TBC Bank closes gap with Bank of Georgia

 TBC Bank closes gap with Bank of Georgia
TBC was founded with $500 in capital in 1992.
By Carmen Valache in London May 17, 2016

TBC Bank, Georgia's second largest bank, appears to be closing the investor perception gap with its big rival, Bank of Georgia (BoG), as it heads towards premium listing status on the London Stock Exchange in the third quarter.

TBC Bank – which boasts a leading market position in retail deposits and lending to small, medium and large enterprises (SMEs) in Georgia – has trailed behind BoG for many years. BoG became listed on the LSE in 2006, and already has premium listing status; TBC only listed in June 2014. But the gap appears to be closing now, a BNP Paribas investment banker told bne Intellinews at the bank's first capital markets day in London on May 13.

"BoG and TBC Bank are the go-to Georgian companies for London-based investors,” the banker said. “In the past, TBC Bank suffered because its investor relations were not as good as BoG's, but, as you can see at today's event, they have more than made up for that shortcoming." Ending with a tasting of Georgian wine, the event was indeed a complete public relations exercise, bound to woo even the most circumspect of investors.

Unlike Bank of Georgia, which is the successor of one of the oldest banks in the country, TBC Bank was founded from scratch "with $500 in capital" in 1992, as Mamuka Khazaradze, co-founder and chairman, likes to recount.

Khazaradze and the other co-founder of the bank, Badri Japaridze, continue to hold a 22% stake in the bank, while 69.9% of the shares are listed on the LSE. The bank is also owned in part by the European Bank for Reconstruction and Development (12.4% share), the International Finance Corporation (6.2%) and the Dutch development bank FMO (4.4%).

Speaking to an audience of investors at the Sofitel Hotel in Piccadilly on May 13, Khazaradze’s underlining message was clear: that the Georgian economy is one of the best performing in the region, that the banking sector is doing well, and that TBC Bank is contributing to this strong growth thanks to its professional management team, transparency and organic growth.

TBC Bank chose the right time to present its quarterly results, by scheduling the session right after a delegation led by Georgian Prime Minister Giorgi Kvirikashvili met with investors in London over lunch, thus benefitting from the presence of central bank governor Koba Gvenetadze at its event. During his speech, the official sought to reassure the audience that inflation was finally in check following a year of above-target inflation, that the Georgian lari was rebounding from the depreciation of 2014-2015 and that the fundamentals of the banking sector were solid.

Improved investor relations go hand in hand with good financial results - a loan portfolio that grew by an average of 22% in 2012- 2015, good asset quality with non-performing loans (NPLs) constituting less than 5% of the total loan portfolio, and return on equity of over 17% in the last five quarters.

The first quarter results themselves weren’t bad either. TBC posted a 29% y/y increase in profits to GEL58.7mn (€23.5mn), an 11% y/y growth in assets to GEL6.65bn, a 7% y/y increase in loans and a 6% y/y growth in deposits to GEL4.5bn and GEL3.93bn respectively.

Potential catalyst

But the results have not seen themselves reflected in the company's stock price, which declined from a high of $16.5 per share in September 2014 to a low of $8.27 in October 2015, only to slowly inch upwards to $11.2 since.

Declining confidence in emerging markets rather than the company's performance is to blame for TBC Bank's poor performance on the stock exchange since it listed, analysts believe, but that may soon change. 

According to VTB Capital, the relatively low market value now could translate into a good investment opportunity, and TBC Bank is becoming more attractive than BoG.

In an April forecast, analysts Jason Hurwitz and Svetlana Aslanova recommended TBC shares over BoG ones "not only because it is less expensive, but also because it has a potential catalyst: a probable boost in share liquidity. Such a boost could be supported by the announced introduction of market makers in the near term, and by the intended upgrade to a premium listing on LSE".

To attain premium listing TBC has to meet tougher regulatory requirements, but this will broaden the range of institutional investors which are able to buy its shares.

Khazaradze said he expects the bank's market value to increase before the migration to premium listing, "particularly now that the lari is appreciating" and concerns over bad assets have subsided.

Love mark

Unlike BoG, which has acquired subsidiaries in Belarus and Ukraine, TBC Bank's operations are all concentrated in Georgia, where it serves 1.7mn customers out of a population of 3.7mn.

Before acquiring Bank Constanta in 2011, TBC Bank's branches were concentrated in the capital city of Tbilisi and other large towns, but thanks to the merger it now has a network of branches that spans the entire country.

Also unlike BoG, which is part of a holding with operations in banking, insurance, leasing, real estate, healthcare, and utility management, TBC Bank has maintained its focus on financial services despite the diverse business interests of its founders. Together with other business partners, Khazaradze owns companies active in the production of wine, real estate and, more recently, port construction, but he has kept his non-financial business interests separate from TBC Bank.

One of the sources of concerns for the Georgian banking sector is how consolidated it is, with the two leading banks - TBC Bank and BoG - accounting for over 60% of sector assets. However, analysts believe that this situation evolved organically, and that the two institutions do not collude to obstruct other players from the market.

"There is a good amount of rivalry between the two largest players, so I do not think that they could reach a secret pact to keep others out," an analyst who asked not to be named told bne IntelliNews. In addition to the two, there are 17 other banks operating in the country, including foreign-owned institutions like Russia's VTB Bank and Azerbaijan's Pasha Bank.

Growth prospects are another source of concern, for the entire market is only 3.7mn consumers. But thanks to the Georgian economy's sustained growth, which the EBRD expects to reach 3.4% this year, up from 2.8% in 2015, and to a relatively low - 47% - penetration rate for the banking sector compared to other regional peers - Turkey (74%), Bulgaria (59%) and Russia (52%) - analysts believe that there is still scope for growth even in the small Georgian banking sector.

TBC is certainly doing its best to win the hearts and minds of unbanked Georgians with its aggressive marketing, user-friendly banking applications and its catchy slogans such as "We want to be a love mark".