WOOD Flash – Georgian banks: notes from Tblisi – still battling uphill

We joined the investor days of both Bank of Georgia (BGEO) and TBC Bank in Tblisi last week. The banks are clearly evolving with a strong focus on ecosystems, which should be a strong asset in the long run, in our view. However, at this point, the short-term pressure on NIMs and limited lending growth prospects are likely to outweigh the long-term upside from ecosystems. Both banks expect another 30-40bps NIM contraction in the rest of the year compared to the 1Q19 levels, due largely to tighter regulation. In our calculations, everything else being equal, the ROE sensitivity to a 30-40bps NIM change is c.200-300bps. Although a NIM normalisation was expected, it seems to be happening fairly quickly, which could hamper the investment case. The banks expect loan growth to stay in a range of 10-15%. The silver lining is that the Georgian banks have been able to avert potential pressure on capital via additional Tier 1 issuances, which boosted the Tier 1 ratios by 200-250bps. The expectations regarding the impact of the Russian travel ban also remain benign. As it stands now, we rate BGEO a HOLD, with a GBP 16.5/share price target (PT). The stock trades at 6.1x P/E and 1.3x P/TBV for 2019E, on our estimates. Our rating on TBC is a BUY, with a PT of GBP 19.1/share. The stock’s multiples for 2019E are 6.3x P/E and 1.2x P/TBV, on our estimates.