Two banks in Georgia face downgrade amid crisis

Moody's Investors Service placed the ratings of two Georgian banks, Bank of Georgia and TBC Bank, on review for possible downgrade on Monday. The rating action reflects a review of the stresses arising from the ongoing global economic and credit crisis, the potential impact of the civil unrest seen in Georgia in recent months and the country's heightened political risk (both domestic and international).
Moody's review of the two bank financial strength ratings (BFSRs), the corresponding local currency deposit ratings and Bank of Georgia's senior unsecured rating will focus on the likely deterioration of the Georgian operating environment and its potential impact on the banks' financial fundamentals; particularly their credit quality, earnings generation and
capital levels.
Although the system's capitalisation level appears to be adequate, Moody's believes that, with the Georgian economy entering a recession, the likelihood of corporate defaults is rising and expects this to lead to increased losses on the banks' corporate loan portfolios. Moreover, delinquencies in the banks' retail portfolios are also expected to rise, reflecting higher local unemployment levels and a potential decline in households' income from remittances as other regional economies are also in recession.
Meanwhile, Georgia's economy is benefiting from the gradual disbursement of the US$4.5 billion of international donor funds that were pledged to the country following its August 2008 military clash with Russia (the country has already signed agreements to receive upwards of 40% of the pledged funds and is reportedly in active negotiations for securing the disbursement of another 40%). That said, the likelihood of a sharper economic slowdown has been increased by the civil unrest seen in recent months.
Although street protests have for the most part been peaceful, the heightened political risk increases the level of uncertainty in the country. Official data (and data from Bank of Georgia and TBC Bank) already points to a large deterioration in asset quality. Although the banks' capital positions are strong enough to withstand current asset quality pressures, in light of recent developments, Moody's is concerned about the velocity of the deterioration and the growth of problem loans in the medium term.
Changes in the banks' ratings will depend on developments in the operating environment as well as their respective intrinsic strength.