The FINANCIAL — IFC, a member of the World Bank Group, is helping TBC Bank, the largest bank in Georgia by retail deposits, hedge interest rate risks and thus improve its operations and competitiveness.
IFC and TBC Bank last week agreed to undertake additional interest rate swaps under their International Swaps and Derivatives Association Master Agreement (ISDA), the international legal documentation for the execution of risk-management transactions. TBC Bank now is able to offer mortgage loans with 14,5% interest rate.
“IFC first started providing TBC Bank with interest rate swaps in 2004. The current transaction will enable the Bank to hedge a USD interest-rate risk on its outstanding long-term borrowings at favourable rates. The transaction is part of IFC’s broader strategy to improve risk-management capacity within its client banks and introduce innovative products to its clients in Central and Eastern Europe,” IFC notes.
ISDA, which represents participants in the privately negotiated derivatives industry, is among the world’s largest global financial trade associations as measured by number of member firms. ISDA was chartered in 1985, and today has over 810 member institutions from 57 countries on six continents.
An interest rate swap involves the exchange of cash flows between two parties based on interest payments for a particular principal amount. However, in an interest rate swap, the principal amount is not actually exchanged. In an interest rate swap, the principal amount is the same for both sides of the currency and a fixed payment is frequently exchanged for a floating payment that is linked to an interest rate, which is usually LIBOR.
As Thomas Lubek, IFC Regional Head of the Caucasus, says, the purpose of signing a contract with TBC is to help TBC Bank improve its risk management.
“We are helping them convert floating rate liabilities and to fix rate liabilities. This is good for the Bank, for the shareholders, for depositors and for the creditors,” Lubek says.
“We have had a long standing relationship with TBC since 1998; when we gave them a small credit line in technical assistance for SME’s. We have been doing several projects with TBC, like additional subordinated loans and equity investments. The first swaps we have done with TBC Bank were in 2004 and now we are doing it again. We are always looking for ways to improve our relationships,” Lubek says.
According to Vakhtang Butskhrikidze, TBC Bank’s General Director, in 2004 TBC Bank was delighted to be the first Georgian bank to use swaps as a risk-management tool.
“As you know the loans taken by Georgian banks which are long term are connected with LIBOR, which represents changing interest rates. If LIBOR rises we are forced to increase the percents on loans for our consumers, and if it decreases automatically percents on loans drop too. In order not to raise percents for our clients, this agreement makes us able to fix the interest rate,” Butskhrikidze told The FINANCIAL.
“Entering the swaps will help us better match our asset and liability positions and increase our ability to manage the Bank’s finances for the benefit of our customers, depositors, and shareholders,” Butskhrikidze says.
According to Butskhrikidze if we compare this first quarter of 2010 to any of the quarters of 2009, it has been quite successful. He says that for the end of the first quarter the number of deposits is slowly rising, credit portfolio will also rise and in the first quarter the Bank will end up with profit of about 3-4 million USD.
“Until this agreement we were dependent on LIBOR changes which are connected to western markets. If Libor rose we were forced to increase percents on loans and now it will be automatically fixed due to this agreement,” Lubek said.
According to Snezana Stoilikovic, IFC Director for Central and Eastern Europe, IFC’s strategy in the financial sector is to help banks improve their sustainability and mitigate risks, including interest rate risks. She is pleased that IFC has another opportunity to extend its support to TBC Bank, their oldest banking client in Georgia, and contribute to strengthening Georgia’s financial sector by encouraging prudent risk management.
IFC is the only international financial institution focused exclusively on the private sector, the engine of sustainable development in emerging markets. Along with IBRD, it is currently seeking a capital increase to strengthen its ability to create opportunity for the poor in developing countries—including by helping strengthen financial system by reducing interest-rate risks.
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