Fixed Income Analysis /

Bank of Georgia: Q1 review – Another good quarter

    Tolu Alamutu
    Tolu Alamutu

    Credit Research Analyst, Banks

    Tellimer Research
    17 May 2019
    Published by

    Assigning Hold recommendation to AT1: We reiterate our Buy recommendations on the Bank of Georgia (GEBGG) GEL and US$- denominated senior bonds. We assign a Hold recommendation to the GEBGG 11.125% Perp, which is up over 3ppts since it was issued in March. Performance in Q1 was good. Although margin pressure has persisted, non-interest income improved yoy and ROE remained over 20%. In addition, there was no significant asset quality deterioration in the quarter, and the bank’s capital ratios were higher than at end-2018, excluding the AT1 issue. 

    Good results overall: Excluding one-off personnel termination costs, Q1 19 net income was GEL112mn, generating a return on equity of 24.5% on the issuer’s calculations. The unadjusted ROE was still quite high at c22%. Fundamentals remain a key strength at Bank of Georgia, supporting our constructive view.

    Expect further pressure on margins: Operating revenue of GEL259mn was up yoy, driven by strong non-interest income. Net fee and commission income was more than 20% higher than a year ago, and trading gains increased. Bank of Georgia also disclosed a modest rise yoy in net interest income, though its net interest margin narrowed. The changing product mix – in which some consumer lending is being replaced by GEL-denominated mortgages – meant that net interest margin contracted yet again, to 5.8% from 6.0% in Q4 18 and 7.0% in Q1 18. Management stated that higher foreign currency liquidity requirements may take another 20-30bps off margins, and extra Tier 1 capital may have an additional 10bps impact. Loan growth (which is expected to be c15% this year) may help offset this impact. 

    One-offs impacted costs: Operating costs decreased qoq as lower administrative expenses countered the impact of one-off termination costs. However, costs rose yoy. The issuer’s cost/income ratio was 38.5%, higher than in Q1 18 and Q4 18, but this ratio still compares well with many other banks we cover.

    No qoq change in NPL ratio: The NPL ratio was flat qoq, at 3.3% as loan growth offset a slight rise in total non-performing loans (to GEL326mn from GEL318mn). Positively, the coverage ratio improved to 92% from 90.5% at end-2018. The cost of risk is expected to be higher in retail, but lower in corporate lending. Management doesn’t expect a significant change in the overall cost of risk relative to the 2018 level.

    LDR improved in Q1: The bank’s LDR was 114% at end-Q1, down from 115.5% at end-2018, as deposit growth of 3% marginally exceeded loan growth. The liquidity coverage ratio improved to 133% from 120%. Cash and equivalents of GEL1.16bn were down qoq, but amounts due from banks increased yoy and qoq. We do not see near-term liquidity as a concern. We think the bank may consider replacing the GEL-denominated Eurobond, which matures in June 2020.

    AT1 not yet included in capital ratios: The Tier 1 and total capital ratios were 12.7% and 17.1%, respectively. Both ratios were higher than at end-2018. We note these ratios do not yet include the US$100mn AT1 issue, as regulatory approval to do so was only granted in April. The bank previously stated that the AT1 security would add c230bps to its Tier 1 ratio and would take its capital ratios above the estimated fully-loaded Basel III capital requirements for 2021. The equity/assets ratio was c12.8%, also higher than at end-2018.