The FINANCIAL – “In the near future, the development of tourism and regional infrastructure, together with increased employment, will support banking service centres’ moving to the regions,” said Zurab Gvasalia, President of the Association of Georgian Banks to The FINANCIAL.
“Bank profits increase in accordance with consumer demand. As more people get employed, the demand for credit resources from the business side will be increased, this will be directly reflected on the profit indicators of the banking sector. Consequently, the bank service market is partly assimilated today, despite the fact that banks are maximally trying to develop it,” Gvasalia said.
In his interview with The FINANCIAL, Mr. Gvasalia evaluated banking sector operations in 2010 and spoke about the banking sector’s major challenges of the year 2011.
Q. How would you evaluate the banks’ operations in 2010? What were the main challenges for the banking sector in 2010? In your opinion, what will be the main challenges for the Georgian banking sector in 2011?
A. The Georgian banking sector faced several challenges in 2010. The major challenge was to overcome the trend of loss of 2009 and generate irreversible profits. The year 2009 turned out to be quite difficult for the banking sector, which was due to the recessional processes of 2008. Despite the fact that the country received solid international aid, the increased tendency of overdue loans has been influencing the banking sector since the end of 2008. This should be added to the amortization and restructuring expenses of problematic loans, which in total caused the banking sector to have losses.
The losses of the system would be much greater, and the results even harder if not for the politics of National Bank of Georgia, which were directed at better risk management and supporting liquidity management.
The second challenge was inflation, which is in connection with on-going and economic cataclysms in the world. The challenge which is firstly associated with energy and the price increase on food products, in terms of exogenic factors, naturally is reflected on our consumer markets and consequently it will be the major challenge for the year 2011.
Despite the non-optimistic picture, we do not have a basis for pessimism. The year 2010 showed that commercial banks and NBG managed to successfully overcome the harsh and large-scale challenges.
The total profit of the banking sector reached 152 million GEL by the end of 2010, while the loss was 65 million GEL in 2009. The whole assets of the banking sector increased from 8.3 billion GEL to 10.6 billion GEL, by 28%, from 2009 to 2010.
The capital share of the banking sector increased from 1.5 billion GEL to 1.78 billion GEL, or by 18.6%, which defines investors attractiveness towards the banking sector.
Q. The major initiative of National Bank of Georgia in 2010 was Larization. Despite this fact, the share of GEL did not change significantly. In your opinion, what steps should be taken to increase the share of GEL in deposits as well as loans?
A. One of the major initiatives of NBG in 2010 was Larization, however no one said it could be reached in a short term period. Larization was declared a priority of NBG and foreseen as a long term process. Despite this, several serious steps were taken in this direction, including the stage by stage increase of minimal reserves to 15% of foreign currency brought deposits and increase of the current liquidity coefficient indicator.
The Georgian banking sector is quite attractive for foreign investors for its liberal banking legislation as well as for the dynamic development of the sector itself. In 2007-2008 when the investment activities in the country were high, investments of 800 million USD were made in the banking sector.
The increase of the deposit base is not defined only with high interest rates. Today, banks try to offer clients multifunctional deposit accounts, which as opposed to mono-deposit accounts provide the opportunity for the client to together with percentage income, insure exchange rate and percentage risks. Moreover so-called bonus offerings and overdrafts for guaranteeing deposits are widely used.
The Larization strategy on one side is aimed at decreasing the pressure of the currency course of USD and on the other hand to stimulate the demand for GEL. It might be considered an anti-inflation barrier. As you are aware, in trade turnover the share of import is significantly higher compared to export, which stimulates inflation while the prices on import are increased.
I do not believe that the Larization strategy does not work. The GEL’s stabilization is proof of its success, while in recent times the GEL’s strengthening tendency indicates an increase in demand for GEL. The banks plaid their role in this strategy when they started offering loans in GEL.
For clients this is a significant privilege, as when their income is in GEL and liabilities are in USD, currency exchange risk always exists. Decrease in the value of GEL increases the payment amount of the individual.
Q. How would you evaluate banks’ crediting politics? In your opinion, which sectors have an advantage while crediting from banks’ sides?
A. I believe that after the low crediting activities in 2009, banks have conducted quite active crediting politics in 2010. The 30% increase in the credit portfolio is quite a high indicator after a recession period, while in separate banks’ cases this indicator is even higher.
If we take into account the recent development perspectives of the country, this indicator will decrease and consequently financing the tourism and agriculture sectors will increase. Like last year, Tbilisi City Hall in the framework of project New Life of Old Tbilisi, intends to start a new stage together with commercial banks and developers. If we take in to account that this project revived the construction business, from the banks’ side financing the construction sector will increase.
Q. From the year 2009 and during 2010 the Bank’s main strategy was to provide high interest rates on deposits. While at the end of 2010 the tendency was changed and banks chose low interest rates on deposits as their strategy. In your opinion, what were these changes governed by?
A. When the bank increases interest rates on deposit resources, it is due to resource bringing stimulation. There is nothing special in this strategy. In a period which was quite difficult for the banking sector in recent years, it was more difficult to acquire finances from international markets due to the global economic recession.
As for 2010, in the first half of the year the banking sector faced over liquidity. From the point of risks profitability, as a liquidity deficit is non-desirable as well as over liquidity. Due to this fact together with increased credit activities interest rates decreased on loans as well as on deposits.
Banks declared interest rates reduction at the beginning of the year. Moreover, it should be noted that decreasing interest rates are influenced by the deposit price as well as the cost of acquiring resources from international markets, which is cheaper and which is also important in the long term as there are internal resources, which provide banks with the opportunity to finance long term assets.
Q. Could the decrease of interest rates on loans from the bank’s side be defined by the fact that banks have renewed crediting the economy?
A. The decrease of interest rates on loans naturally supported increased credit activities. Credit investment increased from 5.2 billion GEL to 6.3 billion GEL, or by 21%. Due to this fact, the credit portfolio increased by 30% in 2010 compared to the previous year, which was recorded as a profit indicator at the end of the year. Credit investment significantly supported deposit market increase.
The deposits of non-bank physical and juridical individuals increased from 3.9 billion GEL to 5.5 billion GEL, or by 42%. The deposits of physical individuals increased from 2.1 billion GEL to 2.6 billion GEL, or by 24% which in total is the indicator of increased trust in the banking sector.
Q. In your opinion, will large scale international banks enter the Georgian market in the near future?
A. The Georgian market has already been entered by large scale European banks such as HSBC and Societe Generale. Moreover, the banks which represent the leading bank institutions in their countries are represented in Georgia, such as Azerbaijan International Bank, Turkish Ziraat Bank, Russian Vneshtorg Bank and Ukrainian Privat Bank.
Moreover, EBRD should be mentioned, which possesses large shares in Georgian banks.
The entrance of large-scale international banks in the Georgian market will depend on what large scale businesses enter the country.
If we take into account infrastructural economic development tendencies and steps put ahead of liberalization of the economy, integration of the country into the Euro-Atlantic structure, this is quite possible even in the next 1-2 years.
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