Georgian banks first-time IFRS 9 results at end-2018 showed a smooth transition to the new accounting standard, Fitch Ratings says. For most banks, IFRS 9 Stage 3 loans (impaired) were broadly in line with loans recognised as impaired under the previous accounting standard, IAS 39. Stage 2 loans (not impaired, but with a significant increase in credit risk) were mostly moderate, but Stage 2 classification criteria varied significantly among banks. We analysed the results of 10 banks, representing 98% of sector loans and 93% of sector assets.
At end-2017, loans with delinquencies of over 90 days but not impaired under IAS 39 were significant in some cases. IFRS 9 captures most of these exposures as impaired (Stage 3). Georgian banks have a consistent approach to Stage 3 classification, based on the definition of borrower default in neighbouring markets and Europe.
The weighted-average Stage 3 loans/gross loans ratio of 6% at the major lenders (end-2018) indicates reasonable asset quality, helped by benign economic conditions and exchange rate stability since Georgia’s currency depreciated in 2015. Some banks’ ratios were significantly higher, reflecting exposure to weaker borrowers or riskier segments such as unsecured consumer finance, construction and real estate.
Cartu Bank‘s Stage 3 ratio of 39% was consistent with weak asset quality already factored into its rating. We downgraded the bank last year, taking account of its regulatory impaired loans ratio of 36% at end-1H18. This included loans classified as ‘substandard’, ‘doubtful’ and ‘loss’ risk categories, giving a fuller picture of asset quality than the IAS 39 disclosure for asset impairments.
Stage 3 loan coverage was generally moderate, reflecting banks’ strong recovery expectations from collateral. Enforcement and realisation of collateral can be difficult in Georgia, potentially requiring additional provisioning, but we believe most banks would be able to fully provision Stage 3 and (where disclosed) higher-risk Stage 2 loans from their annual pre-impairment profits, if required. Liberty‘s higher coverage reflects its large exposure to unsecured retail loans.
Stage 3 loans, net of loan-loss allowances, at Cartu and Halyk Bank were material relative to their 2018 pre-impairment profits (8x and 2x pre-impairment profits, respectively), and Cartu’s sizeable Stage 2 loans could add to the burden. However, both banks’ capital buffers provide some additional loss-absorption capacity.
Stage 2 loans were only modestly provisioned but migration to Stage 3 should be limited in the near-term, given the data disclosed and the relatively favourable operating conditions.
IFRS 9 had negligible impact on the banks’ accounting equity. Regulatory capital was unaffected as it is based on statutory accounts, although the regulator may consider aligning regulatory standards with IFRS in the future. Regulatory capital requirements already capture each bank’s specific risks through Basel III capital buffers (Pillar 1 and Pillar 2), which have applied in Georgia since end-2017. Solvency ratios were all above the regulatory minimum (including buffers) at end-1Q19.
Our Georgian bank sector outlook is stable. We expect limited new problem loans, helped by stricter regulatory standards for new retail lending (tackling dollarisation and excessive retail growth) and relatively good near-term economic growth prospects. However, banks’ credit and solvency metrics remain sensitive to currency movements given high dollarisation of loans (57% of sector loans were in foreign currencies at end-2018), with most borrowers unhedged.
