Extract from 2010 Annual Report
It is my pleasure to write you for the first time since joining Bank of Georgia as Chairman of the Supervisory Board in June 2010. I joined the bank after retiring from a career at McKinsey and Company where I had the chance to work with financial institutions worldwide, though not in Georgia. Allow me this first time to share with you my thoughts with respect to the past year, the outlook for the future and most importantly the environment of Georgia, where the Bank of Georgia continues on its remarkable journey.
During the past year I had a chance to observe how young and determined country like Georgia fares with the effects of global financial crisis and to appreciate its government’s resolve to stay on the free market path. It is this path that helped propel its once failing economy to the emerging economic success that it enjoys today. The most noteworthy accomplishment is the implementation of stunning reforms, which resulted in the eradication of corruption. This is a story that needs to be told to serve as an example for others.
Also of note, is the government’s commitment to ensuring a business and investor friendly environment. These efforts were recognized by the international community, which in 2008, in the midst of global financial crisis, pledged US$ 4.5 billion, or 40% of Georgia’s GDP, helping the country cope with the crisis and providing it with the means to continue to invest in its future.
Georgia ended 2010 with a respectable 6.4% real GDP growth, external debt level of 38% of GDP, stabilized currency and record level of foreign currency reserves at US$ 2 billion that continued to grow to US$ 2.5 billion by March 2011. With more than US$2.0 billion of donor funds still to flow into the country, Georgia is gearing to establish itself as a regional energy hub by utilizing the vast untapped hydro power potential.
Having eliminated corruption, a plague still tormenting the countries in the region, Georgia, with its liberal tax regime and abundant growth opportunities, has the right elements in place to become the destination of foreign investments, as Georgian economy advances and once the perception of risks diminishes. To this end, 2011 started on a positive note. Only several weeks ago, Georgia successfully placed its second US$ 500 million 10-year benchmark Eurobonds. With the yield of 7.125%, the new Eurobond is 37.5 bps lower than the yield of the existing shorter term 2013 Eurobonds. The improved pricing and the strong demand reflected in the deal 5.3 times oversubscribed serve as a testament of the increased investor confidence towards the country. In line with the improved investor sentiment, Fitch Ratings and Standard & Poor’s, both of which have assigned ‘B+’ sovereign rating, have upgraded their respective outlooks from stable to positive in March and April 2011, respectively.
For Bank of Georgia, the country’s largest bank, 2010 was a defining year in many ways. Having demonstrated its resilience in the times of global financial disruption, the bank weathered the tough economic environment without resorting to capital injection. More importantly, Bank of Georgia used its strength to capture the opportunities arising during the bad times and came out stronger from the crisis, reinforcing its leadership role on its home market. The sensible deployment of excess liquidity that we conservatively maintained during the downturn resulted in the healthy growth of the loan book and the improved loan quality in 2010. The country’s most trusted top brand, Bank of Georgia attracted a record volume of client deposits both locally and internationally. These accomplishments, coupled with the increased efficiency, have led to the significant market share gains to the record high 36% by assets and by loans and 32% by deposits by the end of the year. Also, notably, international credit rating agencies have revised their ratings of Bank of Georgia. In August 2010, Fitch Ratings upgraded the bank’s long-term foreign and local currency default ratings from ‘B’ to ‘B+’, the sovereign level. In January 2011, Moody’s Investor Services, rated Bank of Georgia at ‘B1’, an improvement from B3. As of today, all three global credit rating agencies maintain stable outlook for Bank of Georgia.
The ability to align the strategy to the shifting trends in this fast-growing emerging market is one of the main success factors of Bank of Georgia. Acting upon the changed circumstances in our markets of operation, we made decisions that we believe will benefit our bank and our shareholders: the exit from the loss-making Ukrainian banking operation will not only improve the bank’s consolidated operating performance, but more importantly, it will free-up valuable management resource to allow us sharpen our focus on the considerable opportunities that the growing Georgian economy offers – the commitment we underlined as part of our strategy.
With its undisputedly leading banking franchise, Bank of Georgia is well-poised to continue to grow organically as the country’s still modest banking sector loan penetration of less than 30% of GDP increases along with the expected growth of its economy. Furthermore, our new Georgia-focused strategy entails the continuation of the vertical integration of our market-leading insurance and healthcare businesses, aiming at capturing the opportunities that we envisage to come from the rapid growth of the underpenetrated insurance market, to be further boosted by the ongoing integration with the healthcare business. In addition, we have announced about our move into Georgia’s affordable housing sector through our real estate subsidiary. The already allocated capital through the repossessed properties allows us to fill in the gap between the demand driven by significant housing shortage and the inability of real estate developers to satisfy such demand. We expect the insurance and real estate to contribute meaningfully to your bank’s earnings over the next few years. You will get more details about the bank’s performance in 2010 in the CEO’s letter and other sections that follow in this report.
Corporate Governance was the focus of much of the Supervisory Board’s attention in 2010. The move to a two-tier governance structure a year ago has aligned the Bank with international best practices. My fellow non-executive Supervisory Board members bring world-class investment, economic, legal and banking business expertise to the table, complementing the capable and talented group of executives that make up the Management Board of your bank. Building upon the bank’s established results-oriented culture of teamwork and openness, we have put in place an Executive Compensation Policy which implemented the decision to abandon cash-based bonus compensation to replace it with a share based compensation scheme with the long-term share vesting program.
We started 2011 with confidence in our ability to continue building on our strength that will enable us capture the growth opportunities presented on our home market. Our short-to-medium term strategy entails aggressively pursuing these growth opportunities that we strongly believe will augment the Bank’s growth to translate into increased shareholder value for our fellow shareholders. While 2010 saw a stellar growth of the Bank’s share price of 142%, bringing it above its IPO price at the year-end, Bank of Georgia shares still trade at a substantial discount to CIS banks in terms of both PE and BV multiple. Having demonstrated the ability of turning challenges into opportunities, in 2011 we are looking forward to continue delivering results through superior execution of the strategy we believe will lead to fair valuation of your stock.
In closing, I would like to congratulate each member of the Supervisory Board, the management and the employees with the strong 2010 results and thank them for the remarkable efforts that made Bank of Georgia’s success possible. In 2011 I am looking forward to working with this dedicated team and a highly engaged Supervisory Board as we continue to realize the full potential of your bank.
Chairman of the Supervisory Board