The FINANCIAL -- “Under the base case scenario, that assumes smooth economic development and no major political shocks in Georgia, I project annual price growth for TBC Bank shares to be at 15-20%,” Vitaliy Vavryshchuk, Head of Research at SP Advisors, a full-service investment house with operations in Ukraine and Eastern Europe, told The FINANCIAL.
“We expect TBC Bank’s assets and loan book to grow in line with the sector in the future. Georgia’s banking sector is under-penetrated: end-2013 loans-to-GDP ratio stood at 39% and deposits-to-GDP ratio at 39%, substantially below CEE levels of more than 55%. Since GDP growth is picking up and demand for loans remains robust, we project the Bank’s loan book will expand at 16-17% annually in the mid-term. Fast growth of the loan portfolio is only a part of the story - the Bank is also improving its operating efficiency and maintains rigid control of the loan book quality. All these factors combined imply the Bank should achieve net income growth of c. 19% p.a. and maintain ROE of 17-18% in the next five years. Markets will definitely reward such performance via higher valuations,” he said.
“One should note that it’s not only banks’ financials that matter for investors. They also pay close attention to the economic situation in Georgia and in the region. If there is convincing evidence that the economic situation will be improving further, banking stock valuations are growing,” Vavryshchuk added.
With 20 years of strong expertise in the market, a unique franchise, and superior customer experience, TBC Bank has made an ambitious call to become the leading retail and SME bank in Georgia, according to SP Advisors.
SP Advisors believe all the necessary preconditions for that call are in place, including a healthy macro environment, surging customer demand, and a professional management team. Thanks to hefty interest margins, improving operational efficiency, and a low cost of risk, SP Advisors expect TBC Bank’s net income will grow at an average 19% annually for the next 5 years.
SP Advisors set a 12-m TP of USD 19.8/DR (implying 21% upside) and assign a BUY recommendation to the stock.
TBC Bank conducted an Initial Public Offering (IPO) on the London Stock Exchange in June 2014. Its IPO launched a new line of competition with Bank of Georgia. While the two lenders have fought for customer loyalty over the past decade they are now competing for investors’ attention and are striving to deliver superior financial results, according to SP Advisors. The ongoing competition in perfecting their respective business models bodes well for their future performance and both banks will be on a par in terms of creating value for shareholders, SP Advisors believe. SP Advisors therefore expect the valuations of both banks will converge over time.
“Business models of TBC Bank and Bank of Georgia differ. TBC Bank offers pure exposure to the country’s banking sector and its management doesn’t plan to diversify into other areas. Bank of Georgia, on the other hand, is actively developing so-called synergistic areas that include insurance, healthcare, and housing development. As far as lending is concerned, TBC focuses on retail and SME segments while Bank of Georgia doesn’t have a clearly-specified target segment. In terms of funding, TBC Bank is oriented solely on customer deposits and wholesale funding makes up an insignificant part of its liabilities. Bank of Georgia, on the other hand, also relies on issuance of debt securities, which implies it is exposed to shocks in global debt markets. Each model has its advantages and drawbacks and it’s solely up to investors to decide which one they prefer. It’s great that the Georgian banking sector offers two competing models, exposures as this expand the base of investors that are looking at Georgia and might be willing to invest in the economy in the future,” Vavryshchuk said.
Investors believe Bank of Georgia is in perfect financial health and they don’t expect any negative surprises in the future, says Vavryshchuk and adds that Bank of Georgia has made a contribution to Georgia appearing on the radars of many foreign investors.
“Bank of Georgia made significant progress on the London Stock Exchange (LSE) both in terms of share price and stock liquidity. The Bank’s GDR started trading on LSE back in 2006 and in February 2012 the Bank upgraded its listing to the Main Board and the stock was included in the FTSE 250 and FTSE All Share Indexes. This move reinforced investor interest in the stock. The first day of trading closed at GBP 10.6/share and the current price is close to GBP 25/share. It would be fair to say that Georgia appeared on the radars of many foreign investors thanks to the successful performance of Bank of Georgia,” he said.
“Also, Bank of Georgia’s Eurobond which matures in July 2017 trades with a decent yield-to-maturity (YTM) of 4.9-5.0% and offers only a slight premium to the Georgian Government Eurobond that is due in April 2021 and currently trades with YTM of 4.6%. This basically implies that investors believe Bank of Georgia is in perfect financial health and they don’t expect any negative surprises in the future,” Vavryshchuk added.
Q. What about the banking sector in Ukraine? What are the current risks and how is the sector overcoming the challenges?
A. Developments in the Ukrainian banking sector contrast sharply with the situation in Georgia. Ukraine is currently facing the most severe economic downturn since the transition period of the 1990s due to the military conflict in the eastern regions. GDP contraction combined with sharp Hryvnia depreciation took their toll on the financial sector. About 20 banks are currently being liquidated and I believe about 20 more banks are close to becoming insolvent. Recent stress tests held by banks upon requests of the NBU and the IMF revealed that only 5 of Ukraine’s 15 largest banks are adequately capitalized and will be able to absorb losses if the economic situation deteriorates.
The big problem here is that shareholders are not willing to contribute additional capital for their banks anymore. More than 10 large European banking groups divested their subsidiaries in Ukraine over the past three years and none of them is looking to return to the Ukrainian market in the coming years. Those EU banks that are still present in the country are also looking for exit opportunities. Local shareholders simply don’t want to inject money into banking businesses due to the great uncertainties ahead.
In addition to macroeconomic turbulence, the Ukrainian banking sector suffers from a weak institutional environment. Banks in Ukraine can’t easily repossess collateral and can rarely properly protect their rights in the courts. This caused an upsurge in NPLs which now stand at above 25% of the sector’s gross loans, according to rating agencies. Borrower frauds, which include stripping assets from companies and invalidating loan agreements via unlawful court decisions, are widespread in Ukraine.
Ukraine has to address property macroeconomic challenges and improve legislation so as to protect banks and make the banking sector an effective intermediary between depositors and borrowers. In my view, Ukrainian banks will need three to five years to recover their financial health, offset loan losses and return to robust loan book growth.