Baku, Azerbaijan, June 23
Russia's VTB group is interested in expanding its geographic footprint in Georgia, given the strong upside potential of the local economy, Standard & Poor's said June 23.
The agency observes a strong track record of capital and liquidity support to VTB Georgia from its parent, including a $6.5 million capital injection in 2014 and a planned capital injection this year.
"We think that VTB Bank (Georgia), a strategically important subsidiary of VTB Bank, a diversified financial services group headquartered in Russia, will now maintain asset quality in line with domestic peers over the next two years, reflecting its workout of problem loans and reduced risk appetite," the statement said.
Standard & Poor's Ratings Services today affirmed its 'BB-/B' long- and short-term counterparty credit ratings on Georgia-based VTB Bank (Georgia). The outlook is stable.
The affirmation reflects our view that VTB Georgia remains a "strategically important" subsidiary for its parent, VTB Bank, a diversified financial services group headquartered in Russia.
At the same time, we think that VTB Georgia is showing steady progress in working out its problem loans, while curbing its growth appetite. We have therefore revised our assessment of VTB Georgia's risk position to "moderate" from "adequate" and raised our assessment of the bank's stand-alone credit profile (SACP) to 'b' from 'b-'.
"We base our ratings on VTB Georgia on our 'bb-' anchor for a commercial bank operating only in Georgia, the bank's "moderate" business position, "moderate" capital and earnings, "moderate" risk position, "average" funding, and "adequate" liquidity," the statement said.
The bank's 96% owner, VTB group, acquired its stake in 2005, maintaining its presence through the 2008 conflict in Georgia and despite the current sanctions imposed on major Russian entities.
Our assessment of VTB Georgia's business position as "moderate" reflects our view of the bank's still-limited domestic market share. With total assets of approximately GEL 1 billion (about $531 million) the bank ranks No. 6 in terms of assets among Georgia-based financial institutions, with a market share of about 5%. The bank focuses on commercial banking for mid-tier domestic corporate clients (40% of the loan book), and small and midsize enterprises (22%), as well retail clients (36%). We believe VTB Georgia's relatively small capital base limits the bank's pricing power and constrains its ability to compete with Georgia's two largest banks for high-quality borrowers. At the same time, we note that in the future the bank will likely continue to leverage its parent's financial resources to win bigger clients, the statement said.
"We view VTB Georgia's capital and earnings as "moderate," reflecting our expectation that the bank's risk-adjusted capital ratio, which stood at 7.4% as of Dec. 31, 2014, will gradually decline to 6.8%-6.9% in 2015-2016," the statement said.
In our forecast, we factor in a Tier-1 capital injection of GEL10 million in 2015, and do not expect any dividends to be paid this year. We think that net interest margins will contract to about 6%, which would put some pressure on earnings in 2015. We regard the bank's revenue mix as supportive of stable and predictable earnings generation: 65%-70% has historically come from interest income and 8%-10% from fees and commissions. We expect this composition will be sustained in the future, although it could be affected by one-time effects, such as large disposals of repossessed collateral.
"We expect net profit in 2015 at about GEL10 million, equivalent to a return on assets of about 1%," the statement said. "We assess VTB Georgia's funding as "average" and its liquidity as "adequate." Customer deposits remain the major funding source for the bank and the 20 largest depositors represented about 45% of the bank's liabilities as of Dec. 31, 2014, a moderately high level of concentration, in our view. The bank's loan-to-deposit ratio was 86% on the same date, which is better than that of its domestic peers."
In our view, the maturity structure of VTB Georgia's funding is well balanced, with short-term wholesale funding comprising 13% of total funding and broad liquid assets covering short-term wholesale liabilities by almost 2.7x.
Funding attracted from the parent amounted to GEL133 million on Dec. 31, 2014 (approximately 14% of total liabilities), supporting the stability of bank's funding profile and enabling it to sustain a net interest margin at a generally satisfactory level. VTB Georgia also has an outstanding liquidity facility from its parent, VTB Bank, which it could use if necessary.
"We think that the sanctions imposed on the parent bank have an only limited impact on VTB Georgia and the amount of liquidity support available to the subsidiary," the statement said.
In 2014, the share of VTB Georgia's nonperforming assets (by which we mean problem loans and repossessed investment property) reduced to 5.3% from 6.7% of the total loan book and repossessed real estate owned, after the bank recovered about Georgian lari (GEL) 2 million (€800,000) on some large problem assets.
"We consider that the bank has a track record of successful workouts of problem loans for at least four straight years," the statement said. "We expect provision recovery to continue in 2015, although the pace of such recovery will likely slow. We also think that the bank's growth appetite has lessened, which should prevent rapid risk accumulation in the future."
Among the key weaknesses of VTB Georgia's risk position, we still see high single-name loan and industry concentrations. We regard the loan book as concentrated. The 20 largest borrowers represented about 30% of total loans and 1.5x of equity as of Dec. 31, 2014. We still consider that high foreign currency lending, at about 60% of total lending at end-2014, creates substantial financial risk for the bank, not only in terms of credit risk if the lari depreciates, but also in terms of the management of foreign currency mismatch risk.
The stable outlook reflects our expectation that VTB Georgia will maintain at least moderate capitalization, with nonperforming loans generally in line with the system average, and its funding and liquidity position will not worsen.
A positive rating action is currently remote, given that our long-term rating on VTB Georgia is at the level of our long-term rating on Georgia and our view that the bank is unlikely to survive sovereign credit stress, if any occurs. Consequently, an upgrade of the sovereign is a prerequisite for us to consider an upgrade of the bank. We might consider revising our assessment of the bank's SACP upward if its business position improved significantly, and we considered such improvement as sustainable.
"We might consider a downgrade if we saw that the bank's relative importance for its parent had declined, in particular, if VTB Bank's interest or capacity to provide continuing financial support for VTB Georgia diminished and is not sufficient to maintain capital or liquidity ratios at current levels. A deterioration of the sovereign's creditworthiness, resulting, for example, from weaker economic growth than we expect, a worsening financial position, or rising imbalances, could also lead to a negative rating action on the bank," the statement said.