Rating of Georgian Banks: Fitch Affirms 6 Georgian Banks

The FINANCIAL — Fitch Ratings has affirmed Bank of Georgia (BoG, BB-/Stable/bb-), TBC Bank (BB-/Stable/bb-), ProCredit Bank (Georgia) (PCBG, BB/Stable/bb-), Basisbank (Basis, B/Stable/b), Cartu Bank (Cartu, B+/Stable/b+) and Halyk Bank Georgia (HBG, BB-/Stable). Fitch has also upgraded Liberty Bank (LB) to ‘B+’ from ‘B’ with a Stable Outlook. A full list of rating actions is attached at the end of this rating action commentary.

“The upgrade of LB reflects the improved profitability of the bank, while maintaining adequate capitalisation and sound asset quality metrics”, agency said. “The affirmation of other banks’ ratings reflects their strong franchises (BoG, TBC), generally solid capitalisation (more significant at Cartu), sound profitability, ample liquidity and still healthy asset quality metrics (weaker at Cartu), despite high lending dollarisation and the depreciation of the lari in 2015”.

“The Stable Outlooks on all bank ratings reflect Fitch’s view that the banks’ solid profitability and capital buffers should be sufficient to cover potential moderate deterioration of asset quality, while a more severe stress is unlikely, as reflected in the Stable Outlook on the ‘BB-‘ sovereign rating”.

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KEY RATING DRIVERS

The IDRs of BoG, TBC, LB, Cartu and Basis are driven by their intrinsic strengths, as reflected by their Viability Ratings (VRs).

The IDRs of PCBG and HBG are driven by moderate probability of support for these entities from the banks’ majority shareholders, ProCredit Holding AG & Co. KGaA (PCH, BBB/Stable) and Halyk Bank of Kazakhstan (HBK, BB/Stable).

BoG’s senior debt rating is driven by the bank’s IDR.

VIABILITY RATINGS

BoG (bb-)

BoG has a high loan book dollarisation (68%), which however is typical for the market, while the share of naturally hedged borrowers is limited. However, asset quality metrics are healthy, as reflected in a low 2.8% of non-performing loans (NPLs, over 90 days overdue), in addition to 1.2% of restructured loans, which together were 87% covered by reserves.

“The bank’s profitability has been stable through the cycle; in 2015 return on average equity (ROAE) was high at 18%. BoG’s solid pre-impairment profitability was sufficient to cover 9% of credit losses in 2015, in addition to the bank’s moderate capital buffer, allowing it to absorb a further 3% of potential losses, before breaching the regulatory capital ratios. Fitch Core Capital ratio (FCC) at end-2015 was high at 17.3%, albeit down from 22% at end-2014. The decline in capitalisation was driven by the reorganisation of the BGEO Group, as a result of which a number of subsidiaries were deconsolidated from BoG. Fitch also considers the bank’s sound liquidity cushion, which at end-2M16 covered 36% of customer deposits”. “Refinancing risks are manageable; BoG’s USD360m Eurobond matures in 2017 and accounts for 12% of the bank’s funding”.

TBC (bb-)

TBC’s asset quality metrics deteriorated as restructured loans rose to 4.8% of total loans at end-2015 from 3.2% at end-2014. At the same time reported NPLs were low at 1%. Total problem loans were 73% covered by reserves, which is adequate, in Fitch’s view. Loan book dollarisation was high at 65%, in line with the market average.

TBC showed strong profitability metrics through the cycle with a high 19.9% ROAE in 2015. The bank’s capitalisation is robust, as reflected in a high 22.4% FCC at end-2015. Equity buffer was sufficient to cover additional 5.7% of potential credit losses, before breaching regulatory capital ratios, in addition to sizeable pre-impairment profits, which allowed it to absorb a further 7.5% of losses.

Liquidity position is healthy with liquid assets covering a high 26% of customer accounts at end-2015, while refinancing risks are manageable.

PCBG (bb-)

PCBG’s restructured exposures were high at 12% of gross loans in 2015. The restructured loans resulted from local currency devaluation in 2015, as the share of foreign currency-denominated loans was 83% of PCBG’s loan book – significantly higher than the sector average of 65%. Reported NPLs, on the other hand, remained at 2.3% of gross loans at end-2015 and were fully covered by reserves.

Regulatory capitalisation declined in 2015 but was sufficient to provision for an additional 1.3% of gross loans at end-2015. Pre-impairment profitability was solid, allowing the bank to absorb a further 5% of potential credit losses.

The rating also factors in the bank’s robust corporate governance and fairly conservative risk management, in line with the ProCredit group of banks.

LB (b+)

LB reported 2% of individually impaired loans at end-2015, while above 90 days overdue loans, which were not classified as individually impaired, comprised additional 5% of gross loans. These were 118% covered by reserves.

LB’s credit losses in retail loan book (defined as the increase in all loans overdue by over 90 days, plus write-offs, divided by the average performing loans) increased only moderately to 4.6% in 2015 (3.6% in 2014), which is significantly below the break-even level of about 10%. Also positively the level of foreign currency-denominated loans is low at 3.8%. The bank’s capital buffer was moderate at end-1Q16, allowing the bank to additionally provision for up to 2.7% of gross loans.

Some uncertainty exists over the bank’s future strategy and governance, as a majority stake in the bank is now controlled by three private individuals, following the foreclosure of pledged shares.

CARTU (b+)

Asset quality is weak, although NPLs declined to 9% at end-2015 from 11% at end-2014, and were 84% covered by reserves. This was partially due to several recoveries in legacy exposures originated in 2011. Profitability metrics remain volatile through the cycle; Cartu reported a high 21% ROAE in 2015, up sharply from 7% in 2014.

Cartu’s capitalisation is viewed as strong by Fitch (despite the recent negative trend due to 21% FX-adjusted growth in 2015), allowing the bank to reserve 9% of its gross loans without breaching the regulatory capital ratios. The subordinated debt contributed by the shareholder, equal to 13.7% of risk-weighted assets, provides solid additional loss-absorption capacity, equal to about 21% of gross loans.

BASIS (b)

Basis’s NPLs rose to 2.3% of end-2015 gross loans from 1.1% at end-2014, fully covered by reserves. The moderate asset quality deterioration was largely driven by rapid growth and the devaluation of the lari.

Profitability metrics are adequate with 15% ROAE in 2015, albeit the bank’s NIMs are generally weaker than at other Fitch-rated banks, due to the lower interest rates the bank offers on its loans to capture market share. Low impairment charges, which accounted for 14% of pre-impairment profit, supported overall profitability.

Capitalisation is strong; the bank could provision 16% of its gross loans at end-2015. However, the robust capitalisation should be viewed in light of the bank’s rapid growth.

Related-party funding comprised high 29% of customer accounts at end-2015, down from 38% at end-2014. Liquidity buffer is reasonable, in Fitch’s view, allowing the bank to sustain an outflow of 38% of third-party customer accounts at end-2015.

HBG

Fitch does not assign a VR to HBG because of its small size, high management and operational integration with HBK, and significant reliance on parent funding.

SUPPORT RATINGS, SUPPORT RATING FLOORS

The affirmation of BoG’s, TBC’s and LB’s ‘4’ Support Ratings and ‘B’ Support Rating Floors (SRFs) reflects Fitch’s view of the limited probability of support being available from the Georgian government, in case of need. This is because, although the authorities would likely have a high propensity to support these banks in light of their systemic importance/social function, the ability to provide support, especially in foreign currency, may be constrained due to the big size of the banks relative to sovereign reserves.

Cartu’s and Basis’s Support Rating of ‘5’ and SRF of ‘No Floor’ reflect the two banks’ limited systemic importance, and consequently Fitch’s view that state support cannot be relied upon.

PCBG’s and HBG’s Support Rating of ‘3’ reflects Fitch’s view that their parents’ propensity to provide support to their subsidiaries is high, but in the case of PCBG its ability to receive and utilise this support could be restricted by transfer and convertibility risks, as reflected in Georgia’s Country Ceiling of ‘BB’.

The one-notch differential between HBK’s and HBG’s IDRs reflects the cross-border nature of the parent-subsidiary relationship, and the so far limited track record and contribution of the Georgian subsidiary to overall group performance.

RATING SENSITIVITIES

Rating upside of BoG, TBC and PCBG is limited, as the former two are already at the same level as the sovereign, while the latter is constrained by the Country Ceiling. LB’s, Basis’s and Cartu’s ratings could benefit from an extended track record of profitable growth, while maintaining reasonable asset quality metrics and strengthening their franchises.

The downgrades of IDRs and VRs of BoG, TBC, LB, Basis and Cartu, as well as the VR of PCBG, may result from further rapid growth or a marked deterioration asset quality, leading to a substantial weakening of the banks’ capitalisation.

PCBG’s and HBG’s Long-term IDRs are sensitive to changes in Fitch’s assessment of support from their shareholders. PCBG’s Long-term IDRs are also sensitive to a change in Georgia’s Country Ceiling.

The rating actions are as follows:

Bank of Georgia

Long-Term Foreign and Local Currency IDRs: affirmed at ‘BB-‘; Outlook Stable

Short-Term Foreign and Local Currency IDRs: affirmed at ‘B’

Viability Rating: affirmed at ‘bb-‘

Support Rating: affirmed at 4

Support Rating Floor: affirmed at ‘B’

Senior unsecured debt: affirmed at ‘BB-‘

TBC Bank

Long-Term Foreign Currency IDR: affirmed at ‘BB-‘; Outlook Stable

Short-Term Foreign Currency IDR: affirmed at ‘B’

Viability Rating: affirmed at ‘bb-‘