Fixed Income Analysis /
Georgia

Georgian banks: Battening down the hatches

  • Measures put in place by the National Bank of Georgia should help ease pressures faced by the banks

  • More intervention is possible. We do not expect Bank of Georgia or TBC Bank to fall short of regulatory requirements

  • The outlook is challenging, but both lenders have significant capital and liquidity buffers in place

Tolu Alamutu
Tolu Alamutu

Credit Research Analyst, Banks

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Tellimer Research
8 April 2020
Published byTellimer Research

We are keeping our Buy recommendations on Bank of Georgia’s (GEBGG) senior and subordinated securities for now. We are also assigning Hold recommendations to the TBC Bank (TBCBGE) senior and subordinated bonds. Bank of Georgia has a much longer track record in the Eurobond market. Capital ratios at TBC Bank were better than at its largest peer at end-19. However, the FY 19 ROE at Bank of Georgia exceeded TBC Bank’s, the NPL ratio was lower and Bank of Georgia’s liquidity coverage ratio (LCR) is higher than at TBC Bank. Having said this, we think fundamentals at both banks are generally quite strong.

Georgian banks in context: Mid z-spreads (bps)

Source: Bloomberg. Indicative levels only.

We estimate that the sum of reserves and shareholders’ equity covers almost 20% and 23% of gross loans at Bank of Georgia and TBC Bank, respectively. These are significant buffers, in our view. We believe steps taken by the regulator and the banks are positive. Less-stringent capital rules may prove key in these lenders’ battle against the impact of the COVID-19 pandemic. Changes have enabled these banks to book additional general provisions without breaching regulatory requirements. Added to this, we note that Bank of Georgia very recently drew down a second tranche of a subordinated syndicated loan, boosting capital.

Near-term maturities look manageable and we note that both banks have disclosed liquidity coverage ratios of over 100%. TBC Bank continues to secure new financing, even in the current market conditions. We expect Bank of Georgia to repay (rather than replace) a GEL-denominated Eurobond that matures in June this year. The relatively high LCR may explain why Bank of Georgia has decided against securing additional funding at the current time.

Georgian bank bonds: Mid z-spreads (bps)

Source: Bloomberg

Georgian bank bonds: YTM/YTP (%)

Source: Bloomberg

Regulatory changes support banks’ capital and liquidity

On 1 April, the National Bank of Georgia (NBG) published details of a ‘temporary oversight plan’ for Georgian lenders. Bank of Georgia also released details of this plan, which will primarily seek to reduce existing capital and liquidity requirements.

On capital, the capital conservation buffer (2.5% of risk-weighted-assets) is to be abolished, and the Pillar 2 currency-induced credit risk buffer is to be reduced by two-thirds. A concentration risk buffer will no longer be phased in from end-Q1 20, and other Pillar 2 requirements may be fully or partially removed. The NBG stated that banks "should not make dividend payments, stock repurchases, equity investments, increased management bonuses, or other such payments". Our understanding is that this does not apply to payments on perpetual securities, and the banks have emphasised to us that coupon payment skips are not under discussion.

On liquidity, although no significant changes have been made yet, the NBG may revise foreign and local currency liquidity coverage ratio requirements, as well as mandatory reserve requirements and eligibility criteria for repo securities. The NBG notes that it has "adequate foreign reserves" in addition to expected inflows from IFIs. According to TBC, government estimates suggest US$900mn-1.2bn and US$400mn may be disbursed to the government and NBG, respectively. This equates to 7-9% of Georgia’s GDP.

Added to this, stress test results are now to be submitted at the end of May, and the NBG will not impose sanctions on lenders that breach limits due to "external factors". Apart from anti-money laundering reviews, onsite audits have been suspended and most new regulatory requirements will not be enacted until September.

The regulator emphasised that the banking sector is healthy and stated that the sector has "sufficient buffers of capital and liquidity". The NBG also noted that the proportion of impaired loans is low, and profitability has been stable. Further, dollarisation has decreased as a result of restrictions put in place prior to the Covid-19 pandemic. This should put both lenders and borrowers in a better position to navigate current challenges.

The NBG disclosures came after various measures announced by the Georgian government in March, including increased VAT refunds and increased government capital expenditure. The government has also deferred income taxes in the tourism industry for four months and will subsidise interest payments for small and medium-sized hotels for six months. We also note that Georgia has imposed a nationwide quarantine and banned gatherings of more than three people since 31 March. Residents over 70 may only leave their homes for limited reasons. There is also a curfew in place.

Like other emerging market currencies, the GEL has come under some pressure, as the chart that follows shows. However, news of an extended fund facility arrangement from the IMF appears to have helped reverse some of this currency weakness, as has intervention by the NBG. This intervention suggests little appetite for a much weaker local currency.

GEL vs. USD exchange rate

Source: Bloomberg

The table that follows shows key 2019 figures for Bank of Georgia and TBC Bank. Below, we highlight key aspects of these banks’ results, as well as our takeaways from the many disclosures from both lenders.

Key 2019 figures

GELmn / %Bank of GeorgiaTBC Bank
Total assets18,56918,410
Customer loans11,93112,439
Customer deposits10,07710,049
Total equity2,1512,648



Operating income1,1101,128
Pre-provision profit691678
Net income500540



Return on equity26.1%22.4%
Return on assets3.1%3.2%
Net interest margin5.6%5.6%
Cost/income ratio38.9%37.8%
Non-performing loans (NPL) ratio2.1%2.7%
Reserve coverage80.9%91.1%
Common equity Tier 1 ratio11.5%12.0%
Tier 1 ratio13.6%14.6%
Total capital ratio18.1%19.1%

Source: Company statements

Bank of Georgia

  • Bank of Georgia reported net income of close to GEL500mn for FY 19, 32% higher than in the previous year. The ROE was just over 26%. Reduced one-off costs contributed to the yoy improvement in the bottom line, as did solid core revenues and a decline in risk costs. The NPL ratio improved yoy, and so did the Tier 1 and total capital ratios.
  • The bank has said it will keep its FY 20 targets of ROE of at least 20% and loan growth of 15% under review. GEBGG management also stated that early 2020 performance had been "consistent with, or slightly better than its existing guidance and strategic targets". Bank of Georgia has introduced a three-month grace period on all retail loans and potential restructuring for companies operating in the tourism sector. We understand that borrowers have to opt out of the payment holiday scheme, and around two-thirds of retail borrowers are expected to remain in the scheme. Importantly, interest will continue to accrue on these loans during the three-month payment holiday.
  • On capital, at end-February, the CET1, Tier 1 and total capital ratios were 12.2%, 14.2% and 18.6%, respectively. These ratios are much higher than the minimums that now apply (6.9%, 8.7% and 13.3%). We estimate that a US$55mn second tranche of a subordinated Tier 2 syndicated loan (drawn down on 2 April) could have added more than 1.1ppt to the total capital ratio at the end of last year. Importantly, further GEL depreciation in March, and the regulator’s provisioning requirements, will likely mean capital ratios are now lower. Bank of Georgia notes that a 10% decline in the local currency takes 50-60bps off its Tier 1 and total capital ratios. We expect the suspension of dividend payments to help conserve capital.
  • On liquidity, the bank disclosed liquidity coverage ratio of almost 134% and net stable funding ratio of 131% at the end of February. These ratios are higher than at TBC Bank. Bank of Georgia has just two USD-denominated Eurobonds outstanding – a perp, and a US$350mn senior bond, which matures in 2023. The bank also has a GEL500mn Eurobond due on 1 June. Given current market conditions, we expect this to be repaid in full, rather than replaced.
  • On asset quality, the lender disclosed GEL800mn exposures to the tourism sector, which Bank of Georgia states is "fully secured". This equates to 6.6% of gross loans. The lender also notes that GEL350mn of this exposure is to smaller hotels, where the government intends to cover interest payments for a period. Separately, it has been agreed with the NBG that Bank of Georgia will create a GEL400mn general provision in Q1 20 under Georgian accounting standards. According to the bank, this equates to 3.3% of loans, and it is unclear how this will be accounted for under IFRS. We note that GEL400mn equates to well over half of FY 19 IFRS pre-provision profit, but stress that it is unclear what adjustment may be made to this provisions figure under IFRS accounting.
  • S&P downgraded Georgia Capital (GEOCAP) to B from B+ on 3 April. The outlook on the new rating is stable. The downgrade reflects an increase in loan to value to "about 40%" from 25% in July last year, due to GEL weakness (20% depreciation from the peak, according to the rating agency) and a 25% decrease in the value of GEOCAP’s portfolio. GEOCAP has now reported results for 2019. The issuer previously delayed this results release (which was due on March 27) to take additional market guidelines regarding disclosure of the impact of the current pandemic into account. GEOCAP reported net income of GEL604mn, up from GEL26mn in the previous year, reflecting a one-off gain of GEL588mn due to a change in investment entity status, which means subsidiaries are accounted for at fair value rather than consolidated. Net debt was GEL493mn at end-19 and listed assets equate to 2.1x that figure. GEOCAP continues to own 19.9% of Bank of Georgia. This equates to one-quarter of GEOCAP’s portfolio, according to S&P. Although GEOCAP will not receive dividend payments from Bank of Georgia for the time being, non-listed interests are expected to continue to make such payments.

TBC Bank

  • TBC Bank reported net income of GEL540mn for FY 19, 24% higher than in the previous year reflecting good core revenues and a decline in risk costs. The ROE was 22.4%. The NPL ratio was 40bp better than at end-18 and, as at Bank of Georgia, Tier 1 and total capital ratios improved yoy.
  • Similar to Bank of Georgia, a three-month grace period has been introduced for all individual and MSME customers. TBC Bank has also offered this to corporates "most exposed to the current situation". In addition, the lender has introduced a cost-optimisation period, aimed at keeping the efficiency ratio flat this year. Management of the bank has decided to forgo annual bonuses and long-term incentive plans grants for this year.
  • On capital, TBC Bank’s estimated CET1, Tier 1 and total capital ratios at end March were 8.7%, 11.5% and 16.1%, respectively. This compares to minimum requirements of 7.0%, 8.8% and 13.4% (following changes in requirements at the NBG). We stress that TBC Bank’s latest capital ratios reflect additional general provisions required by the NBG, which total 3.1% of loans and which took 244bps off the CET1 ratio. Latest capital ratio estimates also reflect GEL depreciation, which likely drove the GEL1.4bn rise in risk-weighted assets in March (TBC Bank previously disclosed that a 10% decline in the GEL would take 50-65bps off its Tier 1 and total capital ratios). TBC has already stated that the board will not recommend a dividend, which should help conserve capital.
  • On liquidity, at end-February, TBC Bank’s liquidity coverage ratio was 109% and the net stable funding ratio was 125% at end-March. TBC has recently signed a US$50mn three-year facility and secured US$77mn in trade finance loans this month. The EIB is expected to disburse GEL50mn to TBC Bank by end-April, and the bank expects US$150mn in additional funds to be secured over the next 1-2 months. To put these figures in context, end-19 disclosures showed that TBC Bank had US$175mn in loans coming due in 2020, and US$264mn due in 2021. This lender also has two USD-denominated eurobonds outstanding, the first of which matures in June 2024.
  • On asset quality, tourism-related loans total GEL1.2bn, or 9.6% of gross loans. TBC Bank expects 40% of corporates, 63% of MSMEs and 55% of retail clients (by volume) to accept the aforementioned three-month grace period on principal and interest. These are clearly significant figures and may be somewhat concerning. However, we understand that interest will continue to accrue on these loans and borrowers will be expected to repay the full principal and interest that has accrued. We note that the NBG has "only" asked this lender to set aside provisions equivalent to 3.1% of gross loans. Further, the issuer forecasts a cost of risk of 2.0% under IFRS for the first quarter of this year. Both TBC Bank and Bank of Georgia expect to report Q1 20 results next month. We expect more details on the outlook for asset quality and other metrics then.