On the eve of the anniversary of the Russian invasion of Ukraine in 2022, the world is still counting the cost of the war in terms of higher energy prices, higher food prices, higher inflation and heightened geopolitical insecurity.
US President, Joe Biden, recently concluded a whistle-stop tour of NATO’s eastern flank to give encouragement to allies on the eastern fringe of the alliance, stopping in Kiev and Warsaw. One country that has been here before is Georgia, which was attacked by Russia in 2008, which resulted in Russia annexing Abkhazia and South Ossetia in the South Caucasus. However, the War in Georgia was a 12-day affair, and since then Russia has more or less left Georgia alone. Georgia in turn has kept out of the dispute.
One would have thought that the Russian hinterland would be devastated, not only by the same factors feeding into the global slump, but would have been affected even more so, as a result of the sanctions imposed on Russia. Not so.
Bucking global trends
Bank of Georgia LSE:BGEO, the FTSE250-listed commercial bank, just like the country where it is based is bucking the economic trend and having performing strongly. The bank, which listed on the London Stock Exchange in May 2018, recently released its fourth quarter and full year 2022 preliminary results and has had a good year on the back of the Georgian economy maintaining its recent strong momentum despite the ongoing war in Ukraine and global interest rate and inflationary trends.
As Michael Oliver, adviser to the CEO, Bank of Georgia Group PLC explained in a previous conversation with The Armchair Trader last year: “Georgia has benefitted from a distortion in the markets, [being] 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.”
- Share tip: this FTSE 350 stock is well-positioned to benefit from rate cuts
- HSBC vs NatWest: Which stock should you be banking on in 2025?
- Burberry bid: Any substance to ongoing takeover rumours?
The country has benefitted from inbound migration – a lot of professional and mobile Russians, either looking to keep operating their business around the sanctions, or opposing the war and fearing the draft – have take the trip across the 894km border with Georgia. Migrants have also brought capital with them, which has boosted domestic demand.
According to preliminary data, Georgia’s real GDP grew 9.5% year-on-year in the fourth quarter, and estimated real GDP growth for full year 2022 was 10.1%. The export of goods and services was the main driver of growth along with increased investment expenditure.
Domestic demand
Consumption spending slowed due to high inflation and tightened lending conditions. Nonetheless, domestic demand remained strong, supported by increased revenues from the external sector and fiscal spending. The overall growth was broad-based, with primary contributions from transport and communications, hospitality, and other services sectors.
BoG reported pre-tax profit up 55% to GEL1.24bn (GBP391.5m) from GEL801.9m in 2021, with operating income adjusted for one-off items of GEL2bn, up 46.6% year-on-year. The bank’s chief executive, Archil Gachechiladze attributed this to: “a strong performance across core revenue lines, with a four-fold increase in net foreign currency gains on the back of migrant inflows, increased activity, and higher spreads throughout the year,” in a statement to the market. Net interest income rose 24% to GEL1.18 billion from GEL953.9 million.
The performance of the Georgian lari also helped the bank’s results, appreciating 12.5% against the US dollar in 2022, and putting on another 1.9% versus the dollar in January of this year. This saw net foreign currency gain increase to GEL466.1m from GEL109.1m the year before.
Double dividend
BoG opened trading today (23rd February) at 2,672p and has offered a year-to-date return of 5.57%, and a one-year return of 84.2%. Bank of Georgia’s shares have ranged from 960p to 3,015p over 52-weeks. The bank has a market capitalisation of GBP1.3bn and offered an earnings-per-share of GEL30.33 twice the diluted EPS of GEL14.88 the year previously. The bank intends to recommend a final dividend for 2022 of GEL5.80, bringing the total to GEL7.65, doubled from GEL3.81 in 2021.
As ‘one to watch’ in 2022 and given the state of the global economy and the local conditions, BoG has justified our confidence.
Share buyback
Earlier this month the bank approved an increase of GEL148m in its share buyback and cancellation programme, as it forges ahead with its capital and distribution policy, announced in September 2021, to target a dividend/share buyback payout ratio in the range of 30-50% of annual profits. Shares will be repurchased on the open market in order to reduce the group’s share capital, and the cancellation of the treasury shares repurchased will be executed on a monthly basis. The share buyback and cancellation programme increases the total dividend/share buyback payout ratio, relating to 2022 earnings, to 37%.
BoG is Georgia’s leading commercial bank, operating in retail and corporate banking. It offers a broad range of financial products and services, including deposits, loans, payment services, and investment management. Headquartered in Tbilisi the bank and has a network of more than 270 branches across the country, serving over 2.4 million customers.
Over the past few years, BoG has demonstrated strong financial performance, characterized by steady growth in key financial indicators. In 2022, the bank reported total assets of GEL 20.6bn, representing a 14.6% increase compared to the previous year. The bank’s loan portfolio grew by 10.7%, reaching GEL 15.8bn, while customer deposits increased by 14.2%, totalling GEL 15.2bn.
BoG’s profitability has also been robust, with net profit of GEL714m in 2022, a 26.4% increase compared to the previous year. The bank’s return on equity and return on assets ratios were also impressive, standing at 21.3% and 3.6%, respectively.
Increased foreign investment
Several factors have contributed to the BOG’s strong financial performance over the past few years. One of the key drivers has been the robust economic growth in Georgia, which has been supported by favourable macroeconomic conditions, structural reforms, and increased foreign investment.
Georgia’s GDP growth has been strong, averaging 5.1% annually between 2016 and 2021, according to the World Bank. This has translated into higher demand for financial services, including loans and deposits, which has benefited the bank. Moreover, the Georgian government’s efforts to improve the business environment, streamline regulations, and reduce corruption have attracted foreign investors and boosted economic growth.
BoG’s diversification strategy has also played a role in its financial success. The bank has expanded its product and service offerings to cater to different customer segments, including retail, SMEs, and corporates. This has allowed the bank to capture new revenue streams and increase its market share.
In addition, the Bank of Georgia has invested in technology to enhance its operations and customer experience. The bank’s digital transformation efforts have included the development of mobile and online banking platforms, as well as the deployment of artificial intelligence and data analytics solutions to improve risk management and customer insights.
Geopolitical tension
However, BoG does operate in a tough neighbourhood. With a volatile Middle East to its south east – Tehran is some 500 miles away – Russia to the north and sharing a border with a militaristic Turkey to the south, the prospects of geopolitical tensions are never far away.
As with all countries, an economic slowdown or recession will affect the financial services sector significantly, with a reduction in deposits and uptick in non-performing loans. BoG is very tied to the domestic economy, it doesn’t have a huge amount of international diversification (despite being a London-listed entity).
BoG is also the leader in a highly concentrated Georgian banking sector, and any problems in the lower-tier banks and financial services firms can quickly infect the whole sector. Any regulatory scrutiny or legislation prompted by lower-tier financial firms will also affect BoG.
The war has helped Georgia, as it has become an alternative transhipment route for near-east and middle-eastern trade and safe haven for Russian dissenters, or Russian entrepreneurs looking at continuing to access the global economy. Any settlement between Russia and Ukraine could see a resumption of business as normal, trade routes returning to how the were before February 2022 and Russian emigres returning to the motherland with their capital.
That said, the Georgian economy has plenty to be proud about and should instability continue, Georgia should benefit as should BoG.
