Fixed Income Analysis /

Bank of Georgia: Q1 results highlights

  • The Q1 net loss reflects two factors – higher provisions and a charge related to payment deferrals

  • Liquidity metrics remain solid and there is more funding on the way

  • NBG-mandated provisions impacted capital ratios but these ratios are still higher than the regulator requires

Tolu Alamutu
Tolu Alamutu

Credit Research Analyst, Banks

Tellimer Research
26 May 2020
Published byTellimer Research

Buy recommendations unchanged: Bank of Georgia (GEBGG) reported results for Q1 20 on 14 May. The net loss of almost GEL100mn equated to an annualised ROE of -18.6%. Bank of Georgia reported net income of GEL102mn in Q1 19. The loss in the first quarter of this year reflects two factors – a one-off charge of almost GEL39mn related to the 3-month deferral of interest and principal payments on some loans and GEL220mn in through-the-cycle (3-year) pandemic provisions. Operating income actually improved yoy and despite recording a marked rise in costs, pre-provision profit of GEL169mn was about 1% higher than in Q1 19. NBG-mandated provisions booked under local accounting rules and GEL weakness meant that the bank’s capital ratios declined. However, these ratios remain well above the (new) minimum requirements. In addition, liquidity metrics remain strong and the bank is working to secure new long-term facilities. Concerning the rest of 2020, management commented that Q2 ‘will be rough’ – hardly a surprise, we think. April was a weak month due to the full lockdown, but May has been better so far. Management currently appears more constructive on Q3 and Q4, though uncertainties remain regarding the full impact of the Covid-19 pandemic. We reiterate our Buy recommendations on the GEBGG bonds.

Enter the regulator: A Vice Governor of the National Bank of Georgia, Papuna Lezhava, participated in the conference call, alongside Bank of Georgia management. He noted that Georgia’s GDP is expected to decline by 4% this year with exports, tourism and remittances seen falling significantly. On IMF funding, this totals US$1.5bn in debt and a US$100mn grant. Rates are concessional, with 15-20 year bullet maturities. Support of US$1.5bn is also expected for the real sector and the financial sector. Regarding payments on perpetual securities, the Vice Governor noted the optionality in the documentation of these instruments and said this was currently being tested. However, the Vice Governor also stated that investors remain important and there is little near-term risk to the coupons. Coupon skips are seen as a last resort and developments on coupon payments in other jurisdictions will be monitored. On forbearance measures, the regulator stated that banks will be given time to rebuild capital levels, to encourage lending, which will support the economic recovery. The NBG did not commit to reversing forbearance measures within any particular time frame – much will depend on how deep this crisis is. 

Revenues increased yoy: Operating revenue of GEL274mn was 6% higher than in the previous year reflecting a modest yoy increase in net interest income and higher foreign currency gains than in Q1 2019. Net interest income of GEL197mn was up 4% yoy, but down qoq as margins continued to contract and the slowdown in economic activity meant that qoq loan growth was just 1.5% on a constant currency basis. Margin contraction reflects a combination of factors including changes in the loan mix and a decline in loan yields, as well as changes in the refinancing rate towards the end of last year, which impacted funding costs (but had a positive impact on the yield on GEL-denominated liquid assets). Net fee and commission income fell 5% yoy to GEL40mn reflecting reduced customer activity and a decision to temporarily eliminate fees on certain digital platforms. Increased currency volatility meant that the Bank recorded GEL31mn in FX gains, 33% higher than in the previous year. This also contributed to the yoy rise in revenues. 

Costs/income ratio was under 40%: Operating expense of GEL106mn was up 15% yoy reflecting costs related to safety measures put in place to address the Covid-19 pandemic, as well as higher IT and digital service costs. As a result, the cost/income ratio was 3.1ppts higher than in Q1 19, at 38.6%. 

Significant rise in provisions: Bank of Georgia booked GEL241mn in expected credit losses, up from GEL43mn a year ago and GEL14mn in the previous quarter, reflecting the through-the-cycle provisions discussed much earlier. The cost of risk was 7.4% (Q1 19: 1.7%). Management noted that CoR had been declining due to better underwriting practices and an improving improved macro environment. Bank of Georgia now assigns a 50% probability to 2020 GDP growth of -2.7%, a 40% probability to the economy shrinking by 7% and just a 10% probability to 2.1% growth this year. A change in macro assumptions led to amendments in probability of default assumptions, and to the rise in provisions. Management believes the bank is now adequately provisioned across the whole cycle, but highlighted that GEL180-200mn in additional reserves may be required if the downside scenario (which includes -7% GDP growth this year) materialises. The NPL ratio was 2.1%, down from 3.3% at end-March 2019 reflecting write-offs carried out in late 2019. The NPL ratio was flat qoq – a 12% rise in total non-performing loans was offset by as-reported loan growth (which was driven by GEL weakness). No NPL guidance was given for end-2020, but the CoR is expected to revert to c1-1.4% in coming quarters. Management stated that the market for NPL sales in Georgia is not well established, but did not exclude funds entering the country for this purpose. 

Solid liquidity metrics, more funding on the way: The liquidity coverage ratio (LCR) was 121%, down from 137% at end-19 but still much higher than the minimum requirement. Bank of Georgia flagged that the NBG has said foreign and local currency LCR requirements may be revised and has suspended the 75% LC LCR requirement for now. The regulator has also broadened the criteria for repo-eligible securities. Management noted that over US$100mn in new LT borrowing has been secured in recent months, and the bank expects to agree on cUS$500mn in additional LT facilities in two to six months. The LDR was 121% on the bank’s calculations, up from 118% at end-19 as loan growth exceeded the as-reported rise in deposits. On a constant currency basis, deposit balances fell qoq, as there were pandemic-related outflows in late March. These have since reversed. Bank of Georgia still expects to repay the GEL-denominated eurobond maturing on June 1.

NBG-mandated provisions impacted capital ratios: Capital ratios declined as the bank set aside GEL400mn in general provisions under local accounting rules, as required by the regulator. This equates to 3.3% of loans. GEL weakness also contributed to the decline in reported ratios. The CET1, Tier 1 and total capital ratios were 8.3% (end-19: 11.5%), 10.6% (13.6%) and 15.3% (18.1%), respectively. These ratios are well above the new minimum requirements of 6.9% (CET1), 8.7% (Tier 1) and 13.3% (total capital) and the bank expects capitalisation to improve over time. Management noted that dividend payments have been suspended and Bank of Georgia drew down a second tranche of a Tier 2 facility in April. This US$55mn facility may add over 1.2ppts to CAR, based on end-March 2020 disclosures.