The FINANCIAL — 2011 will be viewed as a good year for most Georgian banks and the sector as a whole. During 2011 total assets increased by $1 billion (18%) and profits by $83 million (104%), while loan provisions decreased by $11 million (3%).
The dominance of the five largest banks (accounting for nearly 80% of total assets) has driven the overall positive performance and there remain more opportunities for growth through tapping the “un-banked” population; increased efficiency either through economies of scale from consolidation or from organic improvements; increased use of various banking products by existing customers; increased use of social media and integrated marketing communications to reach new customers; lower delivery costs through technology, staff training and development improvements and finally improved geographical coverage.
These good results may encourage both TBC Bank and Liberty Bank to go ahead with the IPOs they proposed in 2011 and follow Bank of Georgia into the club of listed Georgian Banks.
However growth in this sector faces threats, especially if interest margins or currently high levels of banking fees come under pressure from competition.
From Reforming to Performing — Georgia launched the reform of its banking sector in 1994. Based on the recommendations of the International Monetary Fund and implemented with technical assistance from international financial organizations, the objectives of these reforms were to raise the level of financial stability; improve the security and soundness of the banking system; implement a modern bank supervision policy and practice; introduce International Accounting Standards; upgrade qualifications of banking personnel and improve the financial sustainability of commercial banks. The reforms also envisaged the development of a legislative basis for the banking system.
Banking total assets have increased from $ 0.4 billion in 2001 to $11.9 billion at Q3 2011, an impressive 33% compound growth rate. However this represents only 70% of GDP compared to a figure of 121% for the Czech Republic and 494% for the Netherlands. Georgia’s relatively low percentage could be attributed to the large “un-banked” population in the country’s rural areas, so further growth can be expected in the years ahead.
Results and Standings — Georgia’s banking sector has developed dynamically during the last 10 years. Interrupted by declines during the financial crisis in 2008-2009, in 2010 the economy started recovering and there are positive trends from Q4 2010 through to Q3 2011. For instance, total assets of the Georgian banking sector increased by 18%, while the total net loan portfolio and deposits increased by 20% and 13% respectively. This was primarily due to the government’s stimulus packages for various business sectors and the support of international donors and financial institutions as well as economic growth in general.
Having successfully overcome the global economic crisis, the Georgian banking sector continues to improve. As of the end of Q3 2011 there were 19 banks operating with a market capitalization (by total assets) of $7.2 billion. Bank of Georgia (BOG) accounts for nearly 35%, followed by TBC Bank with nearly 25%. The remaining 40% is shared among 17 banks, with the. leading positions held by ProCredit Bank (7%), Liberty Bank and Bank Republic with close to 6% each and Cartu Bank with a little over 4%. The smallest 10 banks account for only 7.35% of the total.
The year end results of all of the banks are still outstanding but the 31 December 2011 financial reports will show that TBC Bank acquired Bank Constanta and Bank Republic acquired the retail loan portfolio of HSBC, the latter closing in early 2012.
Are Loan Portfolios diversified? — The total amount of loans issued during 2011 was $3.69 billion (2010: $2.95 billion). As can be seen in the chart below, the outstanding loan portfolio is well diversified. The largest sectors are Trade – 28.05% (2010: 31.41%) and Mortgages – 18.83% (2010: 17.64%); worth $ 1.25 billion (2010: $1.0 billion) and $ 0.8 billion (2010: $0.6 billion) respectively.
Highlights of the YearBank of Georgia maintains stable growth; its total assets increased by $ 534 million (24%) and reached $ 2.7 billion. Net profit increased by $32 million (65%) to $80 million, primarily driven by an increase in net interest income of approximately $45 million (47%).
TBC Bank also improved their net profit from $28 million to $55 million on total assets of $2.0 billion (2010: 1.3 billion).
The growth of ProCredit Bank’s total assets slowed increasing only 3% from Q4 2010 to Q3 2011, whereas 2009 to 2010 saw a 14% increase from 2009 to 2010.
Liberty Bank continued its impressive record by increasing total assets by $140 million (a 47% increase).
Bank Republic reported a $ 17 million loss in 2010 but improved their performance by minimizing losses to $ 5.3 million in 2011.
The market dominance of the five largest banks may lead to consolidation in the sector either as the big 5 try to acquire a greater market share through acquisition, or as some of the smaller banks try to seek economies of scale and merge with other smaller banks. Regardless, we expect to see more activity in the banking sector in 2012.
What can customers expect from Georgian banks? — Investors/savers. Today Georgian banks offer a wide range of products to customers. They are innovative in terms of new product development and are trying to be in line with global trends in the industry. For investors, deposit rates still remain high, e.g. term deposits range from 11% to 12 % in GEL, and from 6.65% to 8% in foreign currencies; child deposits range from 13% to 16 % in GEL and from 7% to 9% in foreign currencies; other products such as savings accounts, investment deposits, etc. also exist with high rates for those willing to shop around.
Borrowers — For borrowers the main interest rates offered to retail customers for loans differ according to their purpose, for instance the interest rate for a mortgage is approximately 12%; on consumer loans from 16% to 18%; on student loans from 15% to 19%, and for auto loans from 0% to 20%.
Georgian banks offer various kinds of debit and credit cards to their customers: visa (electron, classic, gold, platinum), maestro/cirrus and American Express, which help Georgian customers, manage both local and international monetary transactions easily.
In terms of wholesale banking, the banks have special terms for deposits and loans for corporate clients dependant on the individual or specific agreements between the parties.
In addition to the current 19 licensed banks, there is also competition in the loan market from micro-finance organizations (MFOs) who have generally seen a significant increase in their loan portfolios over the past few years.
Marketing and Innovation — There has been an increase in investments in integrated marketing communication tools in order to send messages to actual and potential clients. This aggressive marketing supports the development of the banking system as a whole since information about innovations in the banking sector is distributed to the public quickly and regularly.
In addition Georgian banks are widely using social media tools in order to promote their activities and products. These resources are efficient and inexpensive and as a result of the growing global popularity of social media, the banks are efficiently using facebook, twitter, Youtube, LinkedIn, etc. to approach a wide range of potential customers. With the popularity of social media, banks are able to create a loyal customer base for the future by inventing different games and competitions on social media sites.
Georgian banks have a vast geographical coverage, offering their services throughout the country’s main regions, to make banking services attractive for the population and serve the sustainable development of industry.
The banks support employee training and development so that they are able to serve their customers better. While there is a Georgian Banking Training Center in Tbilisi, many of the major banks have their own training centers.
As for technology, most banks offer remote banking channels to their customers, such as internet banking, mobile banking, telephone banking, online consultancy, online payments, etc. However these services are not yet developed sufficiently and many customers are more or less illiterate in terms of the efficient usage of these resources; therefore there is an opportunity for the banks to invest in the use of these resources and increase customers’ awareness. All these steps could lead the banks to operational costs savings, a better quality of service and therefore increased profits across the entire sector.
Competition from non-traditional players, for example Mobi-Pay, who are seeking to challenge the way people doing their banking (with no branch network and lower costs), should not be overlooked.
International Investors and Regulatory environment — Within the last ten years, international financial institutions, such as EBRD (European Bank for Reconstruction and Development), the World Bank, IFC (International Financial Corporation), EIB (European Investment Bank), KFW (German development bank), FMO (Dutch development bank) and others, have made significant investments in the Georgian banking industry. The participation of these organizations in the banking sector has been reflected in the advanced corporate governance and the transparency of the sector.
Today Georgia is represented by a two-tier banking system; one comprised of the National Bank of Georgia (“NBG”) and the other by commercial banks. The only permitted legal status of a bank is a joint stock company. Capital requirements for commercial banks are in line with the standards of the Basel Committee on Banking Supervision and corresponding EU directives. The level of minimum capital for commercial banks is set by the NBG at GEL12 million for newly founded commercial banks and branches of a foreign bank. It should be noted that Georgia does not impose any restrictions on the inflow or outflow of capital.
A brighter 2012? — 2012 is well under way and according to the latest NBG statistics, the growth of banking assets decreased in January of 2012 by 0.05%. FDI is increasing, GDP growth looks strong and there are signs of recovery, albeit patchy and tentative, in some parts of the global economy, so all the indicators seem to point to a positive 2012.
Also the fact that Bank of Georgia successfully upgraded to a premium listing on the London Stock Exchange enabling 35 million of its shares to start trading may herald the start of the largest Georgian banks seeking to tap international capital and reduce their costs of borrowing, which may be passed on to the customer.
The Bank of Georgia listing can be seen as a positive development for the whole banking industry in the region and will serve to further develop the sector. Other large banks may follow this example to go for IPOs in the coming year, but this is partly dependant on the ability of these banks to have a compelling equity growth/story to tell.