Monica Ellena in Tbilisi -

TBC Bank, Georgia's second largest, which this year listed in London, hiked net profits by a third to GEL45.6mn ($25.9mn) in the third quarter and consolidated its leadership in deposits. 

“We have been Georgia’s largest bank in retail deposits for a decade and by the end of the third quarter we became the largest bank in total customer deposits with a 27.8% market share,” Chief Executive Officer Vakhtang Butskhirikidze told bne in an interview. Total customer deposits increased to GEL3bn ($1.8bn), a 15% increase year on year. 

The lender reported a total operating income of GEL114.5mn ($65.2mn), up 20%. As of September 30 total assets increased by 25.6% y/y to GEL5.04bn ($2.8bn) primarily driven by the increase in retail loans and loans to small and medium sized enterprises (SMEs).

In June 2014 TBC floated on the London Stock Exchange, marking Georgia’s largest ever public initial offering (IPO) and a stepping stone in the lender’s 22-year long history.

“In 2000 international financial institutions like the World Bank’s IFC and EBRD came as shareholders bringing key corporate governance,” explains Butskhirikidze. “The IPO was an enormous investment that brought capital, transparency and confidence to investors as well as corporate and retail clients. It is also important for Georgia which has now two traded companies in London, it is a message that the country is open for business and it is transparent.”

Frontier markets have shown more reliance and outperformed emerging markets over the last couple of years. In 2013 the reference index for emerging economies, the MSCI EM, closed down 2.6% while the benchmark for funds operating in frontier markets gained 26.3%.

“Georgia remains one of our favoured frontier markets,” says David Nangle, Head of Equity Research at Renaissance Capital in London. Confirming his 'Buy' rating, Nangle values TBC  “an attractively valued vehicle to gain exposure to the country".

A London-based advisor of TBC told bne that “the trend on the equity market is of disappointment in first and second quarter post-listing,” and that “TBC has been a stand-up performer with post-IPO returns around 13-14%.”

Hitting the targets

Founded in 1992 by Georgian businessmen Mamuka Khazaradze and Badri Japaridze, who still own 22% of the bank, the bulk of the shares is now spread among international institutions, with a 40% free float.

Bank of Georgia, the country’s largest bank, which floated on LSE in 2012,  has diversified in related financial areas such as insurance and health care, while TBC has remained very much a classic universal bank.

On October 31 the National Bank of Georgia announced that commercial banks operating in Georgia’s market are no longer allowed to own companies offering non-bank products and services as of December 2015.

“These changes did not affect us in any way [as] 100% of our business is banking activities,” stresses Butskhrikidze. “Historically, for the present and for the future, our strategy focuses on the core banking, so these changes do not affect our strategy and do not make any changes in our policy.”

Financially, the lender has set three main goals.

“We have reached our mid-term targets,” explains Giorgi Shagidze, Chief Financial Officer. “Our growth is higher than 20%, our return on equity remains above the target of 18%, and our cost of income ratio is below 45%.”

From a strategy perspective, TBC’s goal is to be the No.1 in Georgia in retail, micro and SME banking while remaining a leading lender in the corporate space. To achieve this, in 2011 TBC acquired Bank Costanta, a micro-lending focused institution with 59 branches across the country and a regional bias. Constanta will be fully integrated by Q1 2015.

“We believe in the micro segment, which is our smallest but fastest growing,” stresses Butskhirikidze. As of September 2014, the micro segment accounts for 7.4% and 0.2% of the total loans and deposit portfolio respectively. “It is the least penetrated in the country, there is a growing demand and Bank Costanta has most of its branches outside the capital where the demand is.”

Georgia remains largely a cash-based economy,  so as one of its priorities TBC is set on expanding its remote channels – internet and mobile banking as well as ATMs and cash-in terminals –  to establish a multi-channel distribution platform. 

“We have 121 branches, fewer than our competitors but we are the largest bank in retail and deposit, meaning that we get closer to our customers while increasing the efficiency," says Butskhirikidze. "It is certainly one of our competitive advantages.”

Room for growth

In the future Georgia’s banking sector stands to benefit from a strong regulator, low penetration and a strong economic tailwind. "Margins are some of the best in the region, and it is unlikely that we’ll see any fresh competition of note entering a market of this size with 4.5mn people and a GDP [gross domestic product] of $16.2bn,” says Nangle.

Georgia’s central bank is one of the most conservative of the former Soviet orbit, demanding the most stringent levels of capital and liquidity.

Banking penetration remains one of the lowest compared to Georgia’s peers in the region, but is growing rapidly. Between 2003 and 2013, the loan to GDP ratio advanced from 9% to 39%, and now stands at par with Romania’s and close to Russia’s, but is still far from countries such as Poland or neighbouring Turkey.

The sector is also benefiting from an improving economic environment. According to official estimates, Georgia’s real GDP grew by 5.9%, while the inflation rate was 4.8% y/y.

Nangle believes that Georgia’s growth will be defined by four key factors:  supportive monetary and fiscal policies providing stimulus;  decreased political uncertainty bolstering FDI inflows; a continued expansion of banking loans; and net exports supported by tourists inflows and the rebound of exports to Russia.