How the Georgian banking system deals with financial crisis

Maka Ghaniashvili

Is Georgia in recession? How are the things going in banking sector? Are there liquidity problems in Georgia banking sector?

In his interview in the newspaper “Bank and finances”, Giorgi Kadagidze, the president of National Bank of Georgia declared that country is in the recession.
– Despite the fact that foreign demand reduction is presented, today domestic demand slump is more important. First of all, this is a result of reduced currency streams in the country together with world financial crisis and Russian aggression. – declared Mr. Kadagidze.
However, at the same time, National Bank’s new president declares that Georgian banking sector is able to neutralize existing problems.
Is Georgian banking system holding practicable levers of coping with challenges? What sources are Georgian banks going to use in order to survive? According to data published by the National Bank of Georgia the volume of lending by commercial banks (including loans to non-residents) increased by 1401.6 million GEL (30.6 percent) compared to the beginning of 2008 and reached 6.0 billion GEL. In the mentioned period the volume of lending has increased significantly in the spheres of Real Estate, Researches and Commercial Activity, where this indicator has increased almost 2.0 times and constituted 138.7 million GEL. The volume of lending increased 1.6 times in the sphere of Health Care and Social Services and equaled 36.1 million GEL.
Out of the total volume of lending to legal entities, the biggest share falls on trade – 47.1 percent. During the past 12 months the volume of loans provided for trade grew by 14.8 percent and reached 1.6 billion GEL.
Share of loans provided to the industrial sector constituted 20.4 percent of all loans to legal entities and amounted to 679.7 million GEL by January 1, 2009 (29.0 percent higher than in the beginning of 2008). 12.1 percent fall on construction, amounting to 301.1 million GEL (9.7 percent growth). Thus, 79.6 percent of the total volume of lending to legal entities falls only on three sectors – industry, construction and trade.
The volume of lending to individuals has grown significantly during the reporting period, by 57.8 percent and reached 2.5 billion GEL by January 1, 2009.
Due to current recession, income of the population is reducing gradually. Loan restructing hasn’t taken place in any bank and this is resulted in a continuing and permanent chain of loans. The number of poor debtors in commercial banks is increasing on a daily basis. According to the data of “Creditinfo”, more than 15000 poor debtors are blacklisted in Creditinfo database that is 8 thousand more than in January. In January 2009, the volume of bad loans in the banking sector increased by 829 thousand GEL and made up 177 million GEL. It is worth of mentioning that the same rate in August 2008 was 100 million GEL.
International rating agencies are pointing the problems of Georgian banking system also. Moody’s Investors Service has on March 5 concluded the review of the ratings of Bank of Georgia and TBC Bank as follows: Bank of Georgia : The bank’s D- bank financial strength rating (BFSR) was confirmed and its global local currency (GLC) deposit rating was downgraded to Ba3 from Ba1. The senior unsecured debt rating was also downgraded to Ba3 from Ba2. The outlook on the aforementioned ratings was changed to negative. The bank’s long-term foreign currency deposit rating was affirmed at B3 with a negative outlook. All short-term ratings were affirmed at Not-Prime. TBC: The bank’s D- bank financial strength rating (BFSR) was confirmed and its global local currency (GLC) deposit rating was downgraded to Ba3 from Ba1. The outlook on both ratings was changed to negative. The bank’s long-term foreign currency deposit rating was affirmed at B3 with a negative outlook.
Considering all the abovementioned, it is rather weird that according to the statistical data published by National Bank of Georgia the volume of non-bank deposits increased by 2.3 percent. The volume of non-bank deposits in the banking sector amounted 3 billion GEL on 1st of February 2009. This is 2.3 percent more that the rate of the same period in 2008. The volume of foreign currency deposits increased by 16.5 percent, while the volume of deposits in national currency decreased by 26.6 percent. Dollarization coefficient of the deposits increased by 9.3 percentage points in comparison with the data of February 2008 and amounted 76.2%. Considering the current situation, this tendency is illogical and sounds unlikely, as the last year population’s confidence in banks was higher than today. There is a worldwide tendency of considering gold as the hardest currency and the process of depositing is rather slowed down.
Commercial bank’s rate of interest on deposits: in the course of last year, Georgian banks are paying higher interest rates on the deposits in national currency than in foreign currency. During the mentioned period, interest per annum on time deposits amounted 9.5 percent, while this rate was 11.2% on the deposits in national currency and 9.8% on the deposits in foreign currency.
Recently, commercial banks in Georgia were actively popularizing the mentioned product within the population and were encouraging people to open deposits. Various drawings and different types of deposits and considerably increased interest rates that banks are offering to the consumers are proof to this. Actually, this is signifying deficit in deposits in Georgian banking system.
At present, VTB Bank is offering highest interest rate to the consumers. In case of opening 24-month time deposit in national currency, interest per annum amounts 17%, 12.5% in Dollar and 12% in Euro. Bank of Georgia offers to its clients 15.25% interest per annum on the deposits in national currency and 12.25% in foreign currency. Interest per annum on time deposits in TBC Bank amounts 14.5% in GEL and 11.5% in Dollar and Euro. Interest per annum on time deposits in Bank Republic is 15% in national currency and 12% in foreign currency. ProCredit Bank – 15% per annum on time deposits in GEL and 12% in Dollar and Euro. BasisBank – interest per annum on time deposits in GEL-15%, in Dollar-12% and in Euro-11.75%. People’s Bank – interest per annum on time deposits in national currency – 14% and 11% in foreign currency.
In addition to deposits opened by the population, Georgian banking system is looking forward to the funds attracted from abroad. However, the millions are flowing in Georgian banking system at the expense of sold out shares of Georgian stakeholders. If the events continue this way, one can assume that soon entire banking sector will be in hands of foreigners.
Georgian founders of VTB Bank Georgia sold their stake to Russian VTB Group for $4.999.990. The last Georgian stakeholders of VTB Bank – Anton Ingorokhva and Zaza Sioridze sold their shares in total amount of 7.13 percent. After the mentioned deal, the stake of Russian VTB Group in Georgian bank increased up to 84.7 percent.
Foreigners became the owners of shares in TBC Bank either. As the bank’s representatives declare, they are attracting $200 million investment and the agreement with EBRD (international financial corporation) and the national banks of Holland and Germany will be signed at the and of March. As a result, foreign party will become owner of 45 percent of the bank’s shares. However, control packet of shares will be in hands of bank founders. The part of international investment is intended for increase of bank capital, while the other part is assigned for the replenishment of credit resources.
People’s Bank opened a selling season in 2009. The shareholders of the bank sold their shares to EuroOil founded by Arabian group Rakin Investment. Arabian capital is already presented in another Georgian bank – KOR Standard Bank.
According to the state of 1 January 2009, Georgian banking sector was presented by twenty commercial banks. Foreign investments are presented in the authorized capital of fifteen Georgian banks and two banks – Bank Republic and HDBC are the affiliated branches of foreign banks. The number of banks with international capital has increased from 12 to 15 in comparison with the previous year. Their stake in total authorized capital of the banks is almost 86%. The major player in Georgian banking sector is European Bank for Reconstruction and Development. EBRD is purchasing shares of every big and middle-sized bank. For instance, EBRD is conducting negotiations with Cartu Bank in order to buy shares of the last. If the negotiations end successfully, EBRD will become owner of 25%+1 shares of Cartu Bank. Agreement of principle about purchasing the emitted shares was concluded in the beginning of 2009. EBRD board of directors made a decision on 10 March 2009. The total amount of emitted shares is 18,239. Nominal price of a share is 1000 GEL. The funds invested by EBRD are intended for strengthening of existing positions of the bank in Tbilisi and in regions.
EBRD is possessing shares in Bank Republic, BasisBank, TBC Bank, and VTB Bank. Part of the experts have positive attitude toward strengthening EBRD positions in Georgian banking sector. They reckon that EBRD refreshes management of the banks. In addition, it never buys controlling packet of shares. Inculcation of EBRD in Georgian banking sector is advantageous for the consumers also, as this will cause price reduction of credit resources. In October 2008, on the international conference of donor organizations held in Brussels, EBRD declared that it assigns ˆ351 million for the support of banking sector. The sum is redistributed for tree years. ˆ157 million was already spent in 2008. ˆ84 million is assigned for 2009 and EBRD will invest ˆ110 million in Georgian banking sector in 2010. However, it is hard to say, how long will the Georgian banks go on to exist in the hope of foreign aid. Moreover, foreign economy and banking sector are in crisis either and one should have no confidence in them.