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Bank of Georgia offers growth and value

Investors looking for earnings growth in the banking sector could do worse than this FTSE 250 lender
November 21, 2019

With the odd exception, most European banks trade at a discount to their tangible book value. To equity investors, this means at least one of two things: that lenders’ assets are overvalued, or their liabilities are undervalued. Against a backdrop of anaemic economic growth, small or negative interest rates, low productivity and even lower confidence, it’s not hard to see why. But UK-listed Bank of Georgia (BGEO), like the small Caucasian state in which it operates, does not fit the mould. While its share price has been knocked by falling investor sentiment, a weakened currency and a rise in inflation, the lender is well placed to benefit from a strong national economic growth story.

IC TIP: Buy at 1,474p
Tip style
Growth
Risk rating
High
Timescale
Medium Term
Bull points

Strong loan growth

Georgia GDP growth

Strong dividend

Well-capitalised

Bear points

Currency issues

Falling NIM

A good starting point for potential investors, therefore, is Georgia’s geopolitical position. Bordered by Russia to the north, Turkey and Armenia to the south and Azerbaijan to the south-east, the former Soviet republic boasts a mixed economy, strong trade links with the European Union and corruption levels on a par with Spain, as defined by Transparency International. The real economy is also growing fast. In its latest global economic forecasts, the International Monetary Fund reaffirmed its long-term growth forecast of 5.2 per cent a year for the country, and expects Georgia to grow by 4.6 and 4.8 per cent in 2019 and 2020, respectively.

Georgia’s diminutive size does leave it vulnerable to small economic shocks or currency movements. For example, in the third quarter of 2019, the negative expectations stemming from a drop in Russian tourist numbers caused Georgia’s national currency, the lari (GEL), to fall 6 per cent against the US dollar. In turn, this pushed September’s headline inflation reading to 6.4 per cent, and caused the nation’s central bank to double down on its tight monetary policy, raising the interest rate from 6.5 to 8.5 per cent in the process. At the same time, exports have grown and imports have shrunk, thereby reducing Georgia’s current account deficit. And were the overall picture deteriorating, it is unlikely that Standard & Poor’s would have last month lifted the country’s sovereign credit rating to BB, just one notch below investment-grade.

An investment in Bank of Georgia is therefore a wager on this high-growth, if somewhat risky, macro picture. But the lender’s recent track record also points to high standards and equally high targets. Spread across four divisions – Georgia’s largest retail bank, an asset wealth management business, a corporate investment banking arm and BNB, a small and medium-sized enterprise lender in Belarus – sources of income are also diverse.

Across the group, total assets have swelled by 19.3 per cent a year since the start of 2016, just ahead of the rate of client deposit growth. Although its net interest margin has narrowed from 7 per cent at the start of 2018 to 5.1 per cent in the three months to September, so has the bank’s cost of risk, as new lending has improved to meet higher regulatory standards. At the same time, the bank’s cost of customer funds has declined and the return on average equity has been maintained well above a 20 per cent target, where it has sat since the start of 2016. This has allowed the lender to keep raising dividends – which are declared in lari but paid in sterling – while managing to keep its capital buffer well ahead of Basel III adequacy ratios.

BANK OF GEORGIA (BGEO)   
ORD PRICE:1,474pMARKET VALUE:£701m 
TOUCH:1,430-1,476p12-MONTH HIGH:1,777pLOW:1,220p
FORWARD DIVIDEND YIELD:5.0%FORWARD PE RATIO:5 
NET ASSET VALUE:40.32GELLEVERAGE:8.79 
Year to 31 DecPre-tax profit (GELm)*Earnings per share (GEL)*Dividend per share (GEL)
201639510.62.4
Year to 31 DecPre-tax profit (GELm)*Earnings per share (p)*Dividend per share (p)
201739522371
201849125573
2019*52427267
2020*61030174
% change16%11%10%
Normal market size:1,000   
BetaA:0.51   
£1=GEL3.823. *Numis forecasts, adjusted PTP and EPS figures