Description

TBC Bank Group offers a very attractive bet on a rapidly developing fintech business for an audience of 40 million potential consumers – similar to NuBank, Kaspi, or Tinkoff – but, far from an unproven and risky startup, TBC already has an established banking platform which provides both cheap funding for its new fintech business and a valuation backstop for the stock. Barring new emerging market crises, the company is on a steady path to grow its consolidated earnings at a 20% CAGR while distributing an 8-10% annual dividend+buyback yields to shareholders that along with a modest normalization to its valuation multiple should result in a +300% total return on the stock in the next 4-5 years or a 30%+ IRR more than justifying the inherent geopolitical risks. In case TBC hits a home run in its new geography, and achieves half of the success that NU or KSPI have managed to date, we think the stock can approach a £10b market cap or 6-7x of the spot price over the longer term.

TBC Bank, trading on the London Stock Exchange (LSE) with a £1.5bn market cap and based in Georgia (a former republic of the Soviet Union, located in Eastern Europe/West Asia with a population of 4 million), is an under-the-radar but high-quality dominant bank in which the founders still own over 15% of the shares. Led by a CEO with a 30+ year tenure at TBC, the bank has a track record of delivering ROE consistently above 20% over the past 10 years (except for 12% in 2020 affected by COVID-19). While these numbers are already amongst the  highest in emerging markets, TBC has been steadily increasing its ROE to 25-30% with digital initiatives driving costs down and high-margin earnings streams growing, such as interchange payment fees and consumer fintech/subscriptions. With an EPS CAGR of 20% (in GBP terms) over the past decade, TBC Bank currently trades at 4.5x P/E-LTM or a 10-15% premium to book value. This is an undemanding valuation as compared to, for example, Itau in Brazil (with the same BB credit rating as Georgia), compounding EPS at 3% over the past decade, earning below 20% ROE, and trading at 10x P/E or a 70% premium to book.

While TBC’s Georgia business alone is good enough for a 20% IRR, what gets us excited about TBC is its geographical expansion to Uzbekistan (another former republic of the Soviet Union, located in Central Asia with a population of 36 million), a country that Oliver Hughes – former CEO of Tinkoff, one of the most successful fintech companies of the past decade – picked for the next chapter in his career: to build a scaled fully digital neobank inside TBC.

Below, we explain why TBC's Georgian banking operations are of very high quality, even in a relatively mature market with limited growth potential. In contrast, Uzbekistan presents one of the most promising landscapes for a fintech disruptor.

Georgia – a steady banking oligopoly with digitization tailwinds

TBC was founded in 1993, first as a corporate bank and then it grew to provide a full commercial and retail banking offering, including a recent foray into the digital ecosystem for retail consumers.  TBC has a roughly 40% national share in both deposits and loans with Bank of Georgia taking another 40% and the remaining 20% split amongst niche and subscale local banks. Importantly, the relatively small size of Georgia (less than 4 million people) along with the established positions of the dominant banks make it uneconomic for local challengers to gain the minimum necessary scale to compete effectively while the local features of the market – peculiar language and hard-to-hedge FX – make it unattractive for foreign competitors to entry. Both TBC and Bank of Georgia have access to relatively cheap local deposits and wholesale funding as publicly listed companies on the LSE. Georgia has a conservative and well-regarded banking regulator (providing regular updates so TBC core earnings can be tracked monthly) and the rational competition between TBC and Bank of Georgia has resulted in high and stable ROEs above 20% over the past decade (except for 2020).

Georgia with its real GDP growing ~4-5% annually, still has a long runway for banking services: retail credit (incl. mortgage) accounts for just under 50% of household disposable income compared to Europe at ~70-80%, and digital payments penetration still stands at just 21% of total payments.

On top of its loan book growth, TBC has gradually increased the revenue share of non-interest income, coming mostly from payment interchange fees and merchant acquiring, from 25% in 2012 to the current 34%. It has recently started to roll out its new BNPL product. We believe BNPL will further monetize TBC’s dominant position in merchant acquiring and enrich its value proposition to merchants by stimulating consumer demand – similar to the playbook run by Kaspi.kz (KSPI) in Kazakhstan, albeit without proprietary payment rails (TBC relies on V/MA or Apple/Google Pay for its payment systems instead of QR codes). With KSPI charging merchants ~6-8% take rates for BNPL we expect TBC to achieve at least ~3-4% take rates on its BNPL product as compared to the 1-2% interchange and acquiring fees it currently earns. Taken together, we expect the growing digital payments in Georgia and the emerging BNPL offering to roughly double TBC’s earnings on payments in Georgia or add 40-50% to the current total Georgian profits in the next 4-5 years.

Finally, TBC has been shifting its offering to mobile over the past 5 years, driving the cost of service down and opening new revenue streams from retail consumers. The company launched a fully digital retail banking platform, Space, that helped improve consumer NPS from below 50% to the current 67% and simultaneously lowered the cost-to-income from 40% to 32%. Since 2019 through a series of acquisitions, TBC further complemented its all-mobile banking services suite with classifieds/marketplace offerings, collectively known as TNET. TNET is the market leader in all verticals – real estate, classifieds, ticketing, and general e-commerce – with market shares of 50-80% and accounting for 40% of all Georgian local web-traffic. The company aims to grow GMV through TNET by a factor of 10x in the mid-term to ~$350m by driving wider adoption and increasing engagement with the classifieds business. At present, the platform is also dramatically under-monetized; for instance, both auto and real estate ads are free up to a certain number of listings. As a result, TNET is slightly loss-making. Once scaled, we expect classifieds to add close to 10% to Georgian profits (at a 60%+ operating margin as is common for the clear leaders in classifieds and marketplaces) and to further drive loan book growth through the high conversion of mortgage, auto, and BNPL loan leads.

Overall, we expect Georgian operations to grow at nearly 15% annually, with a slight increase in ROE to the high 20s%. We anticipate moderate capital reinvestments leading to book growth in the low teens, while the remaining profits will be directed to Uzbekistan and returned to shareholders through dividends and/or opportunistic buybacks.

Uzbekistan – a rapidly growing economy provides a fertile ground for fintech

Unlike Georgia with its established banking oligopoly gradually evolving into digital fintech, Uzbekistan has gone through revolutionary changes in the banking landscape as the country began its economic transition to a market economy in 2017 and liberalized its banking system. Writing the rules effectively from scratch and relying on its own payment systems (instead of V/MA), Uzbekistan adopted modern open banking regulation underlined by electronic payments and data infrastructure including, for example, digital biometric tools and digital payments for government services. The ability to open a fully digital banking account or e-wallet has effectively brought the banking system even to the remote non-urban areas of the country and, as a result the number of digital payments users has shot up from 5 million in 2017 to current 16 million, still a low share of 36 million population that itself is growing 2% annually. Overall, Uzbekistan is growing its real GDP by 6% annually and has one of the lowest retail credit penetration of only ~10% debt to household discretionary income.

Until recently, the banking industry was dominated by sleepy incumbents, state-owned legacy banks, controlling around 80% of the assets, but the recent sale of one of those banks lowered their combined share to 70%, and the government plans to sell at least three other banks to foreign investors by 2025. Additionally, a plethora of local fintech businesses have emerged since the banking system reform and there are now also rumors and speculations about Kaspi entering the market. We believe Uzbekistan's rapidly growing banking industry has room for 2-3 large neobanks focused on retail consumers. These neobanks, with their high-quality product offerings, are likely to drive accelerated total addressable market (TAM) growth. Below we detail why we think that TBC Uzbekistan, that includes the payment aggregator Payme and the fully mobile bank TBC Uz (with a full regulatory banking license), will most likely be one of those fintech champions. We believe the company already has a tangible lead on all four key ingredients for success:  human capital, funding for growth, tech stack, and a trusted brand.

Human capital. TBC Uzbekistan is led by an all-star management team. Oliver Hughes, the former CEO of Tinkoff Bank in Russia, scaled it from zero to over 20 million clients and $0.5 billion in earnings during his 15-year tenure until 2022. He joined TBC last year to lead strategic execution in Uzbekistan. Nika Kurdiani, a former executive of Kaspi, the fintech leader in Kazakhstan with over 10 million clients and $2 billion in earnings, led the creation of TBC’s digital banking platform in Georgia before moving to Uzbekistan in 2020. Other key managers came to TBC from leading tech companies in the region (e.g., Yandex or Sberbank Devices) and established international and regional banks (e.g., Royal Bank of Scotland, Citi, Tinkoff, Kaspi). We believe this team not only knows how to execute a market-leading growth strategy but is also experienced in navigating consumer credit cycles in the emerging markets.

Capital. Unlike other fintech businesses, TBC Uzbekistan can rely on equity investments from its big Georgian “sister” company TBC Georgia. For TBC Georgia this is an enviable opportunity to deploy excess capital at even higher rates of return than in its home market. Further, international development organizations such as IFC and EBRD have also provided 40% of TBC Uz’s equity. These investments will soon be folded into TBC Uzbekistan holding (also owning Payme) and will own 20% of TBC Uzbekistan. As TBC Uz penetrates the market with its deposit product, it should also get access to consumers savings as cheap funding.

Tech. TBC Uz has the unique advantages of relying on the tried and tested TBC digital banking platform, Space, but also creating its own suite of tools further advancing Space’s functionality, especially when it comes to UX/UE. For example, TBC plans to lean heavily into AI assistants as part of the user engagement with the mobile app, whereas the development of these at a small fintech startup may prove uneconomic.

Brand. Started just 3 years ago, TBC Uz already has ~15% market share in unsecured consumer micro loans, while Payme has 12 million registered users and is a leading top-of-mind brand (named as the first or second brand that comes to mind for payments by 98% of Uzbeks). Having built the Tinkoff banking brand from scratch in Russia—despite the name initially being associated with beer and restaurants rather than a financial institution—we believe Oliver Hughes will use the same product-led strategy to establish TBC Uz as the most popular solution among younger cohorts. As the platform scales, it will increasingly target the main market.

Importantly, TBC is already profitable in Uzbekistan and underwrites its products at an impressive 45% NPV threshold resulting in the currently reported ROE of 26% and improving to 30%+ after the cost of loss provisioning normalizes (the loan book is growing so fast that front-loaded provisions on the new loans are hurting averages) and the cost of equity is reduced to 15% in the medium term through a higher share of deposits and wholesale funding. While ~40% yields on loans are comparable to other emerging markets with nascent consumer credit offerings, the key reasons why TBC was able to achieve low 5% cost of risk from the beginning of its operations are twofold. First, on loan collection, a unique advantage of Uzbekistan inter-banking regulations is that TBC, as part of the system, is able to charge consumer accounts at other banks through automated daily checks. Second, on credit underwriting, TBC has access to rich transactional data via Payme, which links 12 months of historical consumer data at other linked bank accounts, along with free access to Uzbekistan credit bureaus.

Overall, TBC Uzbekistan plans to take a ~10% share in retail loans by 2028 (up from 4% in 2023) while the banking TAM in the country is expected to double over the same time period. With high operating leverage due to its easily scalable digital infrastructure, the profits are expected to more than 10x from $22.5m in 2023. In the long run, TBC Uzbekistan may reach $500m in net profits at a ~50% margin on $50 ARPU (2% of GDP/capita, slightly below the current average for NuBank, and 3x below what NuBank achieved for mature cohorts) and 20 million active customers. This would be approximately half of what Kaspi has achieved in Kazakhstan, adjusted for the GDP difference between the two countries.

Financial estimates and valuation

To sum up, we project TBC’s Georgia operation to gradually increase ROE from the current 25% to ~30% while growing its book by ~12% annually in 2024-2029 to reach ~$900-950m net profit. Uzbekistan is projected to 10x current earnings and reach $200-250m. Taken together consolidated TBC earnings (excl. 20% minorities’ stake in Uzbekistan) should reach ~$1.1bn or £850-900m, assuming broadly stable FX rates and/or modest local currency depreciations offset with a higher net interest margin translated to higher ROE.

In our base case, we also assume a modest multiple re-rating from the currently depressed 4.5x P/E-LTM to just 6x P/E-NTM. We think an even higher multiple will be earned by the company as Georgia moves into higher quality retail-oriented revenue streams (payments, BNPL, and marketplace), and the profit share of fully digital fintech in Uzbekistan increases from the current 5%, overlooked by the market, to over 25% providing geographic diversification to the group and still growing much quicker than Georgia. Our 6x P/E-NTM assumption compares to Kazakh KSPI trading at 10x, Brazilian NU and INTR at 30x and 16x respectively, and Russian Tinkoff trading at above 20x before the Russia-Ukraine war. Any geopolitical normalization in the former USSR region may lead to a partial closing of the valuation gap with LatAm and imply P/E in the teens for TBC but we don’t count on this upside for the idea to work out.

We thus see TBC reaching a valuation of close to £5.3bn by 2028-2029. Accounting for only a moderate reduction in share count from the current 55m to 53m, TBC stock price can be £100/share in our base case, or 3-4x of the current spot.

Conversely, we see low downside risk from further multiple compression to below 4x P/E and shareholders compensated by an almost 10% dividend/buyback return for every year they hold the stock. Nevertheless, bearing in mind that TBC operates in emerging markets, we point out the following potential risks.

Risks

Political/regulatory: TBC getting nationalized and/or unfavorable regulatory changes. Currently we see both Georgia and Uzbekistan relying on international investments for economic growth and TBC’s caliber further validated by IFC and EBRD funding.

Macro. TBC has been managing its book in a conservative manner since 1993, undergoing a few consumer cycles and FX crises with no lasting impact. In the most recent example, TBC achieved an ROE of 5% during the COVID-19 pandemic in H1 2020 quickly recovering to 20%+ by the start of 2021.

Geopolitical risks: open conflict affecting Georgian or Uzbek economies. We consider this risk to be fully priced-in for both countries simultaneously at 4.5x P/E-LTM.

Catalyst

Earnings,

Buybacks,

Sell-side coverage