Page 27 - GEORptDec17

sector lending.
The banks are well capitalised, Fitch writes, with the capital adequacy ratio at end-June at a healthy 16.1%, sufficient to absorb moderate losses if asset quality comes under pressure. Sector profitability improved in the first half-year to a 22% annualised return on average equity, up from 18% a year earlier.
However, the high dollarisation rates - 58% of lending was in dollars at end-June - continue to pose a risk for the sector. The central bank's recent efforts to de-dollarise the sector should lead to a moderate decrease in the dollarisation rate.
Meanwhile, driven by retail lending, lending increased by 11% in 2016 and 17% in H1/2017. Ratios of consumer loans that are too high could also pose a risk for the sector looking ahead, particularly in the event of defaults on foreign currency-denominated loans.
8.1.1 Earnings
The Georgian banking sector is dominated by TBC Bank and Bank of Georgia, two lenders that are listed on the London Stock Exchange and that, together, account for two thirds of total banking assets. In total, 17 commercial banks operate in the country, after TBC Bank merged with Bank Republic, the country's fifth largest lender, in October. The sector has performed well in recent years, but financial services penetration in the market remains modest.
For the Q1 of 2017, the banking system had total income (interest income plus fee and commission income) of GEL 0.7 billion, which exceeded the total income for the same period of 2016 by 14.7%. The net profit of the banks for the period was GEL 0.3 billion, which is 134.6% higher compared with the same period of 2016, according to KPMG.
8.1.2 Loans
The Georgian government's plan to subsidise the voluntary conversion of dollar-denominated mortgages into local currency at preferential rates is credit positive for banks, ratings agency Moody's wrote in a report on December 5.
Dollar-denominated mortgages of up to GEL100,000 ($39,000) that were issued before January 2015 and are collateralised by real estate would qualify for the preferential conversion program, Prime Minister Giorgi Kvirikashvili said on November 29. The rate of the exchange for the conversion would be the official exchange rate on the day of conversion minus 20 tetri (100 tetri are equal to one lari). The program would run from January 1 until the end of February and would be administered by the central bank, which would also cover the difference.
Moody's estimates that 5% of banks' portfolios are eligible for the program, and that the program will alleviate the pressure on banks' loan capital buffers and ratios posed by the recent depreciation of the lari. In early December, the lari lost some 2% of its value, falling to a record low of 2.56 to the dollar. Georgian banks' risk assets are mostly denominated in appreciating dollars, while the
27 GEORGIA Country Report December 2017 www.intellinews.com