The FINANCIAL — Fitch Ratings-London/Moscow-25 July 2011: Fitch Ratings says in a newly-published report that the recovery of the Georgian economy has supported the stable performance of the country's banks in H111, and this trend is likely to continue in H211-2012.
At the same time, increased competition for both loans and deposits is likely to result in a reduction in currently high margins, and also increases the risk of a weakening of loan underwriting standards.
The Georgian economy grew by 6.4% in 2010, and Fitch forecasts an expansion of 5% in 2011, followed by 6% in 2012.
This in turn has supported loan growth, which ran at 9% in 5M11 (adjusted for exchange rate effects), broadly in line with the 20% increase recorded in FY10, and a rate which should be broadly sustainable into H211, in the agency's view. At the same time, competition for lending business is evident in lower rates being offered to the most attractive corporate borrowers, and banks are often seeking to acquire new customers by refinancing exposures at other institutions.
Although Fitch highlights that it is early to talk of market saturation with a loans/GDP ratio of 31% and a growing
economy, the agency notes that foreign financing of much of the corporate sector limits the potential for banking sector expansion. The corporate sector's external (including intercompany) debt was equal to 33% of GDP at end-2010, slightly in excess of total bank lending, reflecting active international financial institutions' (IFI) financing of the economy, and significant foreign ownership post-privatisation.
Fitch expects asset quality to further improve as the economy steadily recovers. The system-wide non-performing loans (NPL) ratio has gradually declined (to 5% at end-Q111, from 5.9% at end-2010 and a peak of 8.9% at end-7M09), and Fitch expects this trend to continue in the near term. This reflects the supportive operating environment, significant loan growth and banks' active management and writing-off of problem exposures.
The more moderate loan growth rates, compared to the pre-crisis period, and generally greater caution with which banks are lending to the real estate and construction sectors, are supporting the quality of loan underwriting. At the same time, Fitch is concerned about the potential weakening of credit standards due to the intensification of competition in the sector. The still high level of foreign currency lending (more than 70%, broadly in line with the proportion of foreign currency deposits) also represents a major source of contingent credit risk if there was a large devaluation of the GEL.
Improvements in profitability in 2010-2011YTD have been heavily influenced by lower impairment charges on the back of asset quality stabilisation. Although intensifying competition is likely to pressure margins, this is from a relatively high level, and Fitch expects system profitability to still be sound in H211-2012.
Georgian banks' funding structures have become more balanced thanks to strong deposit inflows (up 7% on an exchange-rate adjusted basis in 5M11, following an exceptional increase of 39% in 2010). This has resulted in a markedly improved loans/deposits ratio of 110% at end-5M11 from a high level at the onset of the crisis (174% at end-2008), and Fitch expects this ratio to remain close to current levels in the near term. Wholesale funding continues to be mainly sourced from IFIs and parent banks, considerably reducing refinancing risk.
The system remains highly liquid (approximately 40% of system assets were liquid at end-Q111), reflecting quite conservative liquidity management and stringent regulatory requirements, as well as recent deposit inflows. A relatively cautious approach to liquidity management is justified given the sensitivity of customer deposits to negative shocks, as reflected in large outflows in Q308 and Q109.
The Georgian banking system's solid capital position is a key credit strength. The National Bank of Georgia calculated the sector's aggregate Basel I total capital adequacy ratio at 27.5% at end-Q111, significantly higher than the regulatory ratio of 17.3% (tier 1: 12.8%), mainly due to the 175% risk weighting applied to foreign currency exposures for the latter. Strong reserve coverage of impaired loans (183% at end-Q111) and solid pre-impairment profit generation also support banks' loss absorption capacity.
Fitch expects to conduct a review of its Georgian bank ratings during the next few weeks.
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