Frontier markets, like Georgia, offer investors exposure to a range of sectors and opportunities that are not available in more developed markets, however, they also present a range of risks which need to be carefully managed. In light of recent geopolitical developments, Rory Kutisker-Jacobson discusses the outlook of Georgia’s banking sector.
Long-term readers of our frontier markets commentary will know that we have owned and liked Georgian banks for some time, including the London Stock Exchange-listed TBC Bank (TBC), Bank of Georgia (BGEO) and Georgia Capital, a holding company whose largest investment is BGEO. We notably increased our exposure after the onset of the Russian invasion of Ukraine in late February 2022, subsequently taking some profits after substantial re-ratings in the following 12 months. We have continued to maintain sizeable positions in the Georgian banks, as we saw and continue to see substantial upside from current prices.
During the second quarter of 2024, sentiment towards Georgia turned sharply negative as concerns grew over its democratic independence and the potential for political influence from Russia. Georgia Dream, the ruling party, introduced a “foreign agents” bill in parliament for discussion in mid-April, and this led to mass protests across the country and widespread criticism from Georgia’s bilateral and international partners. The draft law requires non-governmental organisations and media outlets who receive more than 20% of their funding from outside Georgia to register as bodies “pursuing the interests of a foreign power”. With the law comes onerous disclosures, potentially hefty penalties and additional taxes. Critics fear the law could be used to crack down on civil society and dissenting voices ahead of national elections scheduled for October. The bill was widely unpopular with the local population and initially vetoed by President Salome Zourabichvili. However, this veto was later overruled and the bill was signed into law in early June 2024, after a majority vote in parliament.
The market reaction has been swift, with the share prices of TBC and BGEO both down more than 20% in US dollars since the end of April 2024.
The actual underlying impact on the economy has been minimal, and the performance of the banks continues to be healthy. Prior to the recent events, the Georgian economy was growing very strongly, registering real GDP growth of 11% and 7.5% in 2022 and 2023, respectively. The banks themselves have done even better. For the 12 months to 31 March 2024, the reported US dollar earnings of TBC and BGEO were more than double those reported for the 2019 calendar year (i.e. pre-COVID levels). These earnings are also more than 50% higher in US dollars than those reported for the 12 months to December 2021 (i.e. just two years prior) and immediately before the Russian invasion of Ukraine. Notably, on almost any metric, per capita formal banking and credit penetration in Georgia continues to lag developed market peers materially, suggesting good potential for long-term growth.
For such strong past and future growth, one was paying just five times historic earnings for the banks at the end of March 2024. Post the recent sell-off, one is now paying roughly four times historic earnings for TBC and BGEO. These are very attractive prices for well-capitalised, well-run companies with significant runway ahead.
Of course, we cannot predict how the economic and political situation in Georgia will unfold over the longer term. What we do know is that the vast majority of the local population are passionate about Georgian independence, well educated and ambitious. They also continue to favour market-friendly policies after suffering for decades under communist rule. No investment is without risk, but occasionally the market will be overly fixated on the short term, selling down assets to excessive levels and presenting the patient investor with a risk-reward opportunity skewed heavily in their favour. We believe the current prices for Georgian banks present such an opportunity.