Fitch Ratings has revised the Outlooks on Bank of Georgia’s (BoG) and TBC Bank’s (TBC) Long-Term Issuer Default Ratings (IDRs) to Positive from Stable and affirmed the IDRs at ‘BB-‘. Fitch has affirmed Liberty Bank’s (LB) Long-Term IDR at ‘B+’ with a Stable Outlook and ProCredit Bank’s Georgia (PCBG) Long-Term IDR at ‘BB’ with a Positive Outlook.
Fitch has also revised the Outlook on JSC BGEO Group’s (BGEO, a Georgia-based holding company for BoG) to Positive from Stable and affirmed the Long-Term IDR at ‘BB-‘. Fitch has simultaneously withdrawn the ratings for commercial reasons and will no longer provide ratings and analytical coverage for BGEO.
A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
IDRS, SUPPORT RATINGS, SUPPORT RATING FLOORs, SENIOR UNSECURED DEBT
The IDRs of BoG, TBC and LB are driven by the banks’ intrinsic strength as reflected by their Viability Ratings (VRs). BOG’s senior unsecured debt is rated in line with its IDR. The revision of the Outlooks on BoG and TBC to Positive from Stable reflects Fitch’s view that these banks’ risk profiles and financial metrics should benefit from the improving operating environment in Georgia.
The affirmation of BoG’s, TBC’s and LB’s Support Ratings at ‘4’and Support Rating Floors (SRFs) at ‘B’ reflects Fitch’s view of the limited probability of support being available from the Georgian authorities, in case of need. In our view, the authorities would likely have a high propensity to support these banks in light of their high systemic importance (BOG/TBC) and extensive branch network and role in distributing pensions and benefits (Liberty). However, the ability to provide support, especially in foreign currency, may be constrained given the banks’ large foreign currency liabilities (USD6 billion at end-2017) relative to sovereign FX reserves (USD3.2 billion).
PCBG’s IDRs are driven by the potential support it may receive from its sole shareholder, ProCredit Holding AG & Co. KGaA (PCH, BBB/Stable) in case of need. The affirmation of PGBG’s ‘BB’ Long-Term IDRs at one notch above the sovereign rating, and its Support Rating at ‘3’, reflects Fitch’s view that PCH’s propensity to provide support to the subsidiary is high, but PCBG’s ability to receive and utilise this support could be restricted by transfer and convertibility risks, as reflected by Georgia’s Country Ceiling of ‘BB’. The Positive Outlook on PCBG reflects the potential for the Country Ceiling to go up, given the Positive Outlook on Georgia’s ‘BB-‘ sovereign rating.
The affirmations of the banks’ ‘bb-‘ (BoG, TBC, PCBG) and ‘b+’ (LB) VRs consider their reasonable financial metrics, stable funding profiles and adequate capitalisation, which provide resilience in case of potential recurring pressures on asset quality and performance.
The VRs of BoG and TBC also reflect their well-established and dominant domestic franchises (end-2017 market shares by assets: 34% for BoG and 36% for TBC) and significant pricing power, which underpins the banks’ sustainable and healthy profitability through the recent cycle. PCBG’s VR also factors in the bank’s well-developed franchise in its SME niche and fairly conservative risk management, resulting from its close integration with the parent bank. The VRs of BoG, TBC and PCBG also factor in the banks’ high, albeit decreasing, balance sheet dollarisation and certain concentrations in loan and deposits (BoG, TBC).
LB’s lower VR captures the bank’s moderate market share (5%), large exposure to the potentially highly volatile retail lending segment and some uncertainty regarding future strategy and corporate governance following the change of control in 2017.
We expect that Georgia’s favourable macro trends (Fitch forecasts GDP to expand by 4.6% in 2018 and 4.9% in 2019) will support the banks’ asset quality and performance in 2018-2019. Stricter regulatory standards for retail lending and higher solvency and liquidity requirements (linked to the implementation of Basel III standards in Georgia) should contribute to the quality of new loan origination and banks’ maintenance of adequate funding and capital metrics during the period of dynamic growth.
BoG’s non-performing loans (NPLs, loans overdue for more than 90 days) stood at 3.6% of loans at end-2017 (preliminary data, as the end-2017 IFRS report has not yet been published), down from 4.4% at end-2016. Reserve coverage was an adequate 99% of NPLs, while restructured exposures added a further 1% of loans. The unreserved portion of problem loans (NPLs and restructured) made up a low 6% of the bank’s Fitch Core Capital (FCC). The NPL origination ratio (calculated as the growth in NPLs plus write-offs divided by average performing loans in the period) decreased to 2.4% in 2017 from 4.6% in 2016.
Loan concentrations are significant, albeit somewhat below some regional peers, both by name (BoG’s exposures to the 25 largest borrowers accounted for 19% of gross loans or 104% of FCC) and economic sector, including cyclical construction and real estate (around 10% of loans or 57% FCC). Retail loans contributed around 48% of the portfolio, nearly half of which was unsecured (equal to a sizeable 87% of FCC). FX-lending levels were still high at 58% of loans at end-2017, albeit down from 68% at end-2016, mainly due to a reduction in the retail sector.
Profitability remains sound, based on a stable net interest margin (7%), helped by continuing growth (12% on average in 2015-2017, adjusted for FX-effects) and low deposit rates, and good cost efficiency (cost-to-income ratio of 38% in 2017). Moderate impairment charges (at 31% of pre-impairment profit in 2017) also support robust returns (ROAE of 25% in 2017; 2016: 23%). The dividend distribution policy remains unchanged with a 25%-40% payout ratio planned in the medium term.
BoG’s FCC ratio stood at a solid 15% at end-2017 and end-2016, as the bank’s retained earnings were sufficient to offset growth. Regulatory capitalisation was tighter, reflecting more conservative risk weights: BoG’s Tier 1 and total capital ratios under the Basel III framework were 12.4% and 17.9%, respectively, (compared with BoG’s end-2017 regulatory capital requirements, including buffers, of 9.9% and 12.4%, respectively). The regulatory capital cushion allowed the bank to absorb additional losses equal to a moderate 4% of gross loans without breaching the regulatory minimum levels. At the same time, BoG’s pre-impairment profit, equal to a solid 7.4% of average loans, offers additional sizeable loss-absorption capacity. Fitch does not expect significant pressure on the bank’s capitalisation, as only moderate growth is planned along with reasonable earnings.
Core funding is from clients (64% of liabilities), with almost half of client funds being interest-free current accounts, supporting the low funding costs. Deposit concentrations are moderate, as the 20 largest depositors accounted for 20% of the total. Non-deposit funding mainly includes longer-term borrowings from international financial institutions (IFIs; 15% of liabilities) and short-term repo deals with the central bank and MinFin (6%). The liquidity buffer (cash, interbank placements and unpledged securities net of wholesale debt repayments in the upcoming 12 months) was moderate at around 11% of total customer accounts at end-2017, although this should be viewed in light of stable client funding and the potential to refinance maturing debt.
BGEO’s ratings reflect Fitch’s view that the default risk of the holding company (holdco) is highly correlated with that of its main operating entity, BoG. This view is based on BGEO’s reliance on dividends from BoG as the main source of cash flows.
TBC’s NPLs remained a low 1.4% of gross loans at end-2017 (end-2016: 1.3%) and were fully reserved. Total restructured loans contributed a further 3%, mostly due to previous restructurings caused by lari depreciation. The unreserved portion of problem loans (NPLs and restructured) was equal to a low 8% of FCC. The NPL origination ratio remained broadly stable at 2% in 2017 (same in 2016).
Concentration of the loan book was moderate, as the 25 largest borrowers accounted for 35% of gross corporate loans, or 86% of FCC at end-2017. Exposure to the cyclical construction and real estate sector was also moderate, at below 8% of loans or 37% FCC. Unsecured retail loans accounted for 37% of retail book (or a sizeable 89% FCC). FX-lending was also high at around 60% of loans (end-2016: 66%).
Profitability remains healthy, as margins are still wide (7% in 2017, albeit down from 8% in 2015-2016), helped by solid growth driven by organic expansion and the consolidation of Bank Republic in 1H17. Declining operating expenses relative to gross revenues (41%) and moderate impairment charges (21% of pre-impairment profit) supported ROAE at around 21% in 2017 (2016: 22%), in line with management projections. TBC plans a 25%-35% dividend payout ratio in the medium term.
TBC’s FCC ratio remained strong at 20% at end-2017, supported by earnings’ retention and moderate growth of RWAs in 2017. Regulatory capitalisation was tighter due to more conservative risk-weighting of assets and regulatory capital deductions. The regulatory Basel III Tier 1 and Total capital ratios were 13.4% and 17.5% at end-2017, respectively, (compared with TBC’s end-2017 regulatory minimums, including buffers, of 10.3% and 12.9%, respectively). The available regulatory capital cushion allowed the bank to absorb additional credit losses equal to a moderate 4% of loans without breaching the regulatory minimum levels (including buffers). Pre-impairment profit, equal to a solid 7% of average loans at end-2017, offers additional sizeable loss-absorption capacity. Fitch expects TBC’s capitalisation to remain broadly stable in the medium term due to moderate growth plans compensated by reasonable returns.
TBC’s funding is mainly sourced from customer accounts, which were equal to 71% of total liabilities at end-2017. Concentrations are moderate, as the 20 largest depositors accounted for 46% of corporate funding (20% of total customer accounts) at end-2017. Funding from IFIs made up a further 15% of liabilities, but this was quite diversified by name, while repayments were manageable (the majority are beyond 2020). Around 8% of liabilities were short-term repo funding from the Central Bank and MinFin. The buffer of liquid assets (cash, interbank assets and unpledged securities net of wholesale debt repayments in the upcoming 12 months) was a moderate 7% of total customer funding at end-2017, although this should be seen in light of stable client funding and the potential to refinance maturing debt.
NPLs stood at 10.9% at end-2017 (end-2016: 9.5%), and were fully covered by reserves. Restructured loans added a further moderate 2.5% of gross loans. The NPL origination ratio increased to 4.3% in 2017 from 3.2% in 2016, following expansion in the higher-yielding consumer finance segment, although this was well below the bank’s breakeven loss rate of 14% (defined as pre-impairment profit divided by average performing retail loans in the period). LB’s unsecured retail lending accounted for 80% of loans (3.7x FCC) at end-2017. However over 40% of the bank’s retail borrowers receive regular salaries or pension payments on their accounts with the bank, which can be used for loan repayments at the bank’s discretion. Asset quality also benefits from the low share of foreign currency loans (1.5% at end-2017).
LB’s profitability is underpinned by wide margins (around 17%) and stable commission income, which helped to absorb the moderately increased loan impairment charges (to 39% of pre-impairment profit in 2017 from 32% in 2016). ROAE remained a solid 28%, albeit slightly down from 33% in 2016. Fitch expects the bank’s margin to slightly decline in the medium term due to intensified competition from the largest banks.
Strong loan growth of 23% and dividend payments in 2017 (44% of net income for 2016) resulted in the FCC ratio declining to 17.0% at end-2017 from 18.3% at end 2016. The regulatory Basel III Tier 1 and Total capital ratios were lower, at 12.4% and 17.2% at end-2017 (compared with LB’s end-2017 regulatory minimums, including buffers, of 8.5% and 10.6%, respectively) reflecting higher asset risk weightings and regulatory capital deductions. LB’s loss absorption capacity, based on regulatory capitalisation, was a moderate 6% of gross loans at end-2017. However, this does not include the bank’s healthy pre-impairment profit, which allows for significant loss absorption, in case of need.
LB is predominantly funded by customer accounts (90% of liabilities at end-2017), largely from private individuals. These are relatively stable but rather expensive and potentially price sensitive. Liquidity risks are mitigated by a significant cushion of liquid assets covering around 45% of customer accounts.
PCBG’s NPLs declined to a low 1.2% of gross loans at end-2017 (preliminary data as the end-2017 IFRS report has not yet been published) from 1.5% at end-2016 and were fully reserved. Restructured exposures added an additional 4%, but they were mostly performing under the renegotiated terms. The NPL origination ratio remained low, at 0.9% in 2017 (2016: 1.1%). In Fitch’s view, potential risks could stem from the very high dollarisation of the loan book (80% at end-2017, compared to the market average of 57%) while the share of naturally hedged borrowers was limited. The loan book was moderately concentrated: exposure to the 25 largest clients was equal to 100% of the bank’s FCC at end-2017. Unsecured lending is limited.
PCBG’s profitability is constrained by a declining net interest margin (5.0% in 2017, down from 6.8% in 2016), as loan growth has been moderate and sector competition remains high. ROAE moderated further to 11.5% in 2017 from 13.2% a year previously, despite a material decrease in loan impairment charges (to 19% of pre-impairment profits in 2017; 2016: 33%).
Capitalisation remains solid, with the FCC ratio standing at 19% at end-2017. The regulatory Tier 1 and total capital ratios were 14.4% and 18.3% at end-2017 (compared to end-2017 minimum levels for PCBG of 11.5% and 14.5%, including buffers), allowing PCBG additionally reserving moderate 4% of gross loans. Pre-impairment profit provided additional loss absorption capacity equal to 3% of average loans. The bank’s capitalisation may become somewhat weaker in 2018-2019 as renewed loan growth will likely exceed internal capital generation. However, we expect possible capital pressures, if any, would be offset by capital support from PCH.
The funding profile is underpinned by customer accounts (54% of total liabilities at end-2017) and funding from IFIs (17%). Concentrations are moderate as the 20 largest depositors accounted for 14% of customer accounts. Related party funding constituted a significant 24% of liabilities. PCBG’s liquidity cushion (cash, unpledged securities eligible for repo and short-term bank placements, net of potential debt repayments within the next 12 months) was reasonable, covering 15% of customer accounts at the same date.