A country that sits above Italy in rugby's world rankings, and one that could stand to benefit if the northern hemisphere teams widened their horizons, is Georgia. Off the rugby field, the latter is gaining profile for investors on the London market. In August, TBC Bank (TBCG), the country's largest lender by loans (an approximate 37 per cent market share, on Peel Hunt figures) took a premium market listing, four years after its nearest competitor Bank of Georgia (BGEO), with 32 per cent market share, did the same.
And if you had to pile into either the Georgian or the Italian banking system right now, which would it be? The case against the latter is all over the front pages - capital shortfalls, bad debts, political impediments - while the case for the former is gaining adherents on the London market. They present a strengthening economy that is open for business. Bank of Georgia's shares have close to tripled since IPO - and it successfully spun out its healthcare business last year - while TBC's shares are up strongly since listing.
Broker Numis is currently making the case for Bank of Georgia, and Peel Hunt for TBC. The story is similar: returns on equity of more than 20 per cent, loan books growing by around a fifth per year, and a combined stranglehold on a banking market that has headroom. According to Peel Hunt, Georgia has a loans-to-GDP ratio of 47 per cent, compared with its major trading partner Turkey on 80 per cent.
TBC's 2016 results, released late last month, delivered numbers beyond the dreams of many of the UK's major retail banks: a net interest margin steady at 7.8 per cent, a cost-to-income ratio of 46 per cent, or 43 per cent excluding one-offs, and falling non-performing loans. Peel Hunt compares the Georgian lenders to the UK challenger banks, arguing that TBC's superior returns are not reflected in the banking group share price, which is equivalent to 1.3 times expected 2017-end net tangible assets per share. The peer group average is 1.4 times, while Bank of Georgia is more expensive at 1.6.
The valuation argument looks fairly categoric. But where are the gaps here? The buy-and-hold investor has to get comfortable with two related risks, currency and political. That requires a view on the Georgian economy, where policymakers are battling rising inflation and seeking to wean themselves off the dollar, and a view on geopolitical stability less than a decade on from the start of the latest Russo-Georgian conflict. As Georgia Healthcare's (GHG) boss Nick Gamkrelidze told us earlier in February: "We're in a tough neighbourhood.”
Currency matters for a few reasons. A fall in the Georgian Lari versus the dollar will make customers' greenback-denominated loans that much harder to service, and the resultant imported inflation could trigger higher interest rates, which could both increase non-performing loans and choke off new business. Inflation is already close to the central bank's 2017 4 per cent target and rising (admittedly higher excise duties have been a factor), with that target falling to 3 per cent in 2018. And the currency is capable of big falls, having dipped as much as a fifth between late 2014 and late 2016, although it has come back a little since.
Central bank governors are keen to point to external factors - the Lari tends to follow the Turkish Lira in terms of dollar-related strength - rather than the country's fairly large current account deficit for the swing. The bank is understandably seeking to reduce exposure to the dollar by issuing more local currency debt, insisting that smaller bank loans are local-currency denominated, among other measures. With such a fundamental shift in the local economy, amid a historically strong dollar and a local currency exposed to decisions in Ankara and Moscow, investors may find this value proposition a little rich.
