It has been a better year for TBC Bank bonds: We reiterate our Buy recommendation on the GEBGG 6% 2023 bond and upgrade the GEBGG 11.125% Perp to Buy from Hold. The spread difference between TBC Bank (TBCBGE) and Bank of Georgia (GEBGG) USD-denominated senior bonds has narrowed to c20bps from c60bps at the start of the year and the TBCBGE Perp is about 25bps tighter than the GEBGG Perp, having been 40bps wider at the end of last year. We acknowledge that the TBC Bank senior bond was quoted too wide relative to Bank of Georgia – we discussed this in a previous report. Regarding the perpetual securities, the different issuance formats (the TBCBGE Perp is RegS/144A, the GEBGG Perp is RegS only) may have played a part in the bonds’ performance, which we cannot justify based on Bank of Georgia’s most recent figures, or the outlook for this year. A risk to our view on the GEBGG Perp is that management stated that a tap may be considered as the bank grows. We note that management also stated that any such addition would be small.
Strong bottom line: Bank of Georgia disclosed net income of just under GEL500mn for FY 19, 32% higher than in the previous year. Revenue generation was strong, cost growth was modest and provisions fell by a third. There was also a decline in one-off charges. Performance was particularly strong in the fourth quarter. Q4 19 net income of GEL157mn was up 17% qoq, generating an annualised ROE of almost 30%. The FY 19 ROE was over 25% – a solid result, in our view.
Solid core revenues: Operating revenue of GEL1.1bn was 8% higher than in 2018, reflecting solid core revenues. Net interest income rose 8% yoy to GEL789mn, as strong volume growth offset the impact of lower loan yields (due to a change in product mix). On the bank’s calculations, the net interest margin contracted to 5.6% in 2019 from 6.5% in 2018. The 18% rise in net fee and commission income was driven by guarantees and letters of credit. A property revaluation gain of almost GEL13mn also contributed to stronger revenues.
Efficiency ratio remains below 40%: Higher staff costs and depreciation charges led to an 11% yoy increase in operating expenses. This partly reflects increased IT (including additional staff) and marketing investments related to a new brand campaign. The rise in costs also reflects branch upgrades and investment in the SME business. As a result of all this, the cost/income ratio was 1.1ppts higher than in 2018, at 37.8%. We note this ratio still compares well with most lenders we cover.
Significant improvement in asset quality: The non-performing loans ratio improved to 2.1%, 80bps better than at the end of Q3. Management noted that the improvement reflected both write-offs and recoveries. The write-offs of fully-provisioned loans meant that coverage fell to 81% from 91% at the end of the previous quarter. Management believes changes in regulations mean the loan book is less risky and better collateralised and is not concerned about the decline in the coverage ratio.
LCR improved in 2019: The loans/deposit ratio was 118%, up from 115% at end-2018 driven by very strong loan growth in the local currency corporates business. Management noted that changes to corporate taxation contributed to this loan growth, and expects loan growth, especially in the SME business, to remain strong (ie above 20%) as the bank seeks to gain market share. Bank of Georgia made some more progress with de-dollarisation efforts during 2019 – the share of foreign currency loans in the retail and corporate businesses fell to 43.7% (end-2018: 50.3%) and 81.1% (end-2018: 82.3%), respectively. Bank of Georgia’s liquidity coverage ratio (LCR) improved to 137% from 120% at the end of the previous year. This ratio remains much higher than the minimum required level of 100%. Cash and equivalents reached cGEL2.2bn at end-2019, up from GEL1.4bn at the end of September, and accounting for close to 12% of total assets (end-Q3 19: 7.8%). These disclosures suggest there shouldn’t be concerns about the GEL500mn eurobond which matures in June this year.
Boost to total capital expected soon: The bank’s Tier 1 and total capital ratios were 13.6% and 18.1%, respectively. Both ratios were higher than at end-2018 and end-September 2019. The CET1 ratio was 11.5%, down from 12.2% a year ago, but 40bps higher than at the end of Q3 19. Bank of Georgia has a stated aim of maintaining CET1 and Tier 1 ratios, which are 200bps higher than regulatory requirements. However, the latest-reported CET1 and Tier 1 ratios were both 140bps above the minimum required levels (which management states reflects the decision to deploy much more capital). The total capital ratio was 100bps higher than the minimum requirement of 17.1%. We note that some capital buffers actually improved yoy – at end-2018, the Tier 1 and total capital ratios were 80bps and 70bps higher than the minimum required levels. CAR should be boosted when Bank of Georgia utilises the rest of the subordinated loan facility provided by FMO and other lenders. GEBGG has drawn down US$52mn of the US$107mn facility so far and expects to access the rest of this by the end of June this year. On Tier 1, Bank of Georgia stated that a small tap may be considered as the bank grows.