The FINANCIAL -- The Georgian banking sector has returned to growth on the back of
recovering Georgian economy. Bank loans grew 9% in the first five
months of 2011 (adjusted for FX effect), broadly in line with a 20%
increase in 2010.
This growth rate should be broadly sustainable into H211, in Fitch’s view. Strong deposit inflows observed in 2010 reflected the return of confidence of retail depositors and improving corporate liquidity. However, competition for both loans and deposits has intensified, notwithstanding moderate loans/GDP ratio (31%) and growing economy, according to the agency. This is likely to result in a reduction of margins and increased risk of underwriting standards weakening.
Loan growth rates varied from bank to bank in Georgia, depending on their strategy, business focus and positions post-crisis. Two largest banks, Bank of Georgia and TBC Bank , which accounted for about 60% of system lending, have demonstrated above sector growth.
Fitch Ratings rates six Georgian banks including: ProCredit Bank (Georgia) (BB-), VTB Bank (Georgia) (BB-), Bank of Georgia (B+), TBC Bank (B+), Liberty Bank (B) and Basisbank (B-).
“ProCredit Bank (Georgia) and VTB Bank (Georgia) have LT IDRs of “BB-“, which are currently constrained by Georgia’s Country Ceiling. Their IDRs are driven by potential support banks may receive from their foreign shareholders – German ProCredit Holding AG and Russian VTB Bank. ‘B+’ IDR of Bank of Georgia reflects the bank’s stand-along strength. TBC’s IDR of “B+” takes into account potential support the bank could receive from its IFIs shareholders. As for the other banks, Liberty Bank’s Long-term IDR of “B” is underpinned by potential support the bank could receive from the Georgian authorities due to important social function in distributing pensions and social benefits in the country. Basisbank’s IDR of ‘B-‘ reflects the stand-alone strength of the bank,” Ms. Smirnova explained.
Q. What do you consider to be the main challenges for the banking sector in 2011?
A. Competition in the banking sector has intensified recently, with banks competing for both borrowers and depositors. There is a limited number of quite healthy, high-quality borrowers in the market and banks try to attract borrows from other institutions. This could potentially increase banks’ risk appetite and lead to weakening loan underwriting procedures or entering riskier sectors for the purpose of loan growth. Moreover, intensified competition is likely to pressure the banks’ margins.
The high level of foreign currency lending remains one of the major issues for the system. This makes Georgian banks highly vulnerable to exchange rate volatility and gives rise to potentially significant additional credit risk.
Q. How do you see the Georgian banking sector vs. Azerbaijan and Armenian markets?
A. Georgia is one of the leaders in terms of profitability compared to other emerging markets, with net interest margin slightly higher than that of Armenia and stronger than margin in Azerbaijan. In terms of penetration, the loans/ GDP ratio of the Georgian banking sector is generally in line with Armenia and above Azerbaijan’s level, but significantly lower than in larger CIS countries, such as Russia and Ukraine . The sector’s capitalization and liquidity position are quite strong compared to other CIS countries.
Many emerging markets and virtually all CIS countries have accounted significant problems in terms of the asset quality during the crisis. However, the Georgian banking system has emerged from the crisis in a relatively good shape compared to most other CIS markets.
Q. The interest rates on loans are decreasing in the Georgian banking sector, while deposit rates are increasing. What changes in interest rates do you forecast for the short to medium term?
A. Any shifts in interest rates both for loans and deposits are mainly driven by competition and depend on loan growth strategies and liquidity positions of particular banks. It is likely that this tendency will remain in short-to-medium term as banks are striving for further growth.
We expect a degree of negative dynamics in loan rates, that will tend downwards as competition is likely to be strong. However, we believe pressure on margins will be manageable given their currently high level, banks’ capacity to reallocate assets out of liquid instruments into loan books, and actions taken by NBG to prevent an excessive escalation of deposit rates.
“It’s highly likely that interest margins will continue to narrow, however it will remain at a healthy level.”
Q. Georgian banks still remain quite cautious about lending. Could you comment on this, please.
A. Georgian banks demonstrate more moderate loan growth after the crisis vs. very rapid pre-crisis growth. Banks now are more cautious in providing loans to risky real estate and construction sectors, as extremely rapid pre-crisis growth in these sectors led to major asset quality problems during the crisis of 2008-2009. This has forced banks to re-consider their credit risk assessments and strengthen their underwriting policies.
Q. How would you evaluate the market for private individuals and corporate customers in the Georgian banking sector?
A. In terms of retail deposits, individuals are quite sensitive to negative shocks, including political instability. In August 2008 and during the period of some political instability in the first quarter of 2009, we saw high deposit outflows first of all in the retail sector. As for corporate customers, they are also sensitive to such shock, but not to the same degree as individuals.
Confidence of retail depositors has returned and corporate liquidity improved on the back of economic recovery, which led to strong inflows of customer funding to the banking sector.
Loan demand has picked up post-crisis, but both the corporate and household sectors remain more cautious about taking on new credit than they were pre-crisis, and banks have also become less aggressive in their loan underwriting.
In March 2011 Fitch ratings revised the Outlooks to Positive from Stable on Georgia’s Long-Term IDR (B+). The action reflects Georgia’s strong economic recovery, a reduction in both the budget and current account deficits, an improvement in the financial sector’s health and some easing of political risk. Fitch forecasts Georgia’s real GDP growth of 5% and 6% in 2011 and 2012 respectively, following an estimated rise of 6.4% for 2010.
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