OREANDA-NEWS. July 27, 2015. Most Georgian banks operate with strong Basel capital adequacy ratios, which help offset the moderate rise in pressure on their credit profiles due to weaker prospects for the economy and the impact of local-currency depreciation, says Fitch Ratings. Large Basel capital buffers are warranted because a high proportion of lending is extended in foreign currency (FC). Local regulations impose a 150% risk weighting on FC loans, which explains why local capital adequacy ratios are lower than those calculated under international standards.

Overall economic growth should remain positive despite slowing and, positively, asset quality remains sound and deposit outflows have been limited. Loan growth is likely to moderate in 2H15 following external shocks. Sector lending has been broadly flat so far in 2015, although historically it has been quite seasonal and tended to pick up towards year-end. Growth is likely to be strongest in the SME and retail sectors, with consumer and retail mortgage lending having accounted for two-thirds of new loans in 2013-2014. But the outlook for corporate lending is more subdued as many larger companies are foreign owned, and total leverage, including external funding, is already significant.

Reported asset quality remains sound: although NPLs (overdue by 90 days) rose by 24% in absolute terms in 1Q15, this partly reflected exchange rate effects, and sector NPLs are still moderate at 3.3%. Reserve coverage of NPLs has also increased and is very high, at about 200%. Keeping NPLs at bay will be key to supporting profitability, but performance is likely to be quite volatile through the cycle as asset quality affects results.

High loan book dollarisation and significant recent credit growth pose risks. Most new consumer lending is in local currency, which is credit positive because households do not generally have access to FC revenues, but retail loan penetration had increased to 21% of GDP at end-2014, which is high compared to neighbouring countries.

Funding has been fairly stable but the inflow of new deposits, adjusted for exchange rate effects, has been close to zero, reflecting the economic slowdown and lower remittances from abroad. Despite lari depreciation in 1H15, conversion of deposits into FC has been limited, reflecting limited scope for further dollarisation from already high levels.

Liquidity buffers are solid, with highly liquid assets covering around half of customer deposits, partly due to conservative regulation. Refinancing risk is generally limited because the banks rely mainly on deposit funding and borrowings from international financial institutions and foreign parents. Repayment of Bank of Georgia's Eurobond is not due until 2017.