Bank of Georgia's (BGEO) first half results show a 29% increase in pre-tax profits to 232.6m Georgian lari (£71.1m).

A lot has happened in the six months to June 30 2018, not least the company splitting itself in two. This came into effect at the end of May, the original BGEO business separating its retail banking arm (Bank of Georgia) from its higher risk investment operation, now called Georgia Capital (CGEO) and separately listed on the London stock market.

This explains the seemingly huge fall in Bank of Georgia's share price, as you can see from the chart below.

Bank of Georgia's strong results today are driven partly by its strong local market position (alongside peer TBC Bank (TBCG)  the pair control roughly 70% of the retail banking market in Georgia) and surging demand for loans from consumers and small businesses out there.

The company reports a 24% jump in its loan book to £2.4bn during the half year.

HIGH QUALITY OPERATOR

Showing off its quality attractions, Bank of Georgia puts the UK banking group's to shame when it comes to return on equity (ROE), reporting a 25.2% figures.

In contrast, the UK's high street names would be chuffed at hitting the 10% ROE mark, HSBC's (HSBA) own stated medium term target.

James Hamilton, analyst at broker Numis, says the bank’s ROE is of the ‘highest quality’ as it’s derived from margin rather than leverage or borrowing. In 2017 the company’s margin was 10.8% with a leverage ratio of 11.3%, so the bank is making high returns from low leverage.

Comparison’s to banks operating in the UK are perhaps a tad unfair given that Georgia is an emerging market and very high growth. The country’s GDP growth rate is 7.5% while banking penetration is very low. Due to this Numis’ Hamilton says ‘we believe there is a growth opportunity that could last a generation or more’.

CURRENCY ISSUES?

Given the virtual collapse of the Turkish lira recently, there is rightly some concern about emerging market currencies as a whole due to possible contagion. However, despite Georgia bordering Turkey, Numis believes that the bank has no ‘relevant’ direct exposure to the country.

The bank does have quite a bit of dollar dominated debt, and with the greenback on the ascent this could cause problems as it has done for Turkey.

The lari has performed well against the pound although this week has dipped against the dollar but nowhere near the extent of the Turkish lira capitulation.

The dollar debt issue has weighed on the share price recently although following Thursday’s results it is up 2.4% to £17.09.

Bank of Georgia trades on just 6.7-times 2018’s earnings using Numis forecasts.

As a bank its price-to-book is probably a better metric and here it’s not such a bargain, trading on 1.68-times net tangible assets. By contrast, the UK's Barclays (BARC) equivalent metric is 0.7 times.

Full year estimates imply ROE of 23%, with a Tier-1 capital buffer ratio of 14%.

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Issue Date: 16 Aug 2018