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8.1 Bank sector overview
Fitch says Georgia’s banking sector on the mend
National Bank of Georgia has explored ways to help the local financial system
The pre-impairment profitability of Georgian banks will likely improve in the second half of 2020 and 2021, Fitch Ratings said during a recent webinar on Georgia.
Fee incomes have already started to recover amid improving economic activity, and margins will likely be supported by lower funding costs and more active lending, in particular to higher-yielding segments, such as micro, small and medium sized enterprises, the rating agency added.
In the first quarter of this year, in line with National Bank of Georgia (NBG) instructions, banks created Georgian lari (GEL) 1.1bn of loan loss provisions (about 3% of sector loans at end-March) against potential pandemic-driven future deterioration in asset quality. Coupled with weaker revenues, this resulted in a GEL0.5bn sector loss in the first half of the year, corresponding to an annualised return on equity of minus 18%.
At end-June, the Georgian banking sector’s non-performing loans (NPL), as defined by the NBG, stood at 5.5% of the sector portfolio, with the provisions coverage ratio of 130%.
Sizeable one-off reserves resulted, however, in weaker capital metrics: the sector Tier 1 capital adequacy ratio declined to 12.8% at the end of June, from 14.6% at end-2019. But owing to relaxed regulatory requirements, headroom above the reduced minimum levels remained comfortable.
Fitch had previously revised the outlooks on most of the Georgian banks it monitors, namely TBC Bank (TBC, BB-), Bank of Georgia (BOG, BB-), Liberty Bank (LB, B+), Terabank (Tera, B+) and Basisbank (Basis, B+) to negative from stable, while affirming their Long-Term Issuer Default Ratings (IDRs).
The National Bank of Georgia (NBG) together with local commercial banks have explored ways to help the financial system, including by cutting required reserve ratios for foreign currency liabilities. The NBG has presented a number of initiatives it is implementing with the aim of helping the financial sector face problems caused by the coronavirus crisis, major Georgia-based lender TBC Bank a nnounced.
Considering the current level of uncertainty, both credit and liquidity risks have increased, which has been reflected in the growth of market interest rates.
To ensure that liquidity risk does not limit credit to the economy, the NBG introduced additional instruments to provide liquidity, through swap operations for both commercial banks and microfinance organisations.
The NBG took steps to defend liquidity in the market, put at risk by potential losses, by temporarily easing capital requirements. In the process, it made available to the banks some GEL1.6bn—more than the loan loss provisions set up so far for adverse impacts of the COVID-19 outbreak.
The easing of capital requirements for the banks involves the abolition of the capital conservation buffer (2.5% of weighted assets at risk) and the elimination of part of the Pillar 2 buffer (2/3 of the non-hedged credit risk buffer). As a result of these decisions made by the central bank, GEL1.6bn
33 GEORGIA Country Report November 2020 www.intellinews.com
