Rating action

Scope Ratings UK Ltd (Scope) has today assigned a first-time issuer rating of B- to Georgia-based JSC Silk Bank with a Stable Outlook.

The full list of rating actions and rated entities is at the end of this rating action release.

Key rating drivers

Business model assessment: Focused (Low). Silk Bank (Silk) is a niche commercial bank operating exclusively in Georgia. The bank is currently engaged in a profound strategic transformation of its business model to develop its franchise in the highly competitive retail, consumer banking, micro- and SMEs segments, mainly via digital platforms. The assessment reflects the bank’s limited product diversification and limited execution track record. This strategic shift is recent and the viability of the business model remains to be proven. The loan portfolio is likely to grow rapidly but full implementation of the strategy will take several years.

Operating environment assessment: Constraining (Low). Georgia is a small emerging economy lagging regional peers on some macroeconomic indicators (e.g. unemployment rate, GDP per capita, economic diversification), despite gradual improvements and reforms in recent years. The assessment also reflects the specificities of the bank’s niche target markets and high degree of competition in segments where competitors, such as fintechs or consumer credit companies, are not subject to the same degree of regulatory oversight than licensed banks.

Scope arrives at an initial mapping of b- based on a combined assessment of the issuer’s operating environment and business model.

Long-term sustainability assessment (ESG factor): developing. Strategic initiatives to develop digital capabilities is the main driver of this assessment. Silk aims to operate as an innovative digital bank, investing in the development of its digital infrastructure and capabilities. This, if executed well, could provide a competitive advantage and position the bank as a clear challenger to the largest established banks in the market.

Earnings capacity and risk exposures assessment: Constraining (-1 notch). The implementation of the strategic change is still at an early stage. Given the required investments, the bank was loss-making in 2022-2023 and will likely continue to be loss-making for a prolonged period of time. This is a constraining factor for the rating. While Silk Bank expects that its performance will improve gradually over the years, Scope anticipates that the bank is unlikely to break even before 2026.

Financial viability management assessment: Comfortable (+1 notch). Silk Bank’s large capital base and adequate liquidity are a rating strength. The high levels of excess capital and liquidity are aimed to fund the growth strategy. While the current buffers are due to decrease along with the deployment of the strategy and growth of the loan book, Scope considers that maintaining buffers well above the minimum requirement levels is a prerequisite given the bank’s currently weak operating performance and the material execution risk of the business plan.

On a positive note, the assessment also factors the availability and willingness of the shareholder to fund the growth and support the bank in the form of capital injections. Scope considers that this an ongoing operational support part of the strategic plan.

Accordingly, Scope considers that extraordinary support from the parent is not a relevant consideration at the moment. The objective of the strategy is to transform the bank into a profitable and self-sustained business unit.

One or more key drivers of the credit rating action are considered an ESG factor.

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s view that the risks to the current rating are balanced.

The upside scenarios for the rating and Outlook are (collectively or individually):

1. A track record of sustained positive earnings capacity.
    
2. A successful business diversification through a greater product offering and enhanced customer franchise.

The downside scenarios for the rating and Outlook are (individually or collectively):

1. A material erosion of capital and/or liquidity buffers.
    
2. A material deterioration of asset quality metrics, or a riskier financial profile stemming, for instance, from a higher risk appetite or the ambition to growth faster than expected.
    
3. Heightened strategic execution risk which could jeopardise the long-term viability of the bank.

Environmental, social and governance (ESG) factors

Please refer to the ‘long-term sustainability assessment’ under the ‘key rating drivers’ section above for the ESG analysis.

All rating actions and rated entities

JSC Silk Bank

Issuer rating: B-/Stable, new rating

Stress testing & cash flow analysis
No stress testing was performed. No cash flow analysis was performed

Methodology
The methodology used for this Credit Rating and Outlook, (Financial Institutions Rating Methodology, 6 February 2024), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions - Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/uk-regulation. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Rating if the Credit Rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Rating: public domain, the Rated Entity, and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Rating originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Rating and Outlook and the principal grounds on which the Credit Rating and Outlook are based. Following that review, the Credit Rating and Outlook were not amended before being issued.

Regulatory disclosures
This Credit Rating and Outlook are issued by Scope Ratings UK Limited at 52 Grosvenor Gardens, London, United Kingdom, SW1W 0AU, Tel +44 20 7824 5180. The Credit Rating and Outlook are EU-endorsed.
Lead analyst: Alvaro Dominguez Alcalde, Analyst
Person responsible for approval of the Credit Rating: Nicolas Hardy, Executive Director
The Credit Rating was first released by Scope Ratings on 18 June 2024.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
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