Cheap, profitable and dominant

The Georgian banking sector is dominated by Bank of Georgia and TBC Bank, both with 35% of deposits and loans. Bank of Georgia’s net interest margins have been rising all through 2021, to 5.3% in the fourth quarter. That compares well with UK banks such as Lloyds and Barclays on below 3% and Asian banks HSBC and Standard Chartered on below 2%. Bad debts aren’t a problem: at the start of the pandemic, it took a 400m lari “kitchen sink” provision (equating to 3.3% of the loan book or 16% of the current market cap of £590m). Now that profitability has recovered, return on equity (ROE) is over 25% and has averaged 20% over the last five years, compared with UK banks, which are struggling to achieve 10%. That high profitability means book value per share grew by 23% over the last 12 months, which again compares favourably with UK banks.

The shares look cheap, even for a sector that has been unloved by investors for decades, trading on less than three times 2024 forecast earnings and 0.8 times tangible book value. That latter multiple is similar to UK banks, with their much lower ROE. The central bank has removed the restriction on Georgian banks returning capital to shareholders, so the declared dividend for 2021 is 3.81 lari (or 88p at the current exchange rate of 4.3), giving a dividend yield of 7.3%

Clearly the market believes that Bank of Georgia’s high profitability is not sustainable and likely to fall. But there is an old rule of thumb when it comes to investing in bank shares. It is better to own a bank with high market share in small, concentrated urban populations (Hong Kong, Singapore, Australia and the Nordic region being the best examples) than a bank with small market share in a large country (eg, Metro Bank in the UK). Banking is a commodity business, and the most significant driver of returns is competition.