It has been a difficult few months for the Georgian economy. Russia’s economic slowdown, fuelled by plunging oil prices, the tumbling rouble and Western sanctions over the conflict in eastern Ukraine, has sent shockwaves across all former Soviet republics. And despite its strained political relationship with Moscow, Georgia is no exception.
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Remittance flows into Georgia, more than half of which come from Russia, have been one casualty. In February 2015 they were down by 21.7% when compared to the same month a year earlier. Foreign trade is another victim – because of a fall in bilateral trade with Russia, but also because many of Georgia’s other trading partners, such as Ukraine, Azerbaijan and Armenia, have been hit by the problems in Russia. Foreign trade in Georgia dropped by 9% year on year in January and February, according to official data, with exports to Commonwealth of Independent States (CIS) countries diving by 53% by this measure.
“These are difficult times [as what] we are witnessing is a clear economic shock in all our major trading partners, and this influences our economic data,” says Giorgi Kadagidze, governor of the National Bank of Georgia (NBG). In January, gross domestic product (GDP) growth slowed to 0.5% from an unimpressive 1.6% in the fourth quarter of 2014, while the merchandise trade deficit widened to $1.67bn in the fourth quarter of 2014 from $1.45bn in the same quarter in 2013.
“At the same time [as this domestic economic shock], we are witnessing a historically strong US dollar, and huge depreciations in most of our trading partners,” says Mr Kadagidze. The lari, the Georgian currency, has fallen sharply against the US dollar in recent months, triggering widespread alarm within Georgia. As of the end of March, the exchange rate was La2.22 to the dollar, according to NBG figures. At the end of September 2014, the figure stood at La1.75 to the dollar.
The blame game
In February, former prime minister Bidzina Ivanishvili, Georgia’s wealthiest man who is still hugely influential in the country, accused the NBG’s chief of not having intervened enough to support the national currency.
Mr Kadagidze, the only high-ranking official left from the administration of former president Mikheil Saakashvili, which ended in late 2013, believes that draining the central bank’s funds is “the wrong policy decision” as it would run through its reserves, which stood at $2.61bn at the end of January.
“Spending reserves to cover up the fundamental shortages will not help at all,” says Mr Kadagidze. “It would only postpone the problem, and will end up with devaluation later on, but at the same time we will be much less healthy because we’ll have lower reserves and lower buffers to prevent shocks later on.”
Although the lari's drop against the dollar is large, the International Monetary Fund (IMF) considers it in line with what is experienced by many other countries, given the strength of the US dollar. “Indeed, most currencies in the region have depreciated by even more,” says economist Mark Griffith, who headed an IMF mission to Georgia in early March.
Safe and sound
Yet the picture is not uniformly negative. In June, Georgia signed an association and free-trade agreement with the EU, despite pressure to resist from Russia, marking the beginning of a process to deepen political and economic relations with Europe. This act seems to have brought some positive results. In January and February, exports from Georgia to the EU accounted for 33% of the country's total, compared with 22% in the same period of 2014. Meanwhile, in 2014, foreign direct investment soared by 35% on the 2013 figure to $1.27bn, the biggest inflow since 2008 according to Georgian analyst Geostat.
Moreover, Georgia’s commercial banking sector appears to be weathering the country’s macroeconomic storm well. For a start, Georgia’s central bank is one of the most conservative among the former Soviet republics, demanding the most stringent levels of capital and liquidity.
“The system is safe and stable,” says London-based David Nangle, head of equity research at Renaissance Capital, “although we are looking at a GDP slowdown in Georgia and an asset quality deterioration evolution as a result of the depreciating lari. That will affect banks’ growth and their profitability, but not their stability. Margins [among Georgia's banks] are some of the best in the region, and it is unlikely that we’ll see any fresh competition of note entering a market of this size with 4.5 million people and a GDP of $16.2bn.”
As of March 1, 2015, 20 commercial banks were operating in Georgia, including 16 foreign-controlled banks and two branches of non-resident banks, according to the NBG. The five banks with the largest assets constituted 77.7% of the total asset share in the country's banking sector. In March, total assets within Georgia's banking sector increased by 4.6% (or La1bn) and amounted to La22.2bn. Equity capital stood at La3.6bn, accounting for 16.2% of commercial banks’ total assets.
TBC Bank and Bank of Georgia are the main players in the country's banking sector, accounting for about 57% of total assets. The remaining 43% is shared among 18 entities, with Liberty Bank (7.78%), Bank Republic (5.77%) and ProCredit Bank (5.13%) leading the second-tier group.
“Growth opportunities for the two leading Georgian entities are unmatched in the Caucasus and Black Sea region,” wrote Moody’s analyst Alexios Philippides in January. He expects them “to benefit from their dominant positions in the domestic market, aided by lack of any significant competition from foreign lenders”.
TBC's expansion
TBC floated on the London Stock Exchange (LSE) in June 2014, raising $96m in new equity in a $256m initial public offering (IPO) – the largest ever Georgian placement. The bank has been transforming itself since taking on the European Bank for Reconstruction and Development as an investor in 1998 and has been expanding aggressively on the Georgian market.
Last year, its assets grew by 21.8% year on year, outpacing the Georgian banking sector’s 19.4% growth rate, bringing its market share by assets up to 26.3% (including assets held by Bank Costanta, with which TBC merged in January). By the end of 2014, the bank has increased its market share to 33.7% of total retail deposits, and accounted for 29.7% of retail loans (up by 2% year on year), while its loan book expanded by 25%.
“We have delivered all the targets promised to the market during the IPO,” says Giorgi Shagidze, TBC's chief financial officer. “Our growth was about 25%, our return on equity was 18.4%, above the target of 18%, and our interest margins were very strong, and our decreased cost-to-income ratio led to robust profitability.”
Bank of Georgia, the country’s largest bank with a 36% market share in assets and which floated on the LSE in 2012, is TBC’s direct competitor. Despite this rivalry, the two have markedly different strategies. Bank of Georgia has diversified in areas such as real estate and healthcare, while TBC has remained very much a classic universal bank.
Spin-off call
On October 31, 2014, the NBG called on Georgian banks to spin off their non-banking businesses and, as of December 2015, commercial banks operating in the market will no longer be allowed to own companies offering non-bank products and services.
The decision did not affect TBC as “historically our strategy focuses on core banking”, says Mr Shagidze, while Bank of Georgia Holding, the holding company of Bank of Georgia, announced a change in strategy to adapt to the new regulation. “[We are] spinning out the bank subsidiaries,” says Bank of Georgia's CEO, Irakli Gilauri. “I understand the NBG doesn’t want to regulate healthcare and real estate, so we’ll split the group in two – banking and investment business, which will go under the holding company. That doesn’t change anything for our shareholders but does change things for the regulators.”
Bank of Georgia Holding reported a record 2014 full-year profit of La240.8m, up by 15% on 2013, supported by record revenue of La605.6m and earnings per share of La6.85, up by 15.5%. In 2014, the group’s healthcare business, which includes healthcare services and insurance, strengthened its leading position in these fields in the country. It enjoys a market share of 22% in terms of hospital beds, up from 14.3% in 2013. Its net healthcare revenue increased 109.6% year on year, to La46.9m.
Mr Gilauri says that the IPO of the healthcare business is Bank of Georgia Holding's goal for 2015, with London the most likely destination as “we know the market and we are known”.
In December, Bank of Georgia acquired Ukrainian PrivatBank’s subsidiary in Georgia for $51m, which has "enhanced our position in the significantly profitable retail franchise”, according to Mr Gilauri. PrivatBank’s market shares in retail loans and retail deposits in Georgia stood at 4.9% and 2.6% at the end of 2014. Bank of Georgia Holding also acquired a minority stake in Global Utilities, which owns water and wastewater service providers in three Georgian cities, including in the capital Tbilisi.
Micro moves
Despite the list of successes at the top end of the scale, getting onto the banking ladder in Georgia is not easy in a country where the average monthly nominal salary in 2013 was La773, the equivalent of about $350, according to Geostat. However, microfinance organisations (MFOs) are going some way towards bridging this gap.
Indeed, microfinance is one of the fastest growing sectors of the Georgian economy. According to the NBG, in 2014 the total loan portfolio of the sector amounted to La852m, up from La620.3m in 2013, with 99.4% disbursed to individuals.
Leading banks are also expanding into this area, as TBC’s acquisition in 2011 of microlending-focused institution Bank Costanta shows. The merger was finalised in January 2015.
“Microfinancing is our smallest though fastest growing segment alongside small and medium-sized enterprises [SMEs],” says Mr Shagidze at TBC. Both segments at the bank grew by 36% year on year to La273.7m and La533.9m, respectively.
“We are the largest bank [in Georgia] in SMEs,” adds Mr Shagidze. “We always raised funds from international financial institutions for specific SMEs products. In March, we signed a loan agreement with the Asian Development Bank for La100m specifically for SME banking. Also, we've been the first to offer an added value to our products, providing training and guidance to owners and employees and developing a toolkit to improve the financial know-how of the entrepreneurs."
Penetration problems
Banking penetration remains low in Georgia when compared to other countries in central and eastern Europe and the CIS, but there are signs that it is growing. Between 2003 and 2013, Georgia's loan-to-GDP ratio went from 9% to 39%, and banking sector assets are estimated to represent about 62% of GDP in the country as of December 2014. Banks have introduced new products to tap the part of the population without a bank account by increasing internet and telephone banking or bringing banking services closer to customers.
And such creative thinking brings results, as Liberty Bank has been experiencing. “Liberty Express [operates out of] mini-vans to provide a full spectrum of banking services to people in remote and mountainous areas,” says Liberty Bank CEO George Arveladze. “The numbers show that the formula has worked: we started in 2012 with 12 vehicles and ended 2104 with a fleet of 112 vehicles serving about 1200 villages twice a week.”
Liberty Bank, whose net income and net loan book grew year on year by a respective 26% and 14.7% in 2014, also has the largest network of stationary service outlets in the country, with 512.
To support customers caught by the sharp devaluation of the lari, Georgia’s banks have promised to come to the rescue of borrowers who have loans denominated in other currencies by extending the maturity of that debt.
But Mr Gilauri at Bank of Georgia believes that the lari depreciation should not limit the banks’ penetration. “We are experiencing a repacing of our economy. We needed to rebase our currency to remain competitive in the region,” he says. “In 2015 we need to stay disciplined and not make waves, but in 2016 [the economy] will pick up.”
