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Fitch Affirms 3 Mid-Sized Georgian Banks

December 23, 2016 | Cbonds

Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of Cartu Bank (Cartu) at 'B+', Basisbank (Basis) at 'B' and Halyk Bank Georgia (HBG) at 'BB-'. The Outlooks are Stable. A full list of rating actions is at the end of this rating action commentary.

The IDRs of Cartu and Basis are driven by their intrinsic strength, as reflected by their Viability Ratings (VRs) of 'b+' and 'b', respectively. The VRs reflect both banks' solid capital buffers (stronger at Cartu), good profitability and acceptable asset quality metrics. The VRs also consider the banks' large balance-sheet concentrations, high loans dollarisation (on average, 67% of the total) and franchise limitations.

The Stable Outlooks on Cartu and Basis reflect Fitch's expectation that the banks' sizeable loss absorption buffers will provide resilience to potential moderate asset quality deterioration, as loans start seasoning after previous rapid growth and following depreciation of the lari. Severe stresses from the operating environment are unlikely, as reflected by the Stable Outlook on the sovereign rating.

HBG's IDRs are driven by potential support it may receive, in case of need, from its sole shareholder Halyk Bank of Kazakhstan (HBK, BB/Stable). The Stable Outlook on HBG mirrors that on its parent. Fitch has not assigned a VR to HBG because of its high management and operational integration with HBK, small size and significant reliance on parent funding.

At end-1H16, non-performing loans (NPLs, overdue more than 90 days), including legacy exposures originated in 2011, comprised a high 9% of gross loans (unchanged from end-2015) although they were reasonably 86%-covered by reserves. High FX lending, mostly to unhedged borrowers, and large borrower and sector concentrations heighten the bank's risk profile. At end-1H16, top 25 exposures made up to 60% of gross loans; the largest construction and real estate segment accounted for 23% of loans. The bank's annual credit growth has been rapid at around 47% on average in 2013-2015 but moderated sharply to 9% in 1H16. NPL origination (calculated as net change in NPLs plus write-offs divided by average performing loans) was a low 1.5% in 1H16, annualised (2015: 2.5%).

Profitability metrics have been volatile through the cycle, affected by one-off events in 2015, but remain reasonable, with ROAE of 16% in 1H16 (2015: 21%). Cartu's capitalisation remains strong - Fitch Core Capital Ratio (FCC) of 20% at end-1H16, despite the recent negative trend due to the lari depreciation and loan book growth. We estimate that the bank could increase its impairment reserves up to 16% of end-1H16 loans without breaching the regulatory Tier 1 capital ratio. The subordinated debt contributed by the shareholder, equal to 10% of risk-weighted assets, provides additional loss-absorption capacity.

Customer funding (69% of total non-equity liabilities) is highly concentrated but generally stable: the top 20 largest deposits comprised 73% of the total. Related-party deposits accounted for 27% of total end-1H16 liabilities. The liquidity buffer was moderate, at around 28% of end-3Q16 customer accounts.

NPLs remained low at 2% of loans at end-1H16 (unchanged from end-2015), fully covered by reserves. Restructured loans added a further 3% of gross loans, but these were fully performing. High FX-lending, large borrower and sector concentrations (top 25 exposures made up 45% of gross loans; 22% of corporate loans were from the largest construction and real estate segment) are sources of heightened credit risk. The bank's lending volumes stagnated in 1H16, after rapid growth of 68% on average in 2013-2015. NPL origination was low at 0.3% in 1H16 (2015: 2%).

Profitability metrics are adequate with annualised 14% ROAE in 1H16, although slightly weaker than at other Fitch-rated banks mainly due to lower interest rates Basis offers on its loans to capture market share. The bank's capitalisation remains strong with a high 22% FCC ratio at end-1H16, while credit growth has subsided. Regulatory capitalisation was also reasonable, allowing the bank to increase its impairment reserves to 22% of loans without breaching the regulatory minimum levels.

Customer funding (80% of end-1H16 liabilities) is concentrated. The top 20 depositors accounted for 62% of the total. Related-party funding was 13% of total customer accounts (end-2015: 29%). The liquidity buffer is solid, and would sustain an outflow of around 50% of customer accounts at end-3Q16.

Cartu's and Basis's Support Rating of '5' and Support Rating Floor of 'No Floor' reflect the two banks' limited systemic importance, and consequently Fitch's view that state support cannot be relied upon. Potential support from the private shareholders is also not factored into the ratings, as it cannot be reliably assessed.

HBG's Support Rating of '3' reflects moderate probability of support from HBK. The one-notch differential between HBK's and HBG's IDRs reflects the cross-border nature of the parent-subsidiary relationship, and the so far limited track record and contribution of the Georgian subsidiary to overall group performance.

Basis's ratings could benefit from an extended track record of profitable growth, while maintaining reasonable asset quality metrics and strengthening its franchise. The upside potential for Cartu's ratings is limited, although the diversification of the bank's profile and improvements in asset-quality metrics would be credit positive. Downward pressure on both banks' ratings may result from further rapid growth or a marked deterioration in asset quality metrics leading to a significant capital erosion.

HBG's support-driven Long-Term IDR is sensitive to changes in Fitch's assessment of support from its parent bank.

The rating actions are as follows:

Cartu Bank
Long-Term Foreign Currency IDR: affirmed at 'B+'; Outlook Stable
Short-Term Foreign Currency IDR: affirmed at 'B'
Viability Rating: affirmed at 'b+'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'

JSC Basisbank
Long-Term Foreign Currency IDR affirmed at 'B'; Outlook Stable
Short-Term Foreign Currency IDR affirmed at 'B'
Viability Rating: affirmed at 'b'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No floor'

Halyk Bank Georgia
Long-Term Foreign Currency IDR: affirmed at 'BB-', Outlook Stable
Short-Term Foreign Currency IDR: affirmed at 'B'
Support Rating: affirmed at '3'


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