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Fitch Affirms Six Georgian Banks; Outlook Stable
May 28, 2015 / 4:02 PM / 2 years ago

Fitch Affirms Six Georgian Banks; Outlook Stable

(The following statement was released by the rating agency) MOSCOW/LONDON, May 28 (Fitch) Fitch Ratings has affirmed Bank of Georgia (BoG, BB-/Stable/bb-), TBC Bank (BB-/Stable/bb-), ProCredit Bank (Georgia) (PCBG, BB/Stable/bb-), JSC Liberty Bank (LB, B/Stable/b), Basisbank (BB, B/Stable/b) and Halyk Bank Georgia (HBG, BB-/Stable). A full list of rating actions is available at the end of this commentary. KEY RATING DRIVERS VRS OF ALL BANKS, BoG's, TBC's, LB's, and BB's IDRs, BoG's SENIOR DEBT The affirmation of BoG's, TBC's, PCBG's, LB's and BB's VRs, and (with the exception of PCBG) their Long-term IDRs with Stable Outlooks, reflects their generally robust capitalisation, ample liquidity and still sound financial metrics notwithstanding a challenging operating environment in Georgia. The economic slowdown, depreciation of the Georgian lari (GEL) and higher funding costs are likely to have a moderate negative impact on banks' performance in 2015, but Fitch expects that this will be within the tolerance range of the ratings. The Georgian economy has experienced multiple external shocks following the downturn in Russia, which has spilled over to surrounding CIS economies, triggering a wave of trading partner currency devaluations. These developments have had a highly adverse impact on Georgian trade and remittances: exports have fallen sharply, while remittances are down about 25%. The lari has depreciated by about 30% from its 2011-2013 levels against the US dollar, and economic growth is expected to slow markedly to 2% in 2015 from 4.8% in 2014. Direct losses from devaluation will be limited, as the rated Georgian banks do not run significant short open currency positions. Nonetheless, with over 60% of banks' loan portfolios US dollar denominated (with the notable exception of LB, 4%), the fall of the lari could create asset quality pressures and a slight decrease in regulatory capital ratios due to asset inflation. Capital levels are adequate to high, as reflected in Fitch core capital (FCC)/weighted risks ratios that span a broad range from 12% at LB to 30% (BB) at end-2014. Regulatory capitalisation at end-1Q15 was in the same range, from 12% at BoG to 28% at HBG, with ratios partly reflecting loan book dollarisation rates, as the National Bank of Georgia applies a 175% risk weight to foreign currency loans. Asset quality metrics remain reasonable, with non-performing loan ratios (NPLs, loans overdue by 90 days) ranging from 0.5% to 6% of gross loans at end-2014 and restructured loans also moderate. However, these figures do not capture the impact of the significant devaluation of the lari in 2015 (by 20% year to date). Fitch expects credit losses to pick up in the medium term due to the low share of naturally hedged borrowers (e.g. pure exporters, receiving their revenues in foreign currency) in the banks' loan portfolios. Liquidity is adequate, underpinned by high levels of liquid assets on balance sheets, which provide the banks with solid buffers to absorb unexpected funding outflows. Devaluation has had a limited effect on banks' liquidity cushions, as conversion of deposits into foreign currency and outflows were not significant in 4Q14-1Q15. In addition, refinancing risk is generally limited, reflecting typically moderate levels of wholesale funding (borrowed primarily from international financial institutions) and granular, well-spread funding maturities. The exception is BoG's eurobond issue, which matures in 2017 and comprises a significant 14% of the bank's non-equity funding. Margins should remain reasonably wide in the medium term, supported by growth in higher-margin lending, although higher GEL deposit rates and competition will moderately impact spreads. However, asset quality will be the single most important driver of banks' performance through the cycle. BoG's and TBC's 'bb-' VRs are further supported by their well-established and dominant franchises. At end-1Q15, the two banks (on a consolidated basis) accounted for over 60% of sector assets. PCBG's VR is at the same level as those of BoG and TBC, notwithstanding PCBG's significantly smaller size, and reflects the bank's superior track record of asset quality through the cycle, solid performance, robust corporate governance and fairly conservative risk management, resulting from its participation in the ProCredit group of banks. LB's VR of 'b' reflects its niche franchise and moderate loss absorption capacity, particularly in light of its focus on potentially risky retail lending. It also considers concentration and volatility in the funding base resulting from significant government, municipal and corporate funding. There is also some uncertainty regarding LB's future ownership, strategy and governance, as a majority stake in the bank is now controlled by three private individuals, following the foreclosure of pledged shares. However, this is balanced by the bank's improving performance, growing scale, the status of exclusive payment agent for the distribution of social payments and a low level of foreign currency-denominated loans in the loan portfolio. BB's 'b' VR is constrained by the bank's small size, currently limited franchise and short track record as a member of the Chinese Hualing Group. Positively, the rating also reflects the bank's solid capital ratios and sound asset quality to date. However, based on the bank's growth targets, Fitch estimates that BB's capital ratios will fall to levels more in line with those of its peers by 2017. BOG's, TBC's, LB's and BB's SUPPORT RATINGS AND 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. The Support Ratings and SRFs are also constrained by the potentially limited ability of the authorities to provide support, in particular in foreign currency. In Fitch's view, the authorities would likely have a high propensity to support BoG and TBC in light of the banks' systemic importance, and LB given its social function as the country's primary distributor of pensions and social benefits. LB's Support Rating and SRF also consider the support made available to the bank in 2009. BB's Support Rating of '5' and SRF of 'No Floor' reflect the bank's limited systemic importance, in light of which support cannot be relied upon, in Fitch's view. PCBG'S and HBG's IDRS AND SUPPORT RATINGS The affirmation of PCBG's and HBG's Long-term IDRs at 'BB' and 'BB-', respectively, and Support Ratings at '3', reflect Fitch's view of the 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). Fitch views the propensity of PCH to provide support to PCBG as high, but PCBG's ability to receive and utilise this support could be restricted by transfer and convertibility restrictions, 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 A marked deterioration in the operating environment, in particular if this led to negative action on the sovereign ratings, could put downward pressure on all of the banks' IDRs and VRs. A material weakening of asset quality and ratios and/or banks' loss absorption capacity would also be negative for the VRs. There is very limited upside potential for BoG, TBC and PCBG's VRs, and hence for the IDRs of BoG and TBC, as these are already at the same level as the sovereign. LB's VR, and hence its Long-term IDR, could be upgraded if the bank (i) is able to sustain the recent improvement in performance in a more difficult operating environment; (ii) maintains current capital levels and reasonable asset quality metrics; and (iii) does not suffer any material deterioration in its governance and/or risk appetite as a result of the change in ownership. BB's VR, and hence also its Long-term IDR, could benefit from an extended track record of profitable growth, reasonable management of the risks of rapid expansion and a strengthening of the bank's franchise. HBG's Long-term IDR is sensitive to any changes in the Long-term IDR of HBK. PCBG's Long-term IDRs are 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-' Support Rating: affirmed at '4' Support Rating Floor: affirmed at 'B' ProCredit Bank (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 '3' JSC Liberty Bank Long-term foreign currency IDR affirmed at 'B'; Outlook Stable Short-term foreign currency IDR affirmed at 'B' Viability Rating: affirmed at 'b' Support Rating: affirmed at '4' Support Rating Floor: affirmed at 'B' JSC Basisbank Long-term foreign currency IDR affirmed at 'B'; Outlook Stable Short-term foreign currency IDR affirmed at 'B' Viability Rating: affirmed at 'b' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No floor' Halyk Bank Georgia Long-term Issuer Default Rating: affirmed at 'BB-', Outlook Stable Short-term Issuer Default Rating: affirmed at B Support Rating: affirmed at '3' Primary Analyst Evgeny Konovalov Associate Director +7 495 956 9932 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Alyona Plakhova Analyst +7 495 956 2409 Committee Chairperson Alexander Danilov Senior Director +7 495 956 24 08 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com; Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 20 Mar 2015) here Additional Disclosures Solicitation Status here <a href="https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context =2&detail=31">Endorsement Policy ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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