The banking sector of Georgia is small in comparison with that of other eastern European countries and it has its weaknesses. Its two main problems are a high level of dollarisation – too many loans and deposits denominated in US dollars – and unsustainable lending to non-creditworthy individuals.
On the other hand, its banks have a relatively low level of non-performing loans (NPLs). They proved themselves resilient in the 2014-16 regional currency crisis and are now cashing in on the country’s rapid economic growth. Furthermore, its two biggest banks, TBC Bank (with 38% of total sector assets) and Bank of Georgia (with 35%), both listed on the London Stock Exchange, are performing strongly, with the former expanding into foreign markets.
A stable outlook
In April, Fitch reaffirmed the long-term issuer default ratings (IDRs) for both of Georgia's big two banks at BB-. It also reaffirmed the long-term IDRs of the other two banks it rates: Liberty Bank at B+, and Pro-Credit Bank (Georgia) at BB+. Fitch says it will not rate the four banks any higher because of concerns about the “still significant risks associated with rapid loan growth and sizeable foreign currency lending”, particularly in dollars.
As for the sovereign rating, in March 2019 Fitch upgraded the long-term IDR from BB- to BB, with a 'stable' outlook. “Economic growth remained robust [in 2018], the currency was relatively stable, and the National Bank of Georgia [NBG, the central bank] built reserves despite a severe economic shock in the country’s main trading partners,” said Fitch. “This reflects a diverse source of current account inflows, a floating exchange rate and prudent fiscal and monetary policy, underpinned by steadfast adherence to its International Monetary Fund [IMF] programme.”
Papuna Lezhava, vice-governor of the NBG, says: “We enjoyed healthy growth in gross domestic product [GDP] in 2018r of 4.7%, making us one of the top performers in the region.” In 2019 NBG expects GDP to be about the same again, with inflation stable at around its target of 3%.
A place to do business
Georgia, with a population of 3.7 million in an area of 70,000 square kilometres, is on the eastern coast of the Black Sea, with Russia to the north, and Turkey, Armenia and Azerbaijan to the south. It gained its independence from the USSR in 1991, after which followed a decade of civil conflicts and a war with Russia in 2008.
Today it is a unitary parliamentary republic with democratic elections and a vibrant, forward-looking business sector. In the World Bank’s latest Doing Business rankings, Georgia is sixth. It is beaten only by countries such as New Zealand (first) and Singapore (second) and is above Norway (seventh), US (eighth) and UK (ninth).
Christine Lagarde, managing director of the IMF, visited the capital Tbilisi in May, and, in her address, was complimentary about the country’s economic growth over the past 20 years and recent policies to boost economic resilience. But she noted that the economy remained vulnerable to shocks, such as escalating trade tensions and financial market volatility.
“There is room to further reduce the amount of loans and deposits denominated in US dollars,” she said, referring to one of the recommendations in the IMF’s fourth review of the country under the extended fund facility. “Why is this important? Because dollarisation has left many companies and households vulnerable to sharp exchange rate movements that could undermine their financial health,” she added.
Tackling weaknesses
Nikoloz Gagua, Georgia’s deputy finance minister, says that recommendation, and the IMF’s other recommendations, will be acted upon. “The IMF programme has been successful, as it is pretty much a home-grown programme based on government policies,” he says. For the financial sector, the Ministry of Finance (MoF) has two main priorities: de-dollarisation and to encourage responsible lending.
“De-dollarisation was identified by us as one of the main vulnerabilities of the economy and we are following a robust strategy to reduce it – it is still high, but going down,” says Mr Gagua. “We also call it 'larisation', after our currency. We have increased the limit for mandatory lari borrowing, effective from January 2019. For loans below 200,000 lari [$73,000], the loan must be in lari.”
As for encouraging responsible lending practices, regulations were introduced in Georgia in 2018 to ensure that borrowers have enough income to repay their bank loans. “We had 700,000 ‘blacklisted’ people – borrowers with a credit default history. This is 40% of the working age population and a poor credit outlook limited their access to loans,” says Mr Gagua. “These regulations will address this problem.”
The level of NPLs in Georgia is now low and the banking sector is healthy, due in part to “the strengths and independence” of the financial regulator, the central bank, says Mr Gagua. “We weathered the regional currency shock of 2014 to 2016, caused by the global appreciation of the US dollar.”
He accepts, though, that the sector is too concentrated on TBC Bank and Bank of Georgia, each of which have about a 35% share of the market. The country’s other 13 banks share the remaining 30%. “This level of concentration is a risk. But on the other hand, those two banks are strong and listed on the London Stock Exchange, and are looking to expand in the region,” says Mr Gagua.
The right framework
Georgia has a Financial Stability Committee made up of representatives from the MoF, the NBG and the Deposit Insurance System. The latter was established in January 2018 “as an additional pillar of financial safety”, according to Mr Gagua.
The MoF and NBG are also working on a new bank resolution framework similar to those that operate in EU countries, where the authorities will intervene to resolve a problem bank in an orderly and timely way, reducing risks to depositors, the financial system and taxpayers and with the costs borne by investors and creditors.
In March 2019, the president of the European Bank for Reconstruction and Development visited Georgia’s finance ministry. “We discussed several big projects, including the Anaklia deep-sea port, which will boost the logistic potential of the country,” says Mr Gagua.
TBC expansion
TBC Bank is Georgia’s biggest bank, a subsidiary of the TBC Group, which has been listed on the London Stock Exchange since 2014. It has a 39% market share of Georgia’s loans and a 41% share of its deposits – which explains why it is pursuing an ambitious growth strategy in other countries, notably near-neighbours Uzbekistan and Azerbaijan.
In April, TBC Bank acquired 51% of the Uzbek payment platform Payme, which has 1.3 million customers. “The acquisition is another important step in our planned expansion into Uzbekistan,” says Vakhtang Butskhrikidze, TBC Bank’s CEO. TBC also plans to build a greenfield bank in Uzbekistan and has created a next-generation smart branch as proof of concept. As for Azerbaijan, TBC merged its subsidiary there, TBC Kredit, with Nikoil Bank in January.
“We want to expand in these two countries, where the combined population is 40 million, 10 times bigger than ours, and create value for investors,” says Mr Butskhrikidze.
Meanwhile, back home, TBC is conscious of the risk of smaller, nimbler banks eating into its market share. However, Mr Butskhrikidze is confident of defending his bank’s pole position. He says: “We provide a good customer experience, we are customer centric and we have advanced digital technology.”
Indeed, TBC is expanding into other financial sectors. “We are going more horizontal,” says Mr Butskhrikidze. “Two years ago, we entered the insurance sector and today we have the largest insurance business in the country. We are becoming active in investment banking and our investment banking business is the largest in Georgia. We are the largest leasing corporation in the country.”
Earlier in 2019, Mr Butskhrikidze won the 'Special Award for Responsible Capitalism', from First, an international affairs organisation. “It was a great achievement, not personally for me but for the 7000 employees who are doing a great job for TBC,” he says. “We have proved we can do a lot of things for financial inclusion and our country.”
The regulator’s perspective
In January 2019, the NBG fined TBC Bank La1m ($360,000) after an investigation into transactions in 2007 and 2008 involving chairman Mamuka Khazaradze and deputy chairman Badri Japaridze. In February NBG ordered the bank to remove the two men from their positions. They duly resigned from the board of TBC Bank in April, but remain as chairman and deputy chairman of TBC Group, the London-quoted parent.
“All outstanding issues in relation to this case have been resolved between NBG and TBC Bank,” the NBG's Mr Lezhava, who is responsible for financial sector regulation, told The Banker.
“We continue with the normal supervision of TBC Bank,” he adds. “It is a sound institution. It complies with all relevant rules set by NBG. The changes in corporate governance have improved the bank. The new chairman of the bank has been selected. He has a strong background. The best measure of this is the share price.”
TBC’s share price had its ups and downs in January and February but between mid-February and mid-May the price increased by 24%. This compares with only a 0.7% increase in the share price of its main rival, Bank of Georgia; a 2.5% increase in the FTSE-250; and close to 0% in the Europe, the Middle East and Africa bank composite index.
“A positive thing about our history is that our banks have become resilient and used to crises,” says Mr Lezhava. Also important are the country’s “tight” supervisory policies and rules, he adds. “Our capital requirements are in line with Basel III in terms of methodology, but much stricter. The banking sector is well capitalised with the Tier 1 equity capital ratio standing at 14%. We have tight rules on liquidity calculated on the Basel metrics – our liquidity coverage ratio is 200% and net stable funding ratio is 135%.
“Operational profitably is strong. In 2018, the return on equity was around 20%, and the return on assets [ratio was] 2.5. Efficiency is improving. We have gone from a cost-to-income ratio of about 60% to about 40%.”
The shareholding structure of the Georgian banking sector is something “we can boast about”, according to Mr Lezhava. There is no public money in the banks – it is all from the private sector and mostly foreign and diversified.
However, banks’ long-term funding is in US dollars, their loans are dollars and borrowers’ payments are in dollars, so if the dollar appreciates against the local currency, borrowers must find more lari to keep up their payments. “We are taking decisive measures and dollarisation has significantly reduced over the past 10 years,” says Mr Lezhava.
Other widely recognised weaknesses are the underdeveloped capital markets and the concentration in the banking sector. “We would welcome foreign players to the market to create a third or maybe even fourth strong bank," says Mr Lezhava. "HSBC and Société Générale used to be here but left after the global financial crisis following their global policies of deleveraging and focusing on their core businesses.”
Action on lending
“We have the lowest rate of NPLs in the region, at about 5% to 6%,” says Alexander Dzneladze, head of the Banking Association of Georgia. “The rate is decreasing and through the new lending regulations will decrease further. The banking sector has grown a lot in the past two years because of our high GDP growth. The government and the NBG were afraid it would overheat, so introduced measures to limited loan portfolio growth.”
One of those measures, introduced in 2018, reduced the top rate a lender can charge a borrower, from 100% to 50%. Another measure, taken in January 2019 and already mentioned above, was to increase the limit on lari loans. “This is to address the high dollarisation identified by the IMF,” says Mr Dzneladze.
The new pension system introduced by the government in January, mandatory for all employed people under 40, will further contribute to the larisation process. “It will collect long-term lari which will be used by banks to lend and help develop the capital market,” says Mr Dzneladze.
Georgia has weathered numerous political, economic and financial storms over the past three decades. The country, and its banks, have remained resilient. The future looks promising, if the politicians, regulators and the bankers take the right steps and continue on the same path.
