Thursday, April 22 2010 18:04
The Armenian banking sector has proved resilient to the crisis, says the International Monetary Fund's Third Review under the Stand-By Arrangement.
ArmInfo. Substantial capital and liquidity buffers, due in part to low leverage ratios, have enabled the banking sector to absorb shocks. Despite a significant increase in Non-Performing Loans (NPLs) and considerable losses from the dram depreciation last March, the aggregate capital adequacy ratio remained strong at 28.3 percent at end-2009, more than double the prudential minimum of 12 percent. As of end-December 2009, only 3 of the sector's 22 banks had capital ratios below 20 percent. Liquidity ratios remained well above minimum prudential requirements throughout the year. On top of an effective supervision framework, the authorities have implemented measures to help contain the negative impact of the crisis. For example, they have strengthened the financial safety nets (lender of last resort facility and deposit insurance scheme), tightened prudential regulations (reinstating foreign currency exposure limits), and encouraged capital injections to provide increased cushion through its subordinated debt facility.
Banking sector balance sheets have improved since September 2009. After a marked deterioration during the first 8 months of 2009, NPLs under both the CBA and the IMF definitions have fallen to 7 percent in January 2010. Profitability improved, but remains low. Profits turned positive in September 2009 for the first time since March 2009, although the ROA and ROE at end-2009 were 0.75 and 3.4 percent respectively, still significantly less than the figures of 3.1 and 13.6 percent at end-2008.
Latest stress test results indicate that banks are able to withstand a variety of shocks, thanks to the relatively high capitalization. The large capital cushion allows most banks to absorb losses and remain adequately capitalized even under extreme credit shock scenarios. Under all scenarios except for combined shocks, the CAR would decline by no more than 4 percentage points for the system as a whole. A few banks, however, appear to be more vulnerable than others to various risks, due to their relatively low capitalization level. However, the risks are contained and low, as capital injections appear to be readily available for these banks. The CBA is closely monitoring these cases. However, continued vigilance is still needed as risks to balance sheets from indirect foreign currency exposure remain. Since March 2009, deposit and loan dollarization have stabilized at around 70 and 50 percent, respectively. Exposure to unhedged borrowers represents a main source of vulnerability in the banking sector, especially in light of increased exchange rate flexibility. The CBA is in the process of strengthening prudential regulations to specifically address indirect FX risks by increasing provisioning requirements and risk weights in capital requirements for foreign currency loans. This will also provide the CBA with adequate information on the extent of unhedged lending by banks to enhance supervisory monitoring.
The high capital or low leverage in the banking sector is a source of resilience, but it has led to high interest rate spreads and hampered financial deepening. By regional standards, financial intermediation in Armenia is relatively low, with bank loans-to-GDP ratio at 22 percent in 2009, up from 17 percent in 2008 largely as a result of GDP decline.
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