TBC recently announced it completed the legal and operational process of merging with Bank Constanta. The acquisition in 2011 was a milestone event for TBC that granted the latter a powerful growth catalyst. The full merger of the two banks under a common brand and the alignment of their product offerings and customer care practices should bring more synergies in 2015 and beyond. The completion of the merger clearly shows the bank is delivering on its promises in a timely manner. The full integration was expected and our current valuation already accounts for the positive effects. We maintain our positive outlook on the bank post-merger and maintain our BUY recommendation on TBC Bank stock.

Merger follows resolution of dispute with former Constanta shareholders

In May 2011, TBC Bank acquired 80% of Bank Constanta and subsequently raised its stake to 100% through several smaller transactions (the last 0.4% was bought in Aug-Sept 2014). In March 2014, a former Constanta shareholder filed a court suit claiming the sale of a 38.8% stake to TBC was unlawful. The issue was resolved in September 2014; TBC paid a GEL 4.8 mln settlement, which cleared the way for a full consolidation of the two banks.

Key positives: Network expansion, the launch of a new business line…

Constanta was initially established as a microfinance organization, but moved to a full-fledged commercial banking model in 2008 as the lender grew substantially. Its customer base is mainly comprised of farmers and individual entrepreneurs, and it has about 30,000 micro borrowers. For TBC Bank, the acquisition was guided by two main motivations: (i) the launch of micro lending as a new, separate business line and the immediate acquisition of expertise in the field, and (ii) the expansion of its branch network and wider outreach to rural areas where it had almost no presence.

…and growth in revenues

Additional benefits stem from reinforced capacity for product sales: a standard set of TBC banking products (both basic and high-end) will be available to a much wider customer base across Georgia. Coupled with stable funding, this offers an important new source of revenue growth in the mid-term.

"TBC Bank Constanta" sub-brand introduced

All Constanta branches will be rebranded to match the TBC network. However, management has decided not to fully abandon the well-recognized "Constanta" name and has introduced a "TBC Bank Constanta" sub-brand for former Constanta branches. We believe the move will help retain rural customers loyal to the old brand. All 121 TBC branches will offer an identical set of products and services (incl. the 59 former Constanta outlets).

The brunt of the work and costs have already been incurred

TBC management launched a full-scale integration of the operations and administrative functions of TBC and Constanta back in 2011. IT systems, HR management, and finance operations have been fully unified over the past couple of years, and the two banks now function as a single unit on an operational level. Only a physical rebranding and refurbishment of branches and an alignment of the product offerings remain, and management plans to complete those tasks in 1H15. Management estimates the cost of upgrading one Constanta branch at GEL 25,000-100,000, depending on the size and location. That projection would bring the total cost to USD 2-3 mln (1.6-2.4% of TBC 2014E consolidated operating expense). Management expects expenses related to the integration to be fully offset with increased revenues in 2015. TBC also indicated it will continue investing into future growth, including in a further expansion of the branch network (under both the "TBC Bank" and "TBC Bank Constanta" brands).

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