We are a Georgia focused investment platform, aiming to deliver on 4x20 strategy

Our story

Our strategy 

Our 4x20 strategy entails a 20% metric for our ROAE, retail loan growth, minimum IRR for investment business and its profit contribution to the Group’s profit. This strategy is built to allow us to capture compelling investment opportunities in Georgia’s corporate sector, on top of our continued commitment to growing our strong Banking Business.
  • Banking Business
  • 1 ROAE 20%+
       
  • 2Retail loan book growth 20%+%


  • Investment Business
  • 3Min. IRR of 20%

  • 4Profit up to 20%

Ordinary dividends: linked to recurring profit from the Banking Business. Aiming at a 25-40% dividend payout ratio

Capital return: aiming for at least three capital returns within five years (2015-2019 period)
• Aiming for Capital Return to represent at least 50% of regular

3INTERNAL RATE OF RETURN OF MINIMUM 20% FOR EACH OF THE INDIVIDUAL FUTURE INVESTMENTS OF THE GROUP 

We will target investments with a minimum of 20% IRR and partial or full exit in a maximum of six years. We will acquire only businesses that we believe have a well-defined exit path, to which end we will target companies with potential EBITDA of at least US$ 30 million within three to four years post-acquisition with a view to potential future exits, including by way of stock market listings or trade sale.


4A MAXIMUM 20% PROFIT CONTRIBUTION, OF THE GROUP’S PROFITS, FROM OUR INVESTMENTS IN NON-BANKING BUSINESSES

We aim to remain primarily a banking group, with an investment arm. No matter how well our non-banking companies do in terms of operating results, we want to see their exit to unlock the value and with the generated profit return capital to our shareholders and pursue new opportunities – in the event that we see them.

Dividends: Our future dividend policy is expected to comprise recurring ordinary dividend payments linked to recurring profits from the banking group, with a targeted dividend payout ratio of 25-40%. In addition, we will aim to provide capital returns upon the realisation of our financial investments and are targeting at least three capital returns in the next five years. We aim for capital returns to represent at least 50% of regular dividends paid from the Banking Business within 2015-2019. Some of the profits may be reinvested if further attractive investment opportunities arise. This statement should be read alongside our business model and projected returns and our proposed dividend payment this year to be approved at our Annual General Meeting.


1AT LEAST 20% RETURN ON EQUITY IN THE BANKING BUSINESS

Profitability is expected to be driven by further growth in both the Retail and Corporate Investment Banking businesses with an increased focus on the significantly more profitable retail franchise, as we aim to increase our share in retail loans.

2AT LEAST 20% RETAIL LOAN BOOK GROWTH

Our retail net loan book has grown at a CAGR of 26.1% from 2010 to 2016 and we remain committed to at least 20% growth in our retail customer lending. Our focus persists on increasing the retail loan portfolio to 65%, from its current 61%, over the next two years. Specifically, we are looking to continue to further grow our Express (self-service) Banking network as well as our payments business, while benefiting from our transformed retail mass market operations, through the customer-centric Bank of Georgia brand and significantly increase our market share in the mass affluent segment with our premium brand Solo.

  • Banking Business
  • Investment Business

HOW WE ARE GOING TO ACHIEVE OUR TARGETS OVER THE NEXT TWO TO THREE YEARS

Banking Business – crown jewel in our Group and the key driver of profitability

Two key metrics we measure our Banking Business performance against are Return on Average Equity (ROAE) and retail loan book growth, each targeted at the 20% level. To further improve profitability, in 2015 we set a three-year target to increase the share of Retail Banking lending in the overall loan book, from then 55% to a targeted 65% level. Bank of Georgia is also well positioned in terms of both capital and liquidity to deliver on its growth strategy.

We have two segments in the Bank, of which Retail Banking will drive most of our Banking Business growth and Corporate Investment Banking will improve our ROAE, with the latter also contributing an increasing share of our fee and commission income. Wealth Management, under Corporate Investment Banking, will focus on further strengthening our regional private banking franchise.

The Bank’s strategic targets are:

• Over the next one to two years, the Bank of Georgia aims to shift the mix of its customer lending to become 65% retail and 35% corporate (currently 61% retail; 39% corporate). In the Retail Banking segment, the Bank aims at increasing mass retail product per client ratio from the current 1.7 to 3.0 in the next three years
• In the Express Banking segment, the Bank will aim to double the number of transactions over the next two to three years
• In Solo Banking, the Bank will aim to increase the number of Solo clients to 40,000 (19,267 as at 31 December)
• The Bank will continue to reduce concentration risk in the corporate lending portfolio with a target for the top ten borrowers to represent less than 10% of the total loan portfolio (currently 11.8%)
• The Bank will aim to develop a significant regional private banking franchise to reach AUM of GEL 2.5 billion (currently GEL 1.6 billion)
In addition, over the medium-to-long term:

• The net interest margin is expected to be in the 7.25-7.75% range (currently 7.5%)
• The Bank aims to manage to a cost/income ratio of around 35% (currently 38%)
• The Bank will continue to enhance its already prudent risk management practice, and will aim to maintain its Non-Performing Loans coverage ratio in the range of 80-120% through the economic cycle (currently 86.7%) – with a normalised 100% ratio. Through the long-term economic cycle, the Bank’s cost of risk ratio is expected to be c.2.0% per annum

Over two million retail clients

Over the past decade, Retail Banking delivered a stellar performance by reaching c.2.1 million clients, delivering loan book growth and ROAE targets. While we were targeting this milestone, the Bank was product-centric with an aggressive client acquisition approach. Having over two million clients now, this phase is over and we target growth through increasing product to client ratio.

NUMBER OF RETAIL BANKING CLIENTS

In order to better connect with the various segments of the retail client base, Bank of Georgia operates a multi-brand strategy.

We began implementing our Express Banking strategy in 2012 by rolling out small-format, Express branches offering predominantly transactional banking services to clients through ATMs and Express Pay terminals.

Under the Bank of Georgia brand we target the mass retail segment. This is our flagship brand and the most significant profit contributor. We are currently transforming our service delivery to mass retail clients from a product-centric to a customer-centric one.

In April 2015, we launched Solo – a fundamentally different approach to premium banking. As part of the new strategy, the Bank’s Solo clients are given access to exclusive products and the finest concierge-style environment at our newly designed Solo lounges and are provided with new lifestyle opportunities, such as exclusive events and handpicked lifestyle products.

RETAIL BANKING SEGMENTS

Two- to three-year targets and priorities

RETAIL BANKING – CLIENT-CENTRIC, MULTI-BRAND STRATEGY

EXPRESS – CAPTURING EMERGING RETAIL BANKING CLIENTS

Our Express Bank brand is aimed at the emerging bankable population. Express serves as a platform for bringing the currently under-banked population into banking and its main focus is to enable its client base to transact in a fast and easy way.

In 2016, we installed 140 new Express Pay terminals, resulting in 2,729 total Express Pay terminals as of the end of the year. We are now leaders in Georgia in the payment systems market. We have combined our travel card for the Tbilisi bus and metro (of which we are the sole provider) and our contactless card with a loyalty programme linked to the customer’s current account to create an “Express card” and issued 566,394 such cards in 2016. At the end of the year we had 1,279,113 Express cards outstanding. We also sell only a limited number of banking products to our Express banking clients. Currently, 85 out of a total of 128 Express branches are located in Tbilisi and going forward we would like to roll out Express branches in regions to reach a wider population. The all-in cost of opening a new Express branch is just US$ 50,000.

Nowadays, Express is the major growth driver in our fee and commission income from the Retail Banking segment and a strong franchise attracting the unbanked population to the Bank, eventually growing them into mass retail customers.

BANK OF GEORGIA – UNPARALLELED MASS RETAIL BANKING FRANCHISE

Under the Bank of Georgia brand, we serve mass retail clients. However, we now have a relationship with c.2.1 million clients and our challenge by 2018, as declared in 2015, was to increase the product to client ratio from a low 1.7 at the end of 2015, to 3.0 in 2018. To this end, we are shifting our business model from product to client-centric. During 2016, we worked on three main areas to achieve our goal of higher product to client ratio in this segment.

We recognise that our current service model and branches are built around products and they are not convenient to our clients. We have product specialist bankers and separate corners for various products and clients must navigate the branch space to get all the services they need. To address this, we have trained our bankers to become universal product bankers and also freed up their time from processes that do not involve client interaction, by moving those processes to the back office. We also redesigned the branches to build them around the client and make their experience comfortable. In 2016, we moved to a focused service model in 15 branches, so called live-labs, where clients have a single touchpoint to acquire products and receive consultation. In the medium term, we intend to convert the Bank of Georgia brand into a single touchpoint front office organisation. We are launching our first client-centric branch in April 2017 and are aiming to complete the redesign of most of the branches by the end of 2017.

SOLO – A FUNDAMENTALLY DIFFERENT APPROACH TO PREMIUM BANKING

The Solo brand is used for servicing the emerging mass affluent segment. Our new Solo model was introduced in 2015. It is a fundamentally different approach to premium banking. As a part of the new strategy, the Bank’s Solo clients are given access to exclusive products and the finest concierge-style environment at our newly designed Solo lounges and are provided with new lifestyle opportunities, such as exclusive events and handpicked lifestyle products.

To qualify for Solo services one needs to have an income of GEL 3,000 per month. At Solo lounges, clients are served by personal bankers and, in addition to the banking products, are offered luxury goods at cost and other lifestyle offers including a travel magazine and entertainment. In 2016 Solo organised the concerts with the world famous artists. The events were limited to Solo clients only, which created further interest in the Solo franchise. We intend to grow the number of Solo clients to 40,000 by the end of 2018, from the current 19,267 level. Net profit per Solo client stood at GEL 1,692 in 2016, over 26 times what we have in the mass retail segment under the Bank of Georgia brand.

NEW SERVICE MODEL

New way of thinking: CUSTOMER FIRST!

  • GHG
  • GGU
  • Teliani
  • m2

GHG – LEADING IN ALL SEGMENTS OF GEORGIAN HEALTHCARE ECOSYSTEM


GHG will continue to focus on building its presence throughout the Georgian healthcare ecosystem, while also focusing on enhancing its margins and achieving higher intergroup synergies through various cross-selling initiatives. GHG’s strategic priorities are set out below:
In the hospitals and ambulatory clinics business GHG’s aim is to:

• At least double 2015 hospital and ambulatory revenues in 2018, with an EBITDA margin of 30%

• Launch two hospitals with a total of c.650 hospital beds in 2017, achieve a 25% market share of hospital revenues by 2018, and a market share of 28% in the medium-to- long-term (currently 20% share of revenues and 23% share of hospital beds)

• Roll out a network of ambulatory clinics to achieve a 5% market share of revenues in 2018 and a 15%+ market share of revenues in the medium-to-long term (currently 1.5%)

• The key strategic focus in the hospital business over the next few years will be to enhance the Group’s footprint in Tbilisi, continue to fill the current gaps in medical services in Georgia and strengthen and expand services in elective care

• In the ambulatory business, the key focus will be on developing and achieving significant sales growth through a wide variety of distribution channels – including pharmacies, insurance, corporates and state programmes
In the pharmaceuticals business GHG’s aim is to:

• Complete the planned integration of GPC and ABC businesses, and capture the significant synergy potential

• Achieve a 30%+ market share in 2018, whilst increasing the EBITDA margin to 8.0%+

• Continue to decrease the cost of goods sold/services, by consolidating GHG’s pharmacy and hospital purchases of pharmaceuticals and medical disposables

• Enhance the retail margin by launching private label and contract manufacturing initiatives, increasing the number of loyalty programme users and expanding sales to hospitals

• Extract revenue synergies with ambulatory clinics by increasingly redirecting patients from pharmacies to ambulatory clinics through various cross-selling initiatives
In the medical insurance business GHG’s aim is to:

• Reduce the combined ratio to less than 97% over the next few years (currently 104.7%)

• Improve Group synergies by seeking to retain more than 50% of medical insurance claims costs within the Group (currently 23%)

GHG HAS FULL PRESENCE IN GEORGIAN HEALTHCARE ECOSYSTEM

GGU – NATURAL MONOPOLY IN WATER BUSINESS, WITH UPSIDE IN ELECTRICITY GENERATION AND SALES


In July 2016, the Group acquired the remaining 75% equity stake we did not own of GGU, our water utility and energy business, for a cash consideration of US$ 70 million and GGU is fully consolidated in the accounts of BGEO from the acquisition date. The Group has a significant opportunity to increase GGU’s operational cash flow over the next few years from a combination of improving cash collection rates, increasing energy efficiency and reducing water loss rates, and by the development of additional revenue streams.
GGU is an established business, targeting further EBITDA growth as a result of its strategy, which implies strong cash flow generation post-prudent capital expenditures. GGU aims to achieve EBITDA of more than GEL 80 million in 2018, whilst establishing a renewable energy platform targeting 200MW operating,57MW ready-to-build and 150MW pipeline for hydro power plants, and 20-20MW ready-to-build wind farms and solar photo-voltaic stations by 2019, with an IRR in excess of 20%. We are aiming to prepare the combined utility and renewable energy business for an IPO in approximately two to three years. Key measures to increasing operational cash flow are outlined below:

• Stable cash collection rate. The Georgian water utility sector has low, but improving collection rates among households. The latest available data (from 2005), shows average collection rates at only 65% in major cities. The average collection rate from households throughout Georgia was only 45%. GGU’s collection rate was around 95% in 2016
• Increasing energy efficiency and reducing water loss rates. The Georgian water utility sector is also characterised by the existing high level of water delivery losses of an average 50%, which is about four to five times higher than that in Western Europe, creating an opportunity for efficiency gains. Reducing water delivery losses to 30%, from the current 50% level, would result in a significant cost reduction.
There is a dual-effect from water delivery loss reduction, as freed-up energy can be sold to third parties
• Generation of additional income streams. This will require the utilisation of GGU’s existing infrastructure and the development of hydropower plants to increase electricity sales to third parties and installing turbinators to achieve more efficient water supply

Steering GGU towards an eventual IPO is another key project for us – similar to the GHG IPO we completed in 2015. In preparing for its IPO, GGU will be making its water utility more efficient and, if opportunities arise, will make bolt-on acquisitions in the sector. At the same time we will be developing untapped hydro, wind and solar energy resources. In 2017 Archil Gachechiladze, a long-time professional at BGEO Group, was appointed as a CEO of GGU to lead the company on its road to an eventual IPO, aimed for in two to three years’ time.

TARGETS AND PRIORITIES FOR THE NEXT TWO TO THREE YEARS

TELIANI – CREATING A LEADING BEVERAGES PRODUCER AND DISTRIBUTOR IN THE SOUTH CAUCASUS


Teliani Valley is a leading wine producer in Georgia, selling around three million bottles of wine in 12 countries globally per annum, with about 60% of its revenue coming from exports. Teliani has strong production and distribution franchise, and we aim to leverage this expertise by launching beer production in partnership with Heineken. Teliani will produce beer in Georgia and sell it throughout the South Caucasus (c.17 million population). Note that Heineken does not produce in either the Caucasus or Turkey. Of the c.US$ 41.3 million investment in the beer project, US$ 21.7 million is equity of which US$ 16.3 million is BGEO’s share. We expect EBITDA to grow to c.US$ 12.8 million in 2020, up from current US$ 1.4 million, with growth primarily driven by the expansion into the beer segment. A trade sale seems the most likely exit.

CONSTRUCTION OF THE BEER FACTORY WAS COMPLETED IN 2016

GOAL – BECOME LEADING BEVERAGES PRODUCER AND DISTRIBUTOR IN THE SOUTH CAUCASUS

BUSINESS SEGMENTS

STRATEGIC SALE

m2 – A FAST-GROWING, LEADING REAL ESTATE DEVELOPER AND ASSET MANAGER IN GEORGIA


Over the past several years, m2 Real Estate has established itself as one of the most recognisable and trustworthy residential housing brands in the country. For the next three years, the main priority for m2 Real Estate will be to target an internal rate of return of 40%+, whilst delivering a capital return to the Group of US$ 20-25 million in 2020 by:
Developing remaining residential land bank.The total value we are aiming to unlock from the remaining residential land bank is US$ 26.3 million with 5,126 apartments (in addition to 827 remaining apartments to be sold in the existing seven projects, both completed and ongoing).

Franchising real estate development in Georgia.m2 will focus on franchising its brand to develop third-party land plots and generate a fee income by capitalising on its:

• Strong brand name. m2 enjoys 92% customer brand awareness among real estate developers in Georgia

• Pricing power. Under m2, apartments can sell at a higher price than under other brands. m2 has development expertise that the company uses to achieve efficiency in planning and design stages which drives revenues as well as margins
• Sales. m2 is distinguished by its ability to accomplish strong sales performance through dedicated sales personnel and access to finance. Pre-sale reduces equity needed to finance the projects. The top two banks provide mortgages under m2 completion guarantee

• Execution. m2 has an excellent track record for the projects completed on time and budget. The company manages the entire process from feasibility through apartment handover and property management. m2 has discounts from the contractors and can do development at much lower costs. The company can do turnkey projects as well
Growing yielding business.m2 will continue growing its yielding asset portfolio through:

• Commercial space: retaining commercial real estate on ground floors in m2 developed projects, opportunistic purchases of the yielding real estate in prime locations, high street, industrial and office space real estate assets

• three-star hotel development: m2 obtained Ramada Encore exclusivity for seven years and aims to develop three hotels (three-star, select service mixed-use hotels) in the next seven years in Tbilisi and Kutaisi with minimum room-count of 370 in total, catering to budget travellers. When hotels are in a mixed-use development, m2 finances the equity needs of the hotel from the profits and land value unlocked through the sale of the apartments in the development. Construction of a three-star hotel in Kutaisi and a mixed-use hotel in Tbilisi will start in 2017 and complete in 2018

TARGETS AND PRIORITIES FOR THE NEXT TWO TO THREE YEARS