Rating action

Scope Ratings UK Ltd (Scope) has today assigned a first-time issuer rating of B- and a short-term debt rating of S-4 to JSC Pasha Bank Georgia. All ratings have a Stable Outlook.

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

Key rating drivers

The B- issuer rating and the Stable Outlook reflect the following credit considerations:

Business Model assessment: Focused (Low). Pasha Bank Georgia, a subsidiary of OJSC Pasha Bank Azerbaijan, is a small player in the competitive Georgian banking sector, with a market share of approximately 1% of customer loans at the end of 2023. In January 2024, the bank decided to discontinue its mass retail banking activities, which were not generating revenues in line with expectations, and to refocus on commercial and investment banking. Its retail portfolio was sold in March 2024. Scope considers this strategic change to be credit positive because the bank wants to focus on a niche market where it has technical expertise and a positive business track record. However, this strategic move also reflects the challenge of further establishing the bank’s market position and developing an attractive business proposition in a highly competitive sector.

Operating environment assessment: Constraining (High). Georgia is a small emerging economy that, despite gradual improvements and reforms in recent years, still lags behind regional peers in some macroeconomic indicators (e.g. unemployment rate, GDP per capita, economic diversification). Recent political tensions have not altered the economic outlook so far but they remain an area of attention. The banking sector is growing and led by large national champions, with highly competitive business dynamics and aggressive pricing. The dollarization of the economy has reduced but foreign currency mismatches remain a source of risk for the sector. The regulatory framework is generally aligned with the Basel framework and the sophistication of banking regulation and supervision is improving.

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

Long term sustainability assessment (ESG factor): Constrained. The implementation of the bank’s digital strategy which is key to the success of the refocusing strategy, as well as governance considerations in light of recent strategic changes and senior management turnover, deserve attention. The introduction of new corporate digital channels and initiatives to improve IT infrastructures are still at an early stage but are critical to ensure operational continuity and improve operating efficiency.

The long-term sustainability assessment leads to an adjusted rating anchor of b.

Earnings capacity and risk exposures assessment: Constraining (-1 notch). The bank’s ability to generate consistent and predictable earnings has improved but has not yet been tested over an extended period of time. In 2023, the bank reported its first profit after four consecutive years generating recurrent losses. This positive trend continued in 2024. While operating revenue is likely to improve thanks to the refocusing strategy, the high expense base will continue to exert pressure on profitability in 2024. The pressure on earnings capacity will likely ease from 2025 if the refocusing strategy proves to be successful.

Asset quality indicators have deteriorated since 2020 as a result of attempts to develop retail banking activities. The Stage 3 ratio was at around 8% at the end of the first quarter 2024 which is high. Following the strategic refocus on corporate banking activities, the bank expects the Stage 3 ratio to fall to around 4%. Scope also notes the reduction of Stage 2 loans. Risk concentrations are significant on both side of the balance sheet. The bank has a significant portfolio of related-party transactions, as well as a high loan concentration among top borrowers. This concentration will likely decrease over time as balance sheet growth helps to improve portfolio granularity.

Financial viability management assessment: Limited (-1 notch). The bank has been subject to several recapitalisations in the past two years, as a result of persistent losses. Given the challenge to generate capital organically, distance to regulatory capital requirements is tightly managed. At the end of the first quarter 2024, the total capital adequacy ratio was at approximately 22%, around 90 bps above the minimum regulatory requirement. The refocusing strategy and prospects of stabilizing financial performance should help the bank to strengthen its capital position. Deposits are an important source of funding. A large portion of deposits comes from related parties as well as from corporates that are part of its core franchise.

External Support: Moderate support (+1 notch). Pasha Bank Georgia operates as a relatively independent subsidiary from its parent (Pasha Bank Azerbaijan), benefiting from support in case of need. The recent capital injection illustrates this parent support. This is a positive credit rating factor, as group membership provides operational support and strategic oversight for the implementation and execution of the updated medium-term strategy.

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 ratings and Outlooks are (collectively or individually):

1. A sustained improvement of the bank’s earnings capacity.
    
2. Strengthened capital adequacy metrics.
    
3. Evidence of increasing strategic importance, which could lead to a higher likelihood of extraordinary parent support in case of need.

The downside scenarios for the ratings and Outlooks are (individually or collectively):

1. Signs that the strategic importance of the bank for the group is being questioned, for instance in case of failure to execute on the new medium-term strategy, which could lead to a lower expectation of extraordinary support in case of need.
    
2. The bank’s capital position reducing further, closer to the minimum capital requirements.

Debt ratings

Short-term debt: S-4/Stable. The short-term debt rating is derived from the long-term issuer credit rating. The rating is consistent with Scope’s long-term/short-term rating correspondence table.

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 Pasha Bank Georgia

Issuer Rating: B-/Stable, new rating

Short-term debt rating: S-4/Stable, new rating

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

Methodology
The methodology used for these Credit Ratings and Outlooks, (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 Ratings if the Credit Ratings 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 Ratings: 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 these Credit Ratings 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 Ratings and Outlooks and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings and Outlooks were not amended before being issued.

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