The wave of crisis won’t reach us” – representatives of Georgian construction sector were confidently declaring at the end of 2007, when the crisis took a start on the world’s leading mortgage markets (See magazine “Sakartvelos Ekonomika” No 11- 2008).
Construction companies were alleging that construction market was not exhausted and therefore they were anticipating the continuation of tendency of rising demand and prices. Up to August 2008, Georgian commercial banks were considered as the driving engine economical development and source of stability. However, at present, instead of increasing the number of consumers’ and mortgage credits, banks are broadening the volume of blacklisted poor debtors. Developers and bankers are blaming each other in the current crisis. Moody’s Investors Service overviewed financial strength rating (BFSR) of two leading banks in Georgia in March – Bank of Georgia and TBC Bank and changed it to negative D. The global local currency (GLC) deposit rating, for both banks was downgraded from Ba1 to Ba3. The foreign currency deposit rating was affirmed at B3 with a negative outlook for both banks either. It is a common belief to blame August Russia-Georgia war in the problems that revealed themselves now. However, if one takes a long hard look at the development of the recent events, it becomes obvious that Georgian banking system had some clefs before the start of Russian invasion and August war just exaggerated and fastened inevitable outcome.
In June 2004, Basel Committee on Banking Supervision elaborated Basel II regulation system of banking supervision. The new established system covers credit and operation risk assessment issues and the transparency demand. In addition, it proposes creating of common competitive conditions and implementation of new financial instruments in the process of crediting and strengthening capital by the commercial banks. 95 regulators in the world will implement Basel II recommendations up to 2015. Georgian banking system is using Basel I system, but in 2009 Basel II system will be partially implemented here also.
If we take a look on the strategy of commercial banks and their risk management, it becomes obvious that ProCredit Bank is the cleverest player. The bank refused to lend out mortgage loans and now it is focused on financing of average, small and very small businesses. General Director of the bank, Philip Pot declares that bank is holding 8.5% in assets.
– We do not have big-sized deposits, but if we take into account savings of the families and physical bodies then our share in the market amounts 14%. – declared Philip Pot.
At the end of third quarter of 2008, total funds of the clients attracted by the bank made up $191 million. This is by $18 million more than the data in the beginning of the year. The funds attracted by the bank in September made up $10 million that is one third of the funds that flew out in August. New account in amount of 1000 GEL is opened in the bank almost on a daily basis that is record breaking. These numbers express consumers’ confidence in Procredit Bank. Confidence factor was considerably increased by the fact that during August events consumers were able to take out the money from the bank easily.
According to the data of September 2008, ProCredit Bank’s net profit amounted $6.7 million. It is obvious that hostility had no negative impact on the bank’s economic efficiency.
The president of Georgian banks’ association Mr. Zurab Gvasalia declares that debt/GDP relative proportion has big importance. The mentioned proportion in USA amounts 230%, while average rate in Europe is 200%. However, the same index in Georgia is only 31 percent or the proportion of credit portfolio with the economy is much more less than in the countries where banking crisis originated due to unrestrained increase of credit risks. However, one shouldn’t forget that USA and Georgia markets are having different scales.
Long-term crediting of the construction business was encouraging import financing, but not the industry development. This is proved by the increasing volume of long-term credits for physical bodies. It made up one third of total long-term credits. Growing activeness of the banks on the consumption market is connected with big risk taking that is determined by the low and instable income of the population. 20 percent of long-term credits are mortgage loans. The volume of mortgage crediting in 2007 doubled or increased by 600 million GEL in comparison with the volume of 2006. This encouraged further development of the construction business. At the same time the increase of prices on apartments was slowing down (but not decreasing) that was started in 2006. In the current year, housing market conjuncture became active again, but sharp slump took place and originated the current crisis.
Experts mention another problem of Georgian banks that is liquidity risk. Banks were trying to make up the loss by means of credit lines of international financial institutions. Their volume in 2007, increased by 127 percent, while the volume of deposits increased only by 55%. Disproportion between assets and liabilities and crisis of liquidity became obstacles for attraction of credit resources from international organizations.
Association of Georgian Banks’ president, Zurab Gvasalia declares: ‘Main factor in evaluating banks’ reliability and stability is bank capital or own funds. Accordingly capital as financial resource defines bank’s ability of crediting and risk neutralizing that is in direct connection with confidence factor of depositors and creditors. It is note-worthy that despite global financial crisis and its impact on Georgian economy, banks operating in Georgia still have strong capital basis. National Bank of Georgia demands that bank’s supervisory capital adequacy rate must be at least 12%. This rate in Georgian banking sector is higher than the established standard and according to the data of February 2009 it equals 14.7 percent. Therefore, sufficiency of own funds ensures reduction of the risks and stable financing. It is worth of mentioning that Georgian banking sector has high liquidity rate. Liquidity is one of the main criteria in assessing banking activities. Liquidity rate defines bank’s ability to meet the current commitments including deposits, interbank debts and employees’ salaries. According to National Bank of Georgia’s standard, bank’s liquidity rate should amount 20 percent of bank’s liabilities. At present, average rate of liquidity for Georgian banks amounts 30 percent that is much higher than that of established by NBG.’
Experts disagree with this point of view and declare that high average liquidity rate doesn’t mean that there is a high liquidity rate in entire Georgian banking sector. As if one bank has liquidity rate 25%, but another has 5%, obviously their average liquidity rate won’t be a realistic picture of the situation. Georgian banking sector is facing crisis. However, can one surly say that the crisis was originated from world financial recession or due to Russia’s invasion in Georgia? International Monetary Fund carried out reforms in Georgian banking sector. As a result, the authority of National Bank of Georgia has been restrained and free economical environment has been created for commercial banks. Gradually, commercial banks were becoming more independent and were not controlled by the NBG.
Three types of banks stood out: 1. Banks that had diversified assets and were not tightly connected with construction and mining businesses (ProCredit Bank, Cartu Bank); 2. Big banks (Bank of Georgia, TBC Bank, Bank Republic/ Société Générale Group), which elaborated corresponding rescue plan, attracted foreign funds and managed to remain their status of leader banks. 3. Banks directly connected with the construction business that had less diversified assets and less clientele (People’s Bank). As regards the fact that many newly established banks joined Georgian banking sector in 2008 such as Kazakh Halic Bank Georgia that made $50 million investment in 2008. HSBC Bank joined Georgian banking sector on 23 June 2008. Its capital is $16.7 million. First British Bank has been established on the basis of Georgian bank Tetri. Tetri Bank sold its assets for GEL 8.5 million in 2007. The owner of Standard Bank – SALFORD Capital sold the bank to KOR Bank for $42 million in March 2008. At present bank is owned by Dhabi Group. Due to complicated situation in Georgian banking sector, experts reckon that the withdrawal of newly established banks with small-sized capital from Georgian market is not ruled out.
If one analyses the recent events, it will become obvious that August war just accelerated inevitable crisis in Georgian banking sector that was already taking a start by then. In July 2008, according to the data of NBG, the amount of loans credited to physical bodies decreased by GEL 100 million. According to the May data, the amount of total deposits was $3.1 billion. Population deposited four times more funds in April than during last six months. Decrease in deposits started from May 2008 that originated disbalance between attracted resources and loans. The number debtors was twice more than the number of depositors. As a result of reduced demand on credits banks increased interest rates up to 15%. Money supply started to decrease and banks were induced to use resources of international financial organizations. Bank of Georgia and TBC Bank were facing problems due to increased volume of consumer credits. TaoPrivate Bank, Bank Republic, Basis Bank increased interest per annum by 3-4%. Due to high demand on money gradually banks were in danger of liquidity crisis.
The most of the apartments owned by construction companies were sold at the expense of credits and at the same time most of the developers were taking credits from the banks. There were big talks in experts that major interdependence of the banks, insurance and construction companies would not end well and this pyramid would create huge problems. The problems were exacerbated by Georgia-Russia August was and banks’ deposit portfolio decreased by 13%. Banks sharply reduced the volume of crediting. Increasing interest rates on credits created new challenges for developer and construction companies. The demand on mortgage credits slumped significantly and some problems arose in consumer credit payments. It is obvious that even before August war, banks were facing serious liquidity problems due to weak inner management and existing problems in Georgian construction market, as the estimation that devastating wave of crisis started in foreign housing market won’t reach Georgian shores appeared to be false and the crisis was launched. Or the key to crisis origination was the banks’ liberal policy that didn’t justify itself. The growth of consumer credit volume reached 85%. The amount of overdue credits made up GEL 268 million. The president of Georgian Banks Association, Mr. Zurab Gvasalia declares that current indicators of the banking sector should be compared with the indicators of last year August, instead of comparing them with the indices of whole year. There are two reasons why this should be done so: 1. in the previous years, the high pace of growth was observed. In other words, average growth of banks’ deposits and assets made up 50%. 2. In addition to Russia Georgia war, world financial crisis had its negative impact also. The volume of non-bank deposits (current accounts and time deposits) amounted GEL 3.0 billion, on 1 February 2009. In August 1 2008, the volume of non-bank deposits was GEL 3.1 billion, while in September it decreased to GEL 2.7 billion. Actually, at present, we managed to recover the state that was observed in the beginning of August 2008. However, if we start calculation from September, the growth despite huge slump of deposit base in amount of GEL 400 million and worsened economical situation, is a positive event. The benchmark of post crisis situation is considered the nearest phase before crisis. In other words, first we should return to the position before the slump. This factor points that the main source of deposit growth is the part of the deposits that were withdrawn. – declares Mr. Zurab Gvasalia. According to the data of first eleven months of 2008, banking sector sustained loss in amount of GEL 158 million. TBC Bank, the second biggest bank in Georgia sustained Gel 67 million loss. Bank’s assets fell by 8.26% in October and made up GEL 1.792 billion. 3 hundred employees were fired. The leader of Georgian banking sector – Bank of Georgia fired 830 employees. Representatives of commercial banks declare that the demand on banking products is sharply decreased due to global crisis. According to NGB data, by 1 December 2008, assets of five major Georgian banks decreased from 80.4% to 77.6%. The recent statistical data show that Bank of Georgia and TBC Bank are holding first and second places by the volume of assets. Bank Republic/ Société Générale Group, ProCredit Bank Georgia and Cartu Bank are in the list of first five leading banks of Georgia. ProCredit Bank appeared in advantageous position, due to different strategic approach.
In the first eleven months of 2008, non-bank deposits increased by 1.3% and made up GEL 2.9 billion. The deposits in foreign currency increased by 8.6%, while the volume of deposits in national currency decreased by 12.7%. According to the NBG data, the portion of foreign currency deposits is still high – 84.8%. Banks sustained huge damage due to August war. In the first nine months of 2008, $73.6 million investment was made in Georgian banking sector and made up 6.7% of entire investments that is by 37% less compared with the same period of previous year. Georgian banks are looking for the way out of existing problems. Some of strategies prove its value. Bank of Georgia received $200 million from International Financial Corporation and EBRD. TBC Bank received $206 million in 2008 and $220 million in 2009 from various financial institutions: DEG; FMO Mortgage; Merrill Lynch; RoseMount; OTP; Banco Internacinal; EBRD; OPIC/CITI. Therefore the liquidity problem has been solved. Brussels conference appropriated $859 million for Georgian banking sector on 22 October 2008. Georgian banks need to change their risk management and strategic management, otherwise it will be impossible to effectively appropriate received funds.