Letter 16. The Baskets 5# TBC Bank Group PLC
Georgian banking group in the footsteps of Kaspi.kz
Welcome readers to letter 16 where I will introduce you to TBC Bank group. Remember that the name of the company does describe what they actually do, but there is a catch.
DISCLAIMER: This article does not recommend buying or selling any financial instrument. Please do your own research. This information is for general purposes only and should not be considered investment advice. I am not a financial advisor and do not offer investment recommendations. Investors should obtain advice based on their own individual circumstances from their own tax, financial, legal, and other advisers about the risks and merits of any transaction before making an investment decision, and only make such decisions on the basis of the investor’s own objectives, experience, and resources.
TBC Bank description
TBC likes to display their relevance in both financial and non-financial services. Plus they see about 40% of total internet traffic in Georgia passing through the different service platforms on topics like e-commerce, cars, housing, health, and lifestyle. Therefore, it has a business model based on many services similar to Tencent’s WeChat or Kaspi.kz Often they are the market leader in Georgia on non-financial services and help TBC to create leads for loans if a customer wants to purchase a property or car.
And because of their long list of services, the management’s strategy is focused on creating a superapp model for all its services that will be completed in the coming years.
Business Sections
Now to the actual numbers. TBC continues to focus on fee and commission income growth to safeguard from possible margin compressions on lending and deposit products in the future. Here are the numbers: it is clear that banking services account for 2/3 of the income generated by TBC bank with an emphasis on net interest income.
Interest income is to a large extent influenced by the net interest margin (NIM).
A number of factors affect a bank's net interest margin. For example, supply and demand for loans (banks assets) help establish market interest rates. If the demand for savings increases relative to the demand for loans, it is likely that the net interest margin will decrease. The opposite is true if the demand for loans is higher relative to savings. In essence, a bank's net interest margin will improve when customers borrow more than they save.
I am not an expert when it comes to banking and would therefore refer everyone interested to know more to go to some references I mentioned in the Resource section.1 The effect of changing federal/national interest rates is even more complex. However, the FED has written something on this topic as well.23 In a simplified example where you assume that a bank owns their assets (loans) only in 30-year fixed-rate mortgages, it will likely be negative for the bank’s net interest margin as the deposit (savings) interest rate has to stay competitive with national or federal interest rate to keep depositors from pulling their savings out of the bank.4 Below I added a figure showing how average net interest margins jump on lower effective Federal Funds Rate in the United States since 1984. It may surprise you that the NIM of banks after the 2008 financial crisis was going up, not down.5 For me, there is simply no hard theory for the changing NIM and changing national or federal interest rates.
Banking segments
TBC is a bank for all kinds of customers, individuals, small and medium Businessess, and larger corporations. Moreover, they are one out of two of the big banks operating in Georgia with Bank of Georgia taking the latter part of the pie.
TNET Digital services - Superapp
Within Georgia it owns the largest digital ecosystem, TNET, that accounts for 40% of internet traffic on Georgian websites
Some websites are TKT.GE & SWOOP in the lifestyle segment 78% marketshare, Livo & Myhom.ge in housing segment 51% marketshare, Vendoo, Myshop.ge, mymarket.ge in e-commerce segment 69% marketshare, and myauto.ge, and myparts.ge for auto market 82% marketshare. Therefore, it accounts for 67% of the adult population in Georgias 1.9 million unique users are reported annually in 2022.
The Super App will house all our current platforms, as well as financial services such as banking, payments and insurance, under one app. By making it more seamless and user friendly, this should enable us to take our customer journey to another level.
In the medium term, we plan to follow our 4x10 strategy: a 10-fold increase across four key metrics: GMV, GMV per user, loan disbursements from leads and net profit. We believe that all our initiatives create a solid foundation for continued strong growth at TNET and its current success drives our optimism for the future.
Management
I want to summarize a few of the key people at the management level
Arne Berggren as chairman of the board, has more than 25 years of experience at international financial institutions. He has held several senior leadership and advisory roles at prominent financial intuitions including the IMF, World Bank, Swedbank, Carnegie Investment Bank AB and the Swedish Ministry of Finance and Bank Support Authority. Arne had a leading role in the handling of the Swedish banking crisis in 1991-93. During the Asian crisis, he assisted the FRA in Thailand and FSC/ KAMCO in South Korea with the handling of problem assets.
Nikoloz Kurdiani (Deputy CEO Brand Experience Marketing & Payments & Head of International Business) Nikoloz was appointed to his current role as Deputy CEO of JSC TBC Bank in January 2021, leading Brand Experience, Marketing and Payments, as well as the Group’s International Business. His presence in the company is interesting for his history at Kaspi bank could indicate that TBC bank wants to make a serious effort in creating a fintech-superapp like business.
Additionally, Nikoloz has been leading TBC’s digital banking platform, Space, since 2018.
Nikoloz also serves as the chair of the supervisory board at TBC Uzbekistan and PayMe in Uzbekistan.
Prior to joining TBC Bank, Nikoloz was the managing director at Kaspi Bank, a leading retail bank in Kazakhstan.
Risks
Risks are luring in many corners and you should be aware of them as a bank. This is why you will find many documents about all kinds of information in the investor’s section of each bank’s website. Credit, currency, interest rates, (macro)economic , liquidity, politics, and competition are to be considered by management so please have a read on the risks in more details below.
Credit
Due to the high level of dollarization in Georgia’s financial sector, currency-induced credit risk is a component of credit risk, which relates to risks arising from foreign currency-denominated loans to unhedged borrowers in the Group’s portfolio. - annual report 2022
Credit risk also includes concentration risk, which is the risk related to credit portfolio quality deterioration as a result of large exposures to single borrowers or groups of connected borrowers, or loan concentration in certain economic industries. The Group’s maximum exposure to the single largest industry (Real Estate) stood at 9.3% of the loan portfolio as of 31 December 2021. At the end of 2021, exposure to the 20 largest borrowers stood at 10.5% of the loan portfolio. - annual report 2022
Unfavorable macroeconomic conditions also touch upon the credit risk
As of 31 December 2021, the retail segment represented 37.3% of the total portfolio, which was comprised of 64.7% mortgage and 35.3% non-mortgage exposures. No single business sector represented more than 9.3% of the total portfolio at the end of 2021. The Group has a largely collateralized portfolio in all its segments, with real estate representing a major share of collateral.
Currency
Below you can see what part of the loan portfolio is denominated in foreign currency. A potential material GEL depreciation is one of the most significant risks that could negatively impact portfolio quality, due to the large presence of foreign currencies (mainly USD and EUR) on the Group’s balance sheet. As of 31 December 2021, 53.9% of the Group’s total gross loans and advances to customers (before provision for loan impairment) were denominated in foreign currencies. I am actually delighted with the amount of foreign currency on the loan portfolio as TBC still operates in the South Caucasus, bordering Armenia and Russia.
(Macro)economy
A potential slowdown in economic growth in Georgia will likely have an adverse impact on the repayment capacity of borrowers, restraining their future investment and expansion plans. Negative macroeconomic developments could compromise the Group’s performance in various ways, such as exchange rate depreciation, a spike in interest rates, rising unemployment, a decrease in household disposable income, falling property prices, worsening loan collateralization, or falling debt service capabilities of companies as a result of decreasing sales. Potential political and economic instability in neighboring countries and its main trading/economic partners could negatively affect Georgia’s economic outlook through worsening current and financial accounts in the balance of payments (e.g. decreased exports, tourism in flows, remittances and foreign direct investments). - annual report 2022
Politics
The biggest opportunity for Georgia is also the biggest risk that the country can take, which is deepening Western integration and the plan to apply for EU membership in 2024. Georgia could face the same fate as Ukraine in 2022 with the narrative that EU/NATO can not expand closer to Russian borders and that the Russian Federation has the right to protect the lives of native Russians in bordering countries (Abkhazia, South Ossetia). As long as this narrative is alive in the Russian Federation, this will remain a major security threat. It is very easy to see the connection to what happened in Ukraine with the current situation in Georgia. The seed has already been sowed for further conflict in Georgia.
Liquidity
The liquidity coverage ratio refers to the proportion of highly liquid assets held by financial institutions, to ensure their ongoing ability to meet short-term obligations. This ratio is essentially a generic stress test that aims to anticipate market-wide shocks and make sure that financial institutions possess suitable capital preservation, to ride out any short-term liquidity disruptions, that may plague the market.6
The TBC LCR ratio has been well above 100% since 2019 and recorded a 115.8% level in 2021. The Group was in compliance with the minimum liquidity requirements set by the NBG, which include the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR). As of 31 December 2021, the net loan to deposits plus international financial institution funding ratio stood at 100.9%, the liquidity coverage ratio at 115.8%, and the net stable funding ratio at 127.3%. These figures are comfortably above the NBG’s minimum requirements or guidance for such ratios. - annual report 2022
Competition
Bank of Georgia is the only other major bank in Georgia, making it a banking duopoly. For banking this is certainly not healthy for the following reasons.7 Competition significantly improves the efficiency of capital investment and reduces risks. This is an important factor for the stability of the money in economy and for inclusive economy growth. The duopoly in Georgian banking sector has limited the reduction of interest rates on loans. It also restricts the competition in lending and promotes to increase net interest income for duopoly banks.
Humo, Uzcard, CLICK, PAYNET, OLX group in Uzbekistan. OLX is the world’s leading classifieds platform in growth markets. OLX makes it so easy to connect people to buy, sell or exchange used goods and services. It’s free, and can be used from a laptop or mobile phone. Every month, hundreds of millions of people use OLX to find and sell furniture, musical instruments, cars, houses and more. You can buy and sell almost anything with OLX.
Valuations
Like many bank companies, TBC is no different with a discount because of a vulnerable Georgian economy and political issues inside and outside the borders of Georgia. As a stalwart-ish business the growth rate should exceed the PE ratio, which is probably the case with a thriving central asian economy, disregarding the Uzbek opportunity. The valuation on every metric is historically low since the Russia-Ukraine war and for a good reason. You should be very skeptical about the reasoning for discounts on the market value and manage the risks if you want to own a company like TBC Bank Group.
Conclusive remarks
where is the value?
Banking is here to stay, and TBC is well-positioned to benefit from that trend in Georgia and Uzbekistan to some extent.
The digital channels TBC bank/TBC UZ/Payme have a 44% DAU/MAU rate, which is on a lower level compared to Kaspi.kz with about a 63% rate. Even so, it could become a superapp business model so there is some unlocked value there. However, given the revenue mix it is not reaching that superapp-type of business model just yet.
For now, you should approach TBC as a bank with some additional services.
Resources
What Net Interest Margin Is Typical for a Bank? (investopedia.com), https://www.investopedia.com/ask/answers/061715/what-net-interest-margin-typical-bank.asp#:~:text=A%20number%20of%20factors%20affect,and%20the%20demand%20for%20loans.
The Fed - Changes in Monetary Policy and Banks' Net Interest Margins: A Comparison across Four Tightening Episodes (federalreserve.gov)
Do Net Interest Margins and Interest Rates Move Together? | Richmond Fed, https://www.richmondfed.org/publications/research/economic_brief/2016/eb_16-05
Do Net Interest Margins and Interest Rates Move Together? | Richmond Fed, https://www.richmondfed.org/publications/research/economic_brief/2016/eb_16-05
Do Net Interest Margins and Interest Rates Move Together? | Richmond Fed, https://www.richmondfed.org/publications/research/economic_brief/2016/eb_16-05
Liquidity Coverage Ratio (LCR): Definition and How To Calculate (investopedia.com). https://www.investopedia.com/terms/l/liquidity-coverage-ratio.asp
Competition in the Georgian banking sector and its impact on the credit policy of commercial banks (matec-conferences.org), https://www.matec-conferences.org/articles/matecconf/pdf/2021/11/matecconf_simpro21_08003.pdf