Is Bank of Georgia Holdings PLC Falling Out Of Favour With Investors?

Shares of Bank of Georgia Holdings (LSE: BGEO) are sliding this morning, by around 9%, after the group revealed yesterday that it was conducting a placing in order to raise funds for growth. 

The group snuck out an RNS just after the market closed yesterday, stating that it was conducting a placing with existing and new institutional investors. Around 3.6m shares, just under 10% of the group’s current issued share capital will be issued. The cash raised will be used to fund acquisitions and support the bank’s ambitions to operate as a Georgia-focused banking group with an investment arm.

Deploying capital

Bank of Georgia plans to spend $51m received from the placing to acquire JSC Privatbank, the 9th largest bank in Georgia by total assets. Another $52m raised from the placing will be used for the acquisition of a minority interest in Georgian Global Utilities Limited.

What’s more, the company is planning to acquire additional health care assets to support its existing plans to bring the group’s hospital business to market by 2015.

Whether or not this expansion into other markets is a good idea remains to be seen. It’s often the case that companies expanding outside their comfort zone soon find themselves struggling to stay afloat.

That being said, Bank of Georgia has laid down a strict set of criteria that each investment it makes must conform to.  Specifically, investments must have a minimum internal rate of return of 20% per annum, with the possibility of a full, or partial exit within a maximum of six years.  

Impressive record 

Based on Bank of Georgia’s record over the past four years, I believe that these investments and the bank’s further plans for growth are a great idea.

Indeed, over the past five years group net income has nearly doubled, return on risk weighted assets has expanded from 2.3% to 4% and the bank’s tier one ratio, or financial cushion has increased to 22.7% — many of the FTSE 100’s larger banks have a tier one ratio in the low teens.

As well as improving its return on capital and capital cushion, Bank of Georgia’s group’s loan book has expanded at a rate of 20% per annum. 

This is all part of the bank’s new 4×20% plan. Simply put, this plan outlines management’s strategy to achieve a consistent return on equity of 20% per annum, a tier one capital ratio of at least 20%, a 20% per annum growth in customer lending and an IRR of 20% on any investments made. 

These are without a doubt lofty targets. However, if the group can achieve these rates of return then the sky is the limit. City analysts are forecasting that Bank of Georgia’s earnings per share will expand by around 18% per annum for the next two years. 

Foolish summary 

Bank of Georgia may be sliding this morning but if the group can grow earnings at a rate of 20% per annum for the next few years, the bank’s long-term prospects are bright. You would be hard pressed to find earnings growth of 18% per year anywhere else in the banking sector.