The FINANCIAL – Georgian banks are well placed to absorb potential pressures, Fitch Ratings said at its annual conference on Georgia in Tbilisi on October 10. Sector asset-quality metrics have remained resilient through the credit cycle, capital buffers are strong and profitability has improved, helped by declining risk costs.
Banks' asset quality metrics have been solid in recent years despite macroeconomic volatility and 30% depreciation of the lari in 2015, underpinned by reasonable underwriting and continued lending growth. Sector non-performing loans (loans overdue more than 90 days) are moderate at 3.5% of gross loans (end-1H17) and are fully covered by reserves.
Capitalisation of the banking sector remains strong. The regulatory total capital adequacy ratio at end-1H17 was a healthy 16.1%, despite the high 175% risk weight that applies to foreign-currency loans in Georgia. In our view, capital buffers are sufficient to absorb moderate additional losses if asset quality comes under renewed pressure.
The sector's profitability metrics improved in 1H17 (22% annualised ROAE, up from 18% in 2016), helped by reduced risk costs, although net interest margins have moderately declined in recent years, under pressure from intensified competition. We believe future performance will largely depend on asset quality and therefore economic stability. Risks to asset quality stem from high dollarisation, rapid retail lending growth, the potential impact of competition on underwriting standards and spillover from any further external shocks to the economy.
Lending dollarisation rates are high, with the sector average at 58% at end-1H17, reflecting the currency structure of banks' funding bases. But recent measures by the government and the National Bank of Georgia aimed at reducing dollarisation in the economy should lead to a moderate reduction in banks' lending dollarisation in the medium term.
Lending growth accelerated to 11% in 2016 and 17% in 1H17 (annualised), driven by retail lending, after a slowdown in 2015. Rapid credit expansion in the retail segment could expose the sector to asset-quality risks linked to higher borrower indebtedness and a significant share of foreign-currency lending.
The sector's funding structure has remained stable in recent years. Banks are mainly funded by customer deposits, which have been sticky despite the lack of a deposit insurance system. Refinancing risks are moderate, given the limited reliance on wholesale funding, and liquidity cushions are comfortable, covering about 45% of sector deposits.
“We rate seven banks in Georgia: TBC Bank, Bank of Georgia, Liberty Bank, ProCredit Bank (Georgia), Cartu Bank, Basisbank and Halyk Bank Georgia. Ratings could come under pressure if there were an economic shock that triggers a marked deterioration in asset quality and significant capital erosion. In most cases, upgrades would require an upgrade of the sovereign rating”, Fitch said.