The FINANCIAL — Georgian commercial banks have started reducing interest rates on deposits. Consumers’ expectations that such a reduction will automatically reduce interest rates on loans have not been realized.
The FINANCIAL — Georgian commercial banks have started reducing interest rates on deposits. Consumers’ expectations that such a reduction will automatically reduce interest rates on loans have not been realized. Representatives of commercial banks said that the reduction of bank interest on loans is currently under discussion and the result will depend on economic conditions. “The annual interest rate on deposits in the national currency decreased from 11.8% to 10.7%. High risks along with the economy’s weakness determine the high interest rates of credits,” Giorgi Tsutskiridze, Executive Director of the Association of Banks of Georgia (ABG), told The FINANCIAL.
“The declining of interest rates should be considered in short, medium and long terms. It depends on many factors. But if the new government will be able to provide two fundamental tasks – free trial activation and protection of private property, including labour rights, then the country will move to a new investment cycle. That will become the fundament for economic growth and employment. Investment flow in the country will directly affect the reduction of interest rates on deposits and loans in average and long terms. That being said, however, in 2013 reduction of investments by 1-2.5 percent is expected,” Tsutskiridze said.
“From November 2012 interest rates have been reduced on every term and currency by 0.5%. Further reduction of interest rates on deposits will depend on the general situation and tendencies on the market. It is difficult to make accurate predictions now,” said Teo Lezhava, Marketing Specialist at ProCredit Bank Georgia.
As of September 2012 the approximate number of depositors at ProCredit Bank Georgia is 145,000, with a deposit portfolio of USD 237 million. For twelve month term deposits interest rates consist of 11.5% for GEL, and 7.5% for USD and EUR.
Lezhava said that the issue of credit rate reduction is under discussion. She does not rule out the possibility that a deposit rate decrease may cause withdrawal of the deposit portfolio. “Depositors may replace their savings in those financial organizations which aggressively attract consumers with high rates. Although I do think that the probability of such a risk is small,” Lezhava said.
“We offer our clients the most competitive interest rates compared to other banks. With depositors we focus not only on high rates but the stability of our bank, foreign experience and high quality service,” she added.
In the first nine months of 2012 the cost of funding at Bank of Georgia decreased to 7.5% from 7.8% for the same period of last year, the decline reflecting a significant reduction in the cost of deposits in the second quarter of 2012. The currency-blended deposit costs of the Bank were 7.5% and 7.3% in the first nine months of 2012 and 2011 respectively, while the currency-blended loan yields totalled 17.6% and 17.5% during the respective periods. The Bank’s loan book grew 19.6% year-on-year and client deposits grew 24.4% year-on-year. As of 30 September 2012, customer funds accounted for 61.8% of the Bank’s total liabilities.
“The customer lending growth was sufficiently funded by GEL 527.4 million growth of client deposits on a year-on-year basis. Compared to the prior quarter, client deposits decreased by 2.0% to GEL 2,688.5 million reflecting more aggressive liability management after the Eurobond issuance. Since the beginning of the year client deposits are up 5.3%,” said Sophie Balavadze, Brand’s PR Unit Head at Bank of Georgia.
According to Balavadze, the retail net loan book grew by GEL 157.6 million, or 13.6% y-o-y, to GEL 1,317.5 million as of 30 September, 2012, and the cost of deposits decreased from 6.7% in the nine months of 2011 to 6.2% in the nine months of 2012. Deposits from retail clients increased by GEL 59.2 million or 8.6% y-o-y to GEL 745.1 million as of 30 September 2012. On a quarter-on-quarter basis, deposits from retail clients grew by 1.4%, despite interest rate reductions that led to the decrease in the cost of retail deposits from 6.2% in Q2 2012 to 5.9% in Q3 2012. The cost of retail deposits has decreased by 33 basis points since 30 September 2011.
Corporate banking loan yield amounted to 14.2% in the first nine months of 2012 (14.5% in the first nine months of 2011) and CB deposit cost amounted to 7.4% (6.9% in the nine months of 2011).
“The increase in corporate banking deposit cost is attributed to the strong inflow of costly GEL denominated deposits in Q4 2011 and Q1 2012. The subsequent reduction of the deposit rates have been partially reflected in Q3 2012 corporate banking deposit costs, which came down from 8.3% in Q1 2012 to 7.3% in Q2 2012 and 6.8% in Q3 2012,” Balavadze said.
Contrary to Bank of Georgia and ProCredit Bank Georgia, TBC Bank has not decreased deposit interest rates. Nino Kacheishvili, Head of the Retail Sales Department at TBC Bank does not rule out the possibility that the Bank will revise interest rate reduction on deposits. But she does say that a reduction will not cause a decrease of the deposit portfolio. “A further reduction of credit rates will depend on market conditions, the price of attracted finances and concrete circumstances,” Kacheishvili said.
Contrary to Kacheishvili, Tsutskiridze, ABG, sees a risk of withdrawing money from bank accounts in the event of further deposit rate decrease.
The deposit portfolio of TBC Bank amounts to GEL 1,223,184,790 as of October 2012. Average interest rate is 8.22%.
Tsutskiridze, ABG, explained that credit interest rates should be discussed separately in accordance with various products. Interest rates on mortgages in Georgia are not high and the expectation of their reduction is small. Banks offer mortgage loans for 11% for 5 to 10 year terms. However, in the medium term 2-3% reduction can be allowed.
“Unfortunately, the risk premium is also higher in the case of commercial loans. It primarily deals with small and medium-sized businesses. Small business carries higher risks because of high competition and the structural weakness of the market. As a result of it in the USA several thousand new companies register each year, along with thousands of small firms that get closed down,” Tsutskiridze said.
“The risk premium was increased in Georgia because of the disproportionately high tax burden on business. Banks have to consider this factor as a risk. For small companies a fine of 5,000 can be a serious hamper for its business, not to mention a 50,000 penalty. The resources do exist in this direction. Reduction of interest rate up to 3-5% is possible,” he said.
Tsutskiridze discussed consumer loans as one of the most expensive credit products on the market, as they are unsecured loans. He added that rates of consumer loans are equally high in every country. In our case it is added to the total unemployment rate, lack of an employment market and public policy. In the event of long-lasting unemployment there is a big risk that consumers will not be able to cover their responsibilities. However, he still sees the potential of rate reduction from the existing 18% to 14-15%.