Georgian banks expand their business abroad

Discussion of Georgia’s status as a financial hub focuses on domestic operations, yet Georgia’s major banks are energetically extending their operations into neighboring territory, expanding Georgia’s financial network and investment attractions. While Bank of Georgia Group (BoG) and TBC Bank (TBC) are pursuing completely different strategies, their share prices show that their overseas forays are being well received by international financial markets.

The two Georgian banks – Bank of Georgia and TBC – have attracted international investor interest from major fund groups due to their relatively high dividend and capital payouts and steady growth in earnings, and their share price performances have beaten those of most of their European peers. The overseas expansions give reassurance that growth will not be limited by the size of the Georgian economy and that investors have been encouraged by the achievement by Georgia of EU candidate status.

The latest overseas move comes from Bank of Georgia Group PLC (BoGG), which is making a quantum leap. In a surprise announcement in mid-February, it revealed it had agreed a bid to buy Armenia’s largest bank, the highly profitable Ameriabank. This privately owned bank has a strong brand in Armenia, being number one in the retail mortgage and loan markets, with 26 branches, 1,812 staff, and 419,00 customers. Last year, it reported a 4% rise in net income and growth of 34% in loans and advances to customers at $1.98 billion. While Armenia’s population is smaller than Georgia’s, its economy has been growing as fast, and the banking sector is much more fragmented, offering scope for market consolidation and expansion via further acquisitions, as well as strong organic balance sheet growth.

On that news, BoGG shares moved up from 4,265p to 5,180p, before profit-taking pulled back some of the gains. The bid is subject to agreement from the Armenian authorities, but at end-March this was expected very shortly.

BoGG’s acquisition of Ameriabank for an agreed $304 million was described by London stockbroker Peel Hunt as “attractive and material” as the bank would enter the BoGG group “with strong momentum and returns and deliver immediate and significant financial benefits.” The transaction will be financed with the group’s surplus capital, so its dividend and capital distribution policy will not change – this is a pay-out ratio of 30%-50% of annual profits. So Peel Hunt believes that “given the organic momentum in the business, now supplemented by Ameriabank, we see substantial upside to the BoGG share price.”

Another London stockbroker, Numis, estimates that if the acquisition had been incorporated in BoGG’s 2023 trading, it would have increased its net income by 20%. Given that Ameriabank has been delivering a high rate of profitability, it says “we believe that this deal is attractive for investors.”

Other positive comments came from the international banking rating agency Fitch, whose senior director, Dmitry Vasilyev, says Bank of Georgia’s net income prospects are sufficiently strong for it to quickly rebuild the capital spent on buying Ameriabank. Thus, the bank’s BB/Stable rating is unlikely to be impacted.

Last year, the bank’s operating income rose by 26% to $955 million, and its net interest margin improved to 6.5% from 5.4%. Excluding one-off items, pretax profit rose 31% to $604 million. Last month, as well as announcing a 4.6% increase in the dividend, BoGG extended its share buyback program.

Even more enthusiastic about the deal is London broker Cavendish. It believes that in the first year of incorporation in BoGG, Ameriabank will be spending money to begin to bring its operations in line with those of BoG – on digitalization, product introduction, efficiencies, and customer care – although no large-scale restructuring is anticipated. “However, beyond that, we see a substantial payout ratio of 40% in Georgia, combined with 25% in Armenia, which could see BoGG returning around £200 million to shareholders in 2026, an amount that then grows with earnings,” says its analyst.

BoG plans to hold a 30% stake, while its UK holding company, BoGG PLC, will acquire a controlling 60% stake. The remaining 10% shareholding is initially to be retained by the European Bank for Reconstruction & Development (EBRD), which has been an investor in Ameriabank, although BOGG has an option to purchase this stake in three years.

TBC Bank’s expansion

Also eyeing the regional prospects for growth outside Georgia’s relatively small market of 3.7 million people has been TBC Bank, which has been steadily building up the scale of its asset-and-cost light fintech banking and payments operations in Uzbekistan. It made this major move to expand its geographical footprint five years ago, attracted by the opportunities offered by a population of 35 million people, low loan penetration, and high smartphone usage.

At TBC, according to figures released last month, along with its 2023 financial report, there has been a substantial increase in its Uzbek user base, the numbers reaching 15.6 million, its loan portfolio now at $302 million, and its client portfolio valued at $219 million. TBC Bank Uzbekistan achieved “a significant milestone,” says TBC, by reaching break-even in 2023, closing the year with a net profit of £4.3 million (The group announced a 7% rise in pre-tax profit to around £400m and a 32% rise in the dividend).

The attraction of Uzbekistan is its fast growing and relatively young population and strong current and prospective economic growth. GDP forecasts made by the international financial institutions have it set to expand by between 5.5%-5.8% per year for the next three years, which is among the highest rates in the region. The country is also important as it connects trade routes between Asia and Europe and serves as a gateway to the Central Asian region. It has the potential to become more integrated into global supply chains amidst the disruptions in major international east-west trade routes across Russia and in the Red Sea. In recent years, reforms and increasing industrialization have been successful in attracting foreign investment.

The Asian Development Bank commented that strong expansion in manufacturing and mining was boosting growth beyond expectations and last year there were higher exports of goods, with notable growth in gold, textiles, foodstuffs, copper, and petrochemicals. Service exports grew by 16% as demand for transport and tourism services surged. Output in agriculture rose from 2.6% to 3.8% with healthy gains in crop and livestock production.

Uzbekistan is developing a market economy, and its banking infrastructure has been growing as well. TBC, in an economic review of the country published last month, commented that the number of issued bank cards for the first 11 months of 2023 was 45 million, an increase of 32% compared to the entire year of 2022, and the volume of transactions through POS-terminals also rose. The transaction volume through POS-terminals in that period amounted to 228,308 billion UZS, a 29% increase compared to the entire year of 2022 and a threefold increase from 2019.

TBC first ventured into Uzbekistan in 2019 with the acquisition of a 49% stake in leading digital payments provider, Payme, and was welcomed as part of the government’s reform of a banking sector dominated by state banks. It obtained its banking license there in April 2020 and in October of that year opened its consumer banking operations. “The launch of banking operations in Uzbekistan is a very significant step in TBC PLC’s international expansion and is an integral part of our digitally led growth strategy,” TBC CEO, Vakhtang Butskhrikidze said at the time.

TBC’s current operations in Uzbekistan are Payme – a multi-vertical payment services app, and TBC UZ, the country’s first, fully digital, mobile-only bank which is powered by TBC’s inhouse digital platform Space International. TBC UZ offers money transfers, loans, car loans, deposits, installments, bank cards, and bill payments – in other words, the full range of consumer and services.

There has been no problem getting backing for this foray abroad from the bank’s major outside shareholders – the EBRD and the International Finance Corporation. Last year they, along with TBC Group, showed “strong support for the bank’s growth trajectory” by injecting $50.5 million. The total capital investments over the three years of the bank’s existence then amounted to $129.9 million.

Nika Kurdiani, CEO of TBC Group Uzbekistan, expressing optimism about the future, told the Uzbek press and information agency: “We not only continue to grow (we already have more than 1,200 employees), but also create new standards in the industry. Our mission is not just to provide online banking services but to change the landscape of the financial market.”