Issue 5, 2018. October-November


New Digital Bank Expands Georgian Banking's Reach

TBC Bank detailed its fast-growing cloud-based neobank and a new partnership with Azerbaijan's Nikoil Bank in its H1 report to London-based financial analysts.

City of London financial analysts are speculating the developments mark the start of a new fintech regional banking hub.

Space Banking

This speculation was fanned by remarks from TBC Group CEO Vakhtang Butskhrikidze, who spoke with analysts about the H1 report.

"To build upon our leading position in the Georgian market, the successful implementation of our digital strategy and the very promising results of our newly launched fully digital bank, Space, we will also consider entering other markets to further increase our banking operations beyond Georgia," he said, adding, "We want to build our strategy outside Georgia with Space, mainly in mobile banking, via remote channels and dealers' franchises."

At the end of August, Space had around 65,000 registered customers and around 160,000 downloads. However, TBC says that "for now it is available only for Georgian residents."

Structured as an autonomous business, Space provides customers with a full range of retail banking services, including loans, saving products and a credit card powered by Visa. The business was developed from concept to launch in just eight months and on a budget of just over a million lari.

To avoid the hazard of soaring bills that has toppled a number of challenger neobanks in other countries, Lasha Gurgenidze, who heads the Space project team, has kept very tight control on operational costs.

The project's team numbers only 20 members. As Space is cloud-based, there are no branches or other physical spaces, its presence being just on mobile phones. Gurgenidze told a press conference that Space will also keep costs down by taking a collaboration route to furthering innovation for Space's marketing and customer services.

Saying "goodbye" to banks as we know them and embracing the move to digital services has been a key part of TBC's strategy for some years now. In August, TBC told investors that in Q2 2018 only 9.9 percent of transactions were conducted in its branches, while the remaining 90.1 percent were done digitally-on ATMs, mobile phones, online or at pay terminals. While the numbers for branch transactions have risen only slightly over the last two years, digital transactions have more than doubled.

In another move for fintech banking, last year, using Facebook messenger, TBC launched the first Georgian-speaking chatbot, Ti-Bot, which allows customers to receive various information about banking products as well as conduct simple banking transactions. Ti-Bot also seems to have been very well received by customers and has become a very popular communication channel, receiving 10.4 million messages since launch.

Investors like this digital approach, too. It does not seem to be making TBC's banking activities riskier-Anthony Da Cost at London brokers Peel Hunt points out that its credit quality is improving.

Expansion in Azerbaijan

In July, TBC signed a conditional, non-binding strategic partnership agreement with Nikoil Bank to further develop TBC's business in Azerbaijan. The deal lays the groundwork for a future merger between its 10-year-old Azerbaijan subsidiary, TBC Kredit, with Nikoil Bank. Nikoil Bank is a privately-owned commercial bank offering corporate and retail services across Azerbaijan and had assets of GEL 591 million at end 2017. TBC Kredit is much smaller, with end-of-2017 assets of GEL 39 million.

Building the relationship with Nikoil Bank is still a work in progress, with the deal going through due process, according to the H1 report. TBC will own up to 10 percent of the merged entity but has a three-year call option to acquire additional shares (subject to the relevant authorities' approval) to reach a 50 percent-plus-one interest. However, TBC will start quickly on contributing to the development and execution of the merged entity's strategy, including with innovations such as Space, bank officials said during TBC's 2018 H1 figures conference call.

So, this looks to be a very cost-and-risk-lite deal, in the initial stage at least. As TBC CFO Giorgi Shagidze told analysts listening in on the bank's 2018 H1 figures conference call, "our potential investment in Azerbaijan could be around $3.5 million - $4 million, which is the amount of equity we have in our Azeri subsidiary." Stacked up against that, "the target capital that Nikoil Bank could have at the closing of the deal could be about $50 million."

TBC can see the opportunity that comes with the much more developed banking products that it has in Georgia compared to those on offer in Azerbaijan. "We have seen that as TBC Bank we can penetrate further in the Azerbaijani market," Vakhtang Butskhrikidze explained.