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Banking: Two’s company in Georgia

Banking sector concentration, rather than proliferation, is the lesser of two evils.


TBC Bank in Tbilisi, Georgia

How much consolidation is too much? That is the question facing the regulator in Georgia, a small market on the fringes of Europe. 

Société Générale plans to sell its Georgian subsidiary to local number two lender TBC Bank. 

If the acquisition goes through, TBC will become Georgia’s largest bank. The deal will also increase the already high concentration in the sector. Between them, TBC and its closest rival, Bank of Georgia, will account for more than 60% of banking assets in the country.

Would that be a bad thing? Basic economic theory says that it would. Concentration means less competition, higher profits for banks and worse-off customers – in theory.

Yet the experience of Georgia suggests that this is only partly true. Certainly TBC and Bank of Georgia, which have dominated the market for well over a decade, are highly profitable. Both regularly post returns on equity in the region of 20%, while net interest margins can be as high as 800 basis points.

Clearly, Georgian customers are not getting ultra-cheap banking. What they are getting, however, are sophisticated customer service and cutting-edge technology – which, thanks to their healthy margins, the country’s leading banks can afford.

Good profitability also means Bank of Georgia and TBC are able to maintain extremely strong capital bases. Just how strong was demonstrated in the wake of the rouble collapse in late 2014, which set off a domino effect among the currencies in neighbouring CIS countries.

Shrugging off

Banks in markets from Armenia to Kazakhstan struggled to maintain adequate levels of capitalization as asset quality deteriorated and profits evaporated. Several had to be bailed out by their respective governments. By contrast, Georgia’s largest lenders shrugged off a 42% depreciation of the lari to post good returns in both of the last two years.

This is not to suggest, of course, that two big banks are all any country – even a small one – needs. Nevertheless, the resilience of the Georgian banking sector does suggest that, if the choice is between extremes of concentration and proliferation, the former might be the lesser of two evils. 

This is perhaps even more true of the markets of emerging Europe than it is of their counterparts to the west. Out of 27 former communist countries, just six have a population of more than 10 million, while 12 have less than half that number. 

What is more, banking penetration levels remain low. Total lending amounts to barely 60% of GDP in even the developed markets of central Europe, while across CIS the figure is mostly below 50%.

Such markets do not need more than three or four large banks at most, along with maybe a handful of smaller niche players. Yet many still have several times that number. Armenia, a country of 3 million inhabitants with a GDP of $11 billion, had more than 20 banks at the last count.

This does no favours to either banks or customers – or indeed taxpayers, who will be on the hook if banks need bailing out. If consolidation is not happening naturally, regulators should promote it as a matter of urgency. 

This could be done by either forcing lenders to deal with large legacy portfolios of bad debts – a bar to M&A activity in several economies – or, more simply, by raising capital ratios until weaker lenders are forced to sell up or shut down. 

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