The FINANCIAL -- Bank of Georgia (LSE: BGEO, GSE: GEB) Georgia’s leading universal bank reported a Q3 2008 net loss of GEL 59.0 million (USD 1 = GEL 1,49). Bank said the net loss is mainly due to the extraordinary increase in Net Provision Expense (GEL 103.2 million for the quarter) related to the military conflict between Georgia and Russia in August 2008. Consolidated Net Income for nine months of 2008 amounted to GEL 1.3 million. Bellow is the latest data provided by BGEO.
“We are pleased to report that despite the conflict between Russia and Georgia in August 2008 and intensifying global financial crisis Bank of Georgia has a strong capital base, solid liquidity position and clearly visible wholesale funding pipeline”, Nicholas Enukidze, Chairman of the Supervisory Board.
“Following the Conflict, we made significant loan loss provisions, which, in our view, are based on conservative macro economic assumptions and are more than adequate to cover all potential Conflict-related losses in the loan portfolio. Despite these provisions our capital base remains strong and well above the requirements of NBG. Our liquidity position is solid despite significant Conflict-related deposit outflow in Q3 2008. Responding to increasingly challenging market environment we plan to maintain a highly conservative approach to liquidity management”.
“We expect to further improve our liquidity position through sizeable wholesale funding transactions mentioned in our previous press releases. The Conflict and the global financial crisis have forced us to temporarily put on hold our plans to reduce the Bank’s involvement in several of its non-core subsidiaries, including Aldagi BCI, GTAM and Liberty Consumer. However, we plan to re-launch these transactions as soon as the market environment permits”, commented Nicholas Enukidze, Chairman of the Supervisory Board.
In Q3 2008 the Bank’s Total Operating Income (Revenue) increased by 52.9% to GEL 85.9 million. Net Interest Income grew by 75.9% to GEL 58.9 million and Net Non-Interest Income amounted to GEL 27.1 million up 19.1%.
Increased interest rates on banking products and growing share of higher-yielding retail loans in the Bank’s loan portfolio continued to drive Interest Income growth during the quarter.
The Net Interest Margin increased to 9.8% in Q3 2008 from 9.1% in Q2 2008, 8.9% in Q1 2008 and 7.6% in Q3 2007, reflecting the growth of Net Interest Income and the decrease of interest expense resulting from the deposit outflow during the quarter and the repayment of US$55 million first tranche of the Bank’s US$123.5 million syndicated loan received in August 2007.
The decrease of Net Income from Documentary Operations (GEL 1.7 million, down 9.8% q-o-q and down by 6.9% y-o-y) and of Net Foreign Currency Related Income (GEL 9.4 million, down by 9.3% q-o-q, and up 51.4% y-o-y), was a result of the decrease of foreign exchange trading volumes during September, in the aftermath of the Conflict, and low foreign exchange (GEL/USD) volatility during the quarter. Net Fee and Commission Income grew by 7.7% q-o-q during the quarter (up 58.5% y-o-y) and reached GEL 10.9 million. Net Other Non-Interest Income amounted to GEL 5.0 million during Q3 2008, down 34.7% q-o-q and down 35.7% y-o-y and was largely a reflection of disrupted capital markets affecting the operations of Galt & Taggart Securities (“GTS”), the Bank’s brokerage subsidiary. The 34.7% decline in Net Other Non-Interest Income was the main contributor to the 10.1% q-o-q decrease in Net Non-Interest Income for the quarter, which amounted to GEL 27.1 million, up 19.1% y-o-y. Consolidated Recurring Operating Costs for the quarter grew by 1.6% q-o-q (up 70.5% y-o-y) to GEL 49.6 million, resulting in Net Normalized Operating Income (“NNOI”) of GEL 36.3 million, a 34.1% increase y-o-y (down 2.1% q-o-q). The Bank’s Net Non-Recurring Cost of GEL 2.6 million in Q3 2008 (25.9% y-o-y), was largely due to the unplanned costs associated with the Conflict.
YTD 2008 Summary In nine months of 2008 the Bank’s Total Operating Income (Revenue) increased by 69.3% y-o-y to GEL 252.9 million, driven by an 81.9% increase y-o-y in Net Interest Income and a 50.0% increase y-o-y in Net Non-Interest Income. Total Recurring Operating Costs increased by 81.0% y-o-y to GEL 143.0 million. NNOI grew 56.2% y-o-y to GEL 110.0 million. The Bank reported Net Profit of GEL 1.3 million for nine months of 2008 due to the Conflict-related increase in Net Provision Expense to GEL 103.2 million in Q3 2008.
On 30 September 2008 the Bank’s consolidated Total Assets amounted to GEL 3.2 billion (up 31.2% y-o-y, up 6.8% year-to-date and down 7.2% in Q3 2008 as compared with Q2 2008 or q-o-q). Gross Loans stood at GEL 2,060 million (up 58.1% y-o-y, up 20% year-to-date and down 2.2% q-o-q). Corporate Gross Loans to Clients in Georgia stood at GEL 795.8 million (up 11.2% y-o-y, down 1.4% year-to-date and down 9.6% q-o-q). Retail Gross Loans to Clients in Georgia reached GEL 930.9 million (up 74.4% y-o-y, up 44.5% year-to-date and up 1.0% q-o-q). Wealth Management Gross Loans to Clients in Georgia amounted to GEL 45.2 million (up 31.6% y-o-y, up 2.2% year-to-date and up 6.0% q-o-q). UBDP accounted for 10.7% and
12.5% of the Bank’s Total Assets and Total Gross Loans, respectively. BNB accounted for 2.1% and 1.7% of the Bank’s Total Assets and Total Gross Loans, respectively. As of 30 September 2008 the Bank’s consolidated Total Liabilities stood at GEL 2.4 billion (up 24.6% y-o-y, down 2.5% year-to-date and down 7.7% q-o-q). Against the background of intensifying competition for deposits in Georgia and 11.7% appreciation of Georgian Lari against the US dollar during nine months of 2008. Client Deposits in Georgia amounted to GEL 972.6 million (down 7.9% y-o-y and down 16.6% q-o-q). Bank of Georgia ‟s Consolidated Client Deposits stood at GEL 1,202 million (up 12.9%y-o-y, down 11.3% year-to-date and down 13.9% q-o-q).
As of 30 September 2008 Bank of Georgia on standalone basis held market share of 32.9%, 32.6% and 27.8% by total assets, gross loans, and deposits, respectively in Georgia8. As of 30 September 2008 the Bank’s Shareholders‟ Equity amounted to GEL 739.3 million, (up GEL 181.4 million year-to-date, up GEL 274.4 million y-o-y and down GEL 43.7 million q-o-q. The Bank’s equity book value per share stood at GEL 23.66 (US$16.84) as at 30 September 2008, up 38.2% y-o-y, up 14.7% year-to-date and down 5.6% q-o-q.
Bank of Georgia (Standalone) Discussion of the impact of the Conflict Deposits In Q3 2008, the Bank’s deposits in Georgia decreased by GEL 194 million (or 16.6% q-o-q) to GEL 972.6 million. The decrease of deposits was primarily the result of retail and corporate deposit withdrawals during the Conflict, as well as unusually slow deposit inflows and high withdrawals during post-Conflict period from corporate clients, which experienced business interruptions and loss of revenue during the Conflict. The decrease in deposits during the Conflict was amplified by lending restrictions imposed on all Georgian banks by NBG until the end of August 2008. Due to this restriction, many corporate customers, who repaid their loans in August (total corporate loan repayments in August amounted to GEL 81.7 million) were unable to draw down their existing credit lines, thus affecting inflows on corporate current accounts. The reduction of the deposits was also attributed to the appreciation of Lari against USD by approximately 1% and EURO by approximately 10% in Q3 2008 also contributed notably to the decrease in deposits. Capital Adequacy, Liquidity and Leverage According to the requirement of NBG Tier I Capital Adequacy Ratio should be no less than 8% and Total Capital Adequacy Ratio no less than 12%.
As of 30 September 2008, the Bank’s Tier I Capital Adequacy Ratio was 18.2% and Total Capital Adequacy Ratio was 15.5% by NBG standards. The Bank’s Tier I Capital Adequacy Ratio was 24.7% and Total Capital Adequacy Ratio was 25.3% by BIS standards. The Bank’s NBG Liquidity Ratio stood at approximately 34% on 31 July 2008 and decreased to 27% on 30 September 2008, still well above the NBG requirement of 20%. The Bank’s leverage ratio (Total Liabilities to Shareholders Equity) stood at 3.27x as of 30 September 2008, down from 3.35x on June 2008, despite extraordinary Conflict-related loan loss provisions booked by the Bank. Provisions The Bank booked net loan loss provisions of GEL 103.9 million in Q3 2008, as compared to loan loss provisions of GEL 2.8 million in Q3 2007 and GEL 8.6 million in Q2 2008. The Bank’s management believes that these provisions are made based on conservative assumptions and should be sufficient to cover any potential Conflict-related loss in the loan portfolio. The increased provision resulted in the NPL Coverage of 554% as of 30 September 2008.
The Bank’s subsidiaries showed mixed results in Q3 2008. The Bank’s Ukrainian subsidiary, Universal Bank for Development and Partnership (“UBDP”), reported its second consecutive profitable quarter since the start of the reorganization in Q4 2007. UBDP‟s Net Income increased 9.7% q-o-q to GEL 0.72 million in Q3 2008. GTS, the Bank’s fully-owned investment banking subsidiary, which witnessed significant market disruptions in Ukraine and Georgia in Q3, reported a quarterly Net Loss of GEL 2.3 million. Aldagi BCI, the Bank’s fully-owned Georgian Insurance subsidiary, reported a quarterly Net Loss of GEL 26,000 compared with Net Income of GEL 36,000 in Q2 2008. As of Q3 2008 the quarterly results of Belarusky Narodny Bank (“BNB”) are fully consolidated into Bank of Georgia financial results for the period. As the acquisition of BNB was completed just few days before the end of the Q2 2008, the Bank’s equity interest in BNB was reported as Investments in Other Business Entities on the Bank’s 30 June 2008 Balance Sheet. In Q3 2008 BNB reported a Net Income of GEL 1.0 million.
Business Unit Overview
Corporate Banking (CB)9 Allocated Revenues grew 46.0% y-o-y to GEL 71.6 million in nine months of 2008, while Allocated Recurring Costs increased by 31.0% y-o-y to GEL 18.8 million. NNOI grew 52.2% y-o-y to GEL 52.8 million, contributing 48.0% to the consolidated NNOI.
Net Income decreased by 203.1% y-o-y to Net Loss of GEL 22.7 million, which was primarily due to the extraordinary conflict-related provisions booked by the Bank. On a quarterly basis, Allocated Revenues in Q3 2008 grew 40.7% y-o-y to GEL 24.7 million, up 8.1% q-o-q, while Allocated Recurring Costs decreased to GEL 4.6 million, down 15.3% y-o-y, down 36.2% q-o-q. Q3 2008 NNOI grew by 56.0% y-o-y to GEL 20.1 million, up 44.3% q-o-q, contributing 55.3% to the consolidated NNOI. Q3 2008 Net Loss equaled GEL 45.6 million. CB Gross Loans grew 11.2% y-o-y to GEL 795.8 million (down 1.4% year-to-date). Allocated Client Deposits stood at GEL 576.2 million down 14.1% y-o-y and down by 14.5% year-to-date. The reduction of deposits was mainly due to an outflow of deposits during the Conflict.
Retail Banking
Allocated Revenues grew 102.3% y-o-y to GEL 132.1 million in nine months of 2008, while Allocated Recurring Costs increased by 68.7% y-o-y to GEL 57.2 million. NNOI grew 138.5% y-o-y to GEL 74.9 million, contributing 68.1% to the consolidated NNOI. Net Income decreased 78.3% y-o-y to GEL 37.2 million. On a quarterly basis, Allocated Revenues in Q3 2008 grew 118.3% y-o-y to GEL 50.6 million, up 15.6% q-o-q, while Allocated Recurring Costs grew to GEL 18.5 million, up 46.9% y-o-y and down 10.2% q-o-q. Q3 2008 NNOI grew by 203.5% y-o-y to GEL 32.1 million, up 38.7% q-o-q, contributing 88.4% to the consolidated NNOI.
Quarterly Net Loss in Q3 2008 equaled GEL 17.2 million, compared to Net Income of GEL 12.8 in Q2 2008 and Net Income of GEL 6.1 in Q3 2007. RB Gross Loans grew 74.4% y-o-y to GEL 930.9 million (up 44.5% year-to-date), driven by the increased lending activity due to high demand for mortgages, car loans, consumer loans, credit cards and other retail banking products predominantly in 1H 2008. Allocated Client Deposits increased 1.0% y-o-y to GEL 326.0 million (down 4.7% year-to-date), mainly due to the Conflict.
Wealth Management (WM)
In nine months of 2008 Allocated Revenues for WM was GEL 4.4 million, an increase of 25.8% y-o-y. Net Income equaled GEL 579 thousand as compared to Net Income of GEL 1.4 million for January – September 2007.
Allocated Revenues was GEL 1.5 million, up 19.1% q-o-q and up 10.8% y-o-y. Net Loss amounted to GEL 400 thousand in Q3 2008. WM Gross Loans stood at GEL 45.2 million an increase of 31.6% y-o-y and up 2.2% year-to-date. Allocated Client Deposits increased by 10.1% y-o-y (up 0.9% year-to-date) to GEL 70.4 million, largely due to the outflow of deposits during the Conflict. Ukraine UBDP‟s Total Operating Income (Revenue) amounted to GEL 22.0 million in nine months of 2008, while Recurring Costs stood at GEL 21.0 million, resulting in a Net Income of GEL 0.7 million. On a quarterly basis, UBDP‟s Revenue increased by 29.2% from Q2 2008 to GEL 8.7 million and Q3 2008 Net Income reached GEL 0.7 million, up 9.7% q-o-q.
UBDP‟s Total Assets decreased by 3.8% year-to-date to GEL 336.8 million, partially due to the 15% the appreciation of Lari against Hryvna. Gross Loans to Clients stood at GEL 256.8 million by 30 September 2008, down by 13.4% year-to-date. Client Deposits dropped 36.3 % year-to-date to GEL 170.6 million, reflecting the departure of several significant depositors due to UBDP‟s restructuring during 1H 2008. As expressed in Hryvna, UBDP‟s Client Deposits in Q3 2008 increased by UAH 23 million, up 3.8 % q-o-q. UBDP‟s Total Liabilities stood at GEL 229.2 million. UBDP‟s leverage is expected to decrease to just above 2.0x once the UAH 125 million capital increase, approved by the UBDP‟s Shareholders‟ Meeting in May 2008, is registered by the National Bank of Ukraine . UBDP has no international wholesale funding to be refinanced in 2008 and 2009. The Bank’s exposure to the real estate development sector is limited.
Belarus
BNB's Total Operating Income (Revenue) amounted to GEL 2.1 million in Q3 2008, while Recurring Costs stood at GEL 1.3 million, resulting in a Net Income of GEL 1.0 million. BNB‟s Total Assets stood at GEL 66.7 million and Gross Loans to Clients equaled GEL 34.7 million by 30 September 2008. Client Deposits amounted to GEL 26.6 million, while Total Liabilities stood at GEL 29.7 million.
Galt & Taggart Securities (GTS)
Difficult capital markets in Georgia and Ukraine (both GTS Index and the PFTS Index decreased by 68% in nine months of 2008) had a negative impact on GTS, Bank of Georgia ‟s fully-owned investment banking subsidiary. In Q3 2008 GTS reported a Net Loss of GEL 2.3 million in Q3 2008, which compares to Net Loss of GEL 2.6 million in Q2 2008. GTS‟ Revenue and Net Loss in Q3 2008 and Q2 2008 includes the loss from trading activities of GEL 5.8 million, which reflects loss on GTS‟ proprietary trading book in Ukraine . In Q3 2008, GTS initiated a strategic review of its operations and started the implementation of a significant cost-cutting program, including headcount reduction and tight cost control procedures, aimed at reducing its losses in Q4 2008 and returning to profitability in 2009. GTS‟ Q3 2008 results also include relevant severance payments related to the cost-cutting program.
Asset Management (AM)
The following key entities are included in the AM segment: Galt & Taggart Asset Management (“GTAM”), the Bank’s asset management arm, majority owned by the Bank; JSC Liberty Consumer (formerly JSC Galt & Taggart Capital (“GTC”), a GSE-listed consumer-and retail- oriented investment company managed by GTAM in which the Bank owns 65.24% equity stake and JSC SB Real Estate (“SBRE”), a real estate investment company managed by GTAM in which GTC owns 52.08% equity stake.
In the nine months of 2008 Revenues of Asset Management business segment amounted to GEL 14.6 million, which compares to GEL 2.4 million Revenues in the same period in 2007. Net Income for the period amounted to GEL 11.2 million as compared to GEL 1.2 million Net Loss for January – September 2007. On a quarterly basis, Revenue from Asset Management business segment amounted to GEL 477 thousand, down 30.4% y-o-y, and down 71.6% q-o-q and Net Loss was GEL 410 thousand, down 46.0% y-o-y and down112.0% q-o-q.
Insurance
Gross Premiums Written of Aldagi BCI, the Bank’s fully-owned Georgian insurance subsidiary, increased by 61.9% y-o-y to GEL 49.3 million. Net Premiums Earned grew 12.4% y-o-y to GEL 27.4 million. Revenues increased by 7.8% y-o-y to GEL 6.5 million for nine months of 2008. Net Loss for nine months of 2008 equaled GEL 361 thousand. On a quarterly basis, Revenues increased by 25.9% y-o-y to GEL 2.1 million, while Net Loss amounted to GEL 26 thousand for Q3 2008. The loss in 2008 was mainly due to Aldagi BCI‟s participation in the state healthcare program for socially vulnerable citizens and school teachers launched in Q4 2007, which brought 84,000 new clients to Aldagi BCI. The program which was originally scheduled to end in September – December 2008, was extended for another year at increased premiums per participant (60% upward adjustment to the premium). Unlike other major Georgian insurance companies, Aldagi BCI chose not to participate in a new similar program aimed at 550,000 socially vulnerable citizens which was launched in 2008.
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