Fitch Affirms Five Georgian Banks; Outlook Stable

Fri Jun 6, 2014 10:34am EDT

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(The following statement was released by the rating agency) LONDON, June 06 (Fitch) Fitch Ratings has affirmed five Georgian banks' Long-term Issuer Default Ratings (IDRs) and Viability Ratings (VRs). The banks are Bank of Georgia (BoG), TBC Bank (TBC), ProCredit Bank (Georgia) (PCBG) , JSC Liberty Bank (LB) and Basisbank (BB). The Outlooks on the banks' Long-term IDRs are Stable. A full list of rating actions is available at the end of this commentary. KEY RATING DRIVERS: VRS OF ALL BANKS, BoG's, TBC's, LB's and BB's IDRs, BoG's SENIOR DEBT The affirmation of BoG's, TBC's, PCBG's, LB's and BB's VRs, and (with the exception of PCBG) their Long-term IDRs with a Stable Outlook, reflects their generally robust capitalisation, ample liquidity and still sound financial metrics notwithstanding a challenging operating environment in Georgia. Unlike the other four banks whose IDRs are a reflection of their intrinsic strength, PCBG's Long-term IDR is driven by institutional support. The banks' asset quality ratios remain reasonable, with non-performing loan ratios (NPLs, loans overdue by 90 days) ranging from 1% to 5% of gross loans and restructured loans also moderate. Fitch views the banks' near-term prospects as mildly positive, given the agency's forecast of 5% GDP growth for the Georgian economy in 2014, rising to 5.5% in 2015. This should support banks' internal capital generation capacity and asset quality notwithstanding margin pressure from competition. Margins should remain reasonably wide in the medium term, supported by growth in higher-margin lending and funding cost optimisation. However, asset quality is likely to remain key to banks' performance through the cycle. Capital levels remain moderate to high, as reflected in Fitch core capital (FCC)/weighted risks ratios that span a broad range, from 13% at LB to a high 34% (BB) at end-2013. Liquidity is also robust, underpinned by high levels of liquid assets on the balance sheet, which provide the banks with a solid buffer to absorb unexpected funding outflows. In addition, refinancing risk is generally limited, reflecting typically moderate levels of wholesale funding (which, moreover, typically rely largely on facilities from international financial institutions (IFIs)) and granular, well-spread funding maturities. The exception is BoG's eurobond issue, which matures in 2017 and is significant relative to the bank's non-equity funding (13.5%). Nevertheless, the banks' current levels of capitalisation remain warranted given the fairly high- risk operating environment, the cyclical performance of both the economy and the banks and the banks' expansion into the potentially risky retail, micro and SME loan segments. There is also a risk that competition could lead to a weakening of banks' underwriting standards and asset quality ratios. Georgia's banking sector is highly dollarised, exposing the banks to exchange rate risk. Given this, with the exception of LB, capital ratios should be viewed in light of high levels of foreign currency (FC) lending, which would expose them to indirect credit risks if there is a sharp depreciation of the local currency. To an extent, this risk is already captured in the banks' regulatory capital ratios, which in some cases are fairly tight, as the National Bank of Georgia requires that banks apply up to a 175% risk-weighting to FC loans. Fixed and foreclosed assets also reduce the banks' level of free capital, although the banks are generally reducing foreclosed assets through asset sales. BoG's and TBC's 'bb-' VRs are further supported by their well-established and dominant franchises At end-2013, the two banks (on a consolidated basis) accounted for almost 60% of sector 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 through the cycle, solid performance, robust corporate governance and fairly conservative risk management, resulting from its participation in the ProCredit group of banks. LB's VR of 'b' reflects its pressured capitalisation and weak loss absorption capacity, particularly in light of its fairly aggressive loan growth strategy. It also considers concentration and volatility in the funding base resulting from significant government, municipal and corporate funding. High funding costs, in part connected to the latter, also weigh on performance, as does weak cost efficiency (cost/income ratio of 87% in 2013) resulting from LB's smaller scale and substantial branch network. However, this is balanced by the bank's niche franchise as the payment agent for the distribution of social payments and a low level of FC-denominated loans in the loan portfolio. BB's 'b' VR is constrained by the bank's small size, currently limited franchise and short track record as a member of the Chinese Hualing Group. Positively, the rating also reflects the bank's solid capital ratios and sound asset quality to date. However, based on the bank's growth targets, Fitch estimates that BB's capital ratios will fall to levels more in line with those of its peers by 2017. KEY RATING DRIVERS: BOG's, TBC's AND LB's SUPPORT RATINGS AND SUPPORT RATING FLOORS The affirmation of BoG's, TBC'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. At the same time, the Support Ratings and SRFs are constrained by the potentially limited ability of the authorities to provide support. In Fitch's view, the authorities would likely have a high propensity to support BoG and TBC in light of the banks' systemic importance, 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. Support for TBC is also possible from its IFI shareholders, which together hold a 56% stake in the bank. However, some doubt remains over the readiness and ability of the IFI shareholders to provide coordinated and timely support in case of need, particularly given their potential exit from the shareholder structure, starting with the bank's pending IPO. KEY RATING DRIVERS: PCBG'S IDRS AND SUPPORT RATING 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'. RATING SENSITIVITIES: VRS OF ALL BANKS An upgrade of the VRs of BoG, TBC and PCBG, and hence of the Long-term IDRs of BoG and TBC, would be contingent on a sovereign upgrade, a favourable economic backdrop, a marked reduction in FC lending and still strong bank financial metrics. This would be manifested in continued sound asset quality ratios, notwithstanding increasing competition and the banks' fairly rapid planned growth. LB's VR, and hence its Long-term IDR, could be upgraded in case of a strengthening of the bank's capitalisation. Both LB's and BB's VRs, and hence also their IDRs, woud benefit from a proven track record in managing the credit risks associated with fairly rapid growth, an extended track record of profitable growth and, in the case of BB, also a strengthening of the bank's franchise. Conversely, a marked deterioration in the operating environment 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 considers it indicative of a weakening of underwriting standards. RATING SENSITIVITIES: BOG's, TBC's AND LB's SUPPORT RATINGS AND SRFS 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. The rating actions are as follows: Bank of Georgia Long-term foreign and local currency IDRs: affirmed at 'BB-'; Outlook Stable Short-term foreign and local currency IDRs: affirmed at 'B' Viability Rating: affirmed at 'bb-' Support Rating: affirmed at 4 Support Rating Floor: affirmed at 'B' Senior unsecured debt: affirmed at 'BB-' TBC Bank Long-term foreign currency IDR: affirmed at 'BB-'; Outlook Stable Short-term foreign currency IDR: affirmed at 'B' Viability Rating: affirmed at 'bb-' Support Rating: affirmed at '4' Support Rating Floor: affirmed at 'B' ProCredit Bank (Georgia) Long-term foreign and local currency IDRs: affirmed at 'BB'; Outlook Stable Short-term foreign and local currency IDRs: affirmed at 'B' Viability Rating: affirmed at 'bb-' Support Rating: affirmed at '3' JSC Liberty Bank Long-term foreign currency IDR affirmed at 'B'; Outlook Stable Short-term foreign currency IDR affirmed at 'B' Viability Rating: affirmed at 'b' Support Rating: affirmed at '4' Support Rating Floor: affirmed at 'B' JSC Basisbank Long-term foreign currency IDR affirmed at 'B'; Outlook Stable Short-term foreign currency IDR affirmed at 'B' Viability Rating: affirmed at 'b' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No floor' Contact: Primary Analyst Lindsey Liddell Director +44 203 530 1008 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Evgeny Konovalov Associate Director +7 495 956 9932 Committee Chairperson Janine Dow Senior Director +44 203 530 1464 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com; Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, Global Financial Institutions Rating Criteria, dated 31 January 2014 are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here 2014 Outlook: CIS and Georgian Banks here Country Ceilings here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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