Overview

TBC Bank Group PLC (TBCG) is a Tbilisi, Georgia-headquartered universal banking group and the parent company of JSC TBC Bank and its subsidiaries, catering to all key segments in the market, including retail banking, corporate banking, and micro, small and medium enterprises (MSME). Through its subsidiaries, it also provides a wide range of other financial services like brokerage services, investment banking, leasing and insurance. With a focus on the corporate sector and founding capital of just $500, the group was established in 1992, and by June 2014, the group listed global depositary receipts (GDRs) on the London Stock Exchange (LSE). It moved to the premium segment of the exchange in 2016 and was included as a constituent of the FTSE 250 Index from 19 June 2017.
Serving around 83% of the adult population in Georgia, the company is the largest banking group in Georgia. It holds a dominant position in all of its key segments and leads the market in terms of total deposits, total loans and total assets. The group seeks to provide its customers with the most innovative solutions on the market through upgrading its operations and continuously investing in technology, providing the group with a significant competitive advantage. To enhance, support and generate synergies with the core business, the company offers various financial services, in addition to banking, which is offered on an advanced omni-channel platform with a strong focus on digital.

Key Statistics


Management

Nikoloz Enukidze is the Chairman of the group, he joined the board in 2016. Vakhtang Butskhrikidze has been the Chief Executive Officer of the group since 1998. The CEO is supported by Giorgi Shagidze, who is the Chief Financial Officer and deputy CEO of the group.

Segments

The operations of the group are differentiated in three core operating segments, namely Retail, Corporate and Micro, Small and Medium Enterprises (MSME). The retail banking through an advanced omni-channel platform for mass retail clients offers a wide and diverse range of products. Moreover, to affluent and high net-worth individuals, the group offers sophisticated investment management and highly personalised private banking products. The Corporate division offers brokerage, financial advisory and investment banking solutions, in addition to a full range of banking products and services, to large and mid-sized corporates. The MSME divisionservesmicro, small and medium-sized businesses, and through the business support program, non-financial services and innovative banking solutions are offered to start-ups.

Top Shareholders

 
(Source: Thomson Reuters)

Financial Highlights (H1 FY 2019, in Georgian Lari, GEL)

 
(Source: Company Filings)

During the first half of the financial year 2019, interest income rose by GEL 80.2 million or 13.4% to GEL 678.2 million, driven by an increase in interest income from loans and advances to customers of GEL 56.5 million. A 21.8% increase in interest expense on customer accounts to GEL 27.9 million, led to a rise in interest expense by 24.1% to GEL 290.8 million in 1H 2019. This resulted in a growth of 6.6% in net interest income by GEL 23.8 million to GEL 387.4 million, net interest margin was 5.8% in 1H 2019, compared to 7.0% in 1H 2018.

Reflecting an increase in net fee and commission income from guarantees of GEL 3.2 million and a rise in other net fee and commission income of GEL 6.4 million, net fee and commission income was up 15.2% or GEL 11.3 million to GEL 85.3 million. Due to the increased number and volume of FX transactions across all of the segments, net income from foreign currency operations rose by 29.3%, along with a 52.2% increase in gross insurance profit, which contributed in 20.3% growth in total other operating non-interest income and gross insurance profit to GEL 71.5 million in 1H 2019.

Operating income after credit impairment losses during the period amounted to GEL 477.78 millionagainst GEL 422.56 million reported in the corresponding period of the last year. Due to a rise in staff costs, administrative expenses, and depreciation and amortisation, total operating expenses expanded by GEL 28.9 million, or 15.8%, in H1 2019 to GEL 211.9 million. Underlying net income rose by GEL 40.9 million, or 18.8%, over the year to GEL 258.3 million, while reported net income for 1H 2019 increased by GEL 53.6 million, or 26.8%, to GEL 253.5 million.

Reported return on equity was up by 1.1pp at 22.3% and reported return on assets was up by 0.2pp to 3.3%. Due to a 30.4%, rise in liquid assets and a rise in net loans to customers of 26.0%, total assets amounted to GEL 17,278.4 million as of 30 June 2019, up by 27.2%. Compared to the minimum required levels of 11.9% and 16.7%, Basel III Tier 1 and Total Capital Adequacy Ratios (CAR) stood at 12.4% and 17.4%, respectively, and total equity was reported at GEL 2,369.0 million, up by 21.9%.

Key Performance Indicators


(Source: Company Filings)

In the financial year 2018, employee satisfaction, which is indicated by ENPS, grew to 66%, showing a considerable growth from 55% reported in 2017, while engagement index declined by 4 percentage points. Indicating a strong performance in digitalisation, Retail transaction offloading ratio, which shows the number of transactions conducted in remote channels divided by the total number of transactions, rose by 2.3 percentage points to 90.6%, while internet banking penetration ratio and mobile banking penetration grew year-on-year and amounted to 43.7% and 37.0% respectively.

Financial Ratios

 
(Source: Thomson Reuters)

Ratios Commentary

While the net interest margin has slightly decreased in contrast to previous quarters, it is still considerably higher than the industry median, which augurs well for the profitability of the group. The efficiency ratio and operating leverage of the group are lower than the industry median, indicating a room for improvement. In the last quarter, the group reported a higher pre-tax ROA and ROE as compared to the industry median. The group’s financial leverage in the current quarter was significantly lower than the peer group.

Valuation Methodology
Method 1:Price/Earnings Multiple Approach (NTM)



To compare TBCG with its peers, Price/Earnings multiple has been used. The peers are Bank Sankt-Peterburg PAO(NTM Price/Earnings was 2.70), KCB Group PLC(NTM Price/Earnings was 4.45), Bank of Georgia Group PLC(NTM Price/Earnings was 4.81),Halyk Bank AO(NTM Price/Earnings was 4.86), Sberbank Rossii PAO(NTM Price/Earnings was 5.09), TCS Group Holding PLC (NTM Price/Earnings was 5.49) andMoskovskaya Birzha MMVB-RTS PAO(NTM Price/Earnings was 10.18). The mean of Price/Earnings (NTM) of the company’s peers was 5.37x (approx.).

Method 2: Price/Book Value Multiple Approach (NTM)



To compare TBCG with its peers, Price/Book Value multiple has been used. The peers are Halyk Bank AO(NTM Price/Book Value was 0.03), Bank Sankt-Peterburg PAO(NTM Price/Book Value was 0.38), KCB Group Plc(NTM Price/Book Value was 0.91),Bank of Georgia Group PLC(NTM Price/Book Value was 1.11), Sberbank Rossii PAO(NTM Price/Book Value was 1.14), andMoskovskaya Birzha MMVB-RTS PAO(NTM Price/Book Value was 1.67). The median of Price/Book Value (NTM) of the company’s peers was 1.01x (approx.).

Share Price Commentary


Daily Chart as at 09-September-19, before the market closed (Source: Thomson Reuters)

On 09 September 2019, at the time of writing the report (at 10:15 am GMT, before the market closed), TBCG stock was trading at GBX 1,220, remaining flat against the previous day closing price. Stock's 52 weeks High and Low is GBX 1,766.00/GBX 1,204. The company’s stock beta was 0.69, reflecting less volatility as compared to the benchmark index. The outstanding market capitalisation was around £673.76 million, with a dividend yield of 4.88 per cent.

Risks Assessment and Growth Prospects

As the company is engaged mainly in traditional lending activities, credit risk is the most material risk faced by the company, as it is exposed to the risk of loss due to the inability of a customer or counterparty to meet its obligations. These loses may be further augmented during unfavourable macroeconomic conditions and includes risks arising from foreign currency-denominated loans, due to high level of dollarization of the economy and large presence of foreign currencies on the balance sheet of the group. Portfolio growth rates can be impeded, and portfolio quality and profitability might deteriorate in case of a slowdown of economic growth in Georgia. During an economic slowdown, expansion plans in the country would stop, limiting demand for new loans and impacting the repayment capacity of borrowers. The value of loan collateral might also decline due to falling property prices, household disposable income decreases, thus impacting the financials of the group. Moreover, a fall in interest rates can lead to a fall in net interest margin, which can further deteriorate profitability.

The company reiterated its medium-run targets, including loan book growth of 10-15%, dividend pay-out ratio of 25-35%, the cost to income ratio below 35% and ROE of above 20%. The group holds a commanding position in the Georgian market, with market share by total loans at 38.5% as of 30 June 2019 and market share by total assets at 39.1% as of 30 June 2019, helping to enjoy the first position in various markets. Indicating the strong credibility and growth prospect of the business, the group recently achieved the lowest ever yield by a Georgian issuer in the international debt capital markets and the largest and lowest coupon Additional Tier 1 issue ever to have been priced by a Georgian issuer. The total capital adequacy ratio (CAR) per Basel III guidelines and tier I capital ratio were above the minimum requirements, indicating a strong capital base and a robust liquidity position. To minimise the credit risk, the credit portfolio of the group is structurally highly diversified across industry segments, product types and customer types, and it had a largely collateralised portfolio in all its segments.


(Source: Company Filings)

In the first half of the year, the fiscal stance of the Georgian government was expansionary, and external inflows were reasonably strong, while the real GDP increased by 4.9% in the first 5 months. Driven by the growth in tourism and remittances inflows and improved trade balance, the current account deficit has narrowed in the first quarter, though credit growth has moderated. While the growth for the year is expected to be positive at 4%, a substantial impact on tourism inflows is expected from the recent restriction on flights from Russia to Georgia. In the banking sector, corporate loans were the main driver of the acceleration in bank credit growth with an 18.0% growth rate in June, while credit growth came in at 14.1% in June 2019, which was 1.4 percentage points higher compared to the 12.7% in the previous month. During the period, the currency of the country depreciated, which can impact the credibility of foreign borrowers, and it was reported that the central bank would consider the monetary policy tightening to support depreciation of the currency.

Conclusion

The group is the established leader in the Georgian banking sector, with a vast network of branches and advanced omnichannel distribution platform. In the last three years, net interest income for the second quarter has increased by a CAGR of 20.71%, while net interest income after loan loss provision has risen by 18.76%. While net income before taxes rose at a CAGR of 21.82% in the last three years, net income rose by 14.08%.
Based on the decent growth prospects, and supported by valuation undertaken using the above two methods, we have given a “BUY” recommendation at the closing  price of GBX 1,220 (as on 06 September 2019) with single-digit upside potential based on 5.37x NTM Price/Earnings (approx.) on FY19E earnings per share and 1.01x NTM Price/Book Value (approx.) on FY19E book value per share.
 
 
*The buy recommendation is valid for the current price as covered in the report (as on 09-September-19).
*All forecasted figures and Peer information have been taken from Thomson Reuters.

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