Shareholder Letters

Chairman’s Statement

Extract from 2017 Annual Report

Dear Shareholders,

This is expected to be the last BGEO annual report. The forthcoming demerger of the Group, announced in July 2017, reflects both the end of an era and the start of a new one. The Board and management team are convinced that we are on the right strategic path. In fulfilling our fiduciary duties to you, the Board regularly examines strategic options. We elected to split the Group into two independent businesses: the Bank and an investment vehicle, which we call Georgia Capital.

If we do it right, we could be at the eve of a major jump in value creation. We will have created three large groups, all quoted on the London Stock Exchange, each with their own Board, management, and strategic logic. It is an opportunity to deliver better service to our clients, better development to our employees, more growth of the corporate sector of the country, and finally significant financial return to our shareholders. Each management team and the Boards will focus on the development of one kind of business.

In my letter, I have traditionally followed a set structure. First, a few words on Georgia; then on the strategy of the Group; and then on people – Board and top management. Irakli Gilauri, our CEO, and others will expand on the detail of the businesses.

Economically, Georgia is doing exceptionally well in a difficult region and world. I believe three key factors make the Georgian situation positive in the long term:

1. Macroeconomic stability. Prudent monetary and fiscal policies have led to almost 5% real GDP growth during 2017. This has allowed the first ever issuance of offshore local currency bonds by Bank of Georgia.

2. Many healthy and developing sectors, in line with Government policies: 

a. The financial sector, of which we are part 

b. Infrastructure development, especially in the power sector 

c. Healthcare, where we participate in the universal healthcare access policies of Government 

d. Finally, and more long term, the Government has a programme to improve education, and to make the public sector more efficient.

3. Good Government 

a. Strong anti-corruption policies. According to Transparency International, Georgia has maintained its ranking as a low bribery environment — on a par with many European Union member states 

b. Georgia’s ease of doing business ranking was 9th out of 190 countries in the world, in 2018, up from 16th last year. Here again an excellent result 

c. Fiscal development. The corporate tax reforms, effectively eliminating corporate income tax for all re-invested or retained earnings, started at the beginning of the year and have already yielded GEL 600-650 million cash buffer for corporate re-investment in the first year on the policy’s adoption. The reform efforts also envisage capital market development and pension reform. Georgia is on the right path, and these are developments which take time 

d. Reduction of the fiscal deficit. The Government is determined to reduce its fiscal deficit, on the back of reducing non-essential current spending. The 2018 draft budget is an illustration that Government delivers on its commitments; as was the case in 2017. 

The proof of this economic progress lies in the fact that we were able do the first ever Lari Eurobond issuance and that Moody’s has upgraded both Georgia and Bank of Georgia to a level two notches below investment grade. The strategy of creating a “mini Singapore” within the region is moving forward day by day. Singapore was not created in one day. 

Politically, things are as calm as they can be with Russia. The New York Times reported last year on Russia’s attempts to provoke Georgia on the boundaries of Abkhazia and South Ossetia – all true; but we also see that Russia is doing more business with Georgia, specifically in terms of transport links and increased tourism flows. Elsewhere, Turkey remains Georgia’s largest trade partner, whilst the development of trading links with Iran are likely to take more time than we originally thought. At the same time, Georgia signed a free trade agreement with China and now has access to a market of 1.4 billion consumers, with zero tariffs, without additional customs fees and without any transition period. 

Internally, it is important to remember that Georgia is still a pluralist and free country. It is taking the habits of democracies, albeit with one party dominance: historically the UNM party, and Georgian Dream now. We have a Government which is supportive and has very competent public servants. Finally, investors should not forget that the United States and the European Union exercise strong external checks and balances – they do not want to lose Georgia as a rare democratic success story. They showed their confidence in the country by granting Georgia visa-free entry to the 26 countries of the Schengen Area. 

The thinking behind our decision to break-up the Group into two separate businesses, each expected to be quoted on the premium segment of the London Stock Exchange, deserves to be explained. 

It did not come from the analysis of a conglomerate discount, and the expectation that we would see a valuation bump because of the transaction. The value creation boost for the two entities is derived from our belief that we will run them better— with higher ROE and higher growth. The logic is simple: first, complexity creates confusion, simplicity creates focus. Second, each entity will be freer to pursue its own growth strategy without worrying about “the Group”. We can already see the effects of this decision. One example is our insurance subsidiary which has already signed a number of distribution agreements with banks other than the Bank of Georgia. This might not have happened if we had decided to stay in the “previous structure”. 

Both entities have substantial potential of earnings and sales growth. 

The Bank is repositioning its portfolio away from straight lending to corporates which require capital and see their margins diminishing. It behooves us to find innovative ways to serve the corporate segment much more profitably. We are also moving into the high net-worth segments, where we can attract wealth from the region. We will continue to reduce costs. Finally, digital technologies offer us an opportunity that we have not yet exploited. The Bank has a very good management team with Kaha Kiknavelidze as its leader, and they are at work on this strategy. I will become Chairman of the Bank and this will be my only Board appointment. 

The non-banking business within BGEO will become an investment company — Georgia Capital — which will include real estate, energy, utility, beverages, and insurance. It will also have listed stakes in the healthcare business and the Bank. The value proposition to investors is “the best vehicle for emerging growth opportunities in Georgia, selected by people with unsurpassed understanding of the local landscape, and managers/entrepreneurs”. Georgia Capital will be run like a private equity fund with one exception. The interest of its investors will be aligned with those of its “Partners”. In fact, its CEO will be paid exclusively in shares vesting over six years, and his executive team will have a similar compensation structure. Irakli Gilauri will leave the Group and the Bank, to head this company as Chairman and CEO. The Board is made up of old hands, such as David Morrison and Kim Bradley and a number of new recruits: Caroline Brown, William Huyett, Massimo Salvadori and Jyrki Talvitie. 

The healthcare company, GHG, is a stand-alone entity today, with its own Board and separate stock market listing. It has much potential that you can read about in its own annual report. 

Board quality and composition have been one of my main preoccupations: we have an opportunity to build a new Board for Georgia Capital and to reinforce the Boards of the Bank and the healthcare company. We have tried to prioritise skills and experience as well as gender diversity. We need Board members who will spend time on the ground in Georgia. We have attracted Cecil Quillen to the Bank’s Board and are actively seeking an additional member. All of our Board members are T-shaped, capable of broad judgement and all bring a speciality to the company. The composition of the two new Boards and the experience and qualifications of their members are set forth on page 19 of this Report. 

Unfortunately, at the outset, we will still have only one woman on each of our boards. Our goal is to correct that yesterday. We are still seeking to achieve the diversity targets at board level expected of a company of our size, and as chairman, I make this a personal priority. It has been a war for talent. 

Corporate culture and human capital have increasingly become the cornerstone of our success. We would not be able to breakup if we had not developed capable leaders to take over. One of the key components of our talent or human resource development strategy has been our incentive system. Its intent is to incentivise management to create value on a long-term basis: more than 85% of management’s compensation is in shares that vest over a three-to-five-year period – discouraging quick earnings temptations.

This year we have moved further into changing our corporate culture in every one of the entities. We want to go from solo performance executives to executives who thrive on teamwork. We have instituted personal development programmes starting at the very top and cascading to the lower level of the hierarchy. Meritocracy and trust are what we aim to achieve. This starts with top managers’ behaviour and talk. It is reinforced by training programmes which teach both self-development, how to give and receive feedback, as well as how to dialogue rather than impose. All this will not be enough if good behaviour is not encouraged and bad behaviour not tolerated. The Board and I take a particular interest in seeing this through.

Before closing, I would like to thank Irakli Gilauri for his leadership as Chief Executive Officer. During his tenure at BGEO, Irakli has taken a Georgia quoted bank and transformed it into the organisation with multiple businesses which we have today. He did not do it alone. He attracted and developed many executives who all lead their own businesses today, and are developing in turn a set of new leaders. His final act will be to achieve the break-up successfully. The Board of Directors and I are truly grateful for his leadership over the years he has been with the company.

Neil Janin

CEO’s Statement

Extract from 2017 Annual Report

Dear Shareholders,

In what is expected to be my final letter to BGEO Group shareholders I would like to talk about three subjects: 

1. The outstanding performance of the Group
2. Simplicity is a key ingredient to our future success, which drove our difficult decision to demerge
3. Our determined and high-achieving Board


BGEO Group delivered another extremely strong performance during 2017 that resulted in record profit for the year of GEL 463 million, and earnings per share of GEL 11.61, an increase of 11.5% year-on-year. Group revenues increased by 23.7% to GEL 1.1 billion. Book value per share at the end of 2017 was GEL 65.22, up 15.2% year-on-year. This reflects excellent performance from our Banking Business as well as strong momentum and strategic delivery from our Investment Businesses, which were supported by Georgia’s strong macroeconomic performance and business outlook.

In the Banking Business, 2017 was characterised by strong franchise growth in Retail Banking operations, particularly in the fourth quarter. This reflected the continued strong performance of our retail business in all segments and an increase in retail lending during the year of 29.3%. In addition, in 3Q17 we completed our three-year programme to reduce concentration risk in our Corporate Bank and consequently started to deliver corporate lending growth in the last quarter of the year. Loan yields have remained stable, and net interest margins have therefore stayed robust at 7.3%. Costs have remained well-controlled, whilst ensuring continued investment in building an increasingly strong customer franchise. The Banking Business cost of risk ratio in 2017 was 2.2%, in line with our medium-term cost of risk expectations, and a significant reduction from 2.7% in 2016. In addition, we have continued to improve our asset quality and provisions coverage ratios. The Return on Average Equity in the Banking Business continued to improve, and stood at 25.2% for the year, and 27.8% in the fourth quarter.

We have again delivered on all of our key strategic priorities. 2017 revenue growth of 17.5% was particularly supported by strong Retail Banking franchise growth, where revenue increased by 24.4% and customer lending continues to grow at more than 20% per annum. This offset the anticipated decline in the Corporate Investment Banking loan portfolio, as we wound down the banking relationship with a small number of significant corporate borrowers, earlier in 2017. Importantly, this helped us to make strong progress in reducing concentration risk in the Corporate Investment Banking, and we lowered the concentration of our top ten corporate borrowers to only 10.7% of our lending portfolio. We have now exceeded our targeted rebalancing of the retail/corporate portfolio mix to further improve the return profile of the Banking Business. Retail Banking now represents 68% of the Bank’s customer lending and Corporate Investment Banking represents 32%.

In addition to the strong retail lending growth, Retail Banking made strong progress in implementing its customer-centric approach with the launch of its new loyalty reward programme Plus+ in July 2017, and continued investment in digital growth. Our product to client ratio also improved from 2.0 to 2.2 during the second half of 2017. In July 2017, we won the exclusive right to modernise public transport payment system in Tbilisi and continue as the sole provider of the Tbilisi Metro’s payment support systems for the next ten years. In addition, Solo, our premium banking brand, has continued to deliver strong growth momentum, with customer numbers increasing to 32,104, up 66.6% over the last 12 months. Solo is on track to achieving its target of 40,000 Solo clients by the end of 2018. 

The improving growth and strength of the Georgian economy continue to support asset quality. In addition to the reduction to 2.2% in the cost of risk ratio mentioned above, we were able to reduce the ratio of NPLs to Gross Loans, which fell from 4.2% in December 2016, to 3.8% in December 2017. Our NPL coverage ratio also improved – from 86.7% at the end of December 2016, to 92.7% at the end of 2017. 

The Group’s capital and funding position remain strong, with capital being held both in the regulated Banking Business and at the holding company level. At the end of 2017, liquid assets totalling GEL 310 million were held at the holding company level. Within the Banking Business, the NBG (Basel II) Tier 1 Capital Adequacy ratio increased by 120 basis points to 10.3% during the year, reflecting both the continued de-dollarisation of the Banking Business lending portfolio and the Banking Business’ high return on average equity and internal capital generation. 

The National Bank of Georgia is currently in the process of transitioning to Basel III standards, and introduced new capital adequacy requirements in December 2017. On the basis of new regulation, the NBG (Basel III) Tier 1 capital adequacy ratio was 12.4% at 31 December 2017, compared to a new minimum Tier 1 capital requirement of 9.9%, which is expected to increase to 11.4% on 31 December 2018. Bank of Georgia has strong capital ratios and high levels of internal capital generation. As a result, the transition to Basel III is not expected to affect the Bank’s growth expectations or existing dividend payout policy. 

The group’s Investment Business continued to deliver strong growth and performance, with EBITDA growing 55.7% year-on-year, and profit before non-recurring items and income tax, including discontinued operations, increasing by 21.4% over the same period. 

We now expect that, in line with our planned exit strategy for the business, it is highly probable that the Group will own less than a 50% stake in Georgia Healthcare Group (“GHG”) at the end of 2018. As a result, GHG is now reported under “discontinued operations” in the Group’s consolidated income statement. Within the business, GHG delivered a year of strong progress towards its planned investment and business roll-out in all key areas of the Georgian healthcare system. GHG delivered net revenues of GEL 745.7 million during the year, an increase of 76.0%, reflecting a combination of solid organic growth and the impact of acquisitions. The healthcare services EBITDA margin continues to be strong at 26.4%, notwithstanding the dilutive effect of the significant roll-out of the two major hospital renovations – Tbilisi Referral Hospital and Deka – and the ongoing roll-out of a nationwide chain of polyclinics (outpatient clinics). In the pharmacy business, we have made significant progress towards the integration of our two recently acquired businesses, whilst avoiding any significant business disruption. As a result, the EBITDA margin of 8.6% for the year has already exceeded our target of a margin of “more than 8%”. 

Our water utility and energy business, GGU, continued to focus on improving efficiencies in the water utility business and delivered a 6.1% year-on-year growth in revenues during the year, whilst achieving a 52% EBITDA margin. GGU has also continued to achieve efficiencies in its own energy consumption, to free up electricity for third-party sales, and has started a number of investments in additional capacity for electricity generation with the goal to establish a renewable energy platform. During 2017, GGU commenced construction of one of two planned hydro power plants targeting c.100MW of additional capacity over the next few years. 

Our real estate business, m2 Real Estate, continues to demonstrate its strong execution skills to unlock value in the real estate development business. During 2017, m2 sold 629 apartments with a total sales value of US$ 49.1 million, in addition to further increasing its portfolio of yielding assets. In addition, the real estate business continued to execute on its strategy of developing 1,000 hotel rooms by the end of 2020. In the fourth quarter of 2017, we acquired the shell of approximately 100-room hotel, and in February 2018 we launched a 152-room Ramada Encore hotel in central Tbilisi. As part of our “asset light” strategy, m2 signed its largest ever franchise agreement to construct and develop a residential complex under the m2 brand name on a third-party land plot in a densely populated Tbilisi suburb. Additionally, m2’s construction arm gained its first major third-party construction agreement to construct the shell and core of a new shopping mall and business centre in Tbilisi’s Saburtalo district. These developments underpin an extremely successful year for the real estate business, and provide significant growth potential over the next few years. 

Our property and casualty insurance business, Aldagi, continues development of a strong portfolio of new products, supporting 24.6% year-on-year growth in net earned premiums during 2017 and Aldagi’s position as the clear market leader in the fast-developing Georgian P&C insurance market. Over the last few months, Aldagi has also enhanced its distribution capabilities by signing major third-party partnership agreements with two Georgian banks – Liberty Bank and Credo Bank – which will support the further diversification of Aldagi’s multi-channel distribution network. These contracts would not have materialised had it not been for the proposed demerger. 

Our beverage business, Teliani, increased its revenues by 102.5% year-on-year, continued to diversify its distribution portfolio and launched its mainstream beer and lemonade production during 2017. 

The Group Board expects to recommend a regular annual dividend for 2017 totalling c.GEL 120 million. This is in the range of our regular dividend payout ratio target of 25-40% paid from the Banking Business profits. Since 2010, the Group has grown its annual dividend per share by 40% CAGR on a GEL basis, and by 32% CAGR on a Dollar basis. If the expected demerger is successfully implemented as planned, it is intended that Bank of Georgia Group PLC (the then new parent company of the Banking Business), will instead, shortly after the demerger is completed, declare and pay a dividend in a similar aggregate amount to shareholders then on the record. In the event that the demerger is for any reason not completed it is intended, subject to shareholder approval, that the Board would implement the payment of this dividend, which would represent a payment of GEL 3.1 per share, payable in British Pounds Sterling at the prevailing rate, a 19.2% increase over the 2016 dividend. 

In addition to the regular annual dividend paid to shareholders, US$5.0 million was returned to shareholders by way of the buyback and cancellation of 115,608 shares during 2017, as part of the existing Board approved US$50 million buyback and cancellation programme. During 2017, the Group Employee Benefits Trust also purchased shares in the market totalling US$34.1 million. 


In July 2017, the Group announced its intention to demerge BGEO Group PLC into two separate London-listed businesses: a banking business, Bank of Georgia Group PLC, and an investment business, Georgia Capital PLC. On 12 February 2018, the Group announced that the Board has approved the implementation of the demerger, which is subject to shareholder approval at a General Meeting expected to be held in April 2018. The demerger is expected to complete before the end of June 2018. The main benefit of the demerger is to simplify the structure, which in turn will enable the Boards and management teams of the respective businesses greater focus on strategy setting and execution. It was not an easy decision to separate the Group, but simplicity will bring so much benefit that it has clearly out-weighed all the potential downsides.

In its final year before the forthcoming demerger, and supported by the continued macroeconomic performance of Georgia, BGEO Group has delivered a record breaking performance in terms of profitability and growth. Growth and return momentum is there for both the Banking and the Investment Businesses.


Our Board’s role in the success of the Group may not always be apparent to our shareholders or the broader community – but it is pivotal. Each Board member’s dedication, vision, rationalism and collaboration have made an important contribution to our development into the world-class institution we have become. Special thanks go to Neil Janin, our Chairman whose leadership of the board and active involvement in strategy setting and mentoring of senior management has been critical in the success of our Group. The good news is that Neil will continue to be the Chairman of Bank of Georgia. We have continued our commitment to a strong and independent governance structure and have managed to put first-class independent Boards and management teams in both businesses and I am confident that under the proposed governance structure following the demerger both companies independently will prosper even more and will continue their excellent recent track record for many years to come. 

In what is expected to be my final letter to shareholders, I would like to thank you for your continuous support and loyalty. I have very much enjoyed meeting you on roadshows, which served as very good guidance for me personally. I have learned a great deal over the past 13 years of being an executive of a publicly listed company and believe, with your help, a lot more learning will follow in the years ahead. I am very much looking forward to meeting you to discuss our strategy in my new capacity as CEO of the first publicly listed investment company from the region.

Irakli Gilauri
Chief Executive Officer