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Georgians tread well-worn path

The Georgian banking sector is growing and there is healthy competition. Bank of Georgia CEO Lado Gurgenidze is looking at what lies ahead for banks in the Caucasus. James Hydzik reports.
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Georgia’s bankers are watching the development of the Ukrainian banking system closely. While its larger neighbour is the site of a spate of mergers and acquisitions, the Caucasian country is home to a growing banking sector.

Lado Gurgenidze, CEO of Bank of Georgia, says that the banking sector in the country is highly diversified, considering the region. “We don’t have a dominant bank, as they do in Azerbaijan, for instance. There’s healthy competition and we’re a lot like Ukraine in that regard.”

A foreign presence is not uncommon: four of the top five banks have foreign partners. This is reflected within organisations. Mr Gurgenidze, who before being appointed managing director and regional manager for Europe at Putnam Lovell NBF, built ABN AMRO’s transaction pipeline in Russia and then directed central and eastern European (CEE) mergers and acquisitions for the firm, assembled an all-Georgian management team with international experience. “We brought in a blend of repatriates and the most capable entrepreneurs available. A good portion of our team, including 20 in senior and mid-level management, were not only educated abroad, but had also been pulled from industry jobs in London and elsewhere.”

Low market penetration, combined with a high degree of competition, is a primary feature of the Georgian market. At the end of 2005, lending was a mere 15.5% of gross domestic product (GDP), compared with the CEE average of 36%. Consumer lending, in particular, is underdeveloped with consumer loans at 4.6% of GDP and mortgages at 1.6%. Deposits stood at 13.8% of GDP, compared with 44% in the CEE as a whole. However, banking in Georgia is booming, with loan growth in 2005 at 79.3% for the year and deposits growing by 56.5%.

Innovation drivers

These factors have driven innovation in the country. Mr Gurgenidze says that the formation of the present management team at the Bank of Georgia is an example of the manner in which banking is changing in the country. The bank’s acquisition of a controlling stake in Georgian Card, which handles card processing, was seen as a strategic move in retail banking. Reducing card costs has enabled Bank of Georgia to partner with Tbilisi’s major grocery store chain both in co-branded cards and in ATMs.

“Our moves are standard in other markets,” Mr Gurgenidze claims. Still, attracting accounts such as the City of Tbilisi creates opportunities that would be hard to find in other ways.

The relatively small pool of retail clients warrants the pursuit of government as well as commercial banking in Georgia. “We are developing banking for businesses that cater to domestic consumption,” Mr Gurgenidze emphasises. But, at the same time, he gives noteworthy examples of a focus on government-related banking on all levels. On April 14, 2006, Bank of Georgia won a tender in competition against five of the country’s top banks to process the City of Tbilisi budgetary account. The municipality’s 2006 budget is expected to run at La340m ($186.5m) and interest on the account, which was a key factor in the tender, should generate La1m for the city. Bank of Georgia has also been named the partner bank for the US federal government’s Millennium Challenge Fund Georgia project. The aid, in the form of a $295.3m, five-year compact, will focus mainly on infrastructure development within the country.

Acquisitions are also gaining pace, and Bank of Georgia has twice bought the number nine bank in the country. The first, TbilUniversalBank, in November 2004 and the second, Intellect Bank, in February 2006 both added access to clients. Other purchases, especially number three insurer British-Caucasian Insurance and number one investment bank Galt & Taggart, helped to round out the bank’s services portfolio.

Political drivers

In Georgia, as in much of the former Soviet Union, political events that affect business are often leading news stories around the world. The Abkhazia region along the Russian border has been contested since the early 1990s, and war lasted in the region from 1992-1994. This has not had much of a direct effect on the banking sector, Mr Gurgenidze remarks. “It’s really a beautiful land but there isn’t much happening there business-wise. There are a couple of hundred thousand people living there, but they’re not involved in the economic regeneration that’s going on here.”

The other headline event, the 2003 Rose Revolution, has had an enormous effect across Georgian society. Banking has benefited as well as driving the growth that resulted.

However, one institution has not been transformed in the public eye: the National Bank of Georgia. “Even under Edouard Shevardnadze, everyone in the country knew that the only thing that worked well was the central bank. It has always been highly trusted by Georgians,” says Mr Gurgenidze.

Bank of Georgia is looking at Ukraine for more than just a glimpse of its own future. “Banks in the Caucasus are in the same situation that the Austrians or Swiss were a few decades ago. We’ve got a small domestic base and, even if we have room for growth, we will have to cross borders eventually. We see other banks in the area as highly interesting but not transformational, as a move into Ukraine would be,” says Mr Gurgenidze.

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Read more about:  Central & Eastern Europe , Georgia