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WorldAugust 1 2014

Streamlining Bank of Georgia

Bank of Georgia may be sitting comfortably as the largest bank in the eastern European country, but it is not resting on its laurels, with plans to divest some of its acquisitions to focus on its core banking business. 
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Bank of Georgia has an unusual business model. The largest bank in Georgia by assets, Tier 1 capital and market share also owns 36 healthcare centres and 1907 hospital beds.

Bank of Georgia initially acquired its insurance and healthcare business Aldagi through the liquidation of real estate collateral. It is now one of the country’s largest providers of life and non-life insurance with a 30% market share as of December 2013, according to Georgia’s insurance supervisory agency. In 2013, the business reported profits of La25m ($14m) of Bank of Georgia’s total of La209m of full-year profits.

Despite Aldagi's profits, chief executive Irakli Gilauri plans to float the healthcare business on the London Stock Exchange and refocus on the bank's core business. “We are splitting up the company. We will retain 100% of the [property and casualty] and life business in Bank of Georgia, while the healthcare and health insurance business will be [sold by initial public offering]. It is profitable and growing. Many healthcare companies are currently trading at a multiple of at least two times more than banks.”

Bank of Georgia is planning to retain “as much of the share capital as possible” while still creating liquidity for incoming investors, adds Mr Gilauri. “I think this business is capable of being bigger than the Bank of Georgia in three to five years’ time.”

Future plans

Other future plans for Bank of Georgia include the disposal of the bank’s Belarusian subsidiary, Belarusky Narodny Bank (BNB). Bank of Georgia acquired a 70% equity interest in BNB in May 2008, and increased its share to nearly 100% in 2010. BNB’s banking operations accounted for about 5% of total assets at the end of 2013.

Bank of Georgia listed on the London Stock Exchange in 2006 and entered the FTSE 250 on June 18, 2012. As of March 31, 55% of the bank’s shareholders were UK and US institutional investors and 38.6% emerging market institutional investors. The remainder is split between unawarded share options held by management and employees.

Management share options are an important strategic part of the company’s business plan. “At Bank of Georgia, we think bankers should get a high level of non-cash compensation, which we think is one of the keys to our success,” says Mr Gilauri. “Of a senior executive’s basic salary, only a small amount is paid in cash. About 85% to 90% is paid in shares, which are issued but unvested, and which will vest over a period of five years.”

Premium listing

Since its premium listing, Bank of Georgia paid out dividends of La0.70 for 2011, La1.50 for 2012 and intends to recommend La2.00 per share for 2013. It plans to maintain a dividend pay-out ratio between 25% and 40%. In 2013, Bank of Georgia reported return on equity of 18.6%, a Tier 1 capital ratio of 23%, and 14% growth in loans. At the end of 2013, the bank recorded a non-performing loans to gross loans ratio of 4.3%.

With about one-third of the market share in the country, Bank of Georgia’s performance is strongly linked to Georgia’s macroeconomic growth, says Mr Gilauri. He expects 5% to 6% growth in 2014, which should translate into some 20% growth in the loan book.

Still, corporate and retail banking are very competitive. “There are 18 banks in the sector, of which five or six have more than 80% market share, but all banks are good quality, well-run solid banks,” he says, adding that a large share of the population is unbanked.

Bank of Georgia’s retail banking business has been growing fast, following the introduction of its express banking strategy 18 months ago, which facilitates payments at the point of sale. “With the banking system technology in Georgia being a highly electronic, no paper-based system, we can leverage that into building out the retail franchise through our express banking strategy,” he says. The bank opened about 70 branches to build out the franchise and dominate Georgia’s money transmission and payment systems.

Compared with retail, growth of the corporate business has been slower, due to the strong links to the country’s macro growth, which was only at about 3%. “Going forward, we expect our corporate clients to do better than they did last year as Georgia is getting back on its longer term macroeconomic growth path,” says Mr Gilauri. “Corporates are very sensitive to Georgia’s macroeconomic growth and we think 5% to 6% economic growth looks realistic.”

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