Georgian Banks: A tale of two banks (initiation of coverage: Bank of Georgia, HOLD; TBC Bank, BUY)

In this report, we initiate coverage of TBC Bank Group PLC and Bank of Georgia Group PLC, which are LSE-listed holding companies that own two banks that dominate the Georgian banking sector, Bank of Georgia (BGEO) and TBC Bank (TBC). Whilst TBC is a pure banking play, BGEO defines itself as an investment platform that invests in the non-financial sectors as well. The key feature of the Georgian banking sector is the very high level of consolidation, pricing power and pro-business operating environment. We see 20%+ longer-term ROE targets as doable, on the back of somewhat declining, but still rich, margins and the planned introduction of a 0% tax rate on financial services companies in 2019. The risks cluster around dollarisation and the resulting asset quality risks. Potential regulatory or political intervention in rich lending spreads is also a tail risk in the longer run. We would prefer exposure to the sector through TBC (BUY, price target (PT) of GBP 17.4/ share, 6.9x P/E and 1.3x P/TBV for 2018E). We see BGEO as a novel investment case, but we would seek a better entry point (HOLD, PT GBP 34.5/share, 7.7x P/E and 1.3x P/BV for 2018E).