Georgian Banks - Opening Long Trade Idea

We are opening a long trade idea on Georgian banks before they report 2Q20 results next week. > Rationale. We think an important near-term driver for the Georgian bank stocks will be the 2Q20 IFRS results, which are due next week (for TBC Bank on August 18, for Bank of Georgia TBD), as well as the updated operating outlooks from the management teams. Having posted sizable losses in 1Q20 on very high up-front provisioning, we think both banks will bounce back with good profitability in 2Q20 - we expect GEL108 mln net income for Bank of Georgia, with almost 21% ROE, and GEL115 mln for TBC Bank with around 18% ROE. While there remains much uncertainty about the pace and extent of the Georgian economic recovery, our economists think that substantial IFI support should be enough to cover this year's budget and current account deficits. They forecast a 6.3% GDP contraction this year and 5.0% growth in 2021. As we pointed out in our recent report on the Georgian banks ("Georgian Banks - Resilient Enough to Survive Challenging Times"), we think they have solid enough capital and liquidity (in addition to improving profitability) to get through this challenging time without capital calls. > How have the stocks been performing? The stocks have been beaten up YTD, with Bank of Georgia down 49% in dollar terms and TBC Bank down 36%. This compares to Halyk Bank's 18% drop and Sberbank's 23% fall. The two banks now trade on a 3.4-3.7 2021E P/E, well below their historical averages. > Risks to our idea. The main risks to our call are worse than expected 2Q20 numbers and operating outlooks, more damage than expected to the Georgian economy, particularly in terms of tourism and remittances, and a further weakening of the lari, which has been very stable over the past couple of months.