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Banking Sector’s Record Profits

According to National Bank of Georgia (NBG), in January profits of the banking sector made up 58.8 million GEL, up about three times compared to January 2016.

The banking sector’s profits in January 2016 marked 20.1 million GEL, in January 2015 – 15.8 million GEL. The Georgian banking sector registers 16 commercial banks, of which 13 ones ended the period in profits of 59.6 million GEL.

It is worth noting the banking sector’s profits are lower compared to December 2016, but the sector’s profits were always significant at the end of a year. For example, in December 2016 banks’ profits made up 112.5 million GEL, in December 2015 – 84.5 million GEL and in December 2014 – 93.2 million GEL. In the first month of the same years, the banking sector’s profits were 4-5 times lower compared to indicators of the last month. If the banking sector maintains the current paces of making profits, then the indicator is expected to exceed 200 million GEL at the end of 2017.

«The Georgian banking sector is a leader in terms of profits in Europe. Two indicators of profitability exists that are reflected in the global report on financial stability. The global report is published by International Monetary Fund (IMF). These indicators are – Return on Assets and Return on Equity. According to return on assets, Georgia’s commercial banks rank second in Europe (18th in the world), while the sector ranks third in Europe in terms of return on equity.

Extreme upturn in profitability of Georgia-based commercial banks started in 2013, when the sector’s profits increased by 2.5 times compared to 2012. The growth was the result of not increased crediting of business sector, but excessive upturn in crediting of retail sector and household economies. This issue was explored by Development Bank of Germany and the Finances and Management School of Frankfurt. The document reads: «Georgian banking sector makes slight contribution to economic growth. It finances consumption and forgets small and medium business sectors, especially in non-urban settlements». Development Bank of Germany makes focus on high interest rates on GEL-denominated loans and states that in Georgia «loan margin in the domestic currency is twice higher than in Ukraine, and makes up 265% of the margin in Armenia (June 2005)», economic expert Mikheil Dundua said.

It should be noted that several factors precondition a growth in profits in the banking sector and a record upturn in T-bill is one of these factors. Since 2012 internal debts increased considerably, after the state budget borrowed financial resources from commercial banks through T-bills instrument (2.185 billion as of January 31).

«Over the past years generation of revenues at the expense of budget deficit has become an ordinary business for commercial banks. Acquisition of high-rate securities from National Bank at comparatively low interest rates in the form of refinancing loans (the so-called budget monetary financing scheme) and placement of them into their own assets plays considerable role in growth in profits of commercial banks», economic expert David Aslanishvili said.

It should be noted that over the past years Georgian economic growth narrows year to year. Despite this, the banking sector’s profits grow at cosmic paces. Economists frequently note that the banking sector is en engine of economy, but this cannot be said in relation to the Georgian banking sector. Enormous profits of the Georgian banking sector is the result of GEL devaluation, on the one hand, because a major part of loans are denominated in foreign currency. Consequently, commercial banks have received additional revenues after GEL depreciation. At the same time, the so-called Loan Larization Program is a subsidization of commercial banks and nothing more. In the event of conversion of loans, clients have to pay higher rates for credits, even more so amid GEL rate depreciation loan service conditions have worsened. Moreover, budget allocations for subsidizing loans by 20 Tetri  directly flow to commercial banks and creditors receive more benefits from it than borrowers. As a result, the banking sector’s profits grow, while economic growth narrows year to year.