Fitch Upgrades Three Georgian Banks Following Sovereign Action

Fitch Ratings-London/Moscow-16 December 2011: Fitch Ratings has upgraded the Long-term Issuer Default Ratings (IDRs) of three Georgian banks: ProCredit Bank (Georgia) (PCBG) and JSC VTB Bank (Georgia) (VTBG) to 'BB' from 'BB-', and Bank of Georgia (BoG) to 'BB-' from 'B+'. The Outlooks on all three banks are Stable. A full list of rating actions is at the end of this commentary.

The upgrade of BoG reflects the reduction in sovereign and macroeconomic risks, as reflected in the upgrade of Georgia's sovereign Long-term IDRs to 'BB-' from 'B+' on 15 December 2011 (see 'Fitch Upgrades Georgia to 'BB-'; Outlook Stable' at www.fitchratings.com). The upgrade also takes into account the bank's strong capitalisation, liquidity and pre-impairment profitability, its satisfactory asset quality, broad domestic franchise and strong corporate governance. At the same time, the still relatively high risk Georgian operating environment and BoG's substantial foreign currency lending are negative for the bank's credit profile.

BoG's Fitch core capital ratio was a strong 17.1% at end-H111. In addition, pre-impairment profit in H111, notwithstanding moderate margin compression, was equal to an annualised 8.7% of average gross loans, indicating considerable loss absorption capacity through the income statement. Non-performing loans were a moderate 3.9% and covered 121% by impairment reserves.

Highly liquid assets comprised around 26% of the balance sheet at end-H111, equating to 47% of customer deposits. Refinancing risk is moderate, as wholesale funding is mostly provided by international financial institutions and not concentrated by maturity. Wholesale funding repayable by end-2012, including the remaining part of a Eurobond maturing in February 2012, is equal to less than 5% of assets.

Fitch understands that BoG's key financial metrics at end-9M11 were broadly in line with those reported at end-H111.

Given the inherent risks in the operating environment and the high proportion of foreign currency lending, BoG needs to maintain relatively high capital and liquidity buffers in order to warrant ratings in the 'BB' category. If these buffers are significantly reduced, the ratings could come under downward pressure.

A further upgrade of BoG would require another sovereign upgrade (not expected by Fitch at present, as reflected in the Stable Outlook on the sovereign ratings), a further reduction in domestic macroeconomic risks, continued strong bank financial metrics and probably also some progress in reducing foreign currency lending exposure.

The upgrades of VTBG and PCBG reflect the upgrade of Georgia's Country Ceiling to 'BB' from 'BB-'. The Country Ceiling captures domestic transfer and convertibility risks and limits the extent to which support from the foreign shareholders of the two banks can be factored into their Long-term foreign currency IDRs.

VTBG is 96%-owned by Russian state-controlled bank JSC VTB Bank ('BBB'/Stable) and PCBG is 100%-owned by Germany's ProCredit Holding AG ('BBB-'/Stable). The Long- and Short-term IDR and Support Ratings of both banks reflect the likely high propensity of their shareholders to provide support, in case of need.

Fitch notes that VTBG remains potentially exposed to political risks in light of the strained nature of Georgian-Russian relations. However, in Fitch's view, the actions of the Georgian authorities, which have continued to regulate VTBG in line with other local banks, and of JSC VTB Bank, which recapitalised its Georgian subsidiary during the crisis, suggest that VTBG is likely to be able to continue receiving and utilising support from JSC VTB Bank.

PCBG's and VTBG's Viability Ratings (VRs) are unaffected by the rating actions. However, Fitch notes PCBG's relatively strong standalone credit metrics within the 'b' VR category, and the reduction in sovereign and macroeconomic risk reflected in the sovereign upgrade could create scope for an upgrade of the bank's VR to 'bb-' in 2012. Fitch notes PCBG's less volatile through-the-cycle performance than BoG and strong credit underwriting standards. However, PCBG's franchise is narrower and its balance sheet smaller than its larger peer.

The rating actions are as follows:

Bank of Georgia:
Long-term foreign and local currency IDRs: upgraded to 'BB-' from 'B+'; Outlook Stable
Short-term foreign and local currency IDRs: affirmed at 'B'
Viability Rating: upgraded to 'bb-' from 'b+'
Individual Rating: affirmed at 'D'
Support Rating: affirmed at '4'
Support Rating Floor: affirmed at 'B'
Senior unsecured debt: upgraded to 'BB-' from 'B+'

ProCredit Bank (Georgia)
Long-term foreign and local currency IDRs: upgraded to 'BB' from 'BB-'; Outlook Stable
Short-term foreign and local currency IDRs: affirmed at 'B'
Viability Rating: 'b+', unaffected
Individual Rating: 'D', unaffected
Support Rating: affirmed at '3'

JSC VTB Bank (Georgia):
Long-term IDR: upgraded to 'BB' from 'BB-'; Outlook Stable
Short-term IDR: affirmed at 'B'
Viability Rating: 'b-', unaffected
Individual Rating: 'D/E', unaffected
Support Rating: affirmed at '3'