Extract from 2012 Annual Report
Four reasons why we are the leading bank in Georgia:
- Our values drive our business
- Our products and services are right for the market we are in
- We have a strong and robust governance structure
- Our Executive Management team is focused on delivering results
In 2012, Bank of Georgia Holdings has made strong progress in a number of areas that underpin future growth in its revenues, earnings and delivering value to its shareholders. The Board is delighted with the Group’s progress in a year in which it delivered record earnings of GEL 179.6 million.
Our executive management team, led by Irakli Gilauri, has developed and implemented a growth-focused strategy that is generating high levels of business and earnings growth, with strong profitability and returns whilst maintaining a conservative balance sheet with high levels of capital and liquidity – levels that are substantially in excess of minimum regulatory requirements. This strategy clearly works and, as a result, the Group continues to get stronger and stronger.
On behalf of the entire Board, I thank Irakli and the management team for plotting and maintaining the sound strategic course – with challenging goals – for Bank of Georgia. Irakli’s personal integrity and commitment to the values of the Group are clearly recognised, highly regarded and reflected throughout the organisation.
In my letter to shareholders last year I talked about Georgia’s recent progress in the eradication of corruption and in delivering market-oriented reforms that have underpinned Georgia’s macroeconomic development over the last decade. This economic progress has continued to be delivered throughout 2012 and into 2013, notwithstanding a period of uncertainty around the time of the country’s parliamentary elections in October 2012.
In 2012, Georgia remained firmly on the path of economic growth, recording an estimated 6.1% real GDP growth during the year. This economic growth reflects three main pillars: Georgia’s economic liberalisation and strong fiscal and monetary framework, ongoing macro-economic stability and Georgia’s welcoming business environment resulting from recent growth oriented reforms.
Growth in tourism continues to be an important driver of Georgia’s economic progress, with the number of foreign visitors growing by 56% to a total of an estimated 4.4 million visitors in 2012 compared to 2011. Net remittances and foreign direct investment remained robust and are expected to continue to be so into 2013 and beyond. In January and February 2013, the number of foreign visitors continued to increase significantly with 37% year-on-year growth compared to January and February 2012. Georgia benefits significantly from its liberal economic policies and its positioning as the logistics and tourism hub for the Caucasus region. The country’s Liberty Act ensures the continuation of the country’s credible fiscal and monetary policy framework. With effect from 2014, Georgia’s government expenditure as a percentage of GDP will be capped at 30%, the budget deficit as a percentage of GDP will be capped at 3%, and overall Government debt to GDP will be capped at 60%. In addition, recent growth oriented economic reforms, such as eradication of regulation and red tape and eradication of administrative corruption, among others, will continue to benefit the economy for years to come. 2012 was also a breakthrough period in the Deep and Comprehensive Free Trade Area negotiations with the European Commission, which is now expected to lead to the successful conclusion of negotiations during 2013, and to the initiation of free trade with the European Union within two years.
In December 2012, the Parliament of Georgia approved Georgia’s state budget for 2013. The budget revenues are projected at GEL 7.4 billion, while the total state expenditure budget (including acquisition of non-financial assets) is expected to be GEL 7.9 billion. The forecast budget deficit, as a percentage of GDP, is 2.9%, and Government debt to GDP is targeted to be 33.1%. Real GDP growth is budgeted to be c.6%, and average inflation is expected to be c.3%. Whilst 2012 was another year of economic progress in Georgia, it is in the political sphere that a truly remarkable breakthrough was achieved. Following the victory of the Georgian Dream coalition in the October 2012 parliamentary elections, there was a relatively smooth transition to a Government run by the Georgian Dream coalition – a rare democratic achievement among former members of the post-Soviet CIS. The new Government is now clearly ‘up and running’, progress is being demonstrated in many areas and it is encouraging to see good levels of inward investment continue, high and growing levels of tourists visiting Georgia and, perhaps most notably, significant signs of a substantial improvement in both diplomatic and economic relations with Russia – over time I believe this will be extremely beneficial to the people and economy of Georgia. Whilst the last October elections plainly represented a significant source of uncertainty for businesses and consumers in Georgia, having seen these more recent developments in the country, it feels like this period of uncertainly is now behind us.
Throughout 2012, Bank of Georgia has remained firm and true to its core values and principles. Among the many reasons why Bank of Georgia continues to be, by any measure, the leading bank in Georgia, I would highlight these: – Our key values drive our business – Our products and services are appropriate for the markets in which we operate – We have a strong and robust governance structure, and – Our executive management remains clearly focused on delivering high quality, sustainable, results.
The Group recognises that we live in a time when the external environment constantly challenges us to develop innovative solutions that drive both value for our customers and sustainable profits for our shareholders. Many of the ways in which the Group is responding to this challenge are explored in greater detail in the Chief Executive’s statement and elsewhere in this Annual Report. I will mention only a few of the key areas of progress made by the Group. In Retail Banking, our Express Banking strategy is revolutionising Georgian financial services markets and is increasingly been used to bring more, previously unbanked, customers into the banking sector.
Management’s focus on cost efficiency and delivering positive operational leverage is also an important strategic priority. By constantly looking to improve efficiency, and focusing on leveraging new technologies and efficiencies such as Straight-Through Processing, the Bank again delivered revenue growth that is more than double the rate of expense growth. In a maturing financial services market, which we expect to be characterised over the next decade by falling interest rates, management has made reducing the Group’s cost of funds a priority. Over the last 12 months this has been highlighted by a strong focus on reducing deposit rates across all business sectors, as well as the issuance of a five-year Eurobond in July 2012 which, when combined, supported both a significantly reduced cost of funds and, consequently, an increase in the Bank’s net interest margin. This emphasis on strong balance sheet management will, I believe, continue to support strong margins over the next few years. Our strong earnings performance and level of profitability has produced high rates of internal capital generation. Our capital ratios substantially exceed our current capital requirements and proposed future needs. This has enabled the Board to recommend a more than doubled dividend of GEL 1.50 per share, and announce an expected dividend payout ratio going forward of 25%-40% of earnings.
Finally, our listing on the premium segment of the London Stock Exchange in February 2012 has achieved its key objectives. The average daily liquidity of Bank of Georgia Holdings shares has increased substantially, the Group has improved access to global capital markets and we have experienced a significant diversification of our institutional shareholder base, with particularly noticeable increases in our UK and US shareholder bases. The value of these improvements was both demonstrated and further enhanced in March 2013 by the successful placement of a 10% equity holding by East Capital Financials Fund, which is in the process of closing. The Board believes that both Georgia and Bank of Georgia remain well positioned to build on the successes of 2012, in 2013 and beyond. The Bank of Georgia business model has a demonstrated flexibility and ability to generate high quality organic growth in a number of different economic environments. Georgia’s economy is in good shape and I cannot think of a bank better placed to take advantage of the opportunities that will arise in our core businesses over the next few years.