Fitch Ratings: Tighter Regulation Helps Georgia Banking Sector Stability


Fitch Ratings-London-12 September 2018: Tighter regulation of retail lending in Georgia should help support the stability of the banking sector as credit demand increases with economic growth, Fitch Ratings said at its annual conference on Georgia in Tbilisi today.

Annualised credit growth was 14% in 1H18 (net of exchange-rate effects) and likely to remain high as the economy continues to grow. We forecast real GDP growth of 5.2% this year and 4.9% in 2019. But retail lending caps (in force since 30 November 2017) based on maximum payment-to-income and loan-to-value ratios should maintain the quality of new loan origination, while higher solvency and liquidity requirements linked to the implementation of Basel III standards should help to protect banks' capital and funding metrics.

The banking sector's asset quality is sensitive to the stability of the local currency because of high loan dollarisation, reflecting the currency structure of banks' funding bases. The sector's end-1H18 foreign-currency loans/total loans ratio was 41% for retail lending and 72% for corporate lending. However, macro-prudential measures to reduce dollarisation in the economy are leading to a reduction in banks' lending dollarisation. (The corresponding ratios at end-2016 were 55% and 77%, respectively.)

Regulatory non-performing loans (NPLs) were 5.5% of sector loans at end-1H18 (end-2016: 7.3%), with total loan impairment allowances amounting to 92% coverage of these. Most Georgian banks have not yet published IFRS 9 disclosures, but preliminary information we have received from the banks we rate (representing 88% of sector assets) suggests that Stage 3 loans (those impaired under IFRS 9) are broadly in line with regulatory NPLs. However, we observe that Stage 2 loans (loans with a significant increase in credit risk, but not impaired) could be a double-digits percentage of total loans, and weakly provisioned, highlighting banks' exposure to potential asset-quality deterioration. 

The sector's profitability is strong (1H18 annualised return on equity: 18%) despite intense competition, supported by loan growth, generally stable funding costs and moderate impairment charges. We believe that solid pre-impairment profitability (estimated at 4.7% of risk-weighted assets in 1H18, annualised) should support banks' resilience if there is pressure on asset quality.

Georgian banks' solvency positions are adequate (sector total capital adequacy ratio of 18.9% at end-1H18), underpinned by higher regulatory requirements, which now incorporate Basel III capital buffers. The buffers take into account each bank's specific risks, including asset concentrations and dollarisation. At end-1H18, solvency ratios at Fitch-rated banks were above the regulatory limits, including all buffers required in Georgia in 2018. At some banks, however, headroom above total capital requirements is tight and the ability to support loan growth will rely largely on internal capital generation.

We rate seven banks in Georgia: TBC Bank, Bank of Georgia, Liberty Bank, ProCredit Bank (Georgia), Cartu Bank, Basisbank and Halyk Bank Georgia. The banks' ratings are sensitive to the performance of the domestic economy and the stability of the local currency. An upgrade of Georgia's 'BB-'/Positive sovereign rating could contribute to upgrades of some banks. Bank ratings could come under pressure if there is rapid loan growth or a marked deterioration in asset quality, leading to significant capital erosion.

The presentation "Banking Sector: Stable Development Backed by Tighter Regulation" is available at or by clicking the link above.


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