Fitch Affirms Liberty Bank & VTB Bank (Georgia)'s IDRs; Upgrades Liberty's VR
August 2, 2012 Fitch Ratings
Fitch Ratings-London-01 August 2012: Fitch Ratings has affirmed VTB Bank (Georgia)'s (VTBG) Long-term Issuer Default Ratings (IDR) at 'BB' and Liberty Bank's (LB) Long-term IDR at 'B', both with Stable Outlooks. At the same time, the agency has upgraded LB's Viability Rating (VR) to 'b' from 'b-'. A full list of rating actions is at the end of this rating action commentary.
RATING ACTION RATIONALE: LIBERTY BANK'S VR AND IDRS
The upgrade of LB's VR reflects the strengthening of the bank's capitalisation and the extended track record of sound performance under new management since the takeover in 2009.
The affirmation of LB's Long-term IDR reflects the fact that it was already 'B' as a result of the bank's 'B' Support Rating Floor (SRF), and so is not impacted by the VR upgrade. Following the change in the VR, LB's Long-term IDR is now driven by its VR, while still being underpinned at its current level by the SRF.
RATING DRIVERS: LIBERTY BANK'S VR AND IDRS
LB's VR and IDRs reflect the bank's sound recent performance in terms of both pre-impairment profitability and the quality of non-legacy loans, its solid capitalisation, currently comfortable liquidity, the absence of debt funding, the predominantly local currency balance sheet and good standards of management, governance and disclosure.
At the same time, the ratings also consider inherent risks in LB's rapid loan growth in the relatively high-risk operating environment, the bank's still rather narrow franchise, significant concentrations in the deposit base and some reliance on government and municipal funding.
Capitalisation has improved as a result of equity injections and earnings retention, which have increased the bank's Fitch core capital/risk-weighted assets ratio to 13.0% at end-Q112 (end-2010: 8.3%). The regulatory capital ratios are significantly lower (Tier 1 8.5%; total 10.9% at end-H112), mainly as a result of the non-inclusion of fixed assets revaluations in capital. The bank is still reliant on a waiver from the National Bank of Georgia, exempting it from minimum capital requirements (Tier 1 8%; total 12%) until September 2012. Fitch believes retained earnings should be sufficient to ensure regulatory compliance by the time the waiver expires, but potential conversion of a GEL18.8m contingent capital facility (subscribed mainly by LB's main shareholder; mandatory conversion into ordinary shares in case of non-compliance), would also strengthen capital ratios by approximately 3ppts.
The bank's earning capacity is improving on the back of rapid net loan growth (104% in 2011; 20% in H112), which has improved scale efficiencies, reasonable asset quality, and a wide net interest margin, which is supported by the bank's focus on mass retail banking. Non-performing loans in the non-legacy loan book were a moderate 3.0% at end-Q112, while a large majority of exposures in the pre-acquisition legacy book (10% of loans at end-Q112) were impaired.
Positively, and in contrast to other rated Georgian banks, LB's funding is predominantly GEL-denominated (83% of H112 customer deposits), as a result of which the majority of customer loans are also issued in local currency. LB's liquidity position is also comfortable, with highly liquid assets (cash, interbank assets and unpledged government securities) covering 32% of customer funding at end-H112. However, significant reliance on government and municipal funding (54% of customer deposits at FYE11, including some large balances), can make funding levels somewhat volatile.
Company — VTB Bank Georgia
Full nameAO "VTB Bank Georgia"