Normalizing Inflows In Georgia And Armenia Will Deepen Credit Risks

Key Takeaways

• Slowing economic tailwinds, regulatory scrutiny, and heightened competition threaten revenue growth, profitability, and asset quality for Lion Finance Group.
  
• Heavy exposure to high-yield consumer and real estate lending increases vulnerability to downturns and rising bad debt expenses.
  
• Digital leadership, strong asset quality, and disciplined capital management position Lion Finance Group for sustained growth, margin strength, and resilience amid expanding regional markets.

Catalysts

Through its subsidiaries, provides banking and financial services with focus on the Georgian and Armenian markets.

• Lion Finance Group's impressive loan book growth in both Georgia and Armenia has recently been supported by extraordinary economic conditions and resilient external inflows; as these inflows normalize and government support programs such as Armenia's state mortgage subsidy phase out, expected revenue growth will likely slow sharply, with asset quality at risk if consumer demand subsides or real estate markets cool.
  
• The accelerated expansion in high-yield consumer lending exposes Lion Finance Group to heightened credit risks, particularly as demographic changes-like an aging population in core markets-dampen long-term demand for retail credit, ultimately threatening net interest margins and driving up future bad debt expenses.
  
• While digital adoption has enabled strong customer acquisition to date, the region's digital banking sector faces rising competition from agile fintech entrants and non-bank challengers, increasing the risk of customer churn and price wars that will pressure fee-based income growth and compress profitability over the medium to long term.
  
• Intensifying regulatory scrutiny over lending practices, insurance of deposits, and operational compliance is driving up recurring operating costs, as seen in the institution's new, sizable multi-year contributions to resolution funds, which will continue to weigh on bottom-line earnings and offset efficiency gains from digitalization.
  
• The company's concentration in unsecured consumer and real estate lending, combined with moderation in GDP growth forecasts for Armenia and potentially maturing payment markets in Georgia, makes Lion Finance Group increasingly vulnerable to cyclical downturns, which could result in greater earnings volatility and impaired long-term return on equity.

Lion Finance Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Lion Finance Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Lion Finance Group's revenue will grow by 12.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 51.9% today to 49.9% in 3 years time.
• The bearish analysts expect earnings to reach GEL 2.7 billion (and earnings per share of GEL 60.56) by about August 2028, up from GEL 2.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 3.5x on those 2028 earnings, down from 6.3x today. This future PE is lower than the current PE for the GB Banks industry at 8.7x.
• Analysts expect the number of shares outstanding to decline by 3.54% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.33%, as per the Simply Wall St company report.

Lion Finance Group Future Earnings Per Share Growth

Risks

• Sustained macroeconomic growth in Georgia and Armenia-with real GDP growth forecasts of 6.8% and 4.5% respectively and ongoing broad-based expansion-could drive continued strong loan demand and support both top-line revenue growth and overall earnings for Lion Finance Group.
  
• The robust digital transformation of Lion Finance Group, including being named world's best digital bank, consistent double-digit growth in monthly active users, and 99%+ digital transaction volumes, demonstrates significant operating leverage and positions the company to defend and grow net margins by reducing costs and deepening customer relationships.
  
• Strong asset quality, highlighted by very low non-performing loan ratios and a cost of credit risk below 0.3%, together with a sophisticated risk management framework and high collateralization, ensure resilience in the loan portfolio and help protect future profitability and earnings.
  
• Strategic capital management-including consistent share buybacks, cancellation programs, and maintaining capital ratios above regional standards-enables Lion Finance Group to deliver shareholder returns, sustain a 30%+ payout policy, and provide financial flexibility for further growth and dividend stability.
  
• The company's dominant market position and expanding digital footprint in both Georgia and Armenia-supported by rapid growth in active retail and MSME clients, increasing cross-sell of digital services, and new opportunities in markets like payments and consumer finance-could underwrite long-term revenue growth, margin stability, and increased return on equity despite potential headwinds.

Valuation

• The assumed bearish price target for Lion Finance Group is GEL52.26, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Lion Finance Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of GEL90.0, and the most bearish reporting a price target of just GEL52.26.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be GEL5.3 billion, earnings will come to GEL2.7 billion, and it would be trading on a PE ratio of 3.5x, assuming you use a discount rate of 8.3%.
• Given the current share price of GEL78.8, the bearish analyst price target of GEL52.26 is 50.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.