Analysis assesses a COVID-19 crisis effect on credit risks and capital adequacy of Georgian banking sector under different scenarios.
Global COVID-19 Pandemic that the world has been experiencing for the last couple of months, has pushed the global economies into recession. External shocks placed financial sector under stress conditions as well.
Similar to most of the countries, Georgian economy is also facing the challenges caused by the pandemic. The pressure on key economic sectors is still ongoing and the magnitude or the possible length of the crisis is yet unknown.
Due to the lockdown and sharp decline in performance of vulnerable sectors, dramatic increase of financial risks, especially credit risks, is almost inevitable.
Given the importance of the banking sector in Georgian economy, KPMG Georgia Advisory team initiates a generic analysis on the potential impact of COVID-19 pandemic on the quality of the Georgian banking portfolio (hereinafter “analysis”).
The key assumption of the analysis is that the decline in the economy will have a direct impact on solvency of the borrowers, consequently effecting expected credit losses on the loan portfolio.
For the purposes of the impact analysis, period preceding default (“Significant Increase in Credit Risk” as defined per IFRS 9 standard) is considered negligible and only default scenarios are applied. In case of corporates, possible default scenarios were assessed for the most vulnerable economic sectors. For the retail borrowers an impact exercise was performed on the total portfolio due to unavailability of detailed data on the portion of portfolio issued to borrowers employed in affected sectors. However, it is reasonable to assume that the crisis will have an impact on all retail borrowers to a certain extent.
Sensitivity analysis for corporate portfolio was performed for the following sectors: Hospitality, Transportation, Services and relevant Trade subsectors, such as Durable Consumer Goods and Clothing (hereinafter “vulnerable sectors”). These sectors are expected to be most affected as a result of the crisis.Hopefully, the analysis will be found useful.
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