London: Fitch Ratings has revised the Outlooks on Bank of Georgia’s (BoG) and TBC Bank’s (TBC) Long-Term Issuer Default Ratings (IDRs) to Positive from Stable and affirmed the IDRs at ‘BB-‘. Fitch has affirmed Liberty Bank’s (LB) Long-Term IDR at ‘B+’ with a Stable Outlook and ProCredit Bank’s Georgia (PCBG) Long-Term IDR at ‘BB’ with a Positive Outlook.
Fitch has also revised the Outlook on JSC BGEO Group’s (BGEO, a Georgia-based holding company for BoG) to Positive from Stable and affirmed the Long-Term IDR at ‘BB-‘. Fitch has simultaneously withdrawn the ratings for commercial reasons and will no longer provide ratings and analytical coverage for BGEO.
A full list of rating actions is at the end of this rating action commentary. The IDRs of BoG, TBC and LB are driven by the banks’ intrinsic strength as reflected by their Viability Ratings (VRs). BOG’s senior unsecured debt is rated in line with its IDR. The revision of the Outlooks on BoG and TBC to Positive from Stable reflects Fitch’s view that these banks’ risk profiles and financial metrics should benefit from the improving operating environment in Georgia.
The affirmation of BoG’s, TBC’s and LB’s Support Ratings at ‘4’and Support Rating Floors (SRFs) at ‘B’ reflects Fitch’s view of the limited probability of support being available from the Georgian authorities, in case of need. In our view, the authorities would likely have a high propensity to support these banks in light of their high systemic importance (BOG/TBC) and extensive branch network and role in distributing pensions and benefits (Liberty). However, the ability to provide support, especially in foreign currency, may be constrained given the banks’ large foreign currency liabilities (USD6 billion at end-2017) relative to sovereign FX reserves (USD3.2 billion).
PCBG’s IDRs are driven by the potential support it may receive from its sole shareholder, ProCredit Holding AG & Co. KGaA (PCH, BBB/Stable) in case of need. The affirmation of PGBG’s ‘BB’ Long-Term IDRs at one notch above the sovereign rating, and its Support Rating at ‘3’, reflects Fitch’s view that PCH’s propensity to provide support to the subsidiary is high, but PCBG’s ability to receive and utilise this support could be restricted by transfer and convertibility risks, as reflected by Georgia’s Country Ceiling of ‘BB’. The Positive Outlook on PCBG reflects the potential for the Country Ceiling to go up, given the Positive Outlook on Georgia’s ‘BB-‘ sovereign rating.
The affirmations of the banks’ ‘bb-‘ (BoG, TBC, PCBG) and ‘b+’ (LB) VRs consider their reasonable financial metrics, stable funding profiles and adequate capitalisation, which provide resilience in case of potential recurring pressures on asset quality and performance.
The VRs of BoG and TBC also reflect their well-established and dominant domestic franchises (end-2017 market shares by assets: 34% for BoG and 36% for TBC) and significant pricing power, which underpins the banks’ sustainable and healthy profitability through the recent cycle. PCBG’s VR also factors in the bank’s well-developed franchise in its SME niche and fairly conservative risk management, resulting from its close integration with the parent bank. The VRs of BoG, TBC and PCBG also factor in the banks’ high, albeit decreasing, balance sheet dollarisation and certain concentrations in loan and deposits (BoG, TBC).
LB’s lower VR captures the bank’s moderate market share (5%), large exposure to the potentially highly volatile retail lending segment and some uncertainty regarding future strategy and corporate governance following the change of control in 2017.
We expect that Georgia’s favourable macro trends (Fitch forecasts GDP to expand by 4.6% in 2018 and 4.9% in 2019) will support the banks’ asset quality and performance in 2018-2019. Stricter regulatory standards for retail lending and higher solvency and liquidity requirements (linked to the implementation of Basel III standards in Georgia) should contribute to the quality of new loan origination and banks’ maintenance of adequate funding and capital metrics during the period of dynamic growth.
BoG’s non-performing loans (NPLs, loans overdue for more than 90 days) stood at 3.6% of loans at end-2017 (preliminary data, as the end-2017 IFRS report has not yet been published), down from 4.4% at end-2016. Reserve coverage was an adequate 99% of NPLs, while restructured exposures added a further 1% of loans. The unreserved portion of problem loans (NPLs and restructured) made up a low 6% of the bank’s Fitch Core Capital (FCC). The NPL origination ratio (calculated as the growth in NPLs plus write-offs divided by average performing loans in the period) decreased to 2.4% in 2017 from 4.6% in 2016.
Loan concentrations are significant, albeit somewhat below some regional peers, both by name (BoG’s exposures to the 25 largest borrowers accounted for 19% of gross loans or 104% of FCC) and economic sector, including cyclical construction and real estate (around 10% of loans or 57% FCC). Retail loans contributed around 48% of the portfolio, nearly half of which was unsecured (equal to a sizeable 87% of FCC). FX-lending levels were still high at 58% of loans at end-2017, albeit down from 68% at end-2016, mainly due to a reduction in the retail sector.
Profitability remains sound, based on a stable net interest margin (7%), helped by continuing growth (12% on average in 2015-2017, adjusted for FX-effects) and low deposit rates, and good cost efficiency (cost-to-income ratio of 38% in 2017). Moderate impairment charges (at 31% of pre-impairment profit in 2017) also support robust returns (ROAE of 25% in 2017; 2016: 23%). The dividend distribution policy remains unchanged with a 25%-40% payout ratio planned in the medium term.
BoG’s FCC ratio stood at a solid 15% at end-2017 and end-2016, as the bank’s retained earnings were sufficient to offset growth. Regulatory capitalisation was tighter, reflecting more conservative risk weights: BoG’s Tier 1 and total capital ratios under the Basel III framework were 12.4% and 17.9%, respectively, (compared with BoG’s end-2017 regulatory capital requirements, including buffers, of 9.9% and 12.4%, respectively). The regulatory capital cushion allowed the bank to absorb additional losses equal to a moderate 4% of gross loans without breaching the regulatory minimum levels. At the same time, BoG’s pre-impairment profit, equal to a solid 7.4% of average loans, offers additional sizeable loss-absorption capacity. Fitch does not expect significant pressure on the bank’s capitalisation, as only moderate growth is planned along with reasonable earnings.