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TBC Bank Positioned for Steady Growth Despite Macroeconomic Headwinds

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TBC Bank Positioned for Steady Growth Despite Macroeconomic Headwinds Research Note Georgia │ Banks March 26, 2015 TBC Bank Positioned for steady growth despite macroeconomic headwinds Bloomberg ticker TBCB LI TBC headed into 1Q15 in perfect financial health and with ambitious growth Recommendation (previous rec.) Buy (Buy) and efficiency targets. The completion of the Bank Constanta merger 12-m target price (previous TP) USD 14.4/DR (19.9) significantly enhances TBC’s prospects in the retail and SME/micro segments, Capitalization USD 580 mln which the lender views as key mid-term growth pillars. Still, the macro shocks Current price USD 11.85/DR that emerged in 4Q14 are creating some discomfort – the economy’s Upside 22% deceleration may cause a temporary slowdown in asset growth, while the lari Number of shares 49,246,308 depreciation implies a higher cost of credit risk related to FX loans. We expect DR/share ratio 1 DR = 1 share Free float 40% growth in core earnings to steadily outpace operating revenues, but a Free float, value terms USD 232 mln temporary increase in the cost of risk (projected at 2% this year) will restrain Max/Min price / DR (since IPO) USD 16.5 / 11.2 USD net income growth to the 14-15% range in 2015 vs. 28% last year. ROE is P/B (2015E) 1.1x poised to temporarily fall below the bank’s 18% target (we project 16.6%), P/E (2015E) 7.3x solely on a surge in equity following last year’s IPO. With the lari depreciation Data as of Mar.25, 2015 resulting in a one-off increase in RWA, TBC will see its Basel 2/3 Tier 1 ratio Sources: Bloomberg, Company decline to close to 11% in 2015, still well above the NBG’s 8.5% minimum. The TBC Bank DR performance bank is also determined to maintain its 25% dividend payout ratio unchanged. We lower our price target for TBC shares to USD 14.4/DR from USD 19.9/DR, 20.0 1,200,000 to reflect the effects of the lari depreciation – both net income and equity will 1,000,000 be squeezed in USD terms. With 22% upside, we maintain our BUY 15.0 recommendation. 800,000 10.0 600,000 A successful 2014 puts down a solid base for 2015… Last year was a year of accomplishments for TBC Bank. The lender raised 400,000 USD 96 mln in new equity in a USD 256 mln IPO in June (the remainder 5.0 200,000 represents proceeds to selling shareholders) – the largest ever Georgian placement. The bank grew assets 21.8% yoy, outpacing the sector’s 19.4% 0.0 0 growth rate, bringing its market share by assets up to 26.3%. TBC also Jun-14 Jul-14 Sep-14 Oct-14 Dec-14 Jan-15Mar-15 strengthened its retail banking position – it entered 2014 as the No. 1 bank by Number of shares traded, rhs DR price, USD volume of deposits from individuals, and in the past year also became the Sources: Bloomberg SP Advisors largest retail lender. As at end-2014, TBC held a 33.7% share of total retail deposits (vs. 33.1% in 2013) and accounted for 29.7% of retail loans (vs. 27.7% Georgia key macro data and projections 2014 2015E 2016E in 2013). Finally, TBC completed the acquisition and consolidation of Bank Real GDP, chg. yoy 4.7% 2.1% 5.0% Constanta after settling a dispute with Constanta’s former minority Nominal GDP, USD bln 16.5 14.5 15.5 shareholders. The full merging of the two banks’ IT systems, HR operations, CPI, eop 2.0% 6.5% 5.0% and finance operations was practically completed in 2014 and the bank C/A balance, % of GDP -10.2% -15.0% -12.2% officially announced the merger in late January 2015. NBG reserves, USD bln 2.7 2.1 2.0 USD/GEL, eop 1.86 2.30 2.25 …but macroeconomic headwinds pose a challenge Sources: NBG, GeoStat, SP Advisors This year will be more challenging for Georgia’s banking sector. As we outlined in our latest report (see Georgian Marcoeconomic Review released TBC Bank market share by key metrics* on Feb. 26, 2015), the country’s economy has been facing headwinds since September 2014 that are likely to persist though end-2015. Regional turmoil 33.1% prompted by currency depreciations and declines in household purchasing Deposits of individuals (#1) 33.7% power in Russia and Ukraine is the key factor driving Georgia’s weakening macro environment. A major external shock resulted in a material slowdown 27.7% of economic activities (GDP growth slowed to 0.5% yoy in January from an Loans to individuals (#1) 29.7% unimpressive 1.6% in 4Q14), a deterioration of external account positions (the merchandise trade deficit widened to USD 1.67 bln in 4Q14 from USD 1.45 bln 25.3% Total assets (#2) a year before), and a lari depreciation to GEL 2.22/USD currently from 26.3% GEL 1.75/USD at end-September 2014. Overall we project Georgian economic growth at 2.1% in 2015 and an end-2015 exchange rate of GEL 2.3/USD. 2013 2014 Lari weakness is a headache, but not yet critical for the banking sector * Numbers in brackets indicate rank by the given market metric at end- The lari depreciation will likely drive a deterioration in loan servicing discipline 2014. for un-hedged businesses and households that borrowed in FX. Georgia’s Sources: Company, SP Advisors largest banks have already claimed they will address that risk by extending loan maturities as needed to prevent a significant hike in debt servicing-to- spadvisors.eu TBC Bank | March 2015 Loan book development income ratios for borrowers. Looking forward, the recent FX rate shock will 7.0 35% likely discourage many borrowers from taking FX risks and should favor (at a cost) a de-dollarization of banks’ balance sheets. As of January 2015, 63% of 6.0 30% the sector’s loan portfolio was FX-denominated. 5.0 25% With regards to possible loan losses, we expect they won’t be critical thanks 4.0 20% to a traditionally strict debt servicing discipline among borrowers and tough 3.0 15% loan servicing enforcement instruments in place. Georgian banks also boast 2.0 10% strong income-generating capacity (ROE of 15.8% in 2014) and are sufficiently 1.0 5% capitalized (Tier 1 of 13.6% under Basel 2 standards, above the 8.5% minimum) to absorb reasonably high loan losses without any risk of breaching 0.0 0% minimum regulatory thresholds. ΄12 ΄13 ΄14 ΄15E ΄16E ΄17E ΄18E ΄19E ΄20E In terms of liquidity, the key consequence of the lari’s weakening may be a USD bln Chg. yoy, rhs temporary desire by households to withdraw deposits in local currency and Sources: Company, SP Advisors convert them into USD. GEL deposits shrank 4% mom in January, which is still broadly in-line with the seasonal trend based on past years. Still, the stability of GEL deposits will be a key marker and should be watched closely over the Share of key items in total assets next couple of months. 80% 70% The key long-term implication of the lari depreciation is a material increase in 70% 61% 66% 60% the loans-to-GDP ratio for Georgia, which we see reaching 50% by end-2015 50% (up 7pp yoy), in-line with the CEE average of 50-55%. A hike in the loans-to- 40% GDP ratio usually implies weaker sustainable (i.e. without compromising 30% quality) loan portfolio growth in the long-run. That said, the Georgian 20% economy should still see rapid growth – we project nominal GDP growth at 10% 11% over the mid-term which means banks can enjoy decent and comfortable 0% annual growth of 14-15%, following this year’s deceleration to 12-13% (in FX- ΄11 ΄12 ΄13 ΄14 ΄15E ΄16E ΄17E ΄18E ΄19E ΄20E adjusted terms). Cash and balances with NBG TBC’s healthy growth will continue, but the pace may wane We expect TBC Bank will see another year of decent growth in 2015, even though the pace of loan book expansion will not match last year’s outstanding Sources: Company, SP Advisors 25%. On the demand side, growth will be constrained by a slowdown in Evolution of the loan portfolio structure economic activity – businesses and households may revise borrowing plans against the uncertainty over future income. On the supply side, the bank 15% should toughen underwriting standards for FX facilities and have a higher rate 22% 23% of loan application rejections. We see TBC’s loan book adding 29% yoy, but c. 15pp will result from FX effects, with 14pp of real growth. TBC should slightly 39% outpace the sector thanks to its reinforced sales capacity following the 45% 50% rebranding and introduction of new loan products (mainly for the retail and SME/micro segments) at former Bank Constanta branches. Looking forward, we see TBC’s loan book growth at 16% (net of FX effects) over the next 5 46% years, below the 20% rate targeted by management. 33% 27% In 2014, TBC Bank moved to further diversity its loan portfolio – the share of corporate loans fell 5.9pp yoy to 33.2% as retail loans added 4.2pp to 45.0%. ΄11 ΄12 ΄13 ΄14 ΄15E ΄16E ΄17E ΄18E ΄19E ΄20E The SME and micro lending segments lagged only slightly behind retail loans Corporate loans Retail loans SME/micro loans and their combined share increased 1.7pp yoy to 21.8%.
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