Bank of Georgia: London calling

სტატია აღებულია Financial Times–იდან

For any investors tiring of the idea of a London-listing for a former-Soviet area company, park your sceptical thoughts for a moment. Bank of Georgia is now fully tradable on the London Stock Exchange, and analysts are yelling “buy”. But are there any reasons to be cautious? Country risk, perhaps?

As of Tuesday, Bank of Georgia’s global depository receipts quoted on the LSE have switched to a full premium listing, meaning that the banks’ shares are now available to more investors and possible inclusion in the FTSE indices.
The company said that it will “offer shareholders greater transparency combined with exposure to the fast growing and well regulated Georgian market, which continues to perform well even in current global conditions.” The bank issued a tender offer in December last year to acquire all the outstanding GDRs and issue shares. The offer expired on February 24, with over 98 per cent acceptance.
Bank of Georgia is the dominant financial institution in the country, with 36 per cent of total bank loans and 34 per cent of customer deposits, according to recent figures. As such, it is a proxy for investing in the Georgian economy, which is growing at around 6 per cent per year, despite the recent war with Russia, continued border disputes and the collapse in trade between the two countries.
Russia’s accession into the WTO should ease trade problems too. And although the bank may have limited room to increase market share, as the economy grows so too should the bank.

But this isn’t the only thing that is getting analysts excited.

Renaissance Capital think that investors have been playing a wait-and-see game with the GDRs, as the bank has underperformed its Russian peers in 2012:

While banks globally have had a good run this year on the back of LTRO/global monetary easing, BoG’s share price was up only 3%, underperforming its Russian peers by 30-50% on a YTD basis. The mechanics of the move to a premium listing are the reason for this, in our view… [for anyone interested in the shares] the rational course of action therefore would have been to wait until the new shares are listed and then begin trading.

… We view BoG as a natural cornerstone holding for the growing number of frontier funds: it is well managed, transparent, with good corporate governance.

Add in the management estimates that as much as 6 per cent of the bank’s shares may end up being owned by index and tracker funds, which could translate into around $30m inflows at current market prices against around $0.7m over the last six months, and you can see why RenCap talk of “upward pressure on the price”.
Seymour Pearce have also been bullish ever since commencing coverage last year. In a January note, analyst Bruce Packard suggested that investors had found something close to a model bank:

For UK investors, regulators and Chief Executives wondering what shape UK banks’ balance sheets might look like into the future, a glance at Bank of Georgia’s financial accounts could prove helpful. With a loans/deposit ratio of 108% and falling, core tier 1 ratio of 17.9%, Bank of Georgia shows that lower capital and higher L/D ratios are not a prerequiste for either bank profitability (RoE 20%) or economic growth (IMF estimates that Georgian GDP should grow 5% in 2012). What we have learned is what we should not have forgotten… investors looking for a positive FTSE listed banking story can call off the search.

Calling off the search sounds a bit strong, but the bank’s reputation is a good one. The note of caution should be Georgia’s political situation. As global risk consultancy Maplecroft noted in their Global Risks 2012 atlas:
Regional instability will remain a risk in the South Caucasus for the foreseeable future. Armenia, Azerbaijan and Georgia are all vulnerable to internal unrest, unresolved territorial conflicts and the spread of violence from the North Caucasus region of Russia, eastern Turkey and Iran. These neighbouring countries all score worse than the South Caucasus in the Security Risk Index, with Iran and Turkey categorised as ‘high risk’ countries and Russia featuring as an ‘extreme risk’ country.

In other words: Georgia has improved, but the neighbours are still a bit of a problem. Although Vladimir Putin, Russia’s prime minister and hot favourite to regain the presidency, failed to mention Georgia in his recent articles on foreign policy in the FT and elsewhere, and Georgia agreed to Russia’s WTO membership, there are still points of tension, especially over breakaway regions Abkhazia and South Ossetia. And Georgia President Mikheil Saakashvili is still proving a thorn in Putin’s side, calling for opposition candidates to make their stance on Georgia clear.

The 2008 war hurt the Georgian economy, reducing GDP by 3.8 per cent and knocking over 8 per cent off exports. But the Bank of Georgia has survived, as has the economy. All worth bearing in mind before piling in to the London shares, as many will.

And travel-minded investors could do worse than visit Tblisi when they have the opportunity and drop into the bank’s headquarters, surely one of the most interesting head offices in the world.

The bank has recently completed its move to the renovated 1975 building (pictured above) that previously was home to the Soviet Ministry of Roads. It is one of the best examples of post-constructivism style and an architectural landmark of Tblisi, complete with new translucent concrete. “Feel the future” is the big bold message on the bank’s website.

There’s a lot of confidence all-round.

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