Bank Credit Growth at 14.7% in July
Bank credit growth came in at 14.7% YoY in July 2019, somewhat higher compared to the growth in the previous month. GEL loans picked up further to 20.3% YoY while the FX lending growth moderated slightly to 10.0% YoY, excl. the FX effect.
In terms of the segments, corporate credit strengthened to 20.1% YoY. On top of that, MSME lending also continues to expand strongly with July growth amounting to the 17.5% YoY. Even when taking into account the one-offs and the reclassification (from retail to MSME and MSME to corporate), the business lending still came somewhat above our expectations.
Retail lending decelerated slightly with the growth at 9.0% YoY in July. Mortgage lending moderated further to 25.2% YoY, while the decline of non-mortgage lending was broadly unchanged from the previous months. At the same time, some slowdown in mortgage lending growth was more evident on a monthly seasonally adjusted growth basis. This appears to be related to a weaker and more volatile GEL affecting the mortgage decision making (as housing prices are sticky in USD in the short term and the USD/GEL affects sentiments) and also the flattening of the GEL mortgage rates following the steep decline throughout the year. Furthermore, the GEL lending rates are likely to increase going forward as the GEL liquidity is normalizing; the deposit rates have already went up and the NBG rate hike is expected to address undervalued exchange rate and increasing inflation pressures; and the existing bank margins are already tighter.
Despite a weaker GEL, household debt service ratio has started to decline in the first quarter thanks to subdued growth of retail credit, especially in the higher yield non-mortgage segment and due to lower rates on mortgage lending. MFI loan growth dived deeper into the negative territory in Q2 2019 as the regulations affected this segment the most. Its’ likely that the household debt burden has eased considerably, especially that of the lowest income groups as they represent the primary borrowers from the MFIs.
As for the household debt-to-income ratio, adjusted for the FX effect it has been stable since 2018. At the same time, estimated Q2 household credit-to-GDP gap at constant exchange rate has declined, while at current exchange rate, due to a weaker GEL, it remained broadly stable.
Going forward, the chances of retail lending slowing has further increased. This may result in relevant regulatory amendments without excessive risk-taking. For example, the restriction on loans up to GEL 200,000 to be issued only in GEL may be amended to allow 50% borrowing in EUR/USD. This also should support the strengthening of undervalued GEL. Also, in our view, such amendments will not have a material impact on improving sovereign rating trend. Likewise, non-mortgage regulations may be modified, especially taking into account that the household consumption remains weak despite the stronger fiscal spending (see TBC Economic Review: insight #8).