Ben Aris in Tbilisi -

Bank of Georgia chairman Lado Gurgenidze

The chairman of the Bank of Georgia Lado Gurgenidze was still in London and taking a shower when he got the call from Ian Hague who manages Firebird Management LLC.

"We talked for a few minutes. We agreed to a deal on the phone and that was it, he was in," says Gurgenidze sitting in his office in the centre of Tbilisi, the capital of Georgia.

That was 2004, a few months after Georgian-born, but US-educated, Gurgenidze had been headhunted by the Bank of Georgia's shareholders to take over the country's second largest bank. Set up in 1903, nationalized by the communists and then privatized again in 1994, the bank was then owned by the EBRD, the German development agency DEG and Georgia's most famous physicist Vitaly Gelarani, who had built up a big stake after privatisation.

They were unhappy with the old management who were running the bank more for their personal gain than the benefit of the shareholders and the disagreement came to a head in 2004.

Firebird's Ian Hague

After getting an MBA at a US business school, where Gurgenidze studied at the same time as Georgian president Mikhail Saakashvili (although the two were never more than acquaintances), he went onto work in the US and Canada. He cut his teeth with the Dutch bank ABN Amro, eventually running their Moscow office before being poached by Bank of Georgia.

The first thing Gurgenidze decided to do was recapitalize the bank. Gurgenidze sought out investors willing to buy a small but significant stake in the bank in order to pump in the funds necessary to pay for his expansion plans.

Hague, who is one of the most successful investors into the Former Soviet Union and has just under $3bn under management, was the first to come in, taking 14% of the bank. He was soon followed by Eastern Europe specialist fund East Capital, which bought several stakes for its various funds from November 2004, eventually building up a 7% stake over the next year.

With money in the coffers, Gurgenidze turned to building up the business as quickly as possible. He hunted down other Georgians with experience of working in the international capital markets and coaxed them home. The bank now boasts what is easily the strongest management team in the country (and arguably in the region) with about 20 Georgians with international experience to which has been added Russians, Ukrainians, Brits and Israelis with relevant experience.

Despite the fact that the bank had been mismanaged for years, it started from a relatively strong position. It was the second biggest bank in the country, albeit small by international standards, with an established corporate clientele and a decent balance sheet by local standards. The first order of work was to bring the bank's systems and practices up to international standard. Gurgenidze initially saw his new job as an interesting but temporary challenge, but quickly came to realize it was actually a golden opportunity.

"We came in with a private equity investors mentality: clean it, fix it, grow it, sell it," says Gurgenidze sitting in his office in central Tbilisi. "But then in the summer of 2005 we began to realise that we had a two year window before the strategic investors arrived when Georgia would finally be on their radar screen to bulk up the business."

That was the plan things are going extraordinarily well. At the start of this year the bank became the biggest in the country and has capture just over half the retail market. Total assets were more than $724m as of the end of 2006 after growing by more than 169% over the year and net profits were $15.5m in 2006, up 102% year-on-year with a return on equity of 12%. Not bad.

Selling stakes to Firebird and East Capital brought in the cash to get the bank moving, but Bank of Georgia moved into an entirely different league at the end of last year after it floated its shares on the London Stock Exchange, raising $150m and then debuted on the international capital markets with a $200m Eurobond in February this year.

"The international banks are very busy with Ukraine and Kazakhstan, but clearly would turn to Georgia at some point. A London listing was a no-brainer once we realised this," says Gurgenidze.

All these events were first. Bank of Georgia was the country's first international IPO (and was massively oversubscribed) and emerging Europe's second ever banking IPO. While other Eastern European banks from Kazakhstan and (soon) Russia are selling minority stakes, 100% of Bank of Georgia's shares are freely floating with the management holding only 2% of the stock -- another first. The Eurobond was also a first for the country and the first time any company from the CIS debuted with a 5-year bond rather than the 3-years that it normal. The bond was also massively oversubscribed allowing the bank to increase the initial offer from $150m and tighten the pricing from around the original 9.5% to 9%-9.25%. And of course given the banking frenzy sweeping the region it is hardly surprising that the bank's stock is up by over half since the float.

Small is beautiful

All very impressive, but it is not hard to put in triple digit growth in a small moribund market; the banking sector in Georgia is only just starting to grow strongly, but thanks to the strong supervision of the National Bank of Georgia, which has worked hard to avoid the banking crises other CIS countries have suffered, it sports a relatively healthy financial sector.

"Georgia has the highest concentration of banks of any CIS country; the top 5 banks control some 80% of the country's banking assets," says Gurgenidze. "This makes it difficult for outsiders to set up greenfield operations as the competition is already strong."

There are a total of 18 banks, but apart from Bank of Georgia the rest of the sector is underdeveloped and slow moving. With total loans to GDP of 20%, retail loans of only 6% and mortgage loans of a mere 1% as of the end of 2006 booming growth is the order of the day as the sector starts to catch up with its peers.

Both retail and corporate lending has shown impressive 67% and 60% growth last year, whereas mortgage lending has yet to start in any meaningful way. The retail-banking craze that has hit the rest of the countries of the CIS is only just starting. Of Georgia's 4.5m people the banks think about 2m are bankable, but a lot of work still has to be done to convince the population that banks are a safe place to invest their money.

Like the banking sectors across the region, Georgia's has taken off in the last two years, but unlike many of the bigger neighbouring markets it remains ignored by the international competition. Last year banking assets were up 74% year-on-year whereas Bank of Georgia's assets grew 160%, adding another 10% to its market share. French bank Societe General bought a local bank in a reported $50m deal, but no one is expecting Paris to throw any resources at it until it has finished establishing its new businesses in the larger neighbouring markets – Georgia is simply too small to feature high on any international bank's agenda.

The main competition facing Gurgenidze was from incumbent TCB, which had a strong corporate business and a tight grip on its quarter market share. However, Bank of Georgia went to work on this segment. Although Georgia has few (if any) internationally famous businesses, the economy is well diversified and there are significant amounts of natural resources - not enough to make the country rich, but enough to support a variety of companies.

The corporate business is still producing most of the bank's income and Bank of Georgia is the only bank to offer the full range of corporate services to customers, from payroll to investment banking services. Today the bank boasts 45,000 corporate and SME clients that include most of the leading companies in the country. And last year Bank of Georgia won a key account, becoming the exclusive agent to handle all of the City of Tbilisi's money, worth GEL470m ($278m), which makes this one of the biggest corporate accounts in the country. But as elsewhere the future is the burgeoning retail banking sector, where the bank has already built up an almost unassailable lead.

Georgia is a poor country that has been wracked by violence and corruption since its independence in 1991 so most of the banks concentrated on corporates as their main source of income over the last decade. While retain banking is booming across all of Eastern Europe, Georgia is unusual in that the Bank of Georgia appears to have moved into retail banking before consumer lending has taken off. Corporate and investment banking services still make up over half the bank's income whereas retail banking only accounts for just under a third of its revenues. Likewise, consumers account for only 15% of the bank's loan book, while lending to business takes up about 65% of total loans last year. In many of the other countries consumer lending is not only the fastest growing segment but volumes of both deposits and loans has overtaken the corporate business.

The main thrust has been to open new branches in double time: Bank of Georgia's branch network has ballooned from a few dozen branches in 2004 to 107 by the start of this year giving the bank the largest network in the country. Its next largest competitor Procredit bank has a mere 32 branches and Bank of Georgia now has more branches than all of the next four biggest banks combined.

And the bank has tied up the few white good retailers into exclusive express credit deals. Almost every significant store selling tellies and washing machines throughout the country has an orange coloured Bank of Georgia stand somewhere in the shop offering shoppers an instant credit to pay for that must-have gizmo.

Retail banking many not be making much money, but it is the fastest growing of the bank's businesses. Last year the number of clients quadrupled to reach 400,000 customers are using 300,000 debit cards. And the bank has been rolling out the entire gamut of products for these customers from credit cards to mortgages. The mortgage and loans to GDP figures are still tiny, but with economic growth running well over 8% a year the bet is that the consumer business is the most perspective in the sector.

Investment banking and capital markets

In many ways Bank of Georgia is creating the Georgian financial market by building services and products that exist elsewhere before there is a real imperative demand for them in the country and nowhere is this clearer than the bank's investment bank operations. Bank of Georgia's brokerage subsidiary Galt & Taggart accounts for 90% the turnover on the local bourse and the bank's own shares make up 75% of the traded shares volume.

As the bulk of the countries businesses are privately owned and the consolidation and fast investment phase other countries are enjoying has yet to get going in Georgia, the bank's main effort has been focused on private banking services for high net worth individuals.

Like all the countries of the CIS, Georgia has a small number of rich people of which some 900 bank with the Bank of Georgia. Admittedly a salary of more than $3000 a month is enough to classify you as a high net worth in Georgia, however a few of their clients are truly rich and as demanding investment services with international reach as other HNW customers do in other countries.

But even these customers have a lot to learn about managing their money; in the past the only thing wealthy customers were looking for in a bank was a high interest rate on the deposits accounts. Now they are starting to think about stocks and bonds.

"People are beginning to understand there are alternatives [to time deposits] but they are still very cautious as the level of understanding is still very low," says Gurgenidze.

There are a total of 280 listed companies listed on the Tbilisi stock exchange, but only a handful of liquid names. And even these are thinly traded; it is not unusual for a month to past without a single trade in even the biggest and most liquid names on the market. As the free floats are very small and trading volumes low, there is not enough liquidity to maintain things like mutual funds and on the buy side what there is in the way of insurance companies and pension funds are small.

"They all have lousy corporate governance. Most are owned by a small group of red directors who have no respect for minority investors. What these companies report is not reliable and the regulators are weak with no power to enforce the law," says Gurgenidze.

Ever the innovator and faced with this lack of investable assets, Bank of Georgia decided to crate something their customers could invest into and set up GT Capital last year, essentially a private equity fund that owns stakes in the Populi supermarket chain, travel agency Intertours, Prime Time fitness and various real estate assets. GTC was then listed on the local bourse in November 2006 in the country's first IPO.

"The debut pricing of the stock was GEL0.6 per share and was massively oversubscribed. In less than four months the value of the stock had quadrupled," says Gurgenidze.

The investment banking operations are run by the wholly owned brokerage Galt & Taggart, which Gurgenidze set up with his partners in 2000 to channel investment and is the only company with a Euroclear account in the country. Galt & Taggart grew steadily after inception, but really started to move in 2006 when revenues and equity quadrupled to $1.6m and $8m respectively.