Loan portfolio quality in Armenia banking system keeps deteriorating, as NPLs account for 13.6% of total

ArmInfo. Loan portfolio quality in Armenia's banking system keeps deteriorating, as NPLs accounted for 13.6% of total already in April 2016 versus 8.5% a year ago (7.5% in Q1 2014). In absolute terms, the NPL growth rates increased from 38% to 63% (versus 29% year on year growth in Q1 2014) to 316bln drams. 

According to ArmInfo's Financial Rating of Banks, bad loans accounted for over 40% of total NPLs, which was the main factor that affected the quality of the loan portfolio of the Armenian banks. The growth rates of bad loans increased from 62% to 2.4-fold. This indicator totaled 127.4bln drams by April 1 2016.  Most of the bad loans (77%) were in the trade sector (more than 24%), consumer loans (more than 22%), industrial sector (almost 19%), and agricultural loans (12%), rapidly accumulating also in the sectors of public catering and service, construction, and mortgage lending.  As NPLs gather pace, there is slowdown in standard loans - from 14% to 5%. 

The NPL ratio of almost half of the total 19 banks (exclusive of ProCredit Bank and BTA that were amalgamated by INECOBANK and Armeconombank) ranges between 17%-66%, exceeding the international critical range (10%-15%) significantly.  A year ago, only three banks have exceeded the limit (19%-33%).

In this light, the growth rates of the corporate and retail lending decreased from 15%-16% to 4%-9%, while in 2012 these indicators were 31%-37%. Nevertheless, banks like four years ago, prefer corporate lending to retail ones. However, now banks prefer the industrial and agricultural, public catering and service, transport and communications sectors to the trade and constructions sectors.  It is noteworthy that the industrial, service and agricultural sectors form the positive trend in the GDP of the country, while the trade sectors has seen downward trends for over a year. This year the industrial sector will take the lead in terms of the volumes, which would ensure a sustainable growth of GDP if the high exports rates are maintained.  The Government can have a crucial here by supporting the export-oriented enterprises through provision of tax holidays/preferences to some of them.

The liability structure of banks has changed in the following way: the funds raised from foreign sources decreased 2% versus last years 17.3%, timed deposits growth rates increased 18.4% from 6.4%, call liabilities increased 25.6% versus 17.7% decline. The annual dynamics of the raised funds from foreign sources proved twice as high as the one of lending -14.2% vs. 7.1%, while in absolute terms, the difference increased twofold in favor of the raised funds.  Consequently, the investment activity of banks decreased from 91% to 85%. Almost all banks have been lending less than borrowing since 2015 and this tendency has increased dramatically.

In the structure of total incomes and expenses, the interest and non-interest components showed similar dynamics: interests incomes and expenses increased 4.6% and 1.5% respectively amid 11.3%, amid 5.8% growth of the non-interests incomes and expenses, respectively.  Eventually, the total incomes of banks increased 0.4% year on year amid 0.5% growth of total expenses, which hold the balance profits from recession (it was down some 0.4%).  The net profits increased 33% (versus 75% decline a year ago) amid 30% decline of profit tax expenses and 5 loss-making banks with much lower financial results than the ones of the 7 loss-making banks a year ago.  Five banks saw a significant profit of net profits for Q1 2016 (2-4- fold, amid negative indicators of the remaining 12 banks.