Issue 5, 2016. October-November



In September, TBC Bank upgraded to the premium segment on the London Stock Exchange and announced its plans to buy out Bank Republic.

Sally White

The City of London is bemused—how can a tiny country like Georgia support three companies large enough to be quoted on its premier stock market?! Yet it is, with TBC Bank joining the ranks of Bank of Georgia and Georgia Healthcare to have its shares listed there. Startled it may have been, but the City welcomed TBC's debut on August 10 by rapidly moving up its share price, taking it from the debut 1,105p to 1,270p in about one and a half months.

TBC is, of course, no stranger to the City, as it has had a presence on the London market for two years, although on the international section, not the main market. An indication of how much the City liked TBC's move was its lack of concern when, a few weeks later, the bank showed it was going to waste no time in using its acquired status, issuing its new shares to help pay for a major deal. Rather than see this as diluting future earnings per share—a key investment metric—it welcomed the news as adding to TBC's earnings potential, as transformational and by easing share dealing.

Bullish Response to New Deal

There was good reason for the enthusiasm. TBC is using its new shares to help enact its growth strategy. It announced a deal with Societe General (SocGen) to acquire its 93.4 percent stake in its Georgian subsidiary, Bank Republic (and, added for good measure, the purchase of tiny Progress Bank assets and liabilities). TBC is reportedly paying around GEL 315 million for Bank Republic, 70 percent in cash and 30 percent in newly issued shares.

Scheduled to be complete by the end of the year, the acquisition will make TBC Georgia's largest bank in terms of loans (increasing these by 7.3 percent, to 33.7 percent) and deposits (raising them by 5.3 percent to 34.5 percent).

International investment bank analysts—including UBS, the Swiss-based global finance group; U.S. multinational investment group Citi; the investment arms of Russia's Sberbank and VTB Capital; and London broker Peel Hunt—have been bullish about the deal.

Strong Second-Quarter Results

Finally, TBC has established a good record, having delivered a 21 percent return on capital last year. 2016's expectation-beating second-quarter financial results, announced a few weeks before the Bank Republic deal, made the mood even more upbeat.

TBC's main shareholders have continued to support the bank, including London's major investment group Schroders (6 percent) and Sweden-based investment boutique Dunross (6 percent). At the moment, the majority of the shares are still held by the founders, associates and management (32.8 percent) and international financial institutions: European Bank for Reconstruction and Development (12.3 percent), the World Bank's investment arm, the International Finance Corporation, (6.2 percent).

Telling Its Story to the World's Capital Markets

However, new shareholdings are also expected with the closing of the deal for Bank Republic and as TBC tells its story to the world's capital markets. It has embarked on a series of road shows. The international institutions are likely to reduce their stakes, making still more available.

So far, the story has gone down well. Comment from London, New York and other financial centers highlights the business opportunities arising from Georgia's auspicious economic background. Cyclical improvement is coming from tourism growth and stable remittances, boosted by tax cuts, lower interest rates and improving outlooks in trade partners Russia and Turkey. Peel Hunt likes Georgia's stable currency and low inflation rate.

All seem to take for granted benefits flowing from Georgia's increasing links to Europe. None see any prospect of TBC following Bank of Georgia to diversify into non-banking areas.

Opportunities for new banking business, particularly retail rather than corporate, where bank penetration is much higher, are seen as substantial. There is currently relatively low use of financial services among Georgian consumers, says Keefe, Bruyette & Woods (KBW), seeing scope for 20 percent retail credit growth, giving 15 percent loan growth overall.

"There is upside to retail banking growth if banks' initiatives to develop the credit card market toward payment system vs. current 'loan product' succeed", it comments. Adding that a Turkey read-across "suggests 2.5-11 percent upside in bank profits."

A few cautions

Of course, the analysts do have a few cautions, which include geopolitical risks, foreign capital flows and high dollarization in the banking system, though the latter is easing a little. Caution within Georgia itself tends to center on whether fees will rise as this consolidation reduces competition. As it is, Georgian banks have the highest net interest margins of EMEA (Europe, the Middle East and Africa) banks, according to KBW. KBW assumes no cuts, but sees fee income increases coming from TBC's rising share of a growing market and wider credit card use.

Are there more M&As in the pipeline? Announcing the acquisition TBC's CEO, Vakhtang Butskhrikidze, described it as "a major step forward in TBC's ambition to build the leading banking group in Georgia and the broader Caucasus region." However, at this stage anyway, it seems that this does not mean steps outside of Georgia.

For now, TBC sees plenty of scope at home focusing "on the mortgage and consumer-lending segments, complemented by an attractive product offering for large multinationals operating in Georgia." KBW points out that the development of local syndicated loan and capital markets is still to come, as the country intends to become a hub in financial services for the whole region.

Now the City is waiting for Georgia's next listing. Not another bank, but it could hardly be lost on the brokers, bankers and fund managers attending London's May Georgia Investor Day , organized by London multinational finance group Barclays, that the speakers had come to London with a purpose. Among them, Georgian Oil & Gas Corporation and Georgian Railways have already issued corporate bonds in London. Other speakers were from Silknet, Silk Road, and Wissol — a good menu of the Georgian economy.