Rating action

Scope Ratings UK Ltd (Scope) has today affirmed Georgia-based JSC Silk Bank’s issuer rating of B- 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). The issuer rating is anchored by the Focused (Low) business model assessment. Silk Bank is a small niche bank with total assets of GEL 226m (approx. EUR 74m) as of March 2025. The bank operates exclusively in Georgia where its market share on loans is very limited, amounting to less than 1% as of March 2025.

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 and micro segments, mainly via digital platforms. The assessment reflects the bank’s limited, albeit increasing product diversification, and limited execution track record. This strategic shift is recent, and the viability of the business model remains to be proven.

Silk Bank is expected to continue pursuing organic growth in consumer lending, Buy Now Pay Later (BNPL) credit cards as well as micro lending, focusing on self-employed and the Georgian diaspora abroad. By 2027, the bank aims to attract 300k customers and to expand internationally. Between 2022 and 2024 the bank’s loan portfolio has already grown more than sixfold but full implementation of the strategy will take years.

Operating environment assessment: Constraining (High), from Constraining (Low). Georgia (Constraining – High for the banking and micro banking sector) is the bank’s sole market. Georgia is a small emerging economy that has seen gradual improvements and reforms in recent years but still lags regional peers on several macroeconomic indicators (e.g. unemployment rate, GDP per capita, economic diversification). Current social tensions, stemming from a political crisis and contested election, raise economic uncertainty and remain an area of attention.

Georgian banking regulations are considered adequate by international standards and are the strongest in the Caucasus area. While not formally part of the EU, the capital requirements for the Georgian banking sector are aligned to the Basel III standards.

The banking sector has traditionally exhibited high profitability, with an average RoE of about 25% since 2022 due to overall lending volume growth and increasing net interest income. The domestic banking system is highly concentrated and characterised by a moderate level of cost efficiency and improving asset quality indicators. Non-performing loans continue to decline with an average NPL ratio standing approx. at 1.5% as of March 2025. Georgian commercial banks are on average well capitalised, maintaining satisfactory capital buffers above minimum requirements.

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. The assessment reflects Scope’s view that the issuer is embracing changes to ensure the long-term sustainability of its business model. Progress made may be tangible but does not warrant further credit differentiation.

Silk Bank’s strategic initiatives to develop digital capabilities are the main driver of this assessment. The bank launched its digital channels in July 2024 and aims to operate as an innovative digital bank. If executed well, it could provide a competitive advantage and position the bank as a challenger to the incumbent banks in the domestic market.

Sustainability initiatives are part of Silk Bank’s strategy and being a digital bank is expected to provide a lower environmental impact including focus on minimum consumption of environmental resources, energy reduction and material decline of paper-based operations.

Silk Bank is a majority-owned subsidiary of Silk Road Group, one of the leading private investment groups active in the Caucasus and Central Asian regions, based in Georgia. The bank is privately owned by three companies, of which the two largest shareholders own approx. 93% of the bank as of December 2024.

Earnings capacity and risk exposures assessment: Constraining (-1). The assessment reflects Scope’s view that the bank’s earnings capacity is weak and variable over economic cycles and is likely not sufficient to cover expected losses. Earnings and loss experience may show high volatility. Concentration risks require monitoring and can weigh on future performance. Asset quality metrics are below peers. Management is addressing risks, but these may still lead to material losses, putting pressure on the issuer’s viability.

Since 2022 the bank has been loss making and only when the strategic changes have been implemented this is expected to materially change. The bank’s operating revenue are expected to improve due to the rapid growth of the loan book but the high expense base during the transformation will continue to exert pressure on profitability making earnings capacity a constraining rating factor. Silk Bank is unlikely to break even before 2026.

Silk Bank’s asset quality is currently sound, but cost of risk is structurally expected to increase due to its focus on consumer lending (e.g. BNPL credit cards). The bank’s Stage 3 ratio steadily improved to 1.2% in 2024 from 2.2% and 6.4% in 2023 and 2022, respectively. Cost of risk were at annualised 170bps in Q1 2025.

Financial viability management assessment: Adequate, from Comfortable (+1 notch). The assessment reflects Scope’s view that financial viability management provides some buffer and, under a base case scenario, could not imminently push any metric close to minimum requirements or jeopardise the issuer’s financial viability.

Silk Bank’s buffers against minimum capital requirements have eroded materially but are still adequate. Buffers comfortably range between 7-13 p.p. as of Q1 2025. Maintenance of buffers sufficiently above the minimum requirement levels is supportive for the rating. As long as organic capital generation remains limited, the bank’s transformative strategy will likely reduce buffers and makes the implementation of the bank’s strategy reliant on external capital support.

Liquidity metrices remain above the minimum regulatory requirements. The LCR comfortably stands at 227% but the NSFR of approx. 127% is only at just sufficient levels at Q1 2025. The expected further growth of the loan book will continue to pressure liquidity but is projected to sufficiently remain above regulatory minimum requirements.

Silk Bank’s funding structured has historically been tilted towards current accounts and deposits from customers, representing approx. 90% of the bank’s total funding as of December 2024. The bank continues to focus on retail customer deposits but most of its funding base is coming from expensive and more volatile corporate deposits. A single concentration of deposits exists, as government related entities made a large deposit. Scope expects this concentration risk not to exert undue pressure on the banks funding profile.

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 (individually or collectively):

1. A track record of sustained positive earnings, could lead to a more positive assessment of earnings capacity and risk exposures.
    
2. A successful implementation of the bank’s strategy increasing business diversification, providing a larger product offering and enhancing the customer franchise, could improve the business model assessment.
    
3. Sustained organic capital generation and strengthened and stable liquidity that is proactively managed and grows in line with the bank’s strategy could put upward pressure on the financial viability management assessment.

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

1. A material erosion of capital and/or liquidity buffers could lead to a downgrade of the financial viability management assessment.
    
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 could put downward pressure on the earnings capacity and risk exposures assessment.
    
3. Heightened strategic execution risk which could jeopardise the long-term viability of the bank could result in a downgrade of the business model assessment.
    
4. A significant deterioration in the operating environment for Georgian banks and microbanks, which could result from prolonged political uncertainty and tensions could lead to a deterioration of the operating environment assessment.

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, affirmed

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, 10 January 2025), 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
The 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, Senior Analyst
Person responsible for approval of the Credit Rating: Karlo Fuchs, Managing Director
The Credit Rating was first released by Scope Ratings on 18 June 2024.

Potential conflicts
See 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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