High dollarization remains structural weakness of some Georgian banks - Fitch

Business Materials 1 April 2021 15:04 (UTC +04:00)
High dollarization remains structural weakness of some Georgian banks - Fitch

BAKU, Azerbaijan, April 1

Tamilla Mammadova – Trend:

The revision of the Outlooks to Stable on Georgian TBC Bank (TBC), Bank of Georgia (BOG), and Liberty Bank (LB) reflects reduced pressure on the banks' credit profiles from the COVID-19 pandemic and contraction of the Georgian economy, Trend reports via the Fitch.

"We expect their pre-impairment profits will be sufficient to absorb additional credit losses from COVID-19 pandemic without jeopardizing their financial profiles. Banks entered the crisis with healthy capital cushions and sound performance metrics and we believe the ratings of BOG, TBC and LB can tolerate further moderate deterioration of asset quality," the report said.

The senior unsecured debt of TBC and BOG is rated in line with the banks' respective Long-Term IDRs of 'BB-'.

The two banks' perpetual additional Tier 1 (AT1) notes are rated at 'B-', three notches below the VRs, reflecting the high loss severity of the notes due to their deep subordination, and additional non-performance risk relative to the VR, given fully discretionary coupon omission.

The Viability Ratings (VRs) of all four banks reflect their sensitivity to the high-risk Georgian operating environment, which was under pressure in 2020 from the economic fallout from the COVID-19 pandemic and the resultant effect on their asset-quality metrics. High dollarisation remains a structural weakness, albeit less so at LB.

The VRs of TBC and BOG capture their strong domestic franchises, as reflected in sizeable market shares (38 percent and 36 percent of sector assets, respectively), strong pricing power, and the only moderate impact of COVID-19 pandemic on their performance metrics.

Impaired loan ratios increased to 6.1 percent and 5.2 percent at TBC and BOG, respectively, at the end-2020. Coverage by total loan loss allowances (LLAs) stood at 65 percent and 59 percent, reflecting the banks' reliance on collateral.

"High loan provisioning, coupled with weaker revenues, resulted in the operating profits to risk-weighted assets (RWAs) ratio declining to 2.5 percent and 2.4 percent at TBC and BOG, respectively, in 2020 (2019: 4.6 percent and 3.8 percent). The cost of risk amounted to 2.4 percent (TBC) and 1.9 percent (BOG) in 2020, which we expect to moderate this year," the report said.

Net interest margins (NIMs) narrowed to 5 percent at both banks due to higher funding costs and subdued lending growth in high-yield segments.

"Both banks' pre-impairment profits are healthy at 5 percent of average gross loans, which we believe should be sufficient to absorb additional provisioning as loans season in a post-stress environment," the report said.

Fitch Core Capital (FCC) ratios were reasonable at 17 percent and 15 percent as of end-2020, respectively, at TBC and BOG, capturing moderate growth in 2020 and adequate internal capital generation has given dividend retention. Simultaneously, the National Bank of Georgia (NBG) eased regulatory capital requirements by eliminating the capital conservation buffer (used to be 2.5 percent) and reducing the currency-induced credit risk buffer by two-thirds, thus maintaining wide headroom above the minimum requirements.

The funding and liquidity profiles of both TBC and BOG have been stable. Banks are largely funded by customer deposits (66 percent and 73 percent of liabilities at TBC and BOG, respectively) and there have been no material outflows at times of market turbulence in 2020. Upcoming wholesale debt repayments are manageable and banks maintained good access to funding from international financial institutions during the pandemic, thus refinancing risks are low.

LB's 'b+' VR reflects the bank's moderate market share and, consequently, weaker pricing power and economy of scale compared with BOG's and TBC's, which results in weaker profitability.

No significant pressures were seen on the bank's funding and liquidity profile during the COVID-19 pandemic. LB is predominantly funded by customer accounts (81 percent of total liabilities at end-2020), with 46 percent of total liabilities sourced from households. Liquidity buffers are strong, covering 35 percent of customer accounts at end-2020.


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