The FINANCIAL — “A marked deterioration in the operating environment and in banks’ financial metrics could put downward pressure on Fitch’s bank ratings in Georgia,” Lindsey Liddell, Director, Financial Institutions at Fitch Ratings, told The FINANCIAL.
Liddell said that maintaining profitability and asset quality ratios in the face of slowing loan growth and increasing competition are the main challenge that the Georgian banking sector will face in the current year. “The high level of foreign currency lending in banks’ loan books also remains a key weakness of the sector. In addition, Georgia remains a relatively high risk operating environment, vulnerable to external shocks,” she added.
According to Fitch Ratings, Georgian banks are focusing increasingly on SME lending, reflecting weaker demand for corporate lending and a limited pool of high quality corporate borrowers in Georgia on the one hand, but also the chase for yield, volume growth and diversification on the other.
“The expansion of SME lending could help boost the level of growth in this sector. To this end, banks are taking steps to optimise their branch networks and invest in alternative distribution channels to ensure they are able to ‘capture’ the business of SME (but also retail and micro) customers,” said Liddell.
However, Liddell said that to some extent SME loan growth will depend on customer demand, which in turn is likely to be linked to the level of GDP growth in Georgia. “At the same time, it is important that banks maintain robust standards of credit analysis when assessing the creditworthiness of SME borrowers. From a developmental perspective the latter should help to ensure that banks are financing viable and sustainable small and medium sized enterprises. However, it is also important in order to minimise the levels of non-performing loans on their own balance sheets, given that banks have a shorter track record of lending to this customer segment.”
According to Fitch Ratings’ report, the highly concentrated nature of the Georgian banking sector, with the two largest banks accounting for about 60% of sector assets and benefitting from well-established franchises and nationwide networks, means that it will be challenging for any banks, existing or new to the market, to occupy a meaningful position in the Georgian banking sector unless they are successful in finding a niche business or a clear competitive advantage.
Recently, Georgian President Mikhail Saakashvili stated that some Russian banks planned to purchase Liberty Bank. The information was later contradicted. Liddell said that Liberty Bank’s reliance on government is considered a concentration risk and some volatility to the Bank’s deposit base.
“Liberty is somewhat more reliant on government and municipal funding than most Georgian banks, which brings concentration risk and some volatility to the Bank’s deposit base, although it also provides the Bank with a good source of GEL funding,” she explained.
“As regards political risk, we do not consider this to be a particular issue for Liberty Bank more than at other Georgian banks. Fitch has assigned a Support Rating Floor of ‘B’ to Liberty Bank, reflecting the agency’s view that the Georgian authorities would likely seek to support the Bank, if needed, based on Liberty’s social function as the primary distributor of pensions and social benefits and in light of the support given to the Bank in 2009,” Liddell said.
After NBG and EBRD’s statement of expected 3% economic growth of the Georgian economy, Fitch Ratings was the next to remark on the Georgian Government’s optimistic statement regarding 6% growth.
“Basically what is happening with economic growth is a combination of factors on the domestic and external fronts. Domestically we have a slowdown mainly in investment, which is caused in part by the fact that investors are kind of seeing how the Government intends to implement and formulate its policy for various sectors. Once that uncertainty clears up I think it might pave the way for higher investment. But there is also an external side. All of Georgia’s main economic and trade partners are slowing down. The EU, Turkey, Russia and the other Caucasian countries are slowing down. Georgia as a small and open economy is not really shielded from those kinds of events,” said Matteo Napolitano, Director of Sovereign Group at Fitch Ratings.
According to Napolitano, the fundamental issue with Russia is a fairly undiversified economy, mainly relying on its energy resources. The kind of proximate causes are that Russia has links with the EU economy. As for Turkey, which is currently facing mass demonstrations and political instability, he said that Fitch’s current assessment of Turkey is still valid.
According to the recent report of Fitch Ratings, the anti-government protests in Turkey are not a threat to the sovereign’s ‘BBB’. The level of unrest is well within the tolerance of political stability embedded in the current rating, and the economic impact so far is minor.
“We take a fairly positive view of the Turkish sovereign so I do not think it is a situation that will necessarily affect commercial and financial flows between Turkey and Georgia.
“In line with our baseline forecast for the EU and for all these countries, growth will pick up gradually in the second half of the year. The EU will follow recovery next year and Georgia will benefit from this and also from the resolution of some of the uncertainties tied with government policy,” Napolitano added.
Napolitano suggested that Georgia should build on the good things that have been done in the last decade from the business environment to public sector efficiency, all these improvements that have increased FDI and Georgia’s visibility on investors’ maps and take the good things and build on those and fix other things that have not gone so well.
Napolitano named tourism, energy, infrastructure and agriculture as some obvious sectors that can be used both to increase the rate of economic growth and at the same time reduce the external imbalances that we see as being a weakness in Georgia’s sovereign rating.
“The obvious ones, which are already on the way up (tourism, energy, infrastructure, agriculture) are problematic sectors because they present you with serious issues and problems that every kind of emerging market has to go through. Once you improve your energy and infrastructure you give a good boost to your goods and services export that automatically reduces your external imbalance. These are the sectors that have potential,” he said.
“We give a positive assessment to the fact that the transition that carried from October 2012 is ongoing and will continue at least until the presidential elections, if not a little bit after that, and has been broadly positive,” said Napolitano.
“A lot of people were uncertain that a power handover would happen fairly smoothly. There have been hiccups, uncertainties, controversies that are part on part a growing and maturing process of a young democracy. I would like to stress that as a broad positive in our assessment. The current government, like any newish government, is kind of finding its way and its feet, formulating its policies, communicating how to implement its policy and this is a process that inevitably takes time. Obviously, you do not have all the time in the world. You have to reach a point where those policies are communicating and being implemented properly. I think that point will arrive for this government as well,” Napolitano told The FINANCIAL.
Discussion about this post