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Fitch Rates VTB Bank Georgia IDR ‘B’; Outlook Stable

February 14, 2007
Fitch Ratings has today assigned JSC VTB Bank (Georgia) (“VTB Georgia”) ratings of Issuer Default ("IDR") 'B' with a Stable Outlook, Short-term ‘B’, Individual ‘D/E’ and Support ‘4’.

The bank’s IDR, Short-term and Support ratings are underpinned by possible support from the bank’s majority shareholder JSC Vneshtorgbank (“VTB”; IDR ‘BBB+’), Russia’s second-largest and state-controlled bank. In Fitch’s opinion, VTB would have a strong propensity to support the bank, given its 53% ownership, shared brand and VTB Georgia’s small size (accounting for less then 1% of consolidated end-Q306 IFRS equity). However, potential Georgian country risks limit the extent to which this support can be factored into the ratings.

The bank’s Individual rating reflects its small size, limited, albeit growing, local franchise and potential political risks stemming from tensions in Russo-Georgian relations, although to date the latter has not created any serious issues for the bank. VTB Georgia’s liquidity is potentially vulnerable although the bank has not suffered any significant liquidity squeezes to date. Its capitalisation is likely to become rather tight relative to (admittedly stringent) local regulatory requirements in 2007.

VTB Georgia’s asset quality is adequate, although the loan portfolio has been growing rapidly and problems could be revealed at a later stage, when the long-term portfolio seasons. Profitability is adequate and improved in 2005/9M06 on the back of greater business scale, increased leverage and growing micro-finance lending. However, profitability is likely to be constrained in the short- to medium-term by lower-margin corporate lending, a costly branch network and funding diversification efforts (including through retail term deposits).

Movement in the bank’s IDR, Short-term and Support ratings could most likely result from changes in Georgia’s country risk.

Upside potential for the Individual rating is currently limited, but could result from a substantial increase in the bank's size and franchise without any deterioration of asset quality or capitalisation. Substantial credit losses or heightened liquidity pressure from any further deterioration of Russo-Georgian relations could put downward pressure on the rating, although these scenarios are not considered likely at present.

VTB Georgia, formerly United Georgian Bank, has become one of the top three banks by assets in Georgia following VTB’s acquisition of a majority stake in January 2005. This was attributable to a growing local franchise and an USD92m investment loan back-to-back financed by VTB as part of its strategy to serve customers across the CIS. At end-Q306 the back-to-back loan accounted for 41% and 36% of VTB Georgia’s loans and liabilities respectively, although it did not weigh on capitalisation or breach single-borrower exposure regulatory limits due to the risk-free nature of the transaction for VTB Georgia.
Company — VTB Bank Georgia
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