Fitch Affirms Four Georgian Banks
Azerbaijan, Baku, June 17 / Trend A.Akhundov /
Fitch Ratings international agency has affirmed the Long-term Issuer Default Ratings (IDRs) and Viability Ratings (VRs) of Bank of Georgia (BoG), TBC Bank (TBC), ProCredit Bank (Georgia) (PCBG) and JSC Liberty Bank (LB); the outlooks on the banks' Long-term IDRs are Stable, the agency reported in its statement released on Monday.
"The affirmation of BoG's, TBC's, PCBG's and LB's VRs, and (with the exception of PCBG) their Long-term IDRs, reflects the still reasonable prospects for the Georgian economy, notwithstanding the recent slowdown in growth, and the banks' generally sound financial metrics, management and governance. The banks' asset quality ratios remain reasonable, with non-performing loan ratios (NPLs, loans overdue by 90 days) ranging from 1% to 4% of gross loans and restructured loans also moderate. Fitch views the banks' near-term prospects as reasonable, given the agency's forecast of 4.3% GDP growth for the Georgian economy in 2013 and low impairment charges at this point in the economic cycle. In light of the latter, banks' internal capital generation capacity should remain reasonable, supported by fairly wide margins. Capital levels are high, as reflected in Fitch core capital (FCC) ratios ranging between about 15% and 27% at end-2012. Liquidity is good, providing a solid buffer to absorb any unexpected funding outflows, and refinancing risk is limited in view of the international financial institutions that are the main providers of long-term funding, the statement sats.
At the same time, the agency notes that the banks' current levels of capitalisation are warranted given the fairly high-risk operating environment in Georgia and the potentially cyclical performance of both the economy and the banks. Although Fitch's base case expectation is for still solid growth in the near to medium term, political uncertainty and downside risks to economic performance have increased following the change of government in 2012. Furthermore, with the exception of LB, capital ratios should be viewed in light of banks' high levels of FX lending, which would expose them to indirect credit risks if there was a sharp depreciation of the local currency. To an extent this risk is already captured in the banks' tighter regulatory capital ratios (at around 16% for BoG and PCBG, 14% for TBC and 12% for LB at end-2012), as the National Bank of Georgia requires that banks to apply a 175% risk-weighting to FX loans. Sizeable holdings of fixed and foreclosed assets also reduce the banks' level of free capital.
As an additional source of risk, Fitch also notes the banks' expansion in segments (notably in retail, micro and SMEs) where some of them have a shorter track record of lending, and which are gradually becoming more leveraged. BoG and TBC also have significant exposures to more risky long-term project finance loans. The agency also believes that growing competition could lead to a gradual weakening of underwriting at a time when margins are tightening, although softening of both lending standards and credit spreads has been limited to date.
BoG's and TBC's 'bb-' VRs are further supported by their well-established franchises and dominant market shares. At end-2012, the two banks accounted for over 60% of the sector's assets.
The equalisation of PCBG's VR with those of BoG and TBC, notwithstanding PCBG's significantly smaller size, reflects the bank's superior track record of asset quality and performance through the cycle and its good corporate governance and risk management, reflecting its participation in the ProCredit group of banks.
LB's VR of 'b' reflects its more limited track record and franchise, faster growth and more moderate profitability and capitalisation relative to peers. Pre-impairment profitability was equal to a moderate 6% of average loans in 2012, but constrained by weak cost efficiency and a high level of liquid assets. The bank's FCC ratio was a reasonable 15% at end-2012, but capitalisation is managed tightly relative to minimum regulatory requirements, with the regulatory ratio only just above the required 12% at end-Q113. In Fitch's view, the bank's loss absorption capacity is only moderate in light of the bank's fairly aggressive retail lending strategy (with 35% retail loan growth targeted in 2013) and somewhat untested loan book in this respect. LB's credit profile benefits from lending being almost fully GEL-denominated, and from the absence to date of significant wholesale funding. However, significant reliance on government and municipal funding brings concentration risk and some volatility to the deposit base.
The affirmation of BoG'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 Fitch's view, the authorities would likely have a high propensity to support BoG in light of the bank's systemic importance (37% share of sector assets at end-2012) 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. At the same time, the Support Ratings and SRFs are constrained by the potentially limited ability of the authorities to provde support.
The affirmation of TBC's '4' Support Rating reflects Fitch's view of the limited probability of support from the bank's IFI shareholders, which together hold a 57% stake in the bank. However, some doubt remains about the ability and readiness of the IFIs to provide coordinated and timely support in case of need, particularly in view of their ultimate likely exit from the shareholder structure.
Fitch has assigned a SRF of 'B' to TBC, reflecting its view of the limited probability of support available from the Georgian government in light of the bank's systemic importance (26% share of banking sector assets at end-2012).
The affirmation of PCBG's Long-term IDRs at 'BB', one notch above the sovereign rating (BB-/Stable), and Support Rating at '3' reflects Fitch's view of the moderate probability of support from the bank's 100% shareholder, ProCredit Holding AG & Co. KGaA (BBB-/Stable). Fitch views the propensity of PCH to provide support 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'.
An upgrade of the VRs of BoG, TBC and PCBG, and hence of the Long-term IDRs of BoG and TBC, would likely require a sovereign upgrade, a favourable macro backdrop, a marked reduction in foreign currency lending and still strong bank financial metrics and asset quality ratios, notwithstanding increasing levels of competition.
LB's VR, and hence its Long-term IDR, could be upgraded in case of an extended track record of profitable growth, a further strengthening of the bank's franchise and somewhat greater loss absorption capacity.
Conversely, a marked deterioration in the operating environment potentially leading to a sovereign downgrade, would put downward pressure on each of the banks' VRs. A material weakening of asset quality ratios would also be negative for the VRs, particularly if Fitch considered it indicative of a weakening of underwriting standards.
Fitch notes that the banks' VRs are currently underpinned by high capital ratios. Consequently, any significant relaxation of regulatory capital requirements, for example due to the planned transition to Basel II/III risk weightings in Georgia, if followed by a marked reduction in capital levels, could also put downward pressure on the banks' VRs.
Fitch does not expect any change to BoG's, LB's or TBC's Support Ratings or SRFs given the Stable Outlook on Georgia's sovereign rating. However, any changes in the sovereign ratings could result in revisions of the SRFs.
Any change in Fitch's view of support available to PCBG from PCH, or in the Georgian Country Ceiling, would likely result in a change to PCBG's Long-term IDRs.