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Rating Action:

Moody's reviews two banks in Georgia for possible downgrade

08 Jun 2009

Limassol, June 08, 2009 -- Moody's Investors Service has today placed on review for possible downgrade the ratings of two Georgian banks: Bank of Georgia and TBC Bank. The rating action reflects a review of the stresses arising from the ongoing global economic and credit crisis, the potential impact of the civil unrest seen in Georgia in recent months and the country's heightened political risk (both domestic and international). See below for a list of the affected ratings.

Moody's review of the two bank financial strength ratings (BFSRs), the corresponding local currency deposit ratings and Bank of Georgia's senior unsecured rating will focus on the likely deterioration of the Georgian operating environment and its potential impact on the banks' financial fundamentals; particularly their credit quality, earnings generation and capital levels.

Although the system's capitalisation level appears to be adequate, Moody's believes that, with the Georgian economy entering a recession, the likelihood of corporate defaults is rising and expects this to lead to increased losses on the banks' corporate loan portfolios. Moreover, delinquencies in the banks' retail portfolios are also expected to rise, reflecting higher local unemployment levels and a potential decline in households' income from remittances as other regional economies are also in recession.

Meanwhile, Georgia's economy is benefiting from the gradual disbursement of the US$4.5 billion of international donor funds that were pledged to the country following its August 2008 military clash with Russia (the country has already signed agreements to receive upwards of 40% of the pledged funds and is reportedly in active negotiations for securing the disbursement of another 40%). That said, the likelihood of a sharper economic slowdown has been increased by the civil unrest seen in recent months.

Although street protests have for the most part been peaceful, the heightened political risk increases the level of uncertainty in the country. Official data (and data from Bank of Georgia and TBC Bank) already points to a large deterioration in asset quality. Although the banks' capital positions are strong enough to withstand current asset quality pressures, in light of recent developments, Moody's is concerned about the velocity of the deterioration and the growth of problem loans in the medium term.

Changes in the banks' ratings will depend on developments in the operating environment as well as their respective intrinsic strength.

The following ratings are affected:

Bank of Georgia

- D- BFSR placed on review for possible downgrade

- Ba3 global local currency (GLC) deposit rating placed on review for possible downgrade

- Ba3 senior unsecured debt rating placed on review for possible downgrade

- B3 (negative outlook) foreign currency deposit rating and Not Prime local- and foreign-currency short term deposit ratings were not affected by this action

TBC Bank

- D- BFSR placed on review for possible downgrade

- Ba3 GLC deposit rating placed on review for possible downgrade

- B3 (negative outlook) foreign currency deposit rating and Not Prime local- and foreign-currency short term deposit ratings were not affected by this action

Moody's previous rating action on Bank of Georgia was on 5 March 2009, when the outlook on the bank's D- BFSR was changed to negative and its GLC deposit rating was downgraded to Ba3 (negative outlook) from Ba1. The senior unsecured debt rating was also downgraded to Ba3 (negative outlook) from Ba2. The bank's B3 (negative outlook) long-term foreign currency deposit and Not Prime short-term ratings were affirmed.

Moody's previous rating action on TBC Bank was on 5 March 2009, when the outlook on the bank's D- BFSR was changed to negative and its GLC deposit rating was downgraded to Ba3 (negative outlook) from Ba1. The bank's B3 (negative outlook) long-term foreign currency deposit and Not Prime short-term ratings were affirmed.

The principal methodologies used in rating the banks were "Bank Financial Strength Ratings: Global Methodology" (February 2007) and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology" (March 2007), which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies sub-directory. Other methodologies and factors that may have been considered in the process of rating these issuers can also be found in the Credit Policy & Methodologies directory.

Headquartered in Tbilisi, Bank of Georgia had total assets of US$2.0 billion at the end of December 2008.

Headquartered in Tbilisi, TBC Bank had total assets of US$1.1 billion at the end of December 2008.

Limassol
Mardig Haladjian
General Manager
Financial Institutions Group
Moody's Investors Service Cyprus Limited
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Limassol
Stathis A. Kyriakides, CFA
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Cyprus Limited
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's reviews two banks in Georgia for possible downgrade
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