Currently Georgian banks offer a wide range of products to customers. They are innovative in terms of new product development and are trying to be in line with global trends in the industry. For investors, deposit rates still remain high, KPMG Georgia team analyses Georgian Banking Sector
2014 will be seen as a good year for most of the Georgian banks and the sector as a whole. With total assets increasing by GEL3.35 billion (19%) and profits increasing by GEL 85 million (22%). For the year ended 31 December 2014 the loan loss reserves increased by GEL 100 million (14%), compared to the previous year. The dominance of the five largest banks (accounting for nearly 75% of total assets) has driven the overall good performance but there are still more opportunities for growth through:
a) tapping the “un-banked” population
b) increased efficiency either through economies of scale from consolidation of from organic improvements
c) increased use various banking products by existing customers
d) more use of social media and integrated marketing communications to reach new customers
e) lower cost of delivery through technology and staff training and development improvements and
f) improved geographical coverage.
However, threats to growth exist especially if interest margins or currently high levels of banking fees come under pressure from competitors.
In 1994 Georgia launched the reform of its banking sector, which was basedon the recommendations of the International Monetary Fund and implementedwith technical assistance of international financial organisations. The objectives of the reforms were to raise the level of financial stability; improve the safety and soundness of the banking system; implementation of a modern bank supervision policy and practice; introduction of the International Accounting Standards; upgrade of the qualification of banking personnel and improvement of the financial sustainability of commercial banks. The reform also envisaged the development of the legislative basis for the banking system.
Banking total assets have increased from GEL 0.88 billion in 2001 to GEL 20.6 billion in2014, an impressive 27.4% compound growth rate. This is mainly though to be the result of the large “un-banked” population in the rural areas of Georgia. Further growth can be expected in the years ahead.
The Banking sector of Georgia has been developing dynamically during the last years. Interrupted by declines during the financial crisis in 2008 and 2009 in 2010 the economy started recovering and there are positive trends from 2010.
Compared to 2013, in 2014 total net loan portfolio and deposits increasedby GEL 2,404 million (24%) and GEL2,138 million (21%) respectively. Thiscan be partly explained by depreciationof GEL against USD from GEL1.7363 per USD for 31 December2014 to GEL 1.8636 per USD for 31December 2014.
The Georgian banking sector isstable, but according to the InternationalMonetary Fund (IMF) thesector faces key risks. Risks relatedto dollarisation and reliance on nonresidentdeposits should be closelymonitored.
Dollarisation increases credit andliquidity risks. There are two majordollarisation-related problems:First, most of the borrowers in USDare unhedged, as their income andexpenditures are in national currency(this is especially evident in case ofhouseholds). The problem becameobvious in the period of GEL depreciationagainst USD, in the end of 2014,when the borrowers having the loanin USD were in difficulties in respectto paying the payment amount.
By the end of 2014 there were 21banks operating with a market capitalisation(by total assets) of GEL 20.6billion.
For the end of Q3 2014, in terms of valueof total assets Bank of Georgia (BOG)held the leading position for nearly 32%,followed by TBC Bank with nearly 24%.The remaining 44% was shared among 19 banks. Leading positions held byLiberty Bank (8.22%), Bank Republic(5.66%) and ProCredit Bank (5.5%). Thesmallest 11 banks held only 7.1% of thesector’s total assets.
The total amount of loans issuedduring 2014 amounted to GEL 18.3billion (2013: GEL 14.3 billion).The outstanding loan portfolio iswell diversified as shown below.The largest portions represented bymortgage loans − 22% and consumerloans − 18% amounting toGEL 2.8 billion and GEL 2.2 billionrespectively.
There have been significant changesin the banking sector during the lastone year:
Bank of Georgia maintains stable growth; its total assets increased byGEL 664 million (12%) from Q32013to Q3 2014 and reached GEL 6 billion.The results showed an increase in net profit from GEL 78 million (Q3 2013)to 116 million (Q3 2014), while Bank of Georgia Holding plc showed a 15%increase in profit for the year ended 31 December 2014. Also, the Groupreported a 16.5% increase in total assets for the end of the year, amountingGEL 7.6 billion.
During the first 3 quarters of 2014 TBC Bank also improved their netprofit from GEL45 million to GEL86 million on total assets of GEL 4.6billion (2013: GEL 3.7billion). For the year ended 31 December 2014 netprofit of the bank reached GEL 139 million, while total assets amountedGEL 5 billion.
Total assets of Liberty Bank increased by 21% and reached GEL 1.6 billion by the end of Q3 2014. As for the profitability, net profit of the bank decreased by 7% during the period, reaching GEL 17 million.
Compared to the same period last year, during the first 3Q 2014 Bank Republic showed impressive growth. The bank’s total assets increased by GEL 190 million (21%) and reached GEL 1.1 billion, while its net profit increased by 39% amounting GEL 26 million.
ProCredit Bank reported a GEL13million profit in Q3 2014, and simultaneously increased its total assets by 5% reaching GEL 1.05 billion.
Today Georgian banks offer a wide range of products to customers. They are innovative in terms of new product development and are trying to be in line with global trends in the industry. For investors, deposit rates still remain high, e.g. term deposits range from 4% to 8.75 % in GEL, and from 3% to 5.25% in foreign currencies; Child deposits range from 7% to 8.75% in GEL and from 5.25% to 5.5% in foreign currencies; other products, such as saving accounts, on-call deposits, investment deposits, convertible deposits and others also exist for the savers.
Few banks in Georgia have brokerage services, which gives the opportunity to the customers to invest in stocks on local and international financial markets, however this type of service is not well developed in Georgia, as the Georgian customers are not used to this type of investments yet.
In terms of loans, the main interest rates offered to retail customers for loans differ according to their purpose, for instance the interest rate for a mortgage loan is approximately 9 %; on consumer loans from 11% to 12.5%, on student loans from 19% to 20%, and for auto loans from 0% to 15%.
Georgian banks are offering different debit/credit cards to their customers: visa (electron, classic, gold, platinum); maestro/cirrus; American express, which helps Georgian customers to easily handle all local and international monetary transactions.
In terms of wholesale banking, the banks have special terms for deposits and loans for corporate clients, which are dependen on the agreement between the parties. The banks are making the huge investments into integrated marketing communication tools in order to send messages to actual and potential clients and get a high and quick ROE (Return on Equity). This aggressive marketing supports the development of the banking system as a whole due to the fact that information about all the innovations in the banking sector is distributed to the public on a regular basis and raises consumer awareness, which serves to boost banking products sales.
Georgian banks are widely using social media in order to promote their activities and products. These resources are efficient and inexpensive and, due to the growing popularity of social media worldwide, and due to the fact that the banks are using both business models B2B (Business to Business) and B2C (Business to Consumer), the banks are efficiently using facebook, twitter, YouTube, LinkedIn, etc. to approach a wide ange of potential customers. As social media is very popular, banks are
creating a loyal customer base for the future by inventing different games
and competitions on social media sites, and creating the relationship with students and youngsters.
The geographical coverage of banks is quite wide, as their services are offered in all major regions of Georgia, which makes the banking service highly attractive for the population and serves the sustainable development of the industry.
As there is a fierce competition among the banks in Georgia, they are supporting training and development of their employees to provide the best service to the clients. The banks invested in creation of professional training centers and they are paying the tuition fees for executive education of their employees in the leading Georgian and international educational institutions. The banks are headhunting for the best human resources in Georgia and are trying to create the best working conditions to attract the Georgians with international working experience. At the same time, each bank creates a unique concept of the physical environment of the service centers and branches and has its own brand concept, including the different brand attributes, to create a specific approach and to increase the brand image.
In terms of technology development, most of the banks are offering remote
banking channels to customers, such as internet banking, mobile banking, telephone banking, online consultancy, online payments, etc. However, these services are not developed sufficiently and many customers are more or less illiterate in terms of the efficient usage of these resources; therefore, there is an opportunity for the banks to invest in the usage of these resources and increase customers’ awareness. All these steps could lead the banks to operational cost savings, a better quality of services and therefore increased profits in the entire sector.
In addition to the current 21 licensed banks competition is also coming from Micro-finance organisations (MFOs) and companies like 4Finance (vivus.ge), etc. who have generally seen a significant increase in their loan portfolios over the past few years.
Within the last ten years, the international financial institutions, such as EBRD (European Bank for Reconstruction and Development), World Bank, IFC (International Financial Corporation), EIB (European Investment Bank), KFW (The German promotional bank), FMO (the Dutch development bank), ADB (Asian Development Bank) and many others have made significant investments in the Georgian banking industry. The participation of these organisations in
the banking sector has been reflected in the advanced corporate governance and the transparency of the banking sector. The great achievement for the Georgian banking sector is that the two leading banks are public and are listed on London Stock Exchange.
The only allowable legal status of banks is a joint stock company. Capital requirements for commercial banks are in line with the standards of the Basel Committee on Banking Supervision and corresponding EU directives. The level of minimum capital for commercial banks is set by the NBG (National Bank of Georgia) at GEL 12 million for newly founded commercial banks and foreign bank branches and should be fully paid in cash. It should be noted, that Georgia does not impose any restrictions on the inflow or outflow of capital.
According to Fitch Georgia’s banking sector’s IDR (Issuer Default Ratings) is ‘BB-“, which is an improvement from “B+”. FDI increased in the country during the last 6 months and GDP growth looks strong, therefore, the economy recovered in 2014 with the economic growth of 4.7 %, making Georgia one of the strongest economies in the region, which definitely will affect the banking industry as a whole.
Despite some risks associated with the sector, the Georgian banking system can be considered as sound and stable with significant increase not only in terms of profitability, total assets of the sector has also increased by 19% during the last year.
During the last years the sector has become more and more competitive, yet around 75% of the banking sector is concentrated on five leading banks and the good performance of the sector was mainly determined by these banks. Due to the increased competition on the market and also investments
made by international organisations in the sector, the banks now offer the services that are inline with the global standards. The two leading banks, BoG and TBC bank, listed on the LSE also strongly determines the development of the sector in the country.
|Note: The analyses are based on unaudited figures, therefore it is not in accordance with IFRS (unless noted otherwise). The data is mainly provided by NBG.|
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