Improving growth outlook for Georgian banks, says Fitch Ratings

Georgia’s banking sector continues to be characterized by satisfactory asset quality and robust liquidity but risks still remain, says global ratings agency Fitch Ratings.

At a business breakfast in Tbilisi today where Georgia’s economy and banking sector was discussed, agency analysts said overall the Georgian banking sector was well capitalized but there were potential risks in retail, micro and SME loan segment.

"Fitch views the banks near-term prospects as mildly positive, given the agency’s forecast of 5 percent GDP growth for the Georgian economy in 2014, rising to 5.5 percent in 2015,” said Fitch Ratings' director of Financial Institutions Lindsey Liddell at the meeting, which was attended by top management officials from Georgian commercial banks and representatives of the National Bank of Georgia (NBG).

Liddell said Georgia’s economic growth should support banks internal capital generation capacity and asset quality, notwithstanding margin pressure from competition.

Dollarisation - key weakness

When speaking about the main vulnerabilities of the banking sector, Liddell believed high-level of foreign currency lending, so-called dollarisation, remained a key weakness.

"High foreign currency lending, largely driven by deposits on foreign currencies, increases credit risk for banks and results in potential volatility of capital ratios,” Liddell said.

He believed dollarisation was likely to remain material given slowly changing depositor behaviour in the country.

"Dollarisation is declining but mainly only on assets but de-dollarisation of customer deposits is proving a slower process,” Liddell noted.

When defining the competitive landscape, Fitch analysts said two of the largest banks remained dominant - Bank of Georgia and TBC Bank. These two banks accounted for around 60 percent of assets and were likely to remain so, given their growth focus, well established franchises and nationwide networks.

Furthermore, TBC Bank’s initial public offering on the London Stock exchange earlier this month was believed to provide the bank with new scope to grow.

When Fitch Ratings’ managing director of Financial Institutions James Watson evaluated medium and small-sized banks’ competitive advantages, he said medium-sized banks needed a niche or clear competitive advantage to compete.

"But increasing overlap between more niche and mainstream players as banks expand the scope of their business and consumer focus in the quest for yield and volumes,” he said.

As for smaller banks, Liddell said they would face challenges to maintain and develop their franchises. "[For smaller banks it is] harder to make costly investments in technology, staff and infrastructure,” he added.

Currently, Georgia’s banking industry is represented by 21 commercial banks, including 18 banks with foreign capital and the branches of two non-resident banks.

Fitch Ratings analysts believed sovereign and macro issues remained key for bank ratings.

Fitch Ratings rated five Georgian banks. Their results were: ProCredit Bank (Georgia) (BB); Bank of Georgia (BB-); TBC Bank (BB-); Liberty Bank (B); and Basisbank (B-).

The agency upgraded Georgia’s Foreign – and Local Currency IDRs to BB- with a stable outlook, from B+/Positive on December 15, 2011.

Officials at Georgian banks said upgrading the ratings was "very positive news” for any bank, particularly when Fitch ascertained the positive development of the country, and upgraded banks in line with their rating action on the sovereign rating and the country ceiling.

Georgian banking sector - fastest growing among emerging markets

In his presentation at this morning’s event, James Watson of Fitch Ratings focused on Georgia’s banking system in the context of the global emerging market.

Watson believed Georgia had the fastest growing banking sector among emerging markets in 2013, despite a sluggish first nine months.