Amidst Crisis, Georgian Banks Go International for Financial Health

This story was altered on July 23 to correct the list of Bank of Georgia's holdings and the breakdown of investment in TBC Bank.

Georgian Prime Minister Nika Gelauri recently issued an appeal for an additional $200 million in funding from international financial institutions for Georgia's private banks. The catch lies in how Georgian these banks actually are. International financial institutions, in fact, already own 75 percent of Georgia's total bank equity capital, according to Georgian regulators.

Before the economic crisis and 2008 war with Russia hit, foreign commercial banks -- France's Societe Generale Groupe and the United Kingdom's HSBC -- had also shown an interest in Georgia's booming banking sector.

But with banks now facing over $137 million (215 million lari) in bad domestic loans -- up to 15 percent of Georgian banks' total loan portfolio, according to the National Bank of Georgia -- and the need to make payments on tens of millions of dollars in outstanding debts, the commercial interest has begun to fade.

Instead, international financial institutions are moving in.

The European Bank for Reconstruction and Development, one of the targets for Gelauri's appeal, headlines the international financial institutions already active in the Georgian banking sector. EBRD holds roughly 59 percent of the five largest banks in Georgia -- 20 percent in the country's second largest bank, TBC Bank; 10 percent in Republic Bank; 15 percent in Basis Bank; 8.95 percent in the Russian-state-majority-held VTB Bank and a potential 5 percent stake, tied to a loan, in the country's largest bank, the Bank of Georgia.

The International Financial Corporation ranks as the runner-up, with nearly 31 percent equity ownership of the banks active in Georgia. The IFC holds a 20 percent stake in TBC Bank and 10.74 percent in ProCredit Bank Georgia, part of the public-private ProCredit Holding, which operates in developing countries.

One senior Georgian regulator sees the trend as a positive sign for the country's economy, though terms it a "short-term event" linked to the current global crisis.

"IFIs [international financial institutions] have become more active [than private investors] to protect financial systems and help specific institutions escape their problems," commented Otar Nadaraia, deputy head of the Georgian Financial Supervision Agency. Investments from IFIs allowed Georgian banks to pay off "quite big debts" in the first half of 2009, he said.

Government plans for the release of 260 million lari ($155.7 million) in treasury bills and redevelopment of the old quarter of Tbilisi are likely to test banks' financial health still further.

Some Georgian financial analysts also see the role of international financial institutions as a boon to the country's banking sector.

Unlike in the West, the Georgian government has no money to save banks from bankruptcy. That means that international financial institutions which buy into local banks can act as troubleshooters, and help Georgian banks streamline their banking business, said Davit Aslanishvili, a financial sector expert at the Georgian Investment Group, a brokerage and market research firm.

Georgian banks "plunged" into businesses outside of banking that have stretched their management capacities, "plus disbursed risky consumer credits and came to trouble in the end," Aslanishvili said.

Bank of Georgia, the country's largest consumer bank, holds stakes in a chain of supermarkets, an insurance company, a brokerage, a leasing company and a construction development firm. TBC Bank has invested in a brokerage, a construction development firm and a leasing company.

Under an April 2009 deal, TBC bank will receive $140 million from both EBRD and IFC; in exchange, each institution will hold a 20-percent share in the bank. Dutch development bank FMO has picked up 3 percent of TBC's equity.

Other international banking groups have a presence in TBC, too. The German development bank DEG holds a 10 percent stake; JP Morgan and the British emerging markets fund manager Ashmore Fund each acquired a 5 percent stake.

International financial institutions and development banks have shown similar interest in the Bank of Georgia, touted for the past few years as the bank that was setting international standards for Georgian retail banking. Much of the bank's makeover had been attributed to former Prime Minister Lado Gurgenidze, a Western-trained and educated investment banker who served as the bank's chief executive officer and chairman of its supervisory board from 2004 until 2007.

But, here, too, help was needed. In December 2008, EBRD provided the Bank of Georgia with a 10-year loan of $100 million. The IFC also handed over $100 million. Under the terms of the joint agreement, up until 2013 each international financial institution can opt to convert their loans into shares worth up to 5 percent of the bank's equity.

Irakli Mekyabishvili, acting head of EBRD's Georgia office, described the bank's mission as making Georgia's banking management healthier and then selling the EBRD's shares in Georgian banks to a "strategic investor" within three to five years.

"To me, Georgian banks had a management problem rather than a regulatory problem," Mekvabishvili commented. "They got into unhealthy competition via risky projects, including unreasonable consumer credit disbursement."

The IFC declined to comment on its investments in Georgian banks.

Both TBC and the Bank of Georgia claim that their financial health is "not alarming;" based on the most recent data available, TBC claims a net profit of 5.4 million lari ($3.23 million); Bank of Georgia an 11.3 million-lari (about $6.77 million) profit.

Profits perhaps slim by global standards, but with international financial institutions now large investors, figures that Georgian banks are betting will only grow.