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Bank of Georgia pleased with outlook after decent first half

By Josh White

Date: Thursday 16 Aug 2018

Bank of Georgia pleased with outlook after decent first half

(Sharecast News) - Bank of Georgia Group issued its first half report on Thursday, reporting "strong" quarterly results with profit before non-recurring items and income tax totalling GEL 120.0m in the second quarter, up 31.0% year-on-year and 7.9% quarter-on-quarter.
The FTSE 250 company said that figure was GEL 231.2m during the first half, making for 27.8% growth year-on-year, while its return on average equity adjusted for demerger-related expenses and the one-off impact of the re-measurement of its deferred tax balances was 25.2% in the second quarter - up 110 basis points year-on-year and down 70 basis points quarter-on-quarter - and 25.5% in the first half - up 160 basis points year-on-year.

It said asset quality was "very strong" during the second quarter, with its non performing-to-gross loans ratio decreasing to 3.0% as at 30 June from 4.4% a year earlier.

The nonperforming loan coverage ratio stood at 110.5% at 30 June, compared to 111.4% at 31 March and 102.9% on 31 December adjusted for IFRS 9 impact, while its nonperforming loan coverage ratio adjusted for discounted value of collateral stood at 147.2% at 30 June, in line with 31 March and up from 131.5% at 30 June last year.

It said its asset quality improvement positively impacted the cost of risk ratio, which decreased to 1.7% in the second quarter from 2.2% a year earlier, and at 1.9% in the first half, down from 2.3% in the first half of 2017.

The bank said its loan book growth on a constant-currency basis reached 21.5% year-on-year and 2.8% quarter-on-quarter at 30 June.

Its retail banking loan book share in the total loan portfolio was 70.1% as at 30 June, up from 66.1% a year earlier.

Retail banking reportedly continued to deliver "strong growth" across all its business lines, with revenue there reaching GEL 179.2m in the second quarter, up 26.4% year-on-year, with half year revenue totaling GEL 349.9mln, up 23.6% on last year.

The company's retail banking net loan book reached GEL 5.38bn at 30 June, up 29.5% year-on-year and ahead 4.4% quarter-on-quarter.

Its growth on a constant-currency basis was 28.5% year-on-year, with the number of retail banking clients reaching 2.4 million at the end of the second quarter, up 6.7% year-on-year.

Bank of Georgia said its retail banking product-to-client ratio increased to 2.2 in the second quarter, from 2.0 at the same time last year.

"We continue to see solid growth in sales volumes and the number of products sold to our clients in our branches which have been transformed using our client-centric model, contributing to a 29.5% year-on-year growth in our retail loan book," the company's board said in its statement.

Retail banking client deposits increased to GEL 3.48bn at 30 June, up 33.2% year-on-year, with growth on a constant-currency basis put at 31.5% for the same period.

In corporate investment banking, Bank of Georgia said it saw continued further growth in the first half after delivering on its risk de-concentration and loan portfolio repositioning targets in 2017.

The division's net loan book amounted to GEL 2.25bn at 30 June, up 8.9% year-on-year and flat quarter-on-quarter on a constant currency basis.

It said the top 10 corporate investment banking client concentration was 10.2% at the end of the second quarter, down from 11.1% on 30 June last year and 10.3% on 31 March this year.

Assets under management in the investment management division increased to GEL 1.99bn in the second quarter, making for growth of 19.7% year-on-year and 8.6% quarter-on-quarter, which the bank said reflected higher bond issuance activity and servicing Georgia Capital by its brokerage arm Galt & Taggart.

De-dollarisation of the loan book and clients deposits continued during the period, with its loan book in the local currency accounting for 41.7% of the total book at 30 June, compared to 36.8% a year ago and 41.3% in the previous quarter.

"The dollarisation of our loan book has decreased since last year as the demand for local currency denominated loans was stronger than the demand for foreign currency denominated loans, supported by the government's de-dollarisation initiatives implemented at the beginning of last year and our goal to increase the share of local currency loans in our portfolio," the Bank of Georgia board explained.

Client deposits in the local currency represented 37.9% of the total deposit portfolio at 30 June, compared to 26.0% a year earlier and 33.8% on 31 March.

Bank of Georgia said it continued to attract local currency funding to further support the increased demand on the local currency lending, and the de-dollarisation of its loan book.

In the first half, it raised GEL 25m financing with maturity of up to three years from Swiss investment company Symbiotics, to finance the bank's micro, small and medium-sized enterprises.

Additionally, the board noted that the bank again co-operated with Black Sea Trade and Development Bank and secured GEL 75m, with tranches up to five years duration, to finance its small-to-medium enterprise lending.

Finally, the bank secured GEL 160m local currency financing with maturity of five years from Nederlandse Financierings - Maatschappij Voor Ontwikkelingslanden in July.

On 12 June, an amendment to the current corporate taxation model applicable to financial institutions, including banks and insurance businesses, became effective in the country.

The change implied a zero corporate tax rate on retained earnings and a 15% corporate tax rate on distributed earnings starting from 1 January 2023, instead of 1 January 2019 as previously enacted in 2016.

Bank of Georgia said the change had an immediate impact on deferred tax asset and deferred tax liability balances attributable to previously-recognised temporary differences arising from prior periods.

The group re-measured its deferred tax balances at 30 June, and recognised a GEL 30.3m one-off deferred income tax expense in the second quarter.

It said that impact was a reversal of the one-off deferred tax gain recognised by the group in 2016.

"There are currently a number of macroeconomic and currency pressures affecting some of Georgia's trading partners, particularly Turkey," said Bank of Georgia chief executive officer Kaha Kiknavelidze on the company's outlook.

"Georgia has a well-diversified economy and has no significant reliance on any single country or sector to drive its expected macroeconomic growth over the next few years."

Kiknavelidze said that during 2017, Georgia's exposure to Turkey accounted for 6.1% of GDP, through a combination of remittances, FDI, exports and tourist arrivals.

"The exchange rate of the Georgian lari to the dollar has weakened slightly during the last month, but only to levels seen during the beginning of the year.

"We are currently expecting the GEL-USD exchange rate to be approximately 2.70 at the end of the year."

Kiknavelidze said the bank to date had not seen any impact of the regional economic turbulence on its asset quality performance or expectations, but it was continuing to closely monitor developments in Turkey, including spillover effects, if any, on the Georgian economy.

"The bank has no material direct exposure to Turkey, while the indirect exposure is limited to GEL 180.6m tender, performance and advance guarantees, related to road construction projects in Georgia that are cash funded by the Georgian Government and operated by Turkish contractors."

Georgia's macroeconomic growth drivers remained "robust", Kiknavelidze claimed, adding that the bank expected that trend to continue, supported by the Georgian Government's ongoing growth-oriented reform programme, and "prudent" economic and monetary policies.

"Bank of Georgia is well positioned to capitalise on this growth and continue to deliver solid franchise growth, strong operational and capital efficiency, and superior returns to shareholders into the second half of 2018 and over the medium-term."

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