The FINANCIAL — In 2011 net profits of the banking system (323 million GEL) more than doubled relative to 2010 (156 million GEL), resulting in a 2.85 percent return on assets and a 17.3 percent return on equity.
“Decreasing asset yields which accounted for a negative 43 percent increase in net profits were compensated by improved credit quality accounting for 56 percent of the increase in net profits,” said Giorgi Kadagidze, Governor of the National Bank of Georgia. Change in the composition of liquid assets towards higher yield local currency instruments and improved cost efficiency, contributed to by loan portfolio growth, part of which was driven by decreasing overall liquidity, had a relatively smaller noticeable effect of 30 and 34 percent respectively on profit increase. Q. How would you assess the banking sector in 2011? Which were the main sectors financed by the banking industry?
A. The Georgian banking sector that emerged from the global financial crisis and the impact of the Russian invasion is in a largely good condition, which was due to the solid pre-crisis capital and liquidity positions of banks, the support of international financial institutions as well as the countercyclical fiscal, monetary and supervisory policies.
Following recovery in 2010 of banking activity and asset quality the banking system overall had balanced healthy growth in 2011. Despite intensified competition, recovery of asset quality and improved efficiency resulted in acceptable profitability figures. The banking system was offering customers competitive products. This drew interest rates on loans down until the end of the first half of 2011 when turmoil in Europe intensified and the cost of funds increased.
In 2011 the highest growth rate was observed in retail credit portfolio, mainly through consumer loans, credit cards and mortgages. Increase in lending was also observed in the service industry, including healthcare, hotel and tourism business and trading of consumer goods.
Q. What was the biggest achievement and challenge for Georgian banks last year?
A. In terms of challenges, the first half of 2011 was marked by intense competition and decreasing interest rates on credits that diminished banks’ margins significantly. The prices of assets and cost of funds were hardly balanced at that time. In the second half of the year the European turmoil had a negative impact on available external funding of Georgian banks that led to the halt of interest rate decreases on credit products.
Q. High interest rates on deposits make it attractive for foreigners to open deposits in Georgia. How has the volume of inflow of foreign deposits increased and what tendencies will it cause in the Georgian banking sector?
A. Confidence in the Georgian banking system as well as high yields represent the main reasons why foreigners open deposits in Georgia. Nonresident deposits are important to diversify funding sources. It is important however to avoid overreliance on any particular source of funding including non-resident deposits. At the end of December 2011 the share of non-resident deposits in nonbank deposits reached 11.7%, with almost half of it attracted via so-called wealth management channels. So far such deposits did not really exhibit high volatility during the last recession. On the contrary, it somewhat substituted local deposits and provided some diversification of funding during downturns.
Q. Bank of Georgia is already in the premium listing of the London Stock Exchange. How important is this fact and what will it change in the Georgian banking sector?
A. Listing of Bank of Georgia shares in the LSE premium segment brings important strengths to the Bank. This fact also brings benefits to the Georgian banking sector. More investors will have a close eye on the Georgian economy and financial system. The high rate of coverage from investment banks usually analyzing competitors, as well as macro and financial environment, will spur more investor interest towards Georgia. The Bank of Georgia as a first mover sets a good example to other local players to raise capital on international financial markets and diversify their capital base.
It should be noted that the FT considers BOG the least risky FTSE bank and one of the reasons behind that is supervisory quality. “We are reassured by the presence of a strong central bank, with enhanced credibility following the financial crisis,” said the FT.
Q. In your opinion what has resulted from the exit of HSBC Bank from the market? How has it affected the Georgian banking sector?
A. The well-known HSBC strategy was to become “The World’s Local Bank”. However, following the worldwide financial distress HSBC has abandoned this costly business model. The global change in the strategy was to focus its business on the UK, fast developing large countries and small countries where it had a leading market share. HSBC Georgia which just started its operations in 2007 was unfortunately too small to fall in to this category. It should be noted that the Bank closed its operations in many countries. For example it exited Poland and Russia’s retail markets completely as well as sold around 200 branches in the USA. Nevertheless, the HSBC presence had a positive impact on the banking sector as it contributed to the shaping of a competitive banking market.
The last local bank in Georgia’s closing was in 2009. “First British Bank”, one of the smallest local banks, based completely on its own decision, applied for revocation of its banking license.
Q. How would you evaluate the facts related to the incident with Cartu Bank last year?
A. One of the most important goals of National Bank of Georgia is to secure a healthy financial environment. In pursuing these goals, the national bank carries out effective supervision of commercial banks. We need to be confident that the Bank has the ability to mitigate risks and fulfil its obligations towards depositors. NBG’s responsibility is to react to emerging risks in the banks and maintain a vigilant view on the bank in any contingency. Loss of customers and other regretful facts already evidenced this.
NBG is strongly against banks’ involvement in politics ownership practices as international best practice and empirical literature shows that single ownership results in higher risk-taking in the bank and in most countries, directly or indirectly, such type of ownership is not allowed.
Q. What was the total financial aid received by NBG in 2011 for developing the banking sector, and what activities were conducted within its framework?
A. NBG received no financial aid throughout 2011 to support banking supervision, however it did benefit from technical assistance of Asian Development Bank and De Nederlandsche Bank to finance external consultants on banking supervision and the European Fund for Southeast Europe in the field of customer protection.
Q. Larization was one of the main goals of NBG over the last two years. Currently loans issued in the national currency are quite high compared to in previous years. What is the exact share of loans issued in local and foreign currencies? Is this result satisfactory to you? What additional steps are you planning in this direction?
A. De-dollarization is a by-product of the development of financial markets and macroeconomic stability. Due to NBG’s forward-looking policy and prudent reforms, during the last year the monetary policy transmission channel has strengthened, FX was floating but stable in the medium run, inflation was successfully kept under control and liquidity on the interbank money market has increased. Financial market development allowed the Government to issue longer term treasury notes in GEL; the first ten year note was successfully issued in March 2012. Increased efficiency of the monetary policy, flexible exchange rate and deepened financial markets in local currency, all had a positive effect on the degree of dollarization.
As a result of the reforms more GEL loans have become available for borrowers, including for long term loans. In 2011 it was the first time that a few IFI’s and nonresident investors supplied significant funds to Georgian banks in GEL. Compared to the year before, the degree of loan dollarization has declined by 6 percentage points to 68% and improvement was larger for household loans.
As of the end of February, 57 percent of deposits were in foreign currencies, which is ten percentage points less compared to a year ago. Dollarization is declining, and the current level is below the 2008 pre-crisis level (excluding exchange rate effects). In general NBG is satisfied with the magnitude of decrease, but 60-percent dollarization still represents a very high figure. Therefore we will continue supporting the further de-dollarization process. In close collaboration with the commercial banks we will support development of a FX hedging market and continue our efforts towards increasing financial literacy that should foster FX loans with the loans in GEL. As for the deposit side, we will help development of retail Certificates of Deposits market in GEL. CDs are tradable, i.e. they are more liquid for the depositors and at the same time a stable source of funding for the banks, this again should increase preference towards deposits in GEL compared to other currencies.
Q. What is the perspective of micro-financing organizations, which are rapidly developing?
A. Well-managed MFIs maintain excellent repayment performance as the borrower’s main incentive to repay a microloan is the expectation of access to future loans.
Currently the non-banking sector is only a small portion of the total financial sector besides they mostly rely on concentrated wholesale funding. As a result, at its early stage of development NBG so far has maintained “light touch supervision”.
“Microfinance” business in Georgia which as of the end of 2011 counts 443,917,326 GEL assets and 43% increase of assets in comparison with 2010 is considered an effective means of the provision of financial/banking services to low income and rural clients who have previously not had access to such services. The clients are not just micro entrepreneurs seeking to finance their businesses, but a whole range of clients who also use financial services to manage emergencies, acquire household assets, improve their homes, smooth consumption, and fund social obligations.
In the future, NBG plans to update regulations on non-banking financial institutions as some of them are significantly increasing the scales of their activities. One of the priorities of NBG should be to ensure that a clear message is sent to relevant potential individual lenders and investors that the investment risk is solely borne by the lender when microfinance institutions are not subject to prudential regulation.
The increase in online transactions is here to stay and will last for some time to come, which is in line with the overall global trend of increasing transactions associated particularly with the fast-paced growth of e-commerce.
Q. In your opinion, how attractive is the Georgian banking sector for potential investors and what makes it attractive? Are there any new banks planning to enter Georgia?
A. The Georgian banking sector has been demonstrating outstanding and solid growth for the last couple of years and with the prospect of favourable macroeconomic conditions we are reiterating our bullish view on the industry. A sound commercial banking system generates high return for both debt and equity investors, while low level of financial penetration and small leverage of institutions indicates clear further opportunities.
Strategic investors, including European and regional banking institutions, as well as IFIs are well-represented shareholders in the banking system of Georgia. The country’s two largest banks have foreign shareholders, Bank of Georgia, which is listed on the London Stock Exchange, and TBC Bank, which is owned by IFIs (EBRD, IFC and DEG). Other foreign equity-holders in the Georgian banking sector are international and regional strategic investors, such as Procredit Group, Societe Generale, Liberty Investments Holding, HSBC, Bank VTB, Dhabi Group, PrivatBank, BTA Bank, International Bank of Azerbaijan, Halyk Bank of Kazakhstan and Ziraat Bank and others. Overall, increasing international ownership has been a supporting factor in shaping a competitive and resilient local banking market.
Several banks have expressed interest in entering the Georgian market and we are in intensive pre-licensing discussions with a few of them.
One of NBG’s key priorities is to ensure maximum transparency of financial institutions’ communication and interaction with customers. A newly-formed consumer protection division monitors protection of consumer rights, collects statistics in this area and provides recommendations. NBG believes that information disclosure and financial literacy are key factors for the optimal allocation of risk and capital.