Georgian Banks: Battling uphill (BGEO downgraded to HOLD; TBC stays BUY)

The Georgian banks’ stock performance has been muted in 2018 thus far. Although the macro has remained insulated from the rest of the world, we believe the stocks have been affected by the headwinds in the markets and the structural developments in the sector. Regulation is becoming more restrictive, in order to curb dollarisation and households’ indebtedness. NIMs are also normalising and capital is tighter. In short, Georgian banking is maturing, in a good way, in our view: this is a healthy transition, particularly on the regulation front, where NBG is proactive. However, we do not want to sleepwalk. Although we have changed our estimates only marginally here, the battle is an uphill one. We have revised down our price targets (PTs) for the two banks, in line with our increased COE assumptions, which is a reflection of the increasing cost of capital globally. We also downgrade Bank of Georgia (BGEO) to HOLD from Buy (GBP 16.5/share PT) on the back of tighter capital and our relative value argument vs. TBC. TBC remains our preferred pick, and we keep our BUY (GBP 19.1/share PT) rating.