Share the article
twitter-iconcopy-link-iconprint-icon
share-icon

Top Black Sea banks ranking, 2014: Asset quality risks rising

Several of the members of the Organisation of the Black Sea Economic Co-operation are facing rising asset impairment, but the reasons vary.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon

The countries at the eastern end of the Organisation of the Black Sea Economic Co-operation (BSEC) region represent a very diverse set of economies, ranging from Azerbaijan’s hydrocarbon-driven growth to Ukraine’s large population and sizeable agricultural and industrial production. As a result, financial cycles are at very different stages, causing a dramatic difference in the performance of banking sectors in the five countries.

Georgia has long been an outperformer, thanks to its highly concentrated and modern banking sector. Excluding Ukraine, the top Georgian banks account for two of the top three in the region – Bank of Georgia and TBC Bank. The country’s aggregate return on capital in 2012 was 19.2%, the strongest in the region. Georgian banks punched well above their weight in terms of profitability, generating 24% of profits among the five countries from just 6% of total assets.

Georgian banks are investing for further growth, with a London listing by Bank of Georgia contributing to a rise in Tier 1 capital of more than 40%. Asset quality is also healthy, with provisions and impairments the lowest in the region in 2012, at less than 10% of total operating income. However, there are some early-warning indicators. Although still low, impairment charges jumped 62% in 2012. Loans rose by more than 20%, the fastest rate of credit growth in the region at a time when asset quality is beginning to slip. But those risks should be more than offset by the 35% rise in Tier 1 capital. Georgian banks remain the best-capitalised in the region, with a capital-to-assets ratio of 15.8% and Basel total capital ratios often well in excess of 20%.

At the other end of the scale, Ukraine is by far the largest banking market of the five, but it was struggling even before the political tumult that began in late 2013. Of the country’s 25 largest banks by Tier 1 capital, seven recorded losses in 2012, including four of the top 10. The aggregate return on capital was just 2.2%.

This poor performance is due to asset quality weakness, with impairment charges and provisions in 2012 reaching almost 40% of total operating income. Ukraine was especially hard hit by the 2008 financial crisis, as retail and corporate lending driven by foreign investment had led to a national credit bubble. The pull-back of foreign banks, exacerbated by the eurozone crisis in 2011 and local political instability, burst that bubble dramatically. In the past two years, at least eight foreign banks have sold or wound down subsidiaries in Ukraine, and the largest foreign-owned bank – Raiffeisen Aval – is now up for sale.

Unfortunately, just as the political crisis in Ukraine began last year, there were signs that the financial crisis had finally begun to bottom out. Impairments rose by just 6.4%, suggesting that Ukrainian banks might have been able to begin writing provisions back onto the balance sheet in 2013 had the political situation not deteriorated.

Top Black Sea banks

Moldova prompts concerns

Moldova may not be facing the scale of political instability seen in Ukraine, but it may still be on the brink of a banking crisis of its own. Impairments and provisions soared by 240% in 2012, to reach almost 25% of total operating income. Profits fell more than 50%, with the sector as a whole now struggling to make money. Much of this deterioration stems from difficulties at formerly state-owned Banca de Economii (BEM), which prompted concern from the International Monetary Fund (IMF). BEM accounted for almost half the rise in Moldovan impairment charges in 2012 According to auditors Grant Thornton, which qualified the bank’s 2012 accounts: “We were unable to obtain sufficient audit evidence about the estimated values of sales of pledged assets” against impaired loans. “Consequently, we were unable to determine whether any adjustments in respect of the value of allowances for impairment losses on loans were necessary.”

BEM was partially privatised in 2013 to help recapitalise the bank, taking the state’s stake down to 33.3%. However, the identity of the new majority owners has not been publicly disclosed, and the IMF warned in October 2013 that the central bank “needs to maintain a very high level of scrutiny of [BEM’s] operations until the situation is normalised and abstain from regulatory forbearance. Despite the dilution of its share, the government needs to ensure strong representation at the BEM’s board in order to safeguard public interest.”

Two of Moldova’s other largest banks, Agroindbank and Victoriabank, have also changed ownership and management in the past 18 months. The central bank initially rejected new candidates for the Agroindbank management board in late 2013. The IMF press release in October 2013 noted that “corporate governance in banks remains a concern. The [central bank] must be empowered to effectively implement the legal norms pertaining to ultimate beneficial owners and controllers in banks, in particular by enforcing adequate fit-and-proper requirements for bank owners, including the ultimate beneficial owners”. It remains to be seen how far the uncertainty in the Moldovan banking sector will be reflected in any fresh rise in impairments in 2013, or if auditors of other Moldovan banks beyond BEM will struggle to verify accounts.

Black Sea banks impairments

Azerbaijan recovers

By contrast, banks in Azerbaijan now appear to be well on the mend after the country battled through its own real estate boom and bust cycle prior to 2012. Return on capital recovered strongly in 2012, taking second place only to Georgia among the five countries. This performance was assisted by a 57% decline in impairment charges. The country’s largest bank, state-owned International Bank of Azerbaijan (IBA), was substantially recapitalised by the government, with a 42% increase in Tier 1 capital, after suffering from its exposure to the construction sector. Its profits more than doubled in 2012.

The country’s second-largest bank, Pasha, is owned by the Pashayev family, in-laws of Azerbaijan’s president, Ilham Aliyev. The bank is also expanding rapidly, with a 26% rise in Tier 1 capital in 2012, and a 37% increase in profits. Smaller private sector banks also improved their performance, with Unibank enjoying a 30% profit increase and Bank of Baku a dramatic 52% rise in pre-tax profits. The bank also doubled its Tier 1 capital in 2012, standing it in good stead for further expansion. Even so, at 9.4%, the aggregate capital-to-assets ratio in Azerbaijan is far lower than any of the other four countries. IBA remains the second most thinly capitalised bank in the entire region, with the least well capitalised bank also hailing from Azerbaijan.

Black Sea banks profits

Russian competition

Armenian banking appears to be on a steady course, with solid return on capital, and impairment charges that are low and falling. The stand-out performance in the country is from Russia’s VTB, which increased its profits by more than 120%.

Russia’s top two banks, Sberbank and VTB, have increased their domestic dominance since the financial crisis, and are using their home funding base advantage to compete more aggressively in the Black Sea region. Sberbank expanded its asset base by more than 50% in Ukraine in 2012. VTB in Georgia, although too small to make our top 25, increased its assets by almost 30%. Although the expansion drive in Ukraine could be stymied by the breakdown of relations between Russia and Ukraine, Russian banks seem likely to continue growing into the profitable Georgian and Armenian markets.

The Banker's Top Black Sea banks ranking, 2014 originally appeared in the May 2014 issue of the magazine. The full results of the ranking are available on The Banker Database. Find out more about the database, register for a free trial or subscribe today.

Was this article helpful?

Thank you for your feedback!