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Net Profits of Commercial Banks Shrink

According to National Bank of Georgia (NBG), net profits of commercial banks made up 47 993 000 GEL in June 2018.

According to NBG indicators, the banking sector’s net profits halved year on year. According to the 2017 June indicators, the banking sector’s profits made up 95 882 000 GEL.

The NBG statistics shows that the banking sector’s net profits started declining in March 2018. According to NBG indicators, in March the setor’s net profits was 59 959 000 GEL. In April this figure rose by 9 million GEL, but in June the profits indicator declined again.

In the first half of 2018 net profits of Georgia-based commercial banks constituted 410 million GEL, down 37.5 million GEL (-8.4%) compared to the first half of 2017. In June the sector’s profits declined by 50% (-48 million GEL) and totaled 48 million GEL.

Giorgi Kepuladze, director of Society and Banks nongovernmental organization, says that  new regulations could halve the sector’s profits in June 2018.

“The profits indicator changes, it rises or falls. As to new regulations, commercial banks will feel their impact in several months and at the end of 2018, when regulations introduced in May will be fully reflected on profits and turnover, however, the June profits may be related to new regulations”, Kepuladze noted.

It is not ruled out that commercial banks fire a part of personnel because of the new regulations, change business model and alter priorities, he said.

Doctor of Economics Irakli Makalatia says that the sector’s net profits declined because other expenditures rose by 40 million GEL.

«The National Bank’s statistics shows that the sector’s profits was growing before tax payment, but commercial banks faced a huge growth in unforeseen expenditures and under this calculation, the sector’s net profits declined», Makalatia noted.

«Why have the sector’s unforeseen expenditures grown? The commercial banks should explain what  expenditures they have taken and what reasons have grown them. In this case we will definitely learn reasons for the sector’s net profits declination», Makalatia said.

Makalatia rules out that the new regulations could cut the sector’s profits. Retails loans declined by only 1 million GEL, he said.

“Effect of the regulations that the government has set on the bank sector because of excessive debts is not touchable yet. Net profits declined in 2015-2016 too. The banking profits trend is floating and it is difficult to assert whether it goes up or down. The main thing is that the net profits reduction not become tendency in the coming months. Otherwise the banking sector will be genuinely damaged”, Makalatia said.

Gogita Tsutskiridze, vice president of Georgian Banks Association, says that there is nothing alarming in reduction of the banking sector’s profits. The sector’s profits declination has nothing common with NBG regulations, under which physical bodies’ access to loans were restricted.

“The new regulations were introduced a month ago. At the same time, the sector’s crediting indicators have increased by 18% and this is not a low indicator. On the contrary, this is more-than-average indicator. Therefore, it cannot be ascribed to new regulations that sets stricter conditions on growth in loans”, Gogita Tsutskiridze said.

It is worth noting that reduction in the banking sector’s profits is a strange fact for Georgian economy over the past 10 years.

As a rule, the sector’s profits used to grow irreversibly  on annual basis. This year the profits growth pace declined and this was to happen one day, as the sector’s profits could not grow for ever, endlessly.

As reported, in 2001-2013, the 13-year consolidated net profits of commercial banks made up 1.119 billion GEL, while in 2014-2017 total net profits of commercial banks made up 2.561 billion GEL. This signifies over the past 4 years the sector’s profits exceeded the 13-year indicators twice.

It is interesting that if we compare the 2013-2017 economic growth paces to the banking sector’s profits growth  (proportionally, compared to the previous year), the banks’ annual profits growth pace exceeded the economic growth by at least 6 times.

Profitability of the banking sector is determined by two indicators: Return on Assets (ROA) and Return on Equity (ROE). Georgia-based commercial banks are leaders in both components compared to other countries of the world. For many years the Georgian banking sector is recorded among the world’s top 20 banking sectors, while Georgian banking sector is leader among European countries.

By Merab Janiashvili
Economic Analyst
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