Extract from 2015 Annual Report
“As a leitmotif to this letter I would like to draw your attention to people working for your company and long term vision we have for each of our business lines.”
A key challenge for any company is how it performs in a difficult macro-economic environment. This challenge has been successfully met by BGEO Group as your Company managed to deliver a record high profit in US Dollar terms despite the backdrop of the Lari weakening by more than 35% versus US dollar compared to pre-depreciation levels and the uncertain macro-economic environment in the region throughout 2015. This success was mainly driven by two major factors:
- People working for the Group; and
- Strategic decisions made by the Board in the past 5-7 years.
These two factors – the people working for your company and the long term vision we have for each of our business lines – will be a leitmotif to this letter, in which I focus on: strategy – for our Banking and Investment Businesses as well as for the Group in terms of capital returns and allocations; and talent development.
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. As outlined in detail later in this report, both targets were achieved by a considerable margin; we grew the retail loan book by 35% and delivered c. 22% ROAE. To further improve profitability we set a 3-year target to increase the share of Retail Banking lending in the overall loan book, from the current 56% 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. Let me outline the background as well as the strategy going forward for each of the banking segments:
Retail Banking delivered a stellar performance by reaching c. 2 million clients, delivering loan book growth and ROAE targets. The acquisition and successful integration of PrivatBank Georgia played a major role.
To further improve profitability we set a 3-year target to increase the share of Retail Banking lending in the overall loan book, from the current 56% 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.
In order to better connect with the various segments of the retail client base, we operate a multi-brand strategy:
- 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. We also sell only a limited number of banking products to our Express banking clients. Currently, 77 out of a total of 114 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.
- Under the Bank of Georgia brand, we are serving mass retail clients. We have historically been very much a product-driven organisation, which helped us in acquiring new clients. However, we now have a relationship with c. 2 million clients and our challenge for the next three years is to increase the product to client ratio from a current low of 1.7 to 3.0. To this end, we intend to shift our business model from product to client centric. In 2016, we would like to move to a focused service model in 10 branches, 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.
- Our new Solo model was introduced in 2015 and the major part of our planned lounge roll-out has now been completed. The Solo brand is used for servicing the emerging mass affluent segment. 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 banking products, are offered luxury goods at cost and other lifestyle offers including a travel magazine and entertainment. Recently, Solo presented a Sting concert to its clients at a concert that was 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 12,000 level. Net profit per Solo client stood at GEL 1,350 in 2015, over 20 times of what we have in the mass retail segment under the Bank of Georgia brand.
Another big project targeted for 2016 in retail banking will be to plan and begin to implement a new strategy for the digitalization of banking services. Digitalization will play a major part in making our services more competitive and at the same time more efficient.
Retail Banking is headed by Mikheil Gomarteli, who joined the Bank 19 years ago and his first job was to sell debit cards door-to-door. Before heading Retail Banking, Mikheil worked in almost every position in the bank: teller, credit analyst, and headed our reporting and budgeting, marketing, and branch management departments. Mikheil is leading a group of excellent Retail Bankers and their insideout knowledge of Retail Banking and detailed understanding of business are invaluable for the further success of the business line.
Corporate and Investment Banking:
Our Corporate Bank has increased its ROAE from 12% in 2014 to 16% in 2015. We believe the current risk return profile of corporate business is not as attractive as the Bank runs a relatively concentrated loan book, with the top 10 exposures accounting for 12.4% of total loan book. Therefore, our major strategic goal is to deconcentrate the corporate loan book, while stepping up our investment Banking Business by issuing corporate bonds in the local market. We have already made progress in this regard in 2015; we have decreased concentration from 15.7% in 2014 to 12.4% in 2015, and at the same time issued bonds worth US$ 63 million in the local market. Going forward, we are also targeting to syndicate out our large exposures to local and international players.
Georgia is becoming the service hub of the region and we expect to grow our business on the back of it. Further growing our wealth management platform is essential in order for us to issue local corporate bonds. This strategy should result in further de-concentrating the loan book, enhancing the fee-based business, increasing ROAE and improving the overall risk return profile of the segment.
In order to further capture synergies between the corporate banking and investment management (investment banking and wealth management franchises) and expedite the process of developing the local capital market, we have decided to merge these two business lines.
We have appointed Archil Gachechiladze to head the merged entity. Archil joined the Bank in 2009, and he has headed both the corporate banking and the investment management businesses. Archil has delivered great results in both corporate banking and investment management and his obviously successful track record was the key reason for the Board’s decision to appoint Archil as head of Corporate and Investment Banking. Archil is a Cornell MBA and worked at Lehman Brothers’ Private Equity arm prior to returning to Georgia. He has built an excellent team around him. Archil’s superb strategic vision, insights on both corporate banking and the investment management businesses, as well as his great execution skills will be the key to deliver on the merged CIB strategy.
The Bank’s cost discipline:
Identifying and eliminating unnecessary costs is part of our DNA. We have been running positive operating leverage for quite some time. We also have a strong history of successfully acquiring and integrating other financial institutions and delivering substantial cost synergies. The most recent opportunity was the successful integration of PrivatBank Georgia in 2015, where we fully integrated a bank with 400,000 active clients within 4 months while eliminating unnecessary costs and delivering on annualised pre-tax synergies of GEL 30 million, GEL 5 million more than initially announced.
Our three-year target is to maintain a 35% cost to income ratio. Effective implementation of the client-centric model in Retail Banking as well as digitalisation will have a positive contribution to the low Cost to Income ratio going forward.
Tornike Gogichaishvili heads our operations overseeing operating and capital expenditures and his contribution to the 36% cost to income ratio is tremendous. Tornike joined the Group in 2006 and soon became CEO of our insurance business. Tornike also played a crucial role in capturing efficiencies in our Ukrainian banking subsidiary. Tornike has been heading the Bank’s operations business since 2010. His deep understanding of business and processes is the key to successfully capturing further cost efficiencies going forward.
The Bank’s risk management:
In the year of a major depreciation against the US Dollar, I would like to focus on credit risk as it is by far the largest risk category that any bank is exposed to.
Our risk department is best in class. They have passed the test of prudence and control both in 2008 during the global financial crisis, when cost of risk stayed within the Bank’s net interest margin, as well as in 2015, when the currency lost more than 35% of its value against US dollar compared to predepreciation levels.
Investors often ask me how we retained such a low cost of risk (2.7%), in a year of sharp depreciation in consideration that 72% of our loan book is denominated in foreign currency, mostly US Dollars. The simple answer to this question is that Georgian bank balance sheets have been mainly in US Dollars for the past 20 years or so and we manage currency risk, just as banks with local currency balance sheets manage the interest rate risk. (We have limited interest rate risk in our balance sheet.)
How do we manage the foreign exchange risk? Currency-wise, our balance sheet is matched on both sides. Our clients who have local currency income and loan in US Dollars are exposed to currency risk, which makes us consider carefully how to manage their risk. We manage our clients’ risk in two ways: first, we issue these clients 20% less loan compared to issuing a Georgian Lari loan, in doing so we are creating a depreciation buffer. Secondly, we issue shorter-term loans than we would have issued in the first place and at the same time we keep a positive liquidity gap in our balance sheet, so if there is a need to prolong a loan to our client we have the capability to do so. Under the above credit conditions not many qualify for US Dollar borrowing. One of the reasons for the low penetration of loans compared to GDP is due to this conservative underwriting policy used by Georgian banks.
90% of our corporate loan book is denominated in foreign currency, mainly US Dollars - of which 50% have US Dollar income and the rest do not. Because the Georgian economy is dollarised and a US Dollar proxy economy, when the Georgian Lari weakens all corporate players behave in a similar way: they adjust prices, capture efficiencies and adjust to the new reality. As Georgia is an oil-importing country, Georgian corporates had a big saving from lower oil prices, but the adjustment of prices on their final goods was not as dramatic as it could have been. Hence inflation in the country was recorded below 5% in 2015. Weak corporates, whose businesses were struggling even before depreciation, go out of the business, healthier companies will need some sort of prolongation, but their business continues to generate the cash and service the debt on a monthly basis as they used to do, and strong companies do not even need prolongation. This is exactly what happened during the recent depreciation.
On the retail side of the balance sheet we have 54% of loans in foreign currency, mostly US Dollar and the remaining in Georgian Lari. Georgian Lari-denominated loans are mainly issued as consumer loans and credit cards to 400,000 customers. So the mass population are not exposed to currency risk. c. 21% of the retail loan book is in foreign currency, mainly US Dollar loans to SMEs and Micros and the situation with these customers is very similar to corporate clients, as described above. C. 26% of the loan book is in mortgages and the remaining c. 7% is consumer loan and credit cards. When underwriting the mortgages we use a 20% buffer and issue shorter-term. So, the maximum term of the mortgage in Georgia is generally 10 years. With this precondition not many qualify, and actually only the best quality borrowers we have are our mortgage borrowers. In total there are only c. 38,000 mortgages outstanding in the whole country. We announced the automatic re-profiling of the mortgage loans. Basically, we offered automatic prolongation of the mortgage loans in such a way that Georgian Lari monthly payment stayed at a similar level as it was before the depreciation. As we have top quality mortgage borrowers, out of our 13,000 mortgage borrowers only 1,100 took the offer.
Giorgi Chiladze is Chief Risk Officer of the Bank. Giorgi earned his PhD in physics from Johns Hopkins University. He has excellent judgement and a strong understanding of the big picture that serves all of our shareholders well. In Giorgi’s hands we are much safer.
Leadership transition in Banking Business:
One of our major challenges for 2015 was to make sure that banking continued to perform well as I was handing over the leadership of Banking Business to Murtaz Kikoria.
Murtaz is a seasoned banker with more than 25 years’ experience in this sector. Murtaz served as a banking regulator, who institutionalised banking regulation from the early 2000s and made the Georgian banking sector extremely resilient. He has occupied top positions in leading Georgian banks as well as a Senior Banker position at EBRD.
Murtaz joined the Bank in 2008, his major achievement was the successful turnaround of our Ukrainian banking subsidiary and its subsequent divestment. Murtaz also served as CEO of our healthcare business where he acquired a number of different hospitals, contributing in a major way to the successful GHG IPO. Murtaz’s deep knowledge of banking, as well as his great people skills, will be key to the success of our Banking Business going forward.
In last year’s letter to shareholders, I outlined in detail the way we invest in and manage companies. In brief, I would say that the strategy of our Investment Business is very simple: we buy companies or assets cheaply, institutionalising them by allocating and developing top talent in Georgia, eliminating unnecessary costs, growing the companies as market leaders in order to achieve scale-driven cost advantage, and crystalising the value of the them within six years. We invest in small ticket sizes; usually we would not invest more than US$ 25 million in any new opportunity. We also like to stage investments to limit the risks. Once we make sure that an appropriate level of institutionalisation has been achieved in the portfolio company, we may invest in bigger ticket sizes. To this end, we like bolt-on acquisitions to expedite the market leadership and scale-driven cost advantage. Bolt-on acquisitions also enable us to capture cost synergies and eliminate unnecessary costs. The GHG case study in this Annual Report outlines our strategy of doing investments.
In pursuing this strategy, we aim to achieve at least a 20% IRR. The limited access to capital in this small frontier economy is one of the reasons we are able buy cheaply. So, the availability of cash at all times at the Group level is critical to seize opportunities quickly.
Overall, the performance of the Investment Business was exceptional in 2015. We have delivered consolidated profit growth of 81%. The growth was mainly driven by GHG’s superb performance and m2 Real Estate completing its projects ahead of deadline and within budget. The IPO of GHG was the key milestone in the Investment Business as we managed to crystalise the value of our investment and achieve a triple-digit IRR.
Let me speak to our portfolio companies one by one:
Georgia Healthcare Group: GHG’s main goal is to double its 2015 healthcare revenue in 2018 while producing c. 30% EBITDA margin.
The Company targets to achieve this revenue growth by growing its market share by number of beds in the hospital business from the current 27% level to c.30% by the end of 2018. The Company is also in the process of rolling out a national chain of ambulatory clinics where its market share by revenue is currently just 1% and GHG is targeting to grow this to 5% by the end of 2018.
At the beginning of 2016, GHG made a strategic move to expand into pharmaceuticals. Subject to regulatory approvals, GHG has agreed to acquire GPC, the third-largest retail and wholesale pharmacy chain in Georgia. This acquisition will enable GHG to become the largest drug purchaser in the country and be present in the entire healthcare eco-system which amounts to GEL 3.4 billion. The pharmacy business is expected to be highly synergistic both to reduce the cost of drugs for our hospitals as well as to cross-sell through GPC’s loyalty programme to ambulatories. GPC has c. 12 million customer interactions per annum. It is expected GHG will open pharmacies on the premises of approximately 40 hospitals and large ambulatory clinics owned by GHG to boost the revenue of GPC. The acquisition price of GPC implies 5.7 times EV/EBITDA before eliminating unnecessary costs and capturing further cost and revenue synergies. The post-synergy multiple is 3.3.
GHG is led by Nick Gamkrelidze, who joined the Group’s insurance subsidiary business in 2006, soon becoming its CEO, and embarked on the healthcare strategy in 2011. As part of our talent management policy we have rotated Nick as CFO of the Group in order to get him familiarised with the working of a public company. Nick had demonstrated outstanding performance both running the healthcare business and being CFO of the Group. Nick is a good example of how one can become public company CEO in our Group by constantly learning and developing. Nick’s cost discipline and strategic vision is the key to the success of GHG and its IPO. Nick is leading a highly capable team and I strongly believe that under Nick’s leadership, the GHG team will deliver on its strategy.
You can find out more about GHG by visiting its IR website at www.ghg.com.ge
m2 Real Estate: After launching the Real Estate Business in 2011, m2 has developed, or is in the process of developing 2,500 units, of which over 1,600 have already been sold. In a very short period of time m2 has become the largest residential developer in the country, enjoying scale advantage to be a lowest cost producer. To this end, in the past four-year period, m2 has managed to make housing more affordable in Georgia, bring the price of a one-bedroom apartment from US$ 40,000 to US$ 29,000 in Tbilisi, while producing an average 65% IRR on its housing projects. The m2 housing business also complements our Retail Banking and helps to generate mortgages.
If you want to buy an apartment starting at US$ 29,000 in Tbilisi and have it rented out by m2, please email us: firstname.lastname@example.org.
m2 has a strong franchise, excellent track record and solid balance sheet to accelerate its growth. Currently, m2 has a land bank with an estimated value of US$ 34 million, where we can develop more than 5,200 apartments. Demand for apartments is expected to grow further as the country is becoming service hub of the region and urbanisation is expected to continue. At the same time due to a shortage of housing during Soviet-times and the Georgian tradition of multigenerations living in one apartment resulted in 3.7 people living in one apartment in Tbilisi. On top of this, c. 70% of apartments are amortised in Tbilisi, as they were built in the Soviet times.
The good news is that, alongside the housing development, we can develop commercial real estate, such as hotels and retail real estate. Our intention is to develop these projects over the next 4-5 years and retain yielding assets on m2 books. The number of visitors in Georgia grew from 560,000 in 2007 to nearly 6 million in 2015, while branded hotel rooms had a marginal growth to only 1,200 rooms in Tbilisi. Hotel room growth was mainly attributed to four-star hotels, while family-run small hotels are servicing the rest of the visitors. For the budget hotel segment, we observe increasing prices and high utilisation levels. We think with our m2 franchise we can add value in this sector and, therefore, we have signed a 7-year exclusivity with Wyndham for the Ramada Encore brand to develop three-star hotels. Due to the limited supply of three star hotels, we see a significant opportunity in this segment, especially against the background of expected further growth in the number of foreign visitors. Georgia is truly becoming the major destination in the region.
At the same time, we are starting the development of third party land to earn fees. Our customer-driven franchise, sales channels and being a low-cost producer puts us in a unique position to generate fees, while not taking balance sheet risk from re-investing m2 profit into the development of the land bank. To this end, on the back of performance between now and 2019, m2 is targeting to pay US$ 20-25 million in dividends to BGEO Group.
Over the next 4-5 years, our intention is to grow m2 into a Real Estate Investment Trust with an asset manager attached to it – in addition to generating rental income, m2 will be targeting to generate fees from third party land development.
Irakli Burdiladze heads our Real Estate Business. Irakli joined Bank of Georgia as CFO in 2006. In 2010, when we decided to develop land which the Bank had repossessed after the 2008/09 crises, Irakli was assigned to spearhead our Real Estate Business. I have met no one more passionate about the Real Estate Business in Georgia than Irakli. Irakli’s strategic thinking, and his excellent people, sales and execution skills enabled him to build a strong cash flow generating institution and I am confident in his ability, with the help of his excellent team, to deliver on our strategy.
Georgia Renewable Power Company (the hydro business – GRPC):
Our investment so far in our hydropower station business has been very small, but its prospects are tremendous. We decided to develop hydros in Georgia due to the simple fact that the cost of developing one MW of hydro is at least two times cheaper than in neighbouring countries. At the same time, domestic electricity consumption in Georgia has grown by 3.6% CAGR from 2007 through 2015. As we did not know how to develop hydros ourselves, we have entered into a joint venture with RP Global, an experienced Austrian hydro development company. BGEO Group owns 65% in the joint venture and RP Global owns the remaining equity interest.
Our intention is to build 4 hydro stations by the end of 2019 with total capacity of 105 MW. In addition, we plan to do detailed feasibility studies (ready to build) of additional hydros with a total capacity of 150 MW. We have earmarked US$ 25 million in equity investment over the next 3 years to build the first four 105 MW hydros. After launching the hydros in 2019, we expect to produce a ROAE of 20%+.
One can build hydros cheaply in Georgia for two main reasons: 1. Georgia has a lot of hydro resources due to the Caucasus mountains and climate; and 2. these resources have not been tapped as access to capital has been limited.
On the demand side, domestic energy consumption will increase to match the requirements of Georgia’s growing economy, as well as increased external demand from our neighbours such as Turkey, Russia and Iran. Now that Iran is opening-up, it needs energy to develop its economy. The way our hydro licence is structured is that we are obliged to sell electricity during four months in autumn and winter in Georgia, when hydro generation (78% of energy produced in Georgia is hydro) is at a low level in Georgia, while we are free to sell energy during 8 months in spring, summer and autumn, when energy consumption is high in Turkey and Iran, due to the heavy usage of air conditioning. This way, throughout the year, we should be able to capture the most optimal sales price.
GRPC is led by Avto Namicheishvili, who is also Group General Legal Counsel. Avto joined the Group in 2007 and executed all major M&A and IPO transactions for our Group. While Avto acted as the Group’s legal counsel, he has accumulated tremendous business experience and we would like to leverage his knowledge in developing our hydro business. Avto’s execution skills, excellent people skills and out-of-the-box thinking will be critical in institutionalising our hydro development capabilities, which I believe will create a lot of value for our shareholders going forward. Through ongoing Board participation, Avto also helps me to manage our other Investment Businesses. He is one of the key players in executing our Investment Business strategy.
Georgian Global Utilities (water utility and hydro business – GGU):
After the acquisition of our 25% stake in GGU in December 2014, we initiated senior management changes, which triggered substantial improvements in the operating business.
As GGU is an infrastructure company we closely follow cash flow generation capabilities and want to make sure that by eliminating water losses, which currently stand at c. 50%, GGU delivers sustainable cash flow growth. As GGU consumes its own energy, generated by 135 MW hydro stations, efficiency improvements will have a double effect as freed-up energy can be sold to third parties.
We are also developing hydro resources using the existing infrastructure of the Company. In 2015 we identified two stations with a total capacity of 16 MW. Building run-on hydros using the GGU infrastructure decreases the cost of development by 20-30%.
We aim to deliver GEL 80 million EBITDA in 2018 by reducing water losses and building new hydros. GGU is expected to pay dividends on the back of its 2016 performance and step up the dividends to at least GEL 20 million per annum from 2018.
GGU is headed by Giorgi Tskhadadze, formerly CFO of Borjomi, a leading beverage company in Georgia. Giorgi has demonstrated an excellent track record in capturing efficiencies and streamlining operations. Giorgi Vakhtangishvili is CFO of GGU. He joined the Company in April 2015, previously serving as the #2 person in m2 Real Estate. His contribution to the success of the GGU turnaround is equally important.
Teliani Valley (beverage business):
Teliani Valley is one of the largest wine producers in the country, selling c. 3 million bottles a year. Its 2015 EBITDA was GEL 3.9 million, a decrease compared to 2014 as currencies lost values sharply, leading to decreased demand in Teliani’s major export markets, such as Ukraine and Kazakhstan. Teliani also operates a leading distribution company, distributing its own as well as third party goods. Teliani is also the distributor of imported Heineken beer.
In 2016, Teliani is launching a beer and soft drinks production line, which will be a major source for its growth. Because of Teliani’s distribution capabilities, Heineken granted Teliani with a 10-year licence to bottle beer for Georgia, Azerbaijan and Armenia.
BGEO Group owns 71% of Teliani and intends to invest US$ 10 million in equity to build the Heineken brewery in Georgia. The brewery will also produce other Heineken brands, mainstream beer and local lemonades. Teliani is targeting to launch beer production by the end of 2016. The brewery will have a capacity of c. 300,000 hectolitres and will be scalable to 500,000 hectolitres. The total project cost is US$ 37 million. The beer market in Georgia is highly concentrated; Efes Group owns 57% of the market share and 35% is owned by a local producer. Going forward, Teliani may become a diversified beverage producer in Georgia.
Shota Kobelia heads Teliani Valley. Shota joined Teliani in 2009. Prior to joining Teliani, Shota was an executive in the Pernod Ricard Group. Shota managed to capture more than 30% market share in bottled wine in Georgia, where competition is much greater than in the beer market. Shota’s leadership and sales skills will be the key for the success of our new investment. The Teliani team is very excited and engaged with the project, together with the Heineken team, to make it successful.
Group strategy: capital returns and allocations
The simple way to look at our strategy is how much capital return we deliver to our shareholders in relation to the cash investment our shareholders make in the Group. Therefore, our aim going forward is not to issue new shares, rather deliver capital returns in order to generate a high return for already invested cash capital by our shareholders.
Obviously sustainability of capital returns over long period of time is essential for the success of our strategy. As you all know, we run two forms of capital return: Ordinary Dividends paid by the Banking Business and Special Capital Returns (SCR), generated by our Investment Business. Let me discuss each form of capital return separately.
Our Banking Business can be viewed as the provider of Ordinary Dividends. On the back of its 2015 financial performance we will be paying GEL 2.4 per share, which represents growth of 14% over 2014 dividends and a payout ratio of 34% compared to 34% in 2014. Bank of Georgia is by far the largest and most valuable asset in our Group, which provides a high quality, stable dividend flow to our shareholders. Implementing the strategy outlined earlier in this letter should improve the quality of ordinary dividend generation capabilities of Bank of Georgia and make it more sustainable over a long period of time.
Special Capital Returns:
We updated our strategy in December 2014 and introduced the Investment Business and the concept of Special Capital Returns. The Investment Business aims to deliver CSRs from divestments of our portfolio of companies. Our aim over a five-year period is to deliver CSRs of at least 50% in aggregate of the ordinary dividends delivered by the Banking Business over 2015-2019 period. We view CSRs in three different forms: cash dividends, BGEO share buy-backs and the potential distribution of shares in our listed portfolio company. We are also aiming to buy-back shares for our management trust, rather than issue new ones – as we historically used to do. The aim is not to increase the Group’s outstanding number of shares from the current 39.5 million level.
As a result of the successful IPO of GHG and the high cash flow generation of our Real Estate Business, we have clear visibility of SCR flow through 2019. The good news is that our existing investments can generate SCRs beyond 2019.
However, we will need to improve the quality of SCR flow over the longer period of time. Therefore, holding a supply of cash to invest in opportunities and wisely re-allocating capital are important to increase the quality and certainty of SCRs over the longer run. That is why our plans regarding our cash buffer and our capital allocation strategy going forward are important.
Cash buffer and capital allocations:
Currently we hold c. US$ 52 million cash at the BGEO Group level, of which US$ 35 million is allocated to our hydro and beverage businesses. Over the mediumterm, we aim to increase the unallocated cash buffer from the current US$ 17 million level to a higher one of US$ 50 million, or 3.5% of market capitalisation of the Group.
We believe this large cash buffer will be an important component to the successful implementation of our strategy and de-risking the Group in case of unexpected crisis. The unallocated cash buffer will be used to seek opportunities either for new ones or opportunities that capitalise on our existing companies for new projects or bolt-on acquisitions. The buffer will also enable us to buy back BGEO shares cheaply during any global capital markets or emerging market turmoil. As we use cash from the buffer, we will be disciplined to replenish it in a short period of time.
As we will be increasing cash levels at the Group level, we will be running a Groupwide treasury management. Therefore, we are in the process of setting up risk management guidelines at the Group level. The basic idea is to run an extremely conservative liquidity management policy. Allocated cash will be invested in Georgian government treasuries and short-term local bonds, while unallocated cash (e.g. US$ 50 million) will be used to invest in short-term US treasuries or EU government bonds.
Growing the intrinsic value of our portfolio companies will be one of my key performance indicators going forward. To this end, internally we are running valuation models for each of the portfolio companies. Valuation of the portfolio companies will also be used when deciding on BGEO share buybacks as well.
The way we manage the Group:
We run a lean management structure at the Group level. We have five senior people working at the Group level, including me, and all of us have multiple functions. I split my time between helping the Bank executives in strategic projects and overlooking portfolio companies in Investment Business by helping top executives with strategic decisions. Levan Kulijanishvili, a long-time veteran at the Bank of Georgia, is a CFO of the Group and Bank of Georgia. Levan’s ability to constantly learn and develop, as well as understand detail has no boundaries. Avto Namicheishvili and Eka Shavgulidze help me to overlook our portfolio companies by active Board participations, monitoring performance of the Group companies and assessing new opportunities. As mentioned above, Avto is also heading our hydro business and helps the Group company lawyers in case they need advice. In addition to her Group role, Eka handles production of all our investor relation communication materials. Eka also handles the Group’s debt capital funding needs. Eka’s exceptional analytical and strategic thinking skills are invaluable for the Group. Michael Oliver is helping me with investor relations. Mike has 25+ years of experience in UK banking and served as Director of IR of Lloyds Banking Group. Mike attends the Group’s strategic meetings and has a deep understanding of Georgia and the BGEO Group, which helps us to communicate the story effectively. Mike’s understanding of our investors’ way of thinking is very important for us in setting up the strategy. He is very passionate with great people skills.
Attracting the very best talent to our Group has always been a top priority. This is how the success of our Group has been built. Good judgement, flawless execution and excellent team spirit is part of our culture. Bank of Georgia serves as a great platform for developing talent within the Group and the Board’s role in this development is tremendous. In addition to their fiduciary duties, Board members act as advisors/ coaches for all of our top executives. We have a diverse Board with sector specialists and we would like to further enlarge it by bringing more sector specialists to help our heads of businesses to grow further.
As our businesses grow and the market evolves, we are in constant need for top talent to deliver on our strategy. We have much more talent available in-house than 11 years ago, when I joined the Bank of Georgia. To this end, we would like to further institutionalise the talent development and formalise our organisation culture. We would like to use the Bank of Georgia University, internal and external talent pools as platforms to develop future leaders by providing leadership, training and coaching, and mentoring by senior executives and the Board members. We also want to attract young talent through our Leadership Programs to develop future leaders for this organisation.
“Helping each other to succeed by learning and providing feedback” is our leadership culture articulated in one sentence. Indeed, we see constant learning and development of management and employees as key to the success of your organisation and we will be investing time and money in it.
Sasha Katsman heads the HR and Branding of the Bank. He has a Groupwide responsibility to institutionalise our talent development programme as well as roll out our leadership culture throughout the organisation. Sasha joined the Bank in 2010 to head the Bank’s marketing department. His exceptional creativity, execution skills and ability to develop has already created substantial value for our organisation. Sasha built our brand and campaign machine. We decided to promote Sasha to deputy CEO of Bank of Georgia to head the Bank’s HR efforts in addition to his branding responsibilities.
To summarise – at the Group level we want to increase the unallocated cash buffer to US$ 50 million to seize the opportunities in our Investment Businesses as they arise, potentially buy-back BGEO stock if it is cheap, and de-risk the Group in case of unexpected crisis. To improve efficiency in Retail Banking, we will be focusing on rolling out the client-centric model and further digitalising our banking services. To improve the risk-return profile of the Corporate and Investment Banking we want to de-concentrate the loan by issuing local bonds and simultaneously stepping up the wealth management business to leverage Georgia becoming the service hub of the region. In Investment Business, our key goal is to institutionalise our businesses by developing our talented management teams, cutting unnecessary costs, and scaling up the businesses through bolt-on acquisitions to expedite scale-driven cost advantage.
In order to succeed in the outlined strategy, we need three things:
- your continuous support, for which we all at BGEO Group are very grateful
- our continuous effort to develop and grow talent
- Georgia to continue on its successful growth path, about which I am more optimistic than ever.
Chief Executive Officer