Fixed Income Analysis /

TBC Bank: Q1 results highlights – Still worth holding on to

  • Like Bank of Georgia, TBC Bank also reported a net loss; this reflected high provisions and payment deferrals charge

  • The LCR improved in April, according to management; TBC Bank is negotiating additional funding arrangements

  • Medium-term targets remain unchanged, but 2020 will likely be a challenging year

Tolu Alamutu
Tolu Alamutu

Credit Research Analyst, Banks

Tellimer Research
26 May 2020
Published byTellimer Research

Still worth holding on to: TBC Bank (TBCBGE) reported results for Q1 20 on May 20. With enough pages and slides of disclosures to rival some of the world’s longest novels (well, almost!) there was a lot for those in the analyst and investor community to sink their teeth into. The bank disclosed a net loss of GEL57mn. This compares to net income of GEL133mn in Q1 19. As at Bank of Georgia, the loss at TBC Bank reflects two key factors – a one-off charge of GEL31mn related to payment deferrals on certain loans and front-loaded pandemic-related provisions of GEL216mn, which led to a significant rise in the cost of risk. The net loss was narrower than at Bank of Georgia (cGEL100mn net loss), but there was a smaller difference in the pre-tax result of both banks (GEL113mn pre-tax loss at Bank of Georgia versus GEL94mn pre-tax loss at TBC Bank). Pre-provision operating performance was solid – revenues improved yoy and costs rose by a modest 3% versus Q1 19. TBC Bank booked NBG-mandated provisions under local accounting standards, which impacted capital ratios. However, these ratios remain above the new regulatory minimums. This bank's liquidity ratio was almost 108%, which is lower than at Bank of Georgia but above the regulatory requirement. Further, the LCR improved in April. Turning to the NPL ratio, at 2.9%, this ratio this was lower than at end-March 2019, but is likely to rise due to the anticipated pandemic-related asset quality deterioration. Interestingly. TBC Bank has no upside scenario in macroeconomic assumptions used to estimate expected credit losses – there is a baseline scenario with GDP shrinking 5% this year (80% probability) and a downside scenario with a 10% drop in GDP (20% probability). The outlook is clearly very challenging. However, actions taken by Georgia’s major banks, the regulator and other authorities should mean that Bank of Georgia and TBC Bank are in a good enough position to weather the effects of the Covid-19 pandemic. We reiterate our Hold recommendations on TBCBGE bonds.

The regulator appears, again: TBC Bank hosted a conference call, which featured the same Vice Governor of the NBG who participated in the Bank of Georgia call. The NBG presentation confirmed that the incidence of Covid-19 in Georgia has been much lower than in many other countries in the region and detailed Georgia’s response to the pandemic. The total impact of declines in tourism, remittances, imports, exports and FDI is expected to be about US$1.4bn. This compares to US$1.6n in support, which Georgia has received from various IFIs. FC reserves are expected to remain stable this year, at US$3.5bn and the sovereign does not expect to return to the eurobond market any time soon. The NBG also stated that further monetary easing should be expected, and FX intervention is to continue. GEL600mn in long-term funding has been provided to the banking sector. In addition, the NBG remains committed to supporting banking sector stability through additional forbearance measures and through liquidity support in local and foreign currencies. However, Georgia’s regulator has so far taken a more conservative view on loss recognition and accounting than the ECB, by requiring front-loaded provisions and requiring deductions of this from CET1. The NBG sees the banking sector’s fundamentals as strong. The sector LCR exceeds the regulatory limit and the average CET1 ratio is 3.3ppts higher than the NBG requires. This equates to a GEL1.4bn core capital buffer. Tier 1 and total capital ratios are 3.4ppts and 3.6ppts above the regulatory minimums. Regarding coupon payments on AT1 instruments, the NBG Vice Governor reiterated that international practice on loss absorption is being observed. Having said that, the NBG sees no immediate need to restrict coupon payments and ‘will do everything’ to avoid coupon skips, which are still seen as a last resort.

Solid net interest income, higher FX gains: Operating revenue of GEL290mn was almost 7% higher than a year ago, reflecting solid net interest income and higher FX gains. Net interest income improved to GEL208mn from GEL201mn a year ago as loan growth helped offset continued margin contraction (due to regulatory changes, lower FC loan yields, higher LC funding costs). Net interest income declined qoq, and management expects another qoq decline in this quarter, but sees this revenue line improving from Q3. Net fee and commission income of GEL44mn was 4% higher than a year ago but 21% lower than in Q4 19 reflecting reduced activity in March due to the pandemic as well as seasonally-high commissions in the final quarter of last year. TBC Bank also reported other operating income of GEL39mn, up 34% yoy reflecting increased FX volatility and higher volumes. 

Modest yoy rise in costs: Operating expense of GEL106mn was down qoq due to seasonality and just 3% higher than a year ago despite significant GEL weakness. Staff costs and other administrative expenses both fell qoq. The cost/income ratio was 36.5% (Q4 19: 41.8%, Q1 19: 37.7%). TBC Bank will not pay annual bonuses or long-term grants to managers this year. The lender aims to keep this year’s efficiency ratio flat versus the FY 19 level of 35.9%. 

Asset quality is expected to weaken: As mentioned earlier, TBC Bank front-loaded pandemic-related provisions. This meant that in Q1 20, provisions increased to GEL248mn from just GEL33mn a year ago. About GEL211mn of the provision charge relates to Covid-19. Most of this (GEL144mn) was booked against retail exposures, with MSMEs (GEL47mn) and corporates (GEL20mn) accounting for much smaller amounts. Management stated that it was too early to discuss releasing provisions, given the somewhat challenging outlook. TBC Bank also booked a charge on the change in present value of loans due to payment deferrals. According to TBC Bank, 32% of corporates, 59% of MSMEs and 77% of retail customers opted to defer principal and interest payments by three months. This equates to 55% of the total portfolio at TBC Bank. Further, management disclosed that exposure to vulnerable sectors such as hospitality, leisure and real estate accounts for 17% of loans. The relatively long-term nature of these exposures, low LTVs and government support are seen as mitigating factors. Taken together, the bank’s disclosures suggest that asset quality deterioration is almost inevitable. A significant rise in the NPL ratio, which was 2.9% at the end of March (down from 3.3% a year earlier due to loan growth) would not be a surprise. Since the results disclosure, TBC Bank has also stated that the three-month grace period granted on loans will be extended ‘for a further three months to its most vulnerable retail and micro customers’. This could lead to another charge, but any such charge should be lower than in the first quarter as fewer customers may qualify for the additional deferrals.

More funding on the way: There are no near-term eurobond maturities – TBC Bank has only two eurobonds outstanding – a US$300mn 2024 senior bond and a US$125mn perp with a first call date in October 2024. However, the bank does have US$485mn in senior loans coming due this year and US$828mn in senior and subordinated loans due in 2021. Positively, the LCR remains above 100%. This ratio was 108% at the end of March. The LCR was down from 110% at end-19 and 117% a year ago, but improved in April. Since the start of this year, the bank has secured new borrowings of just under US$154mn and of GEL92mn. Part of this was secured in April. As a result, the LCR improved to 117% at the end of last month. In addition, there is a funding pipeline of US$450mn, comprising both on-lending and general purpose funds with 2 to 7 year maturities. The bank has no plans to buy back its eurobond.

Capital ratios remain above required minimums: The CET1, Tier 1 and total capital ratios declined to 9.1%, 12% and 16.7%, respectively. As at Bank of Georgia, TBC Bank booked a significant NBG-mandated credit loss under local accounting standards. This equated to 3.1% of the loan book. In addition, GEL weakness contributed to a 6.5% qoq rise in risk-weighted assets, to GEL16.6bn. We note that capital ratios remain much higher than the regulator requires. As an example, the CET1 ratio was 9.1%, which compares to the minimum requirement of 6.9%. Further, management disclosed that even under the bank’s ‘severe stress’ scenario – where GDP falls by 10%, the GEL versus USD exchange rate rises to 3.6, real estate prices fall by a quarter in USD terms and the cost of risk rises to 2-3% – the CET1 ratio would still be c8%. On exchange rate sensitivity, if the GEL falls 10% this would take 51-69bps off the Tier 1 and total capital ratios.

Medium-term targets, TBC Bank Uzbekistan: TBC Bank has reiterated medium-term targets of 10-15% annual loan growth, a cost/income ratio of less than 35% and a return on equity of over 20%. The lender also expects to pay out 25-35% of net income as dividends over time. Turning to Uzbekistan, banking operations are scheduled to commence in June. US$12.6mn has been invested in this operation and TBC Bank expects to make another US$9.4mn investment before year-end. The new entity is to break even by the end of 2022 and the ROE is expected to be in the range of the group’s target. A loan book of up to US$700mn is forecast and operations in Uzbekistan are expected to account for 10-15% of net income in the medium term. There are no plans to acquire state-owned lenders, which may come up for sale. No further detail was given on the planned partnership with the EBRD and other DFIs.