The FINANCIAL — In the third quarter of 2016, the Group delivered another quarter of strong results that reflect excellent performances from both our banking operations and increased earnings momentum from our investment businesses. All the businesses in the Group continue to perform well and deliver against our key strategic priorities.
During the third quarter, the Group delivered revenue of GEL 269.6 million and profit of GEL 141.5 million, up 24.5% and 75.0%, respectively. Earnings per share increased by 74.0% to GEL 3.55. In the first nine months of 2016, revenues totalled GEL 709.3 million, profit was GEL 339.8 million and earnings per share totalled GEL 8.12, up 15.3%, 57.9% and 47.4% respectively on the same period in 2015. The Group’s figures were positively affected by a number of “one-off” items in the reporting period, which are described in detail on page 4 of this release. Excluding the impact of these items, profit in the third quarter was GEL 106.9 million, up 24.9% year-on-year, and profit in the first nine months of 2016 totalled GEL 278.5 million, up 25.2% year-on-year. Book value per share at the end of the quarter was GEL 56.03, up 28.5% year-on-year. In the Banking business, profits grew by 22.3% year-on-year and 20.1% quarter-on-quarter supported, once again, by excellent franchise growth in the retail bank, where we continue to build our business in all segments and increased retail lending during the quarter by 6.1%. Margins have remained in our targeted range despite the continuing impact of high levels of excess liquidity, and the banking business has delivered a further reduction in the year-on-year cost of risk. The Return on Average Equity in the banking business continues to improve each quarter and was 22.8% for the first nine months of the year, and 24.7% in the third quarter. There continues to be an even stronger performance in the Group’s investment businesses, which have benefited from the full quarter inclusion of our pharma business GPC following its acquisition during the second quarter, and the first time consolidation of Georgia Global Utilities (GGU). EBITDA from the investment businesses more than doubled to GEL 85.9 million in the first nine months of 2016. At the BGEO Group level, revenue growth in the first nine months of 2016 was 15.3% year-on-year. In the third quarter of 2016, retail banking net interest income grew by 14.9% year-on-year, and 12.9% quarter-on-quarter, offsetting the expected decline in corporate banking net interest income as we continue to rebalance the retail/corporate business mix to further improve the return profile of the Bank and reduce concentration risk in the corporate lending portfolio. Pleasingly, the Corporate Investment Banking strategy is starting to deliver improved earnings, with 8.6% revenue growth and 15.5% profit growth quarter-on-quarter. In the first nine months of 2016, revenues from the investment businesses increased by 87.8% as a result of strong organic growth within the healthcare and real estate businesses and the impact of acquisitions. Operating expenses continue to be well controlled, with the year-on-year growth being largely driven by the significant impact of a number of acquisitions. In the third quarter, the Group’s revenue growth of 22.3%, compared to the second quarter, strongly exceeded the equivalent 14.6% growth in expenses. In addition to the strong earnings performance, the Group’s already high returns have further improved. In the banking business, despite carrying over GEL 700 million of average excess liquidity during the quarter, the return on average equity increased from 21.2% in the first quarter, to 22.5% in the second quarter, and 24.7% in the third quarter. In the healthcare services business, the EBITDA margin was 29.6% in the first nine months of the year, and 30% in the third quarter. The Group continues to demonstrate its high growth and high return characteristics. The Georgian economy remained resilient throughout the first nine months of 2016. Foreign Direct Investment continues to be very strong, and tourist numbers – a significant driver of US$ inflows for the country – continue to rise significantly. As a result, asset quality during the first nine months of the year remained robust with the NPL to Gross Loans ratio stable at 4.4%, whilst the NPL coverage ratio improved to 86.5% at 30 September 2016, compared to 85.8% at 30 June 2016. The NPL coverage ratio, adjusted for the discounted value of collateral, also improved, to 131.1%, from 129.7% over the same period. The annualised cost of risk ratio in the first nine months of 2016 was 2.2%, compared to 2.8% in the same period in 2015. Within our Investment Businesses, Georgia Healthcare Group (GHG) again delivered strong revenues of GEL 116.2 million in the third quarter, up 81.0% year-on-year, and 14.2% quarter-on-quarter. This continues to reflect a combination of good levels of organic growth (14.2 % year-on-year) and the impact of acquisitions. The healthcare services EBITDA margin continues to improve, and at 30.0% in the third quarter is now in line with GHG’s medium-term target of 30%. The recently announced acquisition (subject to regulatory approval) of a second pharma chain, ABC, will make GHG the number one player in the pharma market and provide additional synergies for GHG’s healthcare services and medical insurance businesses. GHG remains clearly on track to reach its target to more than double 2015 healthcare services revenues by 2018.
Our real estate business, m2 Real Estate, continues to develop its apartment projects very successfully, with its strong project execution and sales performance delivering a net profit of GEL 7.4 million in the third quarter. In June 2016, the Group announced that it was to acquire the remaining 75% equity stake in GGU, our water and utilities business, for a cash consideration of $70 million; this acquisition was completed in July 2016, and GGU is now fully consolidated into BGEO, with effect from 21 July 2016.
The Group has a significant opportunity to increase GGU’s operational cash flow over the next few years from a combination of improving cash collection rates, increasing energy efficiency and reducing water loss rates, and by the development of additional revenue streams.
The new management team is focused on improving efficiency and, on a stand-alone basis, delivered a net profit of GEL 9.2 million in the third quarter, compared to GEL 5.6 million in the previous quarter. The Group’s capital and funding position continues to be very strong, with capital being held both in the regulated banking business and at the holding company level. Within the bank, the NBG (Basel 2/3) Tier 1 Capital Adequacy ratio was 11.0%, comfortably ahead of the Bank’s minimum capital requirement. In addition, as of 18 November 2016, GEL 281.5 million liquid assets were held at the Group level. From a funding perspective, the Bank’s NBG Liquidity ratio was 41.4%, and the Liquidity Coverage Ratio was 176.2%, reflecting the significant excess liquidity held by the Bank. As a result of the Group’s very strong capital position, excess levels of liquidity and high level of internal capital generation, the Board has approved a $50 million share buyback and cancellation programme, over a two year period, which will shortly be implemented. This represents part of the Group’s already published capital return policy. In addition, the Group will instruct the administrators of the Group Employee Benefits Trust to purchase shares in the market totaling approximately US$20 million. The Group has delivered another quarter of excellent earnings which contributed to nearly 50% earnings per share growth over the first nine months of the year. Returns in both the banking business and the investment businesses continue to improve and the Group is well positioned to deliver a strong performance for the full year and beyond.
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