Fitch: No Impact on TBC Bank's Ratings from Republic Acquisition
In Fitch's view, the acquisition will be moderately negative for TBC's capital and funding metrics, but not to the extent that it will put downward pressure on TBC's ratings. The ratings reflect TBC's strong domestic franchise, sound profitability, solid capitalisation, ample liquidity and reasonable asset-quality metrics, while also factoring in high balance-sheet dollarisation and exposure to Georgia's fairly high-risk market.
BR is currently owned by Societe Generale (SG, A/Stable/a). It was the third-largest bank in Georgia by total assets as of end-1H16 with a 7% market share and a balance sheet equal to about a quarter of TBC's. Fitch estimates that as a result of the acquisition TBC will become the largest bank in the country by total loans and deposits with a market share of about 35%. Given BR's focus on mortgages and consumer lending, the acquisition is consistent with TBC's profile and strategy to focus on the retail segment.
TBC's capital ratios will fall materially as a result of the transaction, albeit from a strong starting point. Based on 1H16 accounts, Fitch estimates that the increase in risk-weighted assets from the consolidation and the creation of a small amount of goodwill will cause TBC's Fitch Core Capital (FCC) ratio to fall from 27% to a still sound 22%, one of the highest among Fitch-rated Georgian banks. TBC's Tier 1 regulatory capital ratio will fall to about 11% from 12.4% (minimum 7.2%), but should still be supported by sound internal capital generation. TBC and BR's asset-based performance ratios were very similar in 2015 (return on assets of 3.4% at both banks), with BR reporting a moderately higher return on equity due to slightly higher leverage. The acquisition could provide opportunities for cost synergies from operating expense optimisation.
BR's and TBC's asset quality metrics were similar at end-2015. BR reported a moderate 4.0% total non-performing loans (NPLs; above 90 days overdue) and all restructured exposures ratio at end-2015, compared with 5.8% for TBC. Together the two banks would have had a total problem loans ratio of 5.4%. BR's funding ratios were materially weaker than those of TBC at end-2015, but the impact on TBC's consolidated metrics should be limited due to the relative size of the banks. BR's loans/deposits ratio was a high 168% (mainly due to SG and IFIs funding) compared with TBC's 111%, giving a pro-forma consolidated ratio of 120%.
The likely moderate weakening of some of TBC's financial ratios is balanced by the expected significant strengthening of its market positions and franchise, in particular in the retail segment.
On 12 September, 2016, TBC announced that it will acquire a 93.6% stake in BR for GEL315m. TBC will pay 1.1x BR's book value, which will be financed with 70% cash and 30% newly issued TBC shares. As a result, SG will become a 5% shareholder of TBC with a minimum one-year holding period. TBC also intends to purchase the remaining 6.4% stake in BR from EBRD by the end of 2016.