investment management speaker: archil gachechiladze ...bgeo.com/uploads/presentations/bank of...

November 2013

Investment Management

Speaker: Archil Gachechiladze, Deputy CEO

November 2013 www.bogh.co.uk www.bankofgeorgia.ge/ir

Research

Wealth Management initiative

Private Banking update and new products

Discussion topics

Asset Management – new initiative


Deposits

BoG deposits breakdown IM geographic distribution

* 12 month US$ deposits

IM deposits and CDs New deposit and CD inflow at reduced interest rate

RB

35%

CB

43%

IM

22%

Total IM

deposits:

GEL 615 mln

Since the beginning of the

year rates decreased from 8%

to 5%* but portfolio

remained flat

78 55 54

26

41

29

22

78

96

84

47 6.8%

7.6%

6.5%

5.5%

4%

5%

6%

7%

8%

9%

0

20

40

60

80

100

120

Q4/2012 Q1/2013 Q2/2013 Q3/2013

GEL mln

Term Deposit Inflow CD Inflow Deposit cost (Blended)

154 163 155 142

451 409 366 345

42 103 128

605 614 624 615

7.9% 7.7% 7.4% 7.3%

4%

5%

6%

7%

8%

9%

10%

0

100

200

300

400

500

600

700

Q4/2012 Q1/2013 Q2/2013 Q3/2013

GEL mln

Current and Demand Deposits Term Deposits

CDs Deposit Cost (Blended)

Israel

16% Austria

2%

Hungary

5%

Germany

6%

Lebanon

2%

UK

3% Russia

3% USA

4%

Other

20%

Georgia

39%

Hungary Rep.

Office since

Sept 12, 13%

Israel Rep.

Office since

2009


Certificate of Deposit – new introduction

• Certificates of Deposit introduced in the beginning of 2013

• Certificates of Deposits (CDs) are non-callable instruments and thus

significantly reduce the risk of liquidity shocks in bad times

• Therefore regulator has lower liquidity requirement for CDs than for

deposits

• While reducing interest rates on deposits significantly, we offered certain

incentives for CD investors and converted 21% of the portfolio into CDs

• Due to regulatory changes Swiss and Austrian banks are

avoiding fiduciary accounts, but are willing to distribute

BoG tradeable CDs among their clients

• End of November we are launching tradeable CDs to be

offered through Swiss and Austrian Private Banks

0

31

42

54

66

103 110

119 128

0

20

40

60

80

100

120

140

Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13

GEL mln

$20 mln

5.25%

1 year

Certificate of

Deposit

$20 mln

6.25%

2 year

Certificate of

Deposit

$20 mln

6.25%

3 year

Certificate of

Deposit




Research


Discussion topics


Asset management creates new opportunities for investors

European investors have a strong preference

and often regulatory requirements to invest in

European structures only

• As deposit rates decrease,

investors are looking for

alternative investment

opportunities in Georgia, while

offering is limited: there is no

stock market, and minority

investments in private companies

are plagued with risks.

• Bank of Georgia Asset

Management offers a package of

portfolio investments at various

levels of risk appetite.

BoG Asset Management

Company (AMC) licensed by UK FCA

Bank of Georgia Holdings PLC

UK

Caucasus Money Market Fund

Mezzanine /PE Fund

Real Estate Fund

Renewable Energy Fund

Luxemburg based

to carry out fund administration in

Luxemburg

JSC Bank of Georgia Georgia

100% 100%



Research


Discussion topics


Money Market Fund

Mezzanine/Private Equity Fund


Real Estate Fund


Caucasus Money Market Fund: arbitrage opportunity

Rationale for the opportunity

Caucasus is under-researched and under-discovered by investors

Yet three Caucasus countries have stable economies, strong

banking sector and much lower debt level than most of Eastern

Europe

Georgia, Azerbaijan and Armenia offer an excellent opportunity to

diversify portfolio for Western investors

Ongoing effort by banks, driven by national banks, to de-dollarize

balance sheets, creates particularly favorable environment for

investing in local currencies

2007-2013 yields by BoG Treasury (percent)

Bank of Georgia expertise

BoG for more than 6 years has profitably placed its own funds

in bank deposits and sovereign bonds in all three countries in

Caucasus and repeatedly received high single digit or even

double digit yields

BoG has an experienced research team covering Georgia and

Azerbaijan macro, as well as different sectors of Georgian

economy and debt securities of several prominent Georgian

issuers

The bank has more than 10 years experience assessing credit

risk of the banks in the region

* Yields on US$ investments taking into consideration exchange rates for each year; Average yield is calculated on 2007-2012 full year results

10.4%*

Project profile:

BoG to set up US$200mln fund in 2014 targeting high single digit

returns for its investors

1-3 months liquidity access

The Fund to be initially invested in Georgian assets, and expended

to Armenia and Azerbaijan

To keep a low risk profile and achieve targeted returns we will

invest in the mix of: sovereign treasury debt instruments in South

Caucasus (Georgia, Armenia, Azerbaijan) and bank deposits in local

currencies and US$

17.0%

9.9% 5.5%

2.9%

17.3%

9.7% 7.2%

7.4%

0.0%

5.0%

10.0%

15.0%

20.0%

2007 2008 2009 2010 2011 2012 2013Q1 2013Q2

Aggregate Weighted Average (USD portfolio)Source: BoG



Research


Discussion topics




Real Estate Fund

Money Market Fund


Mezzanine/PE Fund: funding growth


Number of high performing companies, with whom BoG is familiar

through its corporate lending, are experiencing shortage of growth

capital

There is a shortage of players in Georgia offering growth capital to

mature successful companies

Senior debt providers in Georgia as a rule are unwilling to share

expansion and other transformational risks even with their most

capable borrowers

Investment Projects currently under review

JSC Nikora is a leader in Georgian meat

processing sector and an owner of 89 stores

around Georgia. Company wants to

establish large commercial pig farm in

2014 and is seeking up to US$5 mln equity

or quasi-equity financing.

Chain of neighborhood stores 2 Nabiji (2

Steps) has grown from 6 to 16 in last two

years. Company’s goal is to have 50 stores

by 2016. They are seeking up to US$1.5

mln

JSC Healthy Water bottles and sells one of

the top Georgian mineral water brands –

Nabeghlavi. Currently company is seeking

up to US$10 mln equity or quasi-equity

which will be used for financing a new

bottling factory

Project profile:

BoG to seed US$100mln fund in 2014 and raise equity from investors

The Fund will provide growth capital to high performing Georgian

(potentially Azerbaijani and Armenian) companies

Fund will offer limited horizon participation (up to 3-5 year )

Fund will always retain exit options, including put-option and tag-

along/drag- along rights

Fund will target up to 20% IRR on its investments

When opportunity presents itself, Fund will also share in equity upside

Fund will have 10 year horizon



Research


Discussion topics



Real Estate Fund

Money Market Fund



Renewable Energy Fund: right time to invest


Strong potential in renewable energy - the cheapest electricity in the

region, strong demand in Turkey for electricity

Build-Operate-Own (BOO) scheme offered to investors in hydropower (vs.

more “traditional” Build-Operate-Transfer (BOT))

Strong prospects for export development: Based on TEIAS forecasts

Turkey will have an electricity deficit of 82-118 TWh by 2020.

Georgian hydropower is one of the cheapest options for Turkey to fill its

electricity deficit while the average tariff in Turkey has been at US$ 0.09

and above

A powerful transmission line (500kv) connecting Georgian electricity

system with Turkey completed in 2013

0%

5%

10%

15%

20%

25%

14

15

16

17

18

19

20

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Typical distribution of generation capacity of run-of-the-river HPP in Georgia (%), RHS

Electricity consumption in Turkey (2007-2012 average), TWh, LHS

Hydroelectricity supply seasonality in Georgia nicely matches electricity demand

peaks in Turkey

Project profile:

BoG to set up US$100M private equity fund, with BoG and

partner seed capital of US$10M

Develop medium size (up to 30MW installed capacity) hydro

power plants

The targeted projects are within geographic proximity which

will reduce challenges (and costs) of logistics

Leverage BoG experience in Georgian markets, including in

funding HPP projects

Bring on-board highly experienced international developer of

HPP projects to acquire a strong technical expertise

Mestiachala 2 HPP

Dolra 2 HPP Mulakhi HPP

BoG AMC Renewable Energy Fund

Investors

Source: TEIAS, Deloitte HIPP, BoG analysis


Renewable Energy Fund: milestones

Renewable Energy Fund (REF) will source its HPP projects from:

Ministry of Energy (MoE), via partnership with government owned and MoE controlled

Georgian Energy Development Fund (GEDF)

Private entities having gone through initial stages of HPP project development

May’13 June‘13 July ‘13 Aug ‘13

Initial

discussions of

cooperation with

GEDF and

Ministry of

Energy MoE)

Tender for

water flow

measurement

equipment

held

MoE publicly

declares support in

HPP projects

development

Negotiations

concluded on

Shareholder

Agreement (SA)

with GEDF

Sep‘13

Gov’t approval, SA Signing

and JVC Registration:

GeoHydro is born

Dec‘13

First feasibility

Study Completion

June’14

Decision

regarding HPP

Construction

Commencement

Nov‘13

Search for high potential small HPP projects under private ownership which have completed feasibility study

and/or initiated construction works

Bank of Georgia and Gov’t

owned GEDF established JVC

with BoG owning 85% stake

and GEDF 15%

Strategic partner

comes onboard

Installation of water

flow measurement

equipment

Memorandum of

Understanding

signed with GEDF

Oct‘13

Feasibility

Study tender

Min of Justice

review and

approval of SA

Gov’t tender

of 2 HPP

rights


Renewable Energy Fund: cluster of projects

• Although individual HPP

projects have installed

capacity of ~30MW or less

(with one exception of

50MW), total installed

capacity of all BoG Svaneti

projects is well over

150MWs

• BoG HPP projects are

clustered within 15 km radius

from regional capital Mestia,

creating an opportunity for

significant savings (logistics,

infrastructure, environmental

and geological studies, etc)


BoG’s potential co-manager for Renewable Energy Fund

The company has been active since 1980s in small

hydro and wind energy

Project pipeline of >1,000 MW, of which by 2015 min

300 MW will be developed (investment of € 600 - 800

million)

Presence in 7 countries in Europe and South America.

Their projects include:

Developed 10 small Hydros in Portugal (3 of

them still owned and managed by the company)

Sold Spanish subsidiary that owned10 small

Hydros in 2011

Developing portfolio of 150 MW small Hydros

in Chile (water rights secured)

Strategic Partner Company CEO and CTO

visited Georgia in August 2013 and undertook

site visit together with BoG team and local

technical team to several potential sites in

Svaneti. In October their team of experts

also visited Georgia to conduct a field study

The company has expressed strong interest in

cooperation in development of these projects

Currently negotiations underway to co-

manage REF once it is set up

Terms under discussion:

30-45% participation from the

Company in management and taking

responsibility for the technical

execution of the projects

Matching their commitment with

proportional participation in seeding of

the REF (c.US$ 4M along with BoG

US$6M)



Research


Discussion topics


Real Estate Fund

Money Market Fund




Portfolio of assets,

Distribution of revenue by categories, US$’000 (excl. VAT)

Distribution of assets by categories, US$’000 (excl. VAT)

Yields by categories

64,956

65%

11,660

12%

5,472

5%

18,027

18% High street retail

Offices

Warehouses

Residential and lands

7,555

48%

990

6%

716

5%

6,433

41%

High street retail

Offices

Warehouses

Residential and

lands

11.6% 8.5%

13.1%

35.7%

15.7% 13.0%

0%

10%

20%

30%

40%

50%

High street retail Offices Warehouses Residential and lands Weighted average,

gross

Weighted average,

after fees


NAV upon launch

Real Estate Fund NAV upon launching

Amounts in US$ if not specified otherwise

GEL/US$ exchange rate 1.65

BoG Group ownership US$ %

Third party high street retail 60,000,000 60%

Subtotal to be raised 60,000,000 60%

BoG Group: warehouses 5,471,969 5%

BoG Group: retail 4,956,127 5%

BoG Group: offices 11,660,359 12%

BoG Group: residential developments & land plots 13,026,614 13%

BoG Group: cash equity 5,000,000 5%

BoG contribution 40,115,070 40%

GRAND TOTAL 100,115,070 100%

Real Estate Fund NAV upon launching


GEL//US$ exchange rate 1.65

ITEM AMOUNTS

Cash & cash equivalents 5,000,000

Real Estate

High street retail 64,956,127

Offices 11,660,359

Warehouses 5,471,969

Land for future development 13,026,614

Total real estate 95,115,070

NET ASSET VALUE (NAV) 100,115,070


Key terms

Key terms

Fund type Equity REIT

Domicile TBD

Asset class Real estate and companies possessing real estate

Property type Commercial (high street retail, offices and warehouses) and residential developments

Geographic focus Georgia

Fund size US$100 million

Term Evergreen

Management fee (REIT) 1.2% of portfolio value net of land and residential developments payable quarterly in arrears

Management & developer fees

(residential developments only)

6% of total project cost incl. land value payable quarterly in arrears throughout development stage

Performance fee (residential

developments only)

20% of IRR with a high watermark of 10% p.a. payable upon completion of each project

Anchor investor JSC Bank of Georgia

Anchor investor’s expected

investment & share

US$40 million/40%

Management company JSC m2 Real Estate

Auditor [Ernst & Young Georgia LLC]

Property appraisals [Cushman & Wakefield]


M2 Real Estate experience in housing developments

Housing project on Chubinashvili St.,

Tbilisi, Georgia

-Status: Completed

-Launched in 09/2010

-Completed in 09/2012

-Total number of apartments: 123

-Apartments sold: 100%

-IRR (est.): 47%

Housing project on Tamarashvili St.,

Tbilisi, Georgia

-Status: Under construction

-Launched in 04/2012

-Expected completion in

05/2013

-Total number of apartments: 522

-Apartments sold: 83%

-Expected IRR: 46%


Tamarashvili 13 Development

m2 Real Estate affordable housing projects' comparison


Total of 3 new projects 13 Tamarashvili st. project Comparison

Land area, m2 17,611 15,000 +17%

Building area, m2 83,620 63,247 +32%

Efficiency ratio (sellable area/building area) 74% 66% +12%

Project duration, years 2.5 2.5 +0%

Expected revenue, US$ (incl. VAT) 74,882,024 50,761,065 +48%

Project estimated cost (incl. VAT) 54,146,701 40,439,943 +34%

VAT 5,380,435 3,515,621 +53%

EBITDA 17,317,702 11,516,069 +50%

Estimated ROE of the project 39% 28% +40%

Estimated IRR of the project 72% 46% +57%

m2RE ownership 100% 100% 0%

Net income of the project 13,051,655 5,784,676 +126%

Financing structure

Equity (land value) 8,530,000 5,400,000 +58%

Cash equity 5,000,000 3,000,000 +67%

Equity 13,530,000 8,400,000 +61%

Pre-sales 31,116,701 22,039,943 +41%

Debt 9,500,000 10,000,000 -5%

Total 54,146,701 40,439,943 +34%

Project costs

Demolition costs 244,286 0

Soft costs 1,254,306 1,018,386 +23%

Land cost 8,530,000 5,400,000 +58%

Construction costs 30,501,667 21,390,601 +43%

Other costs (marketing, management, insurance and

brokerage fees and taxes) 4,043,602 2,615,160 +55%

VAT 6,042,247 4,227,592 +43%

Interest 1,962,814 4,710,568 -58%

Contigency 1,567,779 1,077,636 +45%

Total 54,146,701 40,439,943 +34%

M2 Real Estate: new housing projects


Tbilisi housing market

Housing stock sold in Tbilisi

Housing market size in Tbilisi

Household size in Tbilisi

Source: NPRG, Gremic, Paragon, company own data

Source: NPRG, Gremic, Paragon, company own data Source: NPRG, Gremic, Paragon, company own data

Housing prices in Tbilisi

Source: NPRG, Gremic, Paragon, company own data

221 206 197 273 268 334

229 210 197 283 346

471 241 197 175

258 228

180

7%

5% 5%

7%

6% 6%

0%

2%

4%

6%

8%

0

400

800

1,200

1,600

2007 2008 2009 2010 2011 2012

US

$ M

illi

on

Low-end Economy classLuxury Apartments sold as % of GDP

613 569

Circa

US$1

billion

market

1.6

2.3 2.4 2.5

3.7

4.1

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

London Bratislava Riga Kiev Tbilisi Baku

Nu

mb

er o

f p

eop

le p

er h

ou

seh

old

10% 16% 22% 23% 26% 24%

90% 84% 78% 77% 74% 76%

13,399 13,701 14,574

16,534 16,176

18,641

0%

40%

80%

120%

160%

200%

0

4,000

8,000

12,000

16,000

20,000

2007 2008 2009 2010 2011 2012

Un

its

Secondary market transactions, (RHS)Primary market transactions (new supply), (RHS)Number of transactions (secondary & primary) in Tbilisi housing market (LHS)

1,500

1,200

1,000

1,300 1,400 1,500

950 850

750

950 983 1,033

550 500 450 550 588 615

860 745

650

820 867 881

0

400

800

1,200

1,600

2007 2008 2009 2010 2011 2012

US

$/s

qm

Average price for luxury apartments Average price for economy class apartmentsAverage price for low end housing Weighted average price (Tbilisi)

691 814 842

985



Research


Discussion topics



Acts as the first contact for investors for

information on Georgia

Provides insight into Georgian sectors

and economy (Azerbaijan in the future)

to Asset Management and Wealth

Management platforms

Supports corporate business in

attracting more clients and investments

into the country

Is accessible online, free of charge at

web-site: www.bogr.ge

…and all of this is supported by strong in-house research

Launched in June 2012

Sector coverage:

Hydropower

Tourism

Agriculture

Corporate coverage:

Georgian Oil and Gas Corporation

Georgian Railways

Macro coverage: Georgian economy

Azerbaijan economy – economist for Azerbaijan

has joined the research team and Azerbaijan economic

coverage will be available before end 2013.

http://www.bogr.ge/


Hydropower – key takeaways:

Georgia boasts an electricity production potential of 32 TWh annually, or

4.5x larger than its 2012 generation.

Turkish electricity demand grows on average 7% annually and according

to Turkish TEIAS the country is on the way to posting a deficit of 82-118

TWh by 2020.

A new 500kv line connecting Georgia to Turkey is completed in 2013

increasing capacity to export electricity to Turkey 4.6x.

Tourism – key takeaways:

Annualized 10M13 numbers suggest that Georgia is on track to host

around 5.5mn international visitors or 1.2x of its current population in

2013. The number of international arrivals was up 56% y/y in 2012 to

4.4mn.

We forecast 8.8mn international arrivals or 2x of Georgia’s population in

2019. To compare - Croatia, Cyprus, Estonia and Montenegro hosted 2.3x,

2.1x, 2.0x and 1.9x of their respective populations in 2011.

Increasing tourism receipts contribute to growth in international reserves:

NBG’s net FX buying reached US$ 555mn in 9M13, or 3.6x of that in

9M12.

International arrivals and gross international reserves

0

500

1,000

1,500

2,000

2,500

3,000

3,500

0.0

1.0

2.0

3.0

4.0

5.0

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

10M

13

International arrivals (LHS) Gross international reserves (RHS)

Source: National Bank of Georgia and Georgian National Tourism Agency

0%

5%

10%

15%

20%

25%

14

15

16

17

18

19

20

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Typical distribution of generation capacity of run-of-the-river HPP inGeorgia (%), RHS

Source: TEIAS, BOGR

Research: key takeaways

26 24 26 28 24

6

-15

-36

-58

-82

26 22 21 20 12

-9

-34

-60

-88

-118 -140

-120

-100

-80

-60

-40

-20

0

20

40

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Deficit (Low) Deficit (High)

Estimated Electricity deficit in Turkey 2011-2020 (TWh)


Agriculture – key takeaways:

Agricultural yields in Georgia remain 2.9x below global average yields

on fruit and 2.5x on vegetables, and 1.7x and 2.6x lower than Eastern

European fruit and vegetable yields, respectively.

State investments will introduce irrigation up to 278tha by 2017, more

than 11x the current 25tha. Georgia has renewable water resources of

around 14,000m3 per capita or 14x the 1,000m3 threshold for national

water scarcity.

Georgian Economy – key takeaways:

Given the weakened investor confidence between two election periods in

late 2012 and 2013 the economy had slowed down to 1.7% in 1H13.

However, the simple calculations suggest that if the investment had been

flat, the growth of GDP would have been back to historical average of

around 6%.

0.9

-0.9

-4.5

4.4

2.5

-0.5

2.0

-6 -4 -2 0 2 4 6

Private consumption

Public consumption

Investment

Exports

Imports

Discrepancy

Total

Contribution to the annual nominal GDP growth (1H13 vs

1H12 , % change y/y

Source: IMF: Regional Economic Outlook, with reference to GeoStat

Agriculture yield comparison, 2011 tonnes/ha

Source: FAOStat, BOGR

3.8

7.8 6.6

10.5 10.5 11.2

7.7 10.0

19.6

28.4

23.4

19.2

0

5

10

15

20

25

30

Georgia Africa Eastern

Europe

EU Western

Asia

World

Fruits Vegetables

Research: key takeaways continued…


Research



Discussion topics

Asset Management – new Initiative


Wealth Management distribution

European asset management structure investing in Caucasus

EU residency permit possibilities

Private Banking platform in Europe

Diversifying and growing portfolio of

offerings to wealth management and

private banking customers


Q&A


Forward looking statements

This presentation contains forward-looking statements that are based on current beliefs or expectations, as well as

assumptions about future events. These forward-looking statements can be identified by the fact that they do not

relate only to historical or current facts. Forward-looking statements often use words such as anticipate, target,

expect, estimate, intend, plan, goal, believe, will, may, should, would, could or other words of similar meaning.

Undue reliance should not be placed on any such statements because, by their very nature, they are subject to

known and unknown risks and uncertainties and can be affected by other factors that could cause actual results,

and JSC Bank of Georgia and/or the Bank of Georgia Holdings’ plans and objectives, to differ materially from

those expressed or implied in the forward-looking statements.

There are various factors which could cause actual results to differ materially from those expressed or implied in

forward-looking statements. Among the factors that could cause actual results to differ materially from those

described in the forward-looking statements are changes in the global, political, economic, legal, business and

social environment. The forward-looking statements in this presentation speak only as of the date of this

presentation. JSC Bank of Georgia and Bank of Georgia Holdings undertake no obligation to revise or update any

forward-looking statement contained within this presentation, regardless of whether those statements are affected

as a result of new information, future events or otherwise.

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