The FINANCIAL — Bank Republic, Societe Generale Group, one of the leading Georgian banks, plans to offer different packages for corporate clients, drop prices for its products, support business and entrepreneurship development by funding initiatives.
“We have seen a few signs of recovery of the economy in Georgia. However banks need to have some time to be efficient in the recovery of bank loans, and on the improvement of the quality of their portfolio which will lead to re-start actively credit distribution,” says Gilbert Hie, Chief Executive Officer of Bank Republic in his interview with The FINANCIAL.
Q. The year 2009 was very hard for the Georgian financial sector, as well as for many other countries’. The difference with the USA and Europe is that crediting intensiveness was limited by the banks themselves. This fact caused over liquidity. From today’s point of view, how right was it for Georgian banks to implement such politics. Has it interfered with the banks’ development or not?
A. Everywhere the market is a conclusion of offer and demand. Over the last few months on the offer side, bank side, we have adopted more restrictive policies which are linked to macro economic development and the situation.
Borrowers were eager to borrow a lot before the financial crisis. However during the recession period many got in to trouble for repaying the loans, leading to a change in borrower’s behaviour. The systematic registration to credit info lead people to be more careful in their approach to borrowing.
On the corporate side, concerning credit distribution, we faced recently two bad years for profit and cash flow for companies and resulting a lower level of equity. This general borrowers’ poor financial situation is not a stimulus for borrowing. Also corporate behaviour is important as we can see globally a lack of trust and confidence in taking more commercial risks, entrepreneurship is also a little bit low. So after two years of crisis everybody is learning lessons from the hard times and is definitely changing its behaviour and becoming more careful.
Credit distribution was not really and intentionally limited by the banks because the absolute crisis with this global international paid-package banking sector was rescued and liquidity has been remaining high. The banks would like to lend more but of course with good risk conditions.
Georgian banks are very conscious that over-liquidity is detrimental to their profitability level and they would like to develop more lending to rebalance their profit annual account. The risk level must be managed properly as the quality of the portfolio has deteriorated.
Q. At the Tbilisi Economic Development Forum, you and ICC’s Director remarked that Georgia is not an attractive country for investors and for local businessmen in regards to loans. What is stopping Georgia from implementing a radical reform in the depositing sphere, which will significantly reduce interest rates on loans?
A. During the conference the level of competitiveness of Georgia compared to other countries in the restricted resource global environment and worldwide crisis situation was discussed. Obviously it was also mentioned that foreign investors are nowadays globally investing less abroad.
Georgia should raise its competitive edge to be among those countries which are chosen for foreign investments. Of course, it is well understood that it is easy to do business in Georgia but we also need to be more attractive than others.
But this is not directly linked to the foreign investors who do have the opportunity to borrow directly from the international market.
Globally there are a few things to do in order to reduce this interest rate on loans and first to reduce the level of the interest rate on deposits as well, which will keep a necessary level of intermediation margin for the banks, preserve their profit and loss account, and contribute positively to the economy.
Q. In Georgia most of the leading banks represent quite large foreign organizations, including HSBC, ProCredit Bank, EBRD, IFC, Societe Generale. What kind of depositing politics are spread in other countries? How do risks and interest rates differ from each other?
A. First of all we should differentiate between EBRD and IFC, who are international financial institutions and are not taking deposits. Regarding commercial banks with foreign capitals a regular and minimum collection deposit is also necessary, for several reasons such as ratios, and balance sheet structure.
Those banks that have access to international funding are usually not ready to pay a high level of interest rate on deposits. However, the deposit market is driven by banks that have limited access to international funding and here there is a fierce competition pushing even international banks located in the country to over pay their deposits to be safe and preserve their customer base.
Globally we can say that it it is absolutely necessary to lower interest rates on banks deposits for durably decreasing interest rates on lending which is very important for reviving crediting activity.
Q. The financial crisis has greatly influenced purchasing ability, as well people’s decision to use bank products. In your view, what should be done in order to raise the society’s activity in this direction?
A. Coming back to a higher level of distribution of revenues is crucial in the country, there is no way to lend to people who do not have enough income and who cannot afford to repay a debt in acceptable conditions, cheaper rate as well as lending in the local currency are also necessary.
The banking system in Georgia, with high dollarization of the economy and most of the banking resources in USD have pushed the exchange risk to the borrower’s side, and especially household, which is dangerous for both borrowers and lenders on the long run, introducing a systemic potential exchange risk.
All banks together with the central bank and International Financial Institutions are working hard in developing a long term GEL market which is absolutely necessary. Most of the demand for credit is at least medium term and lending maturity is close to 3-5 years for house equipment, car loans. Much longer up to years for mortgages
Q. Representatives of the financial sector interviewed by The FINANCIAL marked that the boom of the banks up until the year 2008 will not be repeated in the future. In your view, what will the role of banks in Georgia be in the next few years?
A. The development of the financial sector was really exceptional in Georgia during the years 2006 and 2008. We are not any more in the range of 10-12% GDP growth rate in this country, so I do not think we can expect to share again this type of development in the coming few years.
The roles of the banks won’t really change but we will adapt to the new situation in order to participate and serve the population in the market in a reasonable way.
Q. Taking loans nowadays is practically impossible without a solid guarantee, which means using real estate or even business as collateral. What kind of practice is used in this direction in France as well as in different developed countries?
A. In each and every country even outside crisis situations, collateral is a very important factor for a credit decision. Quality of Collateral is becoming even more important in the period of economic instability.
In the USA and in Western Europe collateral is also paid great attention. Borrowers should have a good reason for borrowing and should then be in a position to offer at least purchased goods and assets as collateral. The recent decrease of prices on real estate market for instance is not positive for future mortgage loan distribution.
Q. What is the index of bank deposit growth at Bank Republic? What was the amount of deposits in your bank during the first quarter? Please compare it to last year.
A. In 2009 deposits grew between 10-15% in the banking system in Georgia and this continued in the first quarter of 2010.
High amounts of funding have been injected in to the economy over the past 2 years, around 4.5 billion USD from the global international program, which is probably now up to 6 billion. These funds have been partially kept in the banking system. Over liquidity is also due to depressed economy, lack of business initiatives and absence of entrepreneurship from the private sector. We need to drop the rates on deposits in order to encourage the entrepreneurs to invest in business, rather than keep deposits in the banking system.
Q. Have the conditions on saving deposits changed in Bank Republic, if so how?
A. Saving deposits conditions have been dropping over the last few months in Bank Republic and in the whole banking sector and this is absolutely necessary for the survival of the economy.
Q. What is the tendency of saving deposits? In which currency do Georgians prefer to save their money?
A. Many deposits are in the foreign currency, even though the GEL part has been increasing lately. National Bank of Georgia is massively distributing GEL in the economy, which is the long term base for creating a stronger GEL market.
But this is mainly a question of trust and confidence in the local currency and it is a long term process. We should not forget that this country turned into a market economy only 5- 6 years ago.
Also the GEL has always been behaving positively as a strong currency in the region; it is not enough to push deposits massively into the local currency instead of being saved historically in USD.
Q. Recently the world has become victim of USD appreciation against the EUR. After the financial crisis in Greece and Bulgaria saying no to the EUR, analytics say that the Euro Zone might end its existence. Against this background, what is the dependence of Georgians? Are consumers using EUR more or not? What is your prognosis?
A. I am definitely among those who believe that the EURO has been one of the best and greatest achievements of the last few years worldwide. The EURO is now a strong currency of reference and is an element of stability. Even part of crude oil exports is now denominated in EUR
The USD is dominating in the country and we do not generally speak about the EUR’s relevance in Georgia.
Q. Which product will be the most actual for Bank Republic’s corporate clients?
A. For corporate clients the most actual will be credit first and credit second in 2010. Corporate clients need urgently financial resources and their choice will depend very much on the offered products and their anticipations.
Corporate clients need diversification of their banking products and BR is developing off balance sheet products like guarantees, documentary credits, post-finance products.
We will offer also foreign exchange products with good prices on spot and forward markets, it is very important to hedge exchange risk, the management of exchange risk for corporate clients will be crucial in the coming years.
Q. Has the Bank changed its dependence towards corporate clients or not? Have business crediting politics changed or not? What demands should business nowadays satisfy in order to get a low percent loan from BR?
A. We have a universal banking policy for both corporate and individual clients. However Bank Republic is still very corporate banking oriented although significant developments have been made on the retail side. The potential growth for the immediate future is more on corporate side and it is a priority for BR in 2010 to boost volumes and relax credit policy.
Q. What advantages does Bank Republic have nowadays?
A. Nowadays we offer the best rates on the market, mortgage loans from 13% interest rate and up to 25 years , consumer loans from 19% and we have a lower differentiated level of interest rate for all corporate clients on case to case basis.
Moreover we surely have now an excellent quality of service with 50 points of sale network, and are much closer to the consumer.
Bank Republic is proposing a wide range of products for both deposit and credit for all kinds of customers, universal banking scheme, for individuals, micro businesses, to small and medium size companies and big corporate ones. For both public and private sector, we offer universal banking, and global services. We are constantly adding on and developing our market share.
Bank republic and Societe Generale are truly long term players in this country.