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Careful groundwork reaps IPO success

The Bank of Georgia’s oversubscribed London IPO epitomised Georgia’s drive towards catching up with the rest of the world. Ben Aris reports from Tbilisi on how chairman Lado Gurgenidze turned the bank around.
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Almost everything about the Bank of Georgia’s initial public offering on the London Stock Exchange last autumn was unusual.

Not only was it the first Georgian bank to debut on the international capital markets, it was also only the second ever Commonwealth of Independent States (CIS) bank to float its shares. And despite the fact that Georgia’s banking sector is well behind almost all of the eastern European countries, the offer was massively oversubscribed and allowed the bank to raise about $150m.

Then there is the shareholder structure. While other eastern European banks from Kazakhstan and (soon) Russia are selling minority stakes, 100% of Bank of Georgia’s shares are freely floating, with the management holding only 2% of the stock.

The bank quickly followed up with a $200m Eurobond issue (another first for Georgia) and has used the capital to continue its rapid expansion and cement its claim to being Georgia’s best and fastest-growing bank.

The banking sector in Georgia is only just starting to grow strongly, but thanks to the strong supervision of the National Bank of Georgia, which has worked hard to avoid the banking crises other CIS countries have suffered, it has a relatively healthy financial sector.

Underdeveloped sector

There are a total of 18 banks, but apart from Bank of Georgia, the rest of the sector is underdeveloped and slow moving. With loans to gross domestic product (GDP) of only 20% and retail loans of only 6% of GDP, banks have yet to penetrate far into the market and the retail banking craze that has hit the rest of the CIS is still in its early stages.

“Georgia has the highest concentration of banks of any CIS country; the top five banks control some 80% of the country’s banking assets,” says Bank of Georgia chairman Lado Gurgenidze. “This makes it difficult for outsiders to set up greenfield operations as the competition is already strong.”

The sector is growing fast. Last year, banking assets were up 74% year on year, whereas Bank of Georgia’s assets grew 160%, adding another 10% to its market share.

Bank of Georgia was set up in 1903 and nationalised by the Communists before being privatised again in 1994. Among the early shareholders was a famous Georgian scientist, the European Bank for Reconstruction and Development and DEG, a subsidiary of Germany’s KfW. However, these shareholders were not happy with the management of the bank and in 2004 sacked them and persuaded Mr Gurgenidze to take over.

He quickly hired fellow Georgians who had experience of working in international banks and he built up a 20-strong team that has been establishing international banking practices.

Then he went to look for investors to recapitalise the bank to pay for its expansion. The first deal he did was with US-based Firebird Capital LLC, which has about $3bn under the management of Ian Hague, something of an investment guru in eastern Europe. Mr Gurgenidze didn’t need to persuade Mr Hague. A deal was struck and Firebird bought 14% of the bank.

The Stockholm-based East Capital, the leading fund specialising in central and eastern Europe, was only just behind, buying its first stake in November 2004 and building this up to 7% over the following year or so.

Then Mr Gurgenidze turned to building up the business as quickly as possible. “We came in with a private equity investor’s mentality: clean it, fix it, grow it, sell it,” he says. “But then in the summer of 2005 we began to realise that we had a two-year window to bulk up the business before the strategic investors arrived. These international banks were very busy with Ukraine and Kazakhstan, but clearly would turn to Georgia at some point. A London listing was a no-brainer once we realised this.”

The bank floated its shares in November 2006 at a price of just over $20 and the stock was up by half in the first six months, giving the bank a market capitalisation of $575m by the end of the year.

The Georgian economy may not be big, but corporate customers are an important part of Bank of Georgia’s business. The bank boasts 45,000 corporate and small and medium-sized enterprise clients that include most of the leading companies in the country, offering them the full range of corporate services from payroll to pensions. As such, Bank of Georgia is the country’s only full-service bank.

Municipal account

Last year, the bank scored a coup by becoming the exclusive agent for the city of Tbilisi, worth GEL470m ($278m), the biggest municipal account in the country.

However, the future is in retail banking. Of all the country’s banks, Bank of Georgia has the most significance presence and has been pushing hard to expand its market share.

Last year it more than doubled its number of branches to 107, which gives it almost half the retail banking market. In total, the number of retail customers quadrupled in 2006 to reach more than 400,000 in a country of 4.5 million people. The bank has 300,000 debit cards in circulation and more than 100 branches outside the capital.

The bank also offers corporate clients more sophisticated products through its investment banking, asset management and wealth management arms, much of which is grouped under its Galt & Taggart subsidiary.

The Georgian capital market is still extremely rudimentary, but the economy is growing fast. Last November, simmering tensions with Russia flared up into a major showdown after Georgia arrested several Russians in Tbilisi on spying charges. The Kremlin was outraged and closed the borders to trade – destroying Georgia’s lucrative wine exports – cancelled all trains and planes between the two capitals and expelled many Georgian nationals living and working in Russia.

“The embargo was the best thing that ever happened to us,” said president Mikhail Saakashvili earlier this year. Mr Gurgenidze says that it only took a few weeks for the Populi supermarket chain, which the bank owns, to switch suppliers from Russian to Ukrainian companies. Despite being cut off from its largest export market, the Georgian economy still put in a robust 8.9% GDP growth last year and forced everyone to diversify their supplies and customers.

The ability of the economy to withstand such a massive shock is partly due to Kaha Bendukizi, an ethnic Georgian who made a fortune as a Russian industrialist in the 1990s, and went on to head up Georgia’s reform effort.

“No one was happy when our major trade partner slapped an embargo on us,” Mr Bendukizi says, “but the economy is already reformed and could absorb this kind of shock. The embargo cut about 2% off GDP growth but not more.”

Fighting corruption

Privatisation is finished and the state only has a few land plots and small companies left to sell. Mr Bendukizi has slashed the number of permits and licences in an effort to cut the endemic corruption, and Mr Saakashvili took the radical decision to sack the entire traffic police corps to end perennial bribe-taking in the force.

Now the government’s main task is to build up the financial system to promote more growth. There are a total of 280 listed companies on the local bourse, but the bulk of them are never traded. Even the handful of blue chips can go a month without a transaction. Indeed, the only actively traded stock on the market is Bank of Georgia’s own shares, which makes up 75% of the turnover on average.

The bank offers wealth management to its better-off customers. However, a salary of about $3000 a month is enough to class you as a high net worth individual in Georgia, although a few of their customers are truly rich.

As the domestic capital market is so shallow, most customers with money to invest were not initially looking beyond time deposits, but more recently they are beginning to think about equities and bonds.

Through Galt & Taggart, Bank of Georgia can invest into markets such as Russia and London, as the bank has the only Euroclear account in the country.

“People are beginning to understand there are alternatives [to time deposits] but they are still very cautious as the level of understanding is still very low,” says Mr Gurgenidze.

Because of the paucity of investable assets in Georgia, last year the bank took the radical solution of setting up what is in effect a private equity fund called Galt & Taggart Capital (GTC) and listed it on the exchange in November 2006.

“The debut pricing of the stock was GEL0.6 per share and was massively oversubscribed. In less than four months the value of the stock had quadrupled,” says Mr Gurgenidze.

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