We initiate coverage of TBC Bank, Georgia's 2nd largest bank by assets and a newcomer to the LSE's Main Market. With 20 years of strong expertise in the market, a unique franchise, and superior customer experience, TBC Bank has made an ambitious call to become the leading retail and SME bank in Georgia. We believe all the necessary preconditions for that call are in place, including a healthy macro environment, surging customer demand, and a professional management team. Thanks to hefty interest margins, improving operational efficiency, and a low cost of risk, we expect TBC Bank's net income will grow at an average 19% annually for the next 5 years.

We set a 12-m TP of USD 19.8/DR (implying 21% upside) and assign a BUY recommendation to the stock.

Loan book to double in 5 years on sound macro fundamentals

Georgia's macroeconomic fundamentals are soundly in place for TBC Bank to deliver double-digit growth. We see banking sector growth at c. 16.5% annually for the next 5 years, above Georgia's nominal GDP growth rate. In our view, TBC will broadly track the sector's growth, which would see the bank's loan book expand 2.1-fold over the period.

Mature bank with modern infrastructure

TBC Bank is a mature banking institution and its acquisition of Bank Constanta with extensive retail and SME-oriented network allowed it to gain a strong foothold in all major cities and rural areas of Georgia. The lender will not have to invest heavily in order to capture Georgia's surging demand for financial services – all key modern infrastructure to attract new customers and offer high-quality services is already in place.

Growing focus on retail and SME/micro segments

Management has identified the retail and SME/micro segments as priorities, with corporate lending becoming a vital (but not the fastest growing) supplementary business. TBC Bank is the market leader in terms of volume of retail deposits attracted and we believe it is just a few months away from becoming Georgia's top bank by volume of retail loans issued. Hefty interest margins make the retail and SME/micro segments attractive and TBC has successfully entered those segments thanks to a strong brand and superior customer care.

Cost of risk reasonably low

Despite continuing to deliver double-digit growth in assets, TBC has kept the quality of its loan book in check. The cost of risk has remained below 1.5% for the past three years and now that economic growth is accelerating, we see no risks of a deterioration of loan portfolio quality.

Robust net income growth, hefty ROE, and an established dividend policy

On the back of rapid loan growth, improving efficiency, and reasonable cost of risk, TBC will deliver projected annual net income growth of 19% and ROE of 17-18% for the next 5 years. Since the bank is more than sufficiently capitalized it is in a position to pay out a part of its profits as dividends. The bank has announced a 25% payout rate but we believe that payout can be increased over the mid-term without hurting the bank's capital strength.

Valuation of TBC to converge with Bank of Georgia in the mid-term

TBC's IPO launched a new line of competition with Bank of Georgia. While the two lenders have fought for customer loyalty over the past decade they are now competing for investors' attention and are striving to deliver superior financial results. The ongoing competition in perfecting their respective business models bodes well for their future performance and we believe both banks will be on par in terms of creating value for shareholders. We therefore expect the valuations of both banks will converge over the time.

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