Bank of Georgia LSE:BGEO, the FTSE250-listed commercial bank, published its 2Q22 and 1H22 financial results today (16th August) and reported strong growth and profitability with 2Q22 operating income before cost-of-risk up 60% year-on-year to GEL334.2m (GBP99.5m), and 1H22 up 46% year-on-year to GEL591.7m (GBP176.25m).
James Hamilton, an analyst for Numis covering BoG said “[The results show] …a stellar H1 performance in all dynamic areas and a 20% upgrade to forecasts.”
Bank of Georgia opened trading this morning at 1,848p and by 1100H was trading at 1,924.4p. The shares have offered a one-year return of 24.1%, a year-to-date return of 15.4% and have ranged between 960p and 1,938p over 52-weeks with a market capitalisation of GBP892.9m.
Numis retains a ‘Buy’ rating on the stock with a target price of 4,031p
The company declared an interim dividend payment of GEL1.85 (55p) per ordinary share in respect of the period ended 30th June 2022, payable in Pounds Sterling on 20 October 2022. In addition, after the completion of the current GEL72.7m (GBP21.64m) share buyback and cancellation programme, BoG will extend the programme by a further GEL40m (GBP21.6m).
Archil Gachechiladze, chief executive of Bank of Georgia Group said: “[With] … the war in Ukraine ongoing, this has undoubtedly been an emotional time for our people and our communities. It is inspiring to see how our colleagues continue to support each other at all times, and I am grateful to our entire team for their commitment to this organisation and for the outstanding performance that we delivered together during the second quarter.”
Distortion in the markets
Despite the ongoing war between Ukraine and Russia next door, Bank of Georgia has performed well – in fact better than expected – in the first half of 2022. In a recent interview with The Armchair Trader Michael Oliver, adviser to the CEO said: “Georgia has benefitted from a distortion in the markets. It’s a transportation, trade and logistics hub in the Caucasus – part of the old Silk Road. As the northern route [through Russia has closed, and there are ongoing issues in the Black Sea, trade is now taking the Georgia route.”
Gachechiladze said: “The numbers speak for themselves, but I’ll highlight a few points.”
“In the second quarter, the group’s operating income before cost of risk grew 60.0% y-o-y and 29.8% q-o-q to GEL334.2m, and profit amounted to GEL275.5m, up 36.3% y-o-y and up 14.5% q-o-q. We delivered a combination of strong customer lending growth, a higher ROAE of 32.8%, and a lower cost/income ratio of 32.5%.”
He continued: “The group’s performance was supported by the resilience of the Georgian economy. The higher-than-expected economic growth underpinned by Georgia’s position as an important transport, trading, and logistics corridor in the region and increased activity in the tourism, hospitality, and real estate sectors, was reflected across all lines of business. In particular, there were outstanding payments-driven revenues and net foreign currency gains, mainly driven by exchange rate volatility and client-driven flows as Georgia attracted tourists and migrants from nearby countries.”
Beating forecasts
The bank reported profits 24% ahead of forecasts, and with GDP in Georgia being upgraded from 7.2% for 2022 to 9.2% (1H22 GDP growth was 10.5%) the rest of the year is looking good for BoG. Its cost-to-income ratio improved from 35.9% to 33.6% with underlying credit risk of 0.7% – which is very low for a developing economy bank – and non-performing loans (NPLs) declining from 3.5% to 2.6%. The bank had a NPL coverage ratio of 138%.
The bank comfortably exceeded expectations across the board. Return on Equity was at record levels of 31.8% (32.8% 2Q22) smashing Numis’ target of 20% and the bank grew its loan book 19.7% on a constant currency basis. Numis revised its EPS forecast for 2022 by 20% to 540p from 449p, by 2% next year to 582p from 573p and by 5% the year after to 728p from 695p.
Hamilton said: “We believe BoG offers lower risk, materially higher returns and structurally superior growth, compared to every UK lender.”
“Bank of Georgia is consistently delivering strong profitability while maintaining capital adequacy ratios comfortably above our minimum regulatory requirements. The high level of internal capital generation, combined with the appreciation of the Lari against the US Dollar, led to a 30 basis points increase in the CET1 capital adequacy ratio in the second quarter of 2022, even after an 80 basis points effect of dividend distribution,” said Gachechiladze.
Russia risk
Georgia is in a tough neighbourhood and risks remain. Although it seems Russia has its hands full in Ukraine, there is a history of bad blood between the two Caucasian neighbours culminating in a short war in 2008. Russia still occupies the territories of Abkhazia and South Ossetia. Georgia is also a developing country, and as such has a more volatile economy than developed nations, despite being classified as “very high” on the Human Development Index.
However, Hamilton said: “We believe the way the war in Ukraine is developing lessens the likelihood of Georgia being brought into the conflict, with limited incremental gain for Russia. This is reflected in the 21% strengthening of the Lari and 23% BoG share price appreciation since the day before the invasion. In our opinion the geopolitical risk discounted in the current BoG share price is too great.”
The exposure of the Georgian economy to the Russian and Ukrainian markets is considerable, but manageable, said Gachechiladze. External flows from Russia and Ukraine to Georgia accounted for 9.6% of GDP in 2021, according to a company presentation. The major negative impact is expected through reduced exports (the share of Russia and Ukraine in Georgia’s total exports was 14.4% and 7.2%, respectively, in 2021), followed by the negative impact on tourism inflows (Russia and Ukraine together accounted for 25.4% of total tourism revenues in 2021).
Notably, Russia’s share in remittances has decreased significantly in recent years to below 20% of total in 2020-2021. Despite the unprecedented regional disruption, Georgia’s external inflows have remained resilient, said Gachechiladze. Tourism recovery continues, while commodity-led export revenues are increasing on the back of higher commodity prices. Furthermore, remittances increased significantly in April and May 2022, mostly reflecting the inflows related to tourists and migrants from the region, according to a company presentation.
EU membership
Georgia has a liberal, very free-market economy, that typically grows at 5%+ per annum. Georgian banking is very immature, providing a generational growth opportunity. BoG is one of two dominant banks that offer investors disciplined high returns on equity as well as structural growth and in March, Georgia submitted an application for European Union membership, with the government hoping that it will gain candidate status by the end of the year.
With Russian troops continuing to occupy Abkhazia and the Tskhinvali/South Ossetia region, there is a very physical reminder that Georgia is still a small fish in a big pond. Russia is opposed to the eastward expansion of NATO to include the former Soviet republics, such as Georgia. Georgia’s progression towards integration with the EU and NATO may intensify tensions between Georgia and Russia.
On 8th July 2019, Russia’s ban on direct flights to Georgia, imposed over anti-occupation protests in Tbilisi, came into effect. The ban had a short-term negative impact on the Georgian tourism sector, however, it has also provided incentives to further diversify the country’s tourist base.
Economic dependency
Gachechiladze warned: “The group’s operations are primarily located in, and most of its revenue is sourced from, Georgia. The Georgian economy is well-diversified with no significant dependency on a single country. However, it is dependent on the economies of the region, especially Russia, Turkey, Azerbaijan, and Armenia, which are its key trading partners. The group’s ability to deliver its strategy may be impacted by conflicts in the region, especially the ongoing Russia-Ukraine war.”
The bank owns a subsidiary, JSC Belarusky Narodny Bank in Belarus – a close ally of Russia in the current conflict. Another risk driver that has emerged for BoG in the context of the Russia-Ukraine war is the expansion of sanctions against Belarus, including some Belarusian banks. The scope of sanctions on Belarus is also evolving. As at 30th June 2022, Gachechiladze said the bank did not have any exposure to the Russian banks impacted by the US, UK, or EU sanctions.
Despite the fog of war complicating the region’s development, Bank of Georgia remains an interesting prospect. Wholly-owned by western institutional investors, but operating in a rapidly-developing, resource-rich region on the fringes of Europe, Bank of Georgia offers exposure to developing market growth potential, but with institutional market security.
“We’re not seeing the effects of a potential global recession coming through in Georgia,” said Oliver: “there won’t be a recession in Georgia like there is likely to be in the rest of Europe – instead we are expecting high single, to low double-digit growth in the economy, following 10% growth last year.”
