate balance sheet amounts, in 3Q 2019, while no material impact was recorded in the income statement.

Net Interest Income

In 3 Q 2020, net interest income amounted to GEL 211.8 million, up by 9.4% YoY and 14.9% on a QoQ basis.

The YoY increase in interest income by GEL 59.8 million or 16.3% was primarily related to an increase in interest income from loans, which was driven by an increase in the gross loan portfolio by GEL 2,910.5 million, or 24.9%. This was partially offset by a 0.8 pp drop in loan yields across all segments, primarily driven by a decrease in the Libor rate, currency devaluation, as well as segment mix change. Furthermore, the increase in interest income was driven by the growth in interest income from investment securities, on the back of an increase in the respective portfolio by GEL 620.5 million, or 30.3%, as well as an increase in the respective yields by 1.6 pp, due to the refinance rate.

Over the same period, interest expense increased by GEL 36.4 million, or 20.1%, mainly driven by an increase in interest expense from deposits and other borrowed funds. The former increase was related to growth in the respective portfolio by GEL 2,446.1 million, or 24.7% YoY, out of which GEL 855.9 million (as of 30 September 2020) was Ministry of Finance (MOF) deposits. In addition, the increase in interest expense from deposits was driven by an increase in cost of GEL deposits by 1.4 pp, without MOF deposits growth of the respective yield would have been 0.9 pp, related to an increase in the refinance rate and currency devaluation. The increase in interest expense from other borrowed funds was due to an increase in the respective portfolio by GEL 505.3 million, or 14.9% driven by an increase in the average balance of the NBG loan. This increase was partially offset by the drop in the respective yield denominated in foreign currency by 1.2 pp on the back of decrease in Libor rate. Another driver was increase in interest expense from Senior and AT1 Bonds issued in June and July 2019, respectively in the total amount of US$ 425 million.

The increase in interest income on a QoQ basis by GEL 33.1 million, or 8.4%, was mainly triggered by an increase in interest income from loans to customers, which was due to an increase in GEL retail loan yields, as well as currency devaluation.

The increase in interest expense by GEL 4.9 million, or 2.3% on a QoQ basis, was primarily related to an increase in the deposit portfolio by 1,923.1 million, or 18.5%, out of which MOF deposits represented GEL 855.9 million (as of 30 September 2020). In addition, another driver was an increase in the respective yield by 0.3 pp, driven by MOF deposits, without the latter deposits, yield would have decreased by 0.1pp.

In 3Q 2020, our net gains from currency swaps decreased by 61.8% YoY and 19.5% on a QoQ basis, driven by the decline in the interest rate spread on the international markets, due to a decline in the federal funds rate.

In 3Q 2020, our NIM stood at 4.6%, down by 0.5 pp YoY and 0.3 pp on a QoQ basis.

Net fee and commission income

In 3Q 2020, net fee and commission income totalled GEL 47.5 million, up by 20.2% QoQ, and remained broadly stable on a YoY basis.

Fee and commission income remained broadly flat on a YoY basis due to the slow-down in economic actives related to the COVID-19 pandemic across all major categories. Over the same period, the increase in settlement transactions is related to the reclassification of certain fees (in the amount of GEL 4.2 million) from our Uzbek subsidiary Payme (Inspired LLC) from the "other" sub-category to settlement transactions.

The QoQ increase was spread across all categories, but was mostly attributable to net fee income from settlement transactions driven by the upturn in economic activity, as well as by the increase in other fee income related to one-off fee received from the GGU Eurobond issuance. Furthermore, Q3 card net fee and commission income includes a one-time interchange commission expense of payment processing companies, in the amount of GEL 9 million. It was almost fully offset by the cash back income received from the same companies.

Other Non-Interest Income

Total other non-interest income decreased by 13.1% YoY and increased by 29.6% QoQ, amounting to GEL 33.9 million in 3Q 2020.

The YoY decrease was related to a decline in net income from foreign currency operations, due to the lower scale of FX transactions in 3Q 2020 across all segments related to pandemic.

The QoQ growth was mainly due to an increase in other operating income due to low base of other operating income in 2Q, and an increase in FX operations, which was driven by an increased turnover in 3Q compared to 2Q, as well as by higher GEL volatility in September.

Net insurance premium earned after claims and acquisition costs increased substantially YoY since we observed a significant drop in motor and health insurance claims during the lock-down period related to the COVID-19 pandemic. More information about TBC insurance can be found in Annex 3 on page 39.

Credit Loss Allowance

Credit loss allowance for loans in 3Q 2020 amounted to GEL 13.4 million, which resulted in cost of risk of 0.2% or -0.2% at a constant currency basis, driven by slight recovery of provisions in the retail and corporate segments, which were partially offset by MSME segment.

*Cost of risk for 2Q 2020, includes COVID-19 related TBC Kredit credit loss allowances for loans, in the amount of GEL 9.0 million, which given its non-recurring nature was not annualized

Operating Expenses

In 3Q 2020, our operating expenses remained broadly stable YoY and increased by 17.8% QoQ.

The QoQ increase was mainly driven by the increase in administrative and other operating expenses, which was due to low base in 2Q related to reversal of rent expenses in 2Q 2020 in the amount of GEL 4.2 million, the renegotiations per IFRS 16, and increase in other provisions for liabilities and charges and professional expenses in 3Q. Another driver was the increase in staff costs on the back of higher sales-related bonuses in 3Q compared to 2Q, as well as low base in 2Q due to the reversal of share based payments expenses in 2Q accrued before the senior management decided to forgo their annual bonuses and LTIP awards for 2020.

As a result, in 3Q 2020, we continue to operate at high efficiency levels and our cost to income ratio stood at 38.7%, down by 1.2 pp YoY and broadly stable QoQ, while our standalone cost to income stood at 33.5%, down by 3.3 pp YoY and up by 1.2 pp on a QoQ basis.

* For the ratio calculation all relevant group recurring costs are allocated to the bank

NMF - no meaningful figures

Net Income

In 3Q 2020, we generated GEL 152.6 million in net profit up by 20.4% YoY, or 20.9% QoQ. The YoY increase was primarily due to an increase in net interest income and a decrease in credit loss allowances, while the increase on a QoQ basis was stimulated by increased operating income across the board, which was related to higher economic activity.

As a result, our ROE stood at 22.0%, up by 1.2 pp YoY, while ROA stood at 2.9%, up by 0.1 pp YoY.

*Prior to the change in PPE accounting policy from the revaluation model to the cost method, ROE stood at 20.4% while ROA remained unchanged in 3Q 2019

Funding and Liquidity

As of 30 September 2020, the total liquidity coverage ratio, as defined by the NBG, was 131.6%, above the 100% limit, while the LCR in GEL and FC stood at 87.7% and 162.8% respectively, above the respective limits of 75% and 100%.

However, in light of the COVID-19 pandemic, starting from May 2020 the NBG removed the minimum requirement on GEL LCR of 75%, for a one-year period. Despite the ease of requirement, we continue to operate with high liquidity buffers.

As of 30 September 2020, NSFR stood at 127.0%, compared to the regulatory limit of 100%, effective from September 2019.

Regulatory Capital

As of 30 September 2020, CET1 Capital increased by 6.6% QoQ, mainly due to net income generation, while Tier1 and Total Capital grew by 6.9% and 7.1% respectively, also supported by the increase in FX denominated AT1 bonds and subordinated loans, which was due to GEL depreciation.

There was a 7.6% QoQ increase in risk-weighted assets, which was mainly driven by the GEL depreciation.

Overall, our capital ratios remained broadly stable QoQ as income generation was offset by the GEL depreciation.

Loan Portfolio

As of 30 September 2020, the gross loan portfolio reached GEL 14,590.8 million, up by 7.0% QoQ or up by 1.4% on a constant currency basis. QoQ, our corporate loan portfolio decreased by 1.8% on a constant currency basis. This was mainly due to repayment by our large customer, GGU, on the back of issuing a green Eurobond co-managed by TBC Capital. The proportion of gross loans denominated in foreign currency increased by 0.7 pp QoQ and accounted for 61.4% of total loans, while on a constant currency basis the proportion of gross loans denominated in foreign currency decreased by 1.4 pp QoQ and stood at 59.3%.

As of 30 September 2020, our market share in total loans stood at 39.3%, down by 0.2 pp QoQ. Our loan market share in legal entities was 38.8%, down by 0.4 pp over the same period, and our loan market share in individuals stood at 39.8%, down by 0.1 pp QoQ.

Loan Portfolio Quality

Total PAR 30 increased by 0.4 pp on QoQ basis and stood at 1.7%. This increase was driven by an increase across all segments due to the low base in 2Q, which was related to the payment holidays offered to our customers.

As expected, the NPL ratio started to increased in 3Q as the COVID-19 impact began to materialize and amounted to 3.5% compared with 2.9% at the end of the previous quarter. However, we have created upfront COVID-19 related provisions in 1Q in the amount of GEL 211 million and, in 2Q, GEL 9 million for our Azeri subsidiary TBC Kredit.

Cost of risk 

In 3Q 2020, the total cost of risk on a constant currency basis amounted to -0.2%, driven by a slight recovery of provisions in the retail and corporate segments, which were partially offset by MSME. 

* Cost of risk in 2Q 2020 includes COVID-19 related TBC Kredit credit loss allowances for loans, in the amount of GEL 9 million, which given its non-recurring nature has not been annualized

* Cost of risk in 2Q 2020 includes COVID-19 related TBC Kredit credit loss allowances for loans, in the amount of GEL 9 million, which given its non-recurring nature has not been annualized

Deposit Portfolio

The total deposits portfolio increased by 18.5% QoQ and amounted to GEL 12,343.4 million, while on a constant currency basis, the deposit portfolio increased by 12.7%. The proportion of deposits denominated in a foreign currency decreased by 2.1 pp QoQ and accounted for 63.6 % of total deposits, while on a constant currency basis the proportion of deposits denominated in foreign currency decreased by 3.9 pp QoQ and stood at 61.7%.

As of 30 September 2020, our market share in deposits amounted to 38.3%, up by 1.2 pp QoQ, while our market share in deposits to legal entities stood at 38.2%, up by 2.4 pp over the same period. Our market share in deposits to individuals stood at 38.3%, up by 0.2% QoQ.

Segment definition and PL

Business Segments

The segment definitions are as follows:

· Corporate - a legal entity/group of affiliated entities with an annual revenue exceeding GEL 12.0 million or which have been granted facilities with more than GEL 5.0 million. Some other business customers may also be assigned to the corporate segment or transferred to the MSME segment on a discretionary basis;

· Retail - non-business individual customers; all individual customers are included in retail deposits;

· MSME - business customers who are not included in the corporate segment; or legal entities which have been granted a pawn shop loan; or individual customers of the fully-digital bank, Space; and

· Corporate centre and other operations - comprises the Treasury, other support and back office functions, and non-banking subsidiaries of the Group.

Business customers are all legal entities or individuals who have been granted a loan for business purposes.

Income Statement by Segments

Consolidated Financial Statements of TBC Bank Group PLC

Consolidated Statement of Profit or Loss and Other Comprehensive Income

Key Ratios

Average Balances

The average balances included in this document are calculated as the average of the relevant monthly balances as of each month-end. Balances have been extracted from TBC's unaudited and consolidated management accounts, which were prepared from TBC's accounting records. These were used by the management for monitoring and control purposes.

* Prior to the change in PPE accounting policy from the revaluation model to the cost method, ROE stood at 20.4%, while ROA remained unchanged in 3Q 2019

** Cost of risk for 2Q 2020 includes COVID-19 related TBC Kredit credit loss allowances for loans, in the amount of GEL 9.0 million, which given its non-recurring nature has not been annualized

*** Prior to the change in PPE accounting policy from the revaluation model to the cost method, Leverage stood at 7.3x for 3Q 2019

Ratio definitions

1. Return on average total equity (ROE) equals net income attributable to owners divided by the monthly average of total shareholders' equity attributable to the PLC's equity holders for the same period; annualised where applicable.

2. Return on average total assets (ROA) equals net income of the period divided by monthly average total assets for the same period; annualised where applicable.

3. Return on average total equity (ROE) before credit loss allowance equals net income attributable to owners excluding all credit loss allowance divided by the monthly average of total shareholders 'equity attributable to the PLC's equity holders for the same period.

4. Cost to income ratio equals total operating expenses for the period divided by the total revenue for the same period. (Revenue represents the sum of net interest income, net fee and commission income and other non-interest income).

5. Net interest margin (NIM) is net interest income divided by monthly average interest-earning assets; annualised where applicable. Interest-earning assets include investment securities excluding corporate shares, net investment in finance lease, net loans, and amounts due from credit institutions. The latter excludes all items from cash and cash equivalents, excludes EUR mandatory reserves with NBG that currently have negative interest, and includes other earning items from due from banks.

6. Loan yields equal interest income on loans and advances to customers divided by monthly average gross loans and advances to customers; annualised where applicable.

7. Deposit rates equal interest expense on customer accounts divided by monthly average total customer deposits; annualised where applicable.

8. Yields on interest earning assets equal total interest income divided by monthly average interest earning assets; annualised where applicable.

9. Cost of funding equals total interest expense divided by monthly average interest bearing liabilities; annualised where applicable.

10. Spread equals difference between yields on interest earning assets (including but not limited to yields on loans, securities and due from banks) and cost of funding (including but not limited to cost of deposits, cost on borrowings and due to banks).

11. Cost of risk equals credit loss allowance for loans to customers divided by monthly average gross loans and advances to customers; annualised where applicable.

12. PAR 90 to gross loans ratio equals loans for which principal or interest repayment is overdue for more than 90 days divided by the gross loan portfolio for the same period.

13. NPLs to gross loans equals loans with 90 days past due on principal or interest payments, and loans with a well-defined weakness, regardless of the existence of any past-due amount or of the number of days past due divided by the gross loan portfolio for the same period.

14. NPLs coverage ratio equals total credit loss allowance for loans to customers calculated per IFRS 9 divided by the NPL loans.

15. NPLs coverage with collateral ratio equals credit loss allowance for loans to customers per IFRS 9 plus the total collateral amount of NPL loans (excluding third party guarantees) discounted at 30-50% depending on segment type divided by the NPL loans.

16. Credit loss level to gross loans equals credit loss allowance for loans to customers divided by the gross loan portfolio for the same period.

17. Related party loans to total loans equals related party loans divided by the gross loan portfolio.

18. Top 10 borrowers to total portfolio equals the total loan amount of the top 10 borrowers divided by the gross loan portfolio.

19. Top 20 borrowers to total portfolio equals the total loan amount of the top 20 borrowers divided by the gross loan portfolio.

20. Net loans to deposits plus IFI funding ratio equals net loans divided by total deposits plus borrowings received from international financial institutions.

21. Net stable funding ratio equals the available amount of stable funding divided by the required amount of stable funding as defined by NBG in line with Basel III guidelines.

22. Liquidity coverage ratio equals high-quality liquid assets divided by the total net cash outflow amount as defined by the NBG.

23. Leverage equals total assets to total equity.

24. Regulatory CET 1 CAR equals CET 1 capital divided by total risk weighted assets, both calculated in accordance with the Pillar 1 requirements of the NBG Basel III standards. The reporting started from the end of 2017. Calculations are made for TBC Bank stand-alone, based on local standards.

25. Regulatory tier 1 CAR equals tier I capital divided by total risk weighted assets, both calculated in accordance with the Pillar 1 requirements of the NBG Basel III standards. The reporting started from the end of 2017. Calculations are made for TBC Bank stand-alone, based on local standards.

26. Regulatory total CAR equals total capital divided by total risk weighted assets, both calculated in accordance with the Pillar 1 requirements of the NBG Basel III standards. The reporting started from the end of 2017. Calculations are made for TBC Bank stand-alone, based on local standards.

Exchange Rates

To calculate the QoQ growth of the Balance Sheet items without the currency exchange rate effect, we used the USD/GEL exchange rate of 3.0552 as of 30 June 2020. As of 30 September 2020 the USD/GEL exchange rate equalled 3.2878. For P&L items growth calculations without currency effect, we used the average USD/GEL exchange rate for the following periods: 3Q 2020 of 3.1016, 2Q 2020 of 3.1395, 3Q 2019 of 2.9194.

Unaudited Consolidated Financial Results Overview for 9M 2020

This statement provides a summary of the unaudited business and financial trends for 9M 2020 for TBC Bank Group plc and its subsidiaries. The quarterly financial information and trends are unaudited.

TBC Bank Group PLC financial results are prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU") and the Companies Act 2006 applicable to companies reporting under IFRS.

Changes in accounting policies, IAS 16

In 2Q 2020, the accounting policy in relation to subsequent measurement of land, buildings and construction in progress was changed from the revaluation model to the cost model. This led to the restatement of appropriate balance sheet amounts, in 1Q 2020 and 2019, while no material impact was recorded in the income statement.

Net Interest Income

In 9M 2020, net interest income amounted to GEL 604.1 million, up by 2.0% YoY, whereby interest income increased by 16.2% and interest expense increased by 32.6%.

The YoY increase in interest income was mainly attributable to an increase in interest income from loans, which was driven by an increase in the gross loan portfolio by GEL 2,910.5 million, or 24.9%. This effect was partially offset by a 1.1 pp drop in loan yields across all segments, mainly related to a decrease in the Libor rate, currency devaluation, a change in segment mix towards corporate, and competition. In addition, growth was supported by interest income from investment securities, on the back of an increase in the respective portfolio of GEL 620.5 million, or 30.3%, as well as an increase in the respective yields by 1.2 pp over the same period, due to an increase in the refinance rate.

Our interest expense increased by 32.6%, which was primarily related to an increase in interest expense from other borrowed fund, debt securities in issue, and deposits. The increase in debt securities in issue was related to an increase in interest expense from the Senior and AT1 Bonds issued in June and July 2019, respectively, in the amount of US$ 425 million, while the other growth was driven by an increase in the respective portfolios and yields related to an increase in the refinance rate.

In 9M 2020, our NIM stood at 4.7%, down by 1.0 pp YoY.

Net fee and commission income

In 9M 2020, net fee and commission income totalled GEL 130.6 million, down by 1.4% YoY.

This slight YoY reduction is mainly related to a slow-down in economic activity due to the COVID-19 pandemic. The increase in settlement transactions is primary related to the reclassification of certain fees (in the amount of GEL 10.3 million in 9M 2020) from our Uzbek subsidiary Payme (Inspired LLC) from the "other" sub-category to settlement transactions. This decrease was partially offset by an increase in fees from guarantees issued and letters of credit due to an increase in the respective portfolio.

Other Non-Interest Income

Total other non-interest income remained broadly stable YoY and amounted to GEL 98.8 million in 9M 2020.

The decline in foreign currency operations was primarily attributable to slower economic activity in 2020 compared to the previous period, because of the COVID-19 pandemic. The former decrease was offset by an increase in net insurance premium, which grew substantially YoY since we observed a significant drop in motor and health insurance claims during the lock-down period related to the COVID-19 pandemic. More information about TBC insurance can be found in Annex 3 on page 39.

Credit Loss Allowance

Total credit loss allowance in 9M 2020 amounted to GEL 272.5 million. This significant increase on a YoY basis was driven by:

o an extra credit loss allowance booked in the first quarter, in the amount of GEL 215.7 million (or GEL 210.9 million for loans), to prepare for the potential impact of the COVID-19 pandemic on our borrowers; and

o COVID-19 related credit loss allowances for loans in the amount of GEL 9.0 million, which were created in our Azeri subsidiary, TBC Kredit, in the second quarter.

In 9M 2020, these impacts translated into an additional 1.6% cost of risk, which given its non-recurring nature was not annualized.

* Cost of risk for 9M 2020 consists COVID-19 related credit loss allowances in the amount of GEL 219.9 million, which given its non-recurring nature has not been annualized.

NMF - no meaningful figures

Operating Expenses

In 9M 2020, our total operating expenses decreased by 2.5% YoY.

The decrease was mainly related to a decrease in administrative and other expenses due to COVID-19 effects and included discretionary administrative expenses, such as consultation services and business trip expenses, as well as the impact of renegotiated rent expenses per IFRS 16 in the amount of GEL 4.2 million. Another driver was the reduced share based payment expense in staff costs, due to the fact that management waived their right to receive their annual bonus and LTIP awards for 2020.

Thus, in 9M 2020 our cost to income ratio stood at 37.9%, down by 1.4 pp YoY, while our standalone cost to income was 32.4%, down by 3.2 pp over the same period.

* For the ratio calculation all relevant group recurring costs are allocated to the bank

Net Income

In 9M 2020, we generated a GEL 221.8 million profit, which was affected by the following COVID-19 related charges:

· a net modification loss of financial instruments in the amount of GEL 35.9 million

· a COVID-19 related total credit loss allowance in the amount of GEL 224.7 million, out of which GEL 9.0 million is related to the credit loss allowances of our Azeri subsidiary, TBC Kredit.

As a result, our ROE stood at 11.0%, down by 11.1 pp YoY, while ROA stood at 1.5%, down by 1.6 pp over the same period.

* Prior to the change in PPE accounting policy from the revaluation model to the cost method, ROE stood at 21.6%, while ROA remained unchanged in 1H 2019

Funding and Liquidity

As of 30 September 2020, the total liquidity coverage ratio, as defined by the NBG, was 123.6%, above the 100% limit, while the LCR in GEL and FC stood at 118.0% and 126.4%, respectively, above the respective limits of 75% and 100%.

However, in the light of the COVID-19 pandemic, starting from May 2019, the NBG removed the minimum requirement on GEL LCR of 75%, for a one-year period. Despite the easing of the requirement, we continue to operate with high liquidity buffers.

As of 30 September 2020, NSFR stood at 127.0%, compared to the regulatory limit of 100%, effective from September 2019.

*Prior to the change in PPE accounting policy from the revaluation model to the cost method, Leverage stood at 7.3x as of 30 September 2019

Regulatory Capital

In 1Q 2020, due to the COVID-19 pandemic, the NBG implemented countercyclical measures to support the financial stability of the banking system and to ensure the provision of financial support to sectors of the economy affected by the current turmoil. In relation to capital adequacy requirements, the following measures have been taken:

· Postponing the phasing in of additional capital requirements planned in March 2020, with a 0.44 pp effect on TBC's CET 1;

· Allowing banks to use the conservation buffer (currently at 2.5pp on CET1) and 2/3 of the CICR buffer resulted in the release of 1.0-2.0% of capital across our CET1, Tier 1 and Total CAR;

· Leaving open the possibility of releasing all pillar 2 buffers (remaining 1/3 CICR, HHI and Net Grape buffers) in the range of 1.0-4.0% of capital across our CET1, Tier 1 and Total CAR 

As of 30 September 2020, the Bank's CET 1, Tier 1 and Total Capital adequacy ratios stood at 9.9%, 12.7% and 17.1%, respectively, comfortably above the respective eased minimum requirements of 6.9%, 8.7% and 13.2%.

The YoY decrease in capital ratios is mainly related to the COVID-19 related provisions of GEL 410 million, as required per local standards, as well as currency deprecation.