Thursday, May 27 2010 15:08

ArmInfo. The Armenian Government's anti-crisis measures aimed to support the banking system last year have had a significant effect considering the indicators of banks for several last months, though, the clouds of the global economic crisis over the country have not yet broken. Albeit, the official statistics of personal incomes is absolutely inadequate to the crisis situation and since the beginning of the year GDP has started growing thanks to the rise of prices for raw-materials in the ore-mining sector, the “hemal” banking system still experiences high pressure and, in fact, hypertonic crisis in economy in general.

So far there is no unique answer to the question if the economic crisis is over in Armenia or not because there is no data on successful absorption of the country’s economy. It is not known either if the country’s economy have become of more practical value at the expense of borrowed the anti-crisis resources. The circumstance that the corporate securities market, which is a peculiar market manometer of economy, has failed to reanimate is a bright evidence of the low efficiency of economic entities even if such negative factors as inflation and devaluation expectations are tossed aside.

Nevertheless, the dynamics of indicators in the banking system shows that the banks have successfully adjusted to the new tough conditions of the “anti-crisis” period and evident panics from the first blows of the “global elements” that gave way to “the ninth wave” of the dram rate in March of the last year has started calming down thanks to the government’s assistance and the Central Bank’s regulatory measures.
It is clear that unprecedented deterioration of general economic situation in the country has resulted in insolvency of debtors, which could not but affect the balances of creditors. Those crisis phenomena began to emerge already in the first half of the last year and resulted in almost fivefold growth of “toxic assets” outstripping the dangerous 10% bar. Fortunately, timely government aid helped reducing the share of overdue loans from 10.03% to 8.5% of total loan portfolio in late Q3. Till the end of the year that indicator fell to 5.3% and was left almost unchanged in the Q1 2010. The country’s banks are obliged to the state infusions for maintenance of that important indicator and growth of their loan portfolio by 20.4% in the crisis year 2009. The banks closed Q1 2010 at 6% growth of the portfolio, but the share of loan default did not change which means that the absolute indicator of the bad loans or the so-called classified loans is gradually growing. Nevertheless, one can hardly speak of downward trends in growth of "toxic" loans now.
Successful overcoming of today’s upset will depend exclusively on general economic situation in the country for at least the whole year of 2010. The key creditor of Armenia, the IMF, has already forecasted the 5% economic growth in Armenia. The European Bank outstripped that forecast anticipating the 10% economic growth. Unfortunately, both the IMF and the European Bank count just on the quantitative growth of indicators thanks to rehabilitation of the global economy and better state of affairs in creditor-countries and not on development of Armenia’s economy and its structural changes able to ensure that growth. They count that Armenia will gradually get hooked on transfers again and further develop raw-material-intensive economy. In case these optimistic scenarios come true, the pre-crisis dynamics of indicators in the banking sector will be recovered undoubtedly, but qualitative development will fail as before. In addition, one should take into consideration that some international analysts expect the third wave of crisis that may spread from Europe’s vulnerable “links” – Greece, Spain and Portugal (the second wave) to the countries of Eastern Europe and (non-primary) weak links in the CIS, especially that external debts of those countries have exceeded the limits.

Nevertheless, one can already state the fact of reorientation of banks’ loan portfolios. The crisis made the banks revise many key approaches especially to the personal loans segment that was earlier based on the criteria of undervaluation of pledges, which was the “no-regrets” policy of banks in the conditions of low competition and permanent growth of real estate prices, growth of incomes connected, first of all, with huge inflow of private transfers to Armenia. However, that reorientation was based on the government anti-crisis program of support to small and medium enterprises through refinancing with the stabilization funds raised from abroad. The productivity of those funds for economy of Armenia will be felt in the mid-term outlook when it is time to repay those loans. It will become clear how efficiently those funds were placed, on the one hand, and how effectively economy has absorbed those funds, on the other hand.

By the statistics, banks have fulfilled the government’s “order” well enough and have coped with the stabilization loan process in general. Industrial loans grew 68% last year, agribusiness loans grew 20%, construction loans - 41%, loans to the transport and communication sector 34%, loans to the service and trade sectors 23% and 4.6% respectively. Such proportions would be perfect for an industrially developed country but not for Armenia. Unfortunately, the stabilization aid is what lies at the bottom of it all. Industry, mainly the ore-mining sector, like the unfinished construction, was financed on the conditions of the Russian US$500 million loan.

In addition, consumer lending fell almost 21% as it was expected, specifically auto loans fell 31% and mortgage market suffered 20% decline. This could not but affect the quality and level of the demand, which, in turn, affected incomes of local producers. The country found itself in the conditions of classical recession: GDP decline amid high inflation pressure. All this led to tangible shakes in the domestic currency market and, in fact, loss of confidence in the national currency, and interest rates grew and suppressed demand for resources that had already fallen even without that. This resulted in negative macroeconomic shifts, specifically, in increasing of the gap in the foreign trade, growing of the budget deficit and dollarization of the weakened economy.

Despite excess liquidity in the banking system of Armenia ensured by the regulatory requirements of the Central Bank before the crisis, the problem of resources deficit has become especially acute during the crisis. Although the aggregate capital stock of the banking system grew 19.6% last year, including statutory capital grew 23.7%, the banking system faced the problem of retaining the lending rate and preventing durable prevalence of spending growth rates over incomes. Over the year, total incomes of the banks grew 12% and total expenses – 25.6%. In the first half of 2009 banks zeroed investing in government securities and reduced funds on nostro accounts to retain lending rate. But for the timely government assistance in maintaining effective demand, banks would not recover their original positions in terms of diversification of operations. Thus, investments in government treasury bonds in the first half of 2009 suffered an unprecedented decline of 21% and only after stabilization refinancing in the second half of 2009, this indicator again grew 49%. In early 2009 interest rates on government debt liabilities averaged 9.8% depending on maturity, in the middle of the year after getting access to resources, this indicator grew to 15-16% and at the end of the year when the loan market began to recover it totaled 13%.

The uneasy period in the middle of 2009 connected also with liabilities was overcome with a help of the regulator. Over Q4 the deposits and loans of financial organizations, and mostly from international structures and creditors as part of the Russian stabilization loan grew 73% and 60% for the year 2009 amounting to 251.5billion drams. General upward trends of interest rates caused by economic recession resulted in growth of deposits in foreign exchange. Time deposits growth rates prevailed over growth of call liabilities. Time deposits grew 52.5% over the year and 14.1% for Q4 2009.

All these measures taken by the regulator and the banks made it possible for the banking system to increase the anti-crisis buffer ensuring safety cushion for the money not used in the crisis situation. Just thanks to non-performing assets the banks kept on increasing their excess liquidity, one the key reliability indicators. Thus, general liquidity (ratio of high-liquidity assets to general) grew from 26.47% to 35.32% over the year, and the current liquidity (ratio of high liquidity assets to call liabilities) grew from 167.85% to 217.31%. However, the lending activity decline resulted in reduction of ROE from 9.45% to 6.08% in general in the banking system and fall of ROA from 3.4% to 1.26%. Net profits fell 43% over the year. Thanks to the increase in the capital of some banks after investing by shareholders, the system has retained also another important reliability indicator i.e. capital adequacy ratio that fell insignificantly from 37.26% to 37.21%,

The results of the Q1 2010 in the banking system fully justified the government measures taken in 2009. However there are still different trends of quality indicators though the greatest part of the summary quantitative indicators of the system “swept up”. Even if overdue loans grew by some 1.7% (to 54billion drams), from the point of view of their regrouping by risks, the picture is not sunny because possible loss reserves have more than doubled. The level of bad loans grew 71% for Q1 only (to 12billion drams – 1.4% of total lending portfolio) probably at the expense of reduction of doubtful loans under pressing of the supervisory body.

Non-standard loans also grew 58.6% (to 16.1 billion drams or 2% of total lending portfolio). Supervised loans grew 52.5% (to 22.2 billion drams or 2.75 of total portfolio), whereas standard loans that bear no real risks so far grew just 8.1% (to 750.4 billion drams or 90/3% of portfolio). Unfortunately, there is no write off statistics. Such proportions of classified loans in total portfolio are considered quite healthy in international practice and do not affect the financial sustainability of banks. Nevertheless, growth of these indicators may continue until crisis aftermaths are overcome and the borrowing capacity of bank customers is recovered. No matter if the customer is an ore and metallurgic combine or a first-year student that applied for an overdraft and failed to repay it because of the “hole” in the family budget.

By Emmanuil Mkrtchyan, Karina Melikyan, ArmInfo NA Financial Analysis Service