OREANDA-NEWS. Fitch Ratings has assigned Georgia's JSC Cartu Bank (Cartu) a Long-term foreign currency Issuer Default Rating (IDR) of 'B+' with a Stable Outlook. A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS
Cartu's ratings are driven by its standalone creditworthiness, as expressed by its Viability Rating (VR) of 'b+'. The VR considers the bank's small size and concentrated franchise in a relatively high risk economy, its significant stock of NPLs and restructured loans, exposure to the potentially vulnerable real estate and construction segment and the high dollarisation of the bank's balance sheet. The rating also takes into account the bank's large capital cushion, comprising equity and subordinated debt, limited refinancing risk, reasonable liquidity and satisfactory performance metrics.

The bank's Support Rating Floor of 'No Floor' and Support Rating of '5' reflect Fitch's view that support from the Georgian authorities cannot be relied upon due to the bank's low systemic importance. Potential support from the private shareholder is also not factored into the ratings, as it cannot be reliably assessed, although the owner's personal wealth appears to be substantial and he has provided capital and liquidity support to Cartu, when required.

The Stable Outlook on the bank's Long-term IDR reflects Fitch's view that the currently more challenging Georgian operating environment, characterised by lower growth and a weaker currency, should not have a marked negative impact on the bank's credit profile.

At end-1H15, the share of non-performing loans (NPLs, over 90 days overdue) was a relatively high 15.5% of gross loans, with restructured exposures comprising a further 10%. At end-1H15, reserve coverage of NPLs was a moderate 40%, and of total problem loans (NPLs and restructured) 25%, reflecting the bank's reliance on loan collateral. Problem loans largely comprise longstanding legacy exposures, but these have generated significant cash recoveries in 2014 and 1H15.

Loan concentrations are large (the top 25 groups of borrowers comprised 68% of the portfolio at end-2014), but moderate compared with the bank's total capital (83%). The high share of FX lending (74% of the total) poses additional risks, as most of this is issued to unhedged borrowers, whose debt servicing capacity could have been negatively affected by the recent devaluation of the lari and lower growth environment.

The bank's solid capital base, as reflected in a Fitch core capital ratio of 33.5% at end-2014 and subordinated debt contributed by the shareholder equal to a further 13.2% of risk-weighted assets, provides substantial loss absorption capacity, equal to about 40% of gross loans at end-2014. The regulatory Tier 1 capital ratio was somewhat lower, at 19.3% at end-1H15 (although still well above the regulatory minimum of 7.6%), as the National Bank of Georgia applies a 150% risk weight to FX-denominated loans and the loan portfolio grew by 30% in 1H15, in part due to devaluation.

The bank's profitability metrics were reasonable in 2014, supported by a solid net interest margin of 9.6%, a relatively low cost base, as reflected in the cost/income ratio of 40%, and moderate provisioning charges. At the same time, the return on average equity (ROAE) of 7.2% was lower than for most peers in Georgia, primarily due to significantly lower leverage. ROAE rose to a high 33% in 1H15, mainly due to non-recurring non-interest revenues.

Liquidity is comfortable, with the available cushion consisting mainly of cash and equivalents equal to 30% of customer accounts at end-1H15. Refinancing risk is moderate and mostly associated with significant concentrations in the deposit base, with the largest 20 customers comprising 63% of total accounts. However, the bank does not have material wholesale borrowings, and the overall share of third parties in total funding (liabilities and equity) is a low 40%.

RATING SENSITIVITIES
The ratings could be downgraded if the weaker operating environment translates into a much more significant deterioration in the bank's asset quality than Fitch currently expects, leading to a significant erosion of capital.

A significant improvement in the bank's asset quality metrics and a stronger, more diversified franchise, combined with a still moderate risk appetite and sound capital cushion, could result in upward pressure on the ratings.

The rating actions are as follows:

Long-term IDR assigned at 'B+'; Outlook Stable
Short-term IDR assigned at 'B'
Viability Rating assigned at 'b+'
Support Rating assigned at '5'
Support Rating Floor assigned at 'No Floor'.