Eastern Europe Banking & Deposits: Abkhazia – Central bank issues consolidated report on commercial banking sector in 2012: NPLs still very high but profits are recovering

Commemorative 50 apsar gold coin issued by the Bank of Abkhazia on 22 March 2013

and featuring the Dormition Cathedral of Lykhny

On 17 April the Bank of Abkhazia (Аҧсны Аҳәынҭқарра Амилаҭтә банк) published a 19-page report on the performance of Abkhazia’s banking sector in 2012. The highlights are discussed below. (All currency amounts are given in Russian rubles. As of 31 Dec. 2012 one euro equaled 40.25 RUB. The Bank of Russia reports that core inflation in RUB in

Russia

ran at 5.7% in 2012.)

GENERAL

In 2012 the number of commercial banks operating in Abkhazia decreased from 15 to 11. Although the number had remained unchanged at 15 banks for more than three years, since 3Q 2008, in 2012 the central bank revoked the licenses of four commercial banks.

- On 4 April the central bank revoked the licenses of three banks, stating in each case that the bank’s management had failed to remedy a situation consisting of insufficient equity, non-compliance with required ratios, and untimely fulfillment of obligations to creditors:

1. Invest-Bank (Abkhazian: Акоммерциатә банк «Инвест-Банк» (ЗҲА); Russian: ООО КБ «Инвест-Банк»), which was headquartered in Sukhum. The central bank’s quarterly report on the banking sector for 2Q 2011 had identified Invest-Bank as having 100% of its loan portfolio impaired, i.e., all of its loans classified as falling in quality categories II through V.* The central bank’s quarterly report for 3Q 2011 indicated that due to non-performing loans, the average effective interest rate that the bank received on its loan portfolio in the first nine months of 2011 was 6.0%. Invest-Bank at end-2011 had a 2.9% market share in Abkhazia in total assets. (The largest bank, Sberbank of Abkhazia, had a 49.4% market share in total assets, followed by Gagra-Bank with 11.6% and Garant-Bank with 6.3%.)

Leon

-Bank (Акоммерциатә банк «Леон-Банк» (ЗҲА); ООО КБ «Леон-Банк»), a bank headquartered in Novy Afon. The central bank’s quarterly report for 2Q 2011 had identified the bank as having more than 70% of its loan portfolio impaired, and stated that the bank’s liquidity ratios had fallen below the established minimums several times in 9M 2011. The central bank’s quarterly report for 3Q 2011 indicated that due to non-performing loans, the average effective interest rate that Leon-Bank received on its loan portfolio in the first nine months of 2011 was just 0.6%. Leon-Bank at end-2011 had a 1.6% market share in Abkhazia in total assets.

3. Bank-Prestige (Акоммерциатә банк «Банк-Престиж» (ЗҲА); ООО КБ «Банк-Престиж»), a bank headquartered in Gulrypsh. The central bank’s quarterly report for 2Q 2011 had identified the bank as having 100% of its loan portfolio impaired, and stated that the bank’s liquidity ratios had fallen below the established minimums several times in 9M 2011. The central bank’s quarterly report for 3Q 2011 indicated that due to non-performing loans, the average effective interest rate that the bank received on its loan portfolio in the first nine months of 2011 was 5.1%. Bank-Prestige at end-2011 had a 2.3% market share in Abkhazia in total assets.

- On 31 May the central bank revoked the license of one other credit organization, stating that its management had failed to maintain sufficient equity and failed to comply with mandatory standards:

4. Gudauta, formerly known as Agrarian-Bank (Гудауҭатәи акоммерциатә банк “Аграртә-Банк”; КБ «Аграрный-Банк» / РНКО «Гудаута»), headquartered in Gudauta. The central bank’s quarterly report for 2Q 2011 had identified the bank as having 100% of its loan portfolio impaired. The central bank’s quarterly report for 3Q 2011 indicated that due to non-performing loans, the average effective interest rate that the bank received on its loan portfolio in the first nine months of 2011 was just 0.6%. Agrarian-Bank at end-2011 had a 0.7% market share in Abkhazia in total assets.

Data: Number of commercial banks (количество действующих кредитных организаций) in operation at yearend:

2012: 11

2011: 15

2010: 15

2009: 15

2008: 15

2007: 14

2006: 15

2005: 14

2004: 14

*The Bank of Abkhazia in 2007 established five categories for loan performance that banks must use when allocating loss reserves. The categories are based not on the number of days that a loan is in arrears but on an estimate, made using professional judgment, of the risk that the borrower will default on the loan. The categories are as follows:

Category I: Standard loans (стандартные ссуды) – no risk of default

Category II: Non-standard loans (нестандартные ссуды) – 1-20% risk of default

Category III: Doubtful loans (сомнительные ссуды) – 21-50% risk of default

Category IV: Problem loans (проблемные ссуды) – 51-100% risk of default

Category V: Uncollectible loans (безнадежные ссуды) – 100% risk of default

A bank may not proceed to write off a loan until the borrower has been in default on his obligations for at least one year.

Data: Number of scheduled and unscheduled bank inspections (инспекционной проверки, плановый и внеплановый) carried out by Bank of Abkhazia during the year:

2012: n.a.

2011: 12

2010: 12

2009: 18

2008: n.a.

ASSETS

Total assets: In 2012 total assets of commercial banks increased by 7.6% to RUB 7,271,578,000 (€ 180.7 mln).

Data: Total assets (валюта сводного баланса (брутто)) at yearend:

2012: 7,271,578,000

2011: 6,757,228,000

2010: 4,563,586,000

2009: 3,344,795,000

2008: 2,408,323,000

2007: 1,634,169,000

2006: 900,476,000

2005: 770,076,000

Total loans: In 2012 the total loan portfolio of commercial banks decreased by 1.0% to RUB 2,983,525,000 (€ 74.1 mln). The ratio of total loans to total assets declined somewhat more significantly, from 44.6% at end-2011 to 41.0% at end-2012.

Data: Total loans (кредитные вложения) at yearend:

2012: 2,983,525,000 (41.0% of total assets)

2011: 3,014,474,000 (44.6% of total assets)

2010: 2,286,665,000 (50.1% of total assets)

2009: 1,798,046,000 (53.8% of total assets)

2008: 1,536,482,000 (63.8% of total assets)

2007: 995,147,000 (60.9% of total assets)

2006: 405,325,000 (45.0% of total assets)

2005: 325,102,000 (60.7% of total assets)

NPLs: In 2012 the total of non-performing loans declined 9.7% to RUB 1,281,743,000 (€ 31.8 mln). The ratio of non-performing loans to all loans at end-2012 was 43.0%, slightly improved over the 47.1% recorded in the previous year. The ratio of coverage for allowances for impaired loans also improved slightly in 2012, from 44.2% to 45.7%.

Data: Non-performing loans (impaired loans of categories II-V) (качество кредитных вложений (обесцененные ссуды II-V категорий)) at yearend:

2012: 1,281,743,000 (43.0% of total value of all loans)

2011: 1,419,160,000 (47.1% of total value of all loans)

2010: 652,337,000 (28.5% of total value of all loans)

2009: 480,878,000 (26.7% of total value of all loans)

2008: 304,108,000 (19.8% of total value of all loans)

2007: 161,412,600 (15.7% of total value of all loans)

2006: n.a. (reporting of the data via Form 115-А only became obligatory on 1 June 2007)

Data: Allowances for impaired loans (резервы на возможные потери по ссудам) at yearend:

2012: 585,659,000 (45.7% of impaired loans)

2011: 627,118,000 (44.2% of impaired loans)

2010: 300,824,000 (46.1% of impaired loans)

2009: 118,347,000 (24.6% of impaired loans)

2008: 49,780,000 (16.4% of impaired loans)

2007: 14,785,000 (9.2% of impaired loans)

2006: n.a. (allowances became obligatory only from 1 April 2007)

Illarion S. Argun (Илларион Шамахович Аргун), Chairman of the Bank of Abkhazia

LIABILITIES

Deposits by physical persons: Deposits by physical persons in 2012 declined 7.2% to RUB 475,055,000 (€ 11.8 mln). The share of deposits denominated in currencies other than Russian rubles declined for the fourth straight year in 2012, falling from 16.9% to 12.4%.

Data: Deposits by physical persons (депозиты (вклады физических лиц)) at yearend:

2012: 475,055,000 (87.6% in RUB)

2011: 511,880,000 (83.1% in RUB)

2010: 485,779,000 (77.9% in RUB)

2009: 338,874,000 (76.0% in RUB)

2008: 241,646,000 (83.7% in RUB)

2007: 146,973,000 (84.7% in RUB)

2006: 106,130,000 (68.1% in RUB)

2005: 161,100,000 (51.7% in RUB)

Deposits by legal entities except financial institutions: Non-retail deposits, which had been extremely small but growing continuously since the war of August 2008, underwent extreme volatility in 2012. The total of such deposits began January 2012 at RUB 43,180,000, collapsed to RUB 3,184,000 by 31 March, rose again to RUB 13,150,000 by 30 June, and returned to RUB 46,558,000 – approximately its original level – by 30 September, only to collapse again down to RUB 11,577,000 by 31 December. But because total non-retail deposits rarely exceeded the equivalent of one million euros at any point during the year, the volatility might well be due to activity by one or more comparatively large firms or government agencies.

Data: Deposits by legal persons (excluding financial institutions) (депозиты юридических лиц (кроме кредитных организаций)) at yearend:

2012: 11,577,000

2011: 43,180,000

2010: 9,967,000

2009: 3,400,000

2008: 3,794,000

2007: n.a.

2006: n.a.

INCOME

Net income: In 2012 the net income of the commercial banking sector increased by 41.7% to RUB 2,261,200,000 (€ 56.2 mln). Net income increased at 6 out of the 11 commercial banks, most notably at Sberbank of Abkhazia (+63.3%), Garant-Bank (+37.1%), Universal-Bank (+26.2%), and CIBIT-Bank (+12.9%). But net income decreased at 5 out of 11 banks, especially at Amra-Bank (-57.9%), Sukhum-Bank (-20.3%), Ochamchira (-16.3%), and Black Sea Development Bank (-14.5%).

Data: Net income (общая сумма доходов) for year:

2012: 2,261,200,000

2011: 1,595,900,000

2010: n.a.

2009: n.a.

Past-due interest: At end-2012 the total amount of interest in arrears was RUB 412,800,000 (€ 10.3 mln), 4.7% lower than the level at end-2011.

Data: Past-due interest (просроченная задолженность по процентам / задолженность по просроченным процентам) at yearend:

2012: 412,800,000

2011: 433,200,000

2010: 97,300,000

2009: 50,600,000

2008: 29,400,000

2007: n.a.

2006: n.a.

Net profit: Following on enormous losses experienced by five banks in 2011, in 2012 profits in the sector recovered, with net profit for commercial banks reaching in 2012 the modest level of RUB 49,855,000 (€ 1.24 mln).

Data: Net profit (конечный финансовый результат) for the year, and the number of banks that showed a signicant profit or significant loss (количество рентабельных/нерентабельных кредитных организаций) for the year:

2012: 49,855,000 (Banks with profit: 7. Banks with loss: 3.)

2011: -224,682,000 (Banks with profit: 10. Banks with loss: 5.)

2010: -85,679,000 (Banks with profit: 9. Banks with loss: 6.)

2009: 15,301,000 (Banks with profit: 12. Banks with loss: 3.)

2008: 67,729,000 (Banks with profit: 12. Banks with loss: 2.)

2007: 31,268,000 (Banks with profit: 11. Banks with loss: n.a.)

2006: 9,664,000 (Banks with profit: 12. Banks with loss: 3.)

2005: 10,888,000 (Banks with profit: 11. Banks with loss. 1.)

CAPITAL/EQUITY

Shareholder capital: Total authorized share capital in the commercial banking system declined by 15.3% in 2012, primarily due to the revoking of the licenses of four credit institutions in the second quarter of the year.

Data: Total authorized capital (уставный капитал) at yearend:

2012: 454,759,000

2011: 536,854,000

2010: 315,589,000

2009: 288,589,000

2008: 278,589,000

2007: 189,332,000

2006: 57,677,000

2005: 28,856,000

Equity: In 2012 equity soared by 120.6% to RUB 1,181,593,000 (€ 29.4 mln) notwithstanding the closure and resolution of four banks during the year.

Data: Total shareholders’ equity (собственный капитал) at yearend:

2012: 1,181,593,000