The FINANCIAL — The Georgian banking sector is quite stable and emerging from the global financial crisis reported Fitch Ratings, the global rating agency committed to provide the world’s credit markets with independent and prospective credit options, research and data.
“The Georgian banking sector has weathered the crisis quite well. Georgian banks are coming out of the crisis with quite good levels of capital and liquidity and at the moment we regard the sector on the whole as being quite stable,” said James Watson, CFA, Managing Director of Fitch Ratings.
“Three things have helped the banks to weather the crisis. Firstly, some of the banks entered the crisis with strong balance sheets, i.e. high levels of capital and liquidity. Secondly, the Georgian economy as a whole has received significant international assistance during the crisis and this has helped the economy as a whole and bank asset quality in particular, and finally, some of the banks have received support directly from their shareholders or international financial institutions,” declared Watson.
FitchRatings is operating in 150 countries with 50 offices worldwide. The company has been operating in CIS countries for 15 years already. Fitch covers corporate, banking, insurance, international public finance and sovereign sectors. The company rates 249 issuers in the CIS region, within which 122 are financial institutions.
In his exclusive interview with The FINANCIAL James Watson discussed the role of banks in Georgia’s future, the Georgian banking sector compared to other emerging market banking sectors and the Georgian banking system within the crisis.
“We expect in the medium term that the Georgian banking sector will grow gradually. We won’t see the very high rates of growth as before the crisis for three reasons.
Firstly, the management of most Georgian banks is more cautious now than before the crisis, in respect to credit risk appetite. Secondly, the banks have limited access to long-term funding on both the local and international markets. Thirdly, there are base effects, with sector penetration now considerably higher than at the start of the last credit build up,” declared Watson.
“Most of the banks at the moment are looking at where they can expand their business. All of the major banks are putting the crisis behind them, they have addressed most of the problems they had and are now looking at where they can start lending again,” added Watson.
The report states that significant underlying weaknesses for the sector remain in the form of the quite narrow base of the Georgian economy, limited sources of domestic funding for banks and the system’s high level of dollarization.
Lending in foreign currency was 77% of total loans at the end of 2009, which represents a potentially significant additional source of credit risk. However, the relative stability of the GEL during the crisis has limited the impact of foreign currency lending on loan performance says the report.
Georgia has some similar features to many banking systems in Central and Eastern Europe in that it has high foreign ownership, quite high levels of foreign funding and high proportions of foreign currency deposits and loans.
However, Georgia has high capital ratios relative to other emerging markets generally, and Central and Eastern Europe in particular, and high margins which allow banks to generate income to protect against potential loan losses. In these respects, Georgia compares favourably to other emerging markets,” declared Watson.
Watson says that interest rates are definitely higher in Georgia than in most emerging markets. “The net interest margin of Georgian banks in 2009, even though it was quite a difficult year, was still higher than all of the other 24 emerging markets we reviewed in a recent report. In any banking sector, loan rates are determined by banks’ funding, operational and anticipated credit costs, as well as how strong competition is. In Georgia, deposit rates are still relatively high, banks’ efficiency ratios are moderate due to scale effects and lending risks are viewed as significant” declared Watson. “At the same time, reductions in deposit rates, greater competition between banks and increasing confidence in the country’s economic recovery are helping to push loan rates down.”
“The banking sector is small in absolute terms with total assets of USD4.8 billion, and largely foreign-owned. The two largest banks Bank of Georgia and TBC Bank account for more than 50% of the banking system, but beyond that the sector is are quite fragmented,” said Natalia Smirnova, a Financial Institutions Analyst at FitchRatings. At the end of the first quarter of 2010 market shares in assets were as follows: Bank of Georgia 34%, TBC Bank 21%, ProCredit Bank Georgia and Bank Republic 9%, Cartu and VTB Bank Georgia 5%, other banks below 5%.
“In terms of the ownership structure of the banking system in Georgia, we see that the system is 100% privately owned, no state ownership. Moreover, 88% of system assets are under foreign ownership. However, the two largest banks, TBC Bank and Bank of Georgia, do not have single majority strategic shareholders,” Smirnova added.
“Foreign ownership of Georgian banks is overall positive as the banks have access to funding support and if necessary capital support from their strategic shareholders.
We have seen in parts of Central and Eastern Europe the banking sector be almost wholly owned by foreign banks. While that can be beneficial in terms of available capital and funding support, it means that local credit growth can be restricted if foreign banks become risk averse in respect to a particular country, and reduced credit availability can have implications for the development of the economy as a whole.
I think in Georgia that’s less of a risk as the two largest banks in Georgia TBC Bank and Bank of Georgia do not have single strategic bank owners who might be keen to reduce risk exposures to emerging markets,” declared Watson.
“We saw two main periods of deposit outflow in Georgia, the first was at the time of military conflict with Russia when we saw deposits fall by around 13% and the second big outflow of around 18% was during the first half of 2009, when there was some political instability in Georgia.
However, in the second half of 2009 we saw deposits coming back into the system, with very rapid growth in the last six months of the year,” said Watson.
Fitch expects comfortably positive results for the Georgian banking sector in 2010, based on a reduction in loan impairment charges, still healthy margins and a return to at least moderate credit growth.
The increase in deposit funding, coupled with the extensive replacement during the crisis of foreign market funding with facilities from international financial institutions and shareholders, have resulted in a somewhat more balanced funding structure for the sector and reduced refinancing risk. Nevertheless, the loans/deposits ratio is still high (131% at the end of the first quarter of 2010, albeit down from a peak of 182% at the end of the first quarter of 2009) and domestic funding sources may be insufficient to fund future credit growth, states the report.
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