Banks and economy: multi-directionality with claim to growth

ArmInfo. ArmInfo. The preliminary results of 2016 fixed on the banks’ balance sheets inspire hope for recovery of the general economic situation in the country in 2017. In an interview with NEWS.am, AmRating head, ArmInfo News Agency director general Emmanuil Mkrtchyan says that the data on the banking system of the country have proved to be beyond expectations and demonstrate gradual expansion of lending that contributes to growth of economic activity.      

What makes you think that in 2017 the Armenian economy will start overcoming the crisis?

As a matter of fact, one cannot yet say that the country is overcoming the economic crisis because we deal with a too low base and we should pass a certain path, after which it will be possible to speak of creation of prerequisites for a way out of the current economic stagnation. The results of the Armenian banking system activities demonstrate such prerequisites. I mean the vivid and tangible imbalance between the economic activity of Armenia in 2016 (0.5%) and the significant growth of the banking system’s main indicators. Such imbalances are quite justified under conditions of a low base and unbalanced structure of our economy. However, the figures speak for themselves. Look. The GDP growth slackened from 3.1% to 0.5% in 2015, the important indicator of the banks’ lending grew from 1.1% to 16%.We seem to have come across a paradox, but facts remain facts. After all, the banking system is a litmus test of the economy, figuratively speaking. If as compared to 2015, a significant increase in lending was fixed last year, with a certain time lag this active lending should be partially reflected in the economic activity indicators. Thus, speaking about the interdependence of the banking system heath and the economy in general, one can say that the former can in some way become the harbinger of the latter’s condition.

Unfortunately, we have not yet got such an important indicator as the investment position of the banking sector. In addition, the loan book is preliminary – “the wheat is not separated from the chaff”. Nevertheless, the growth of the lending indicator is so tangible that it leaves no doubt whatsoever. In 2016 the aggregate lending of the banks exceeded 2.5 trillion AMD or 5.2 bln USD. It is an essential figure. 

Isn’t this growth of the loan book explained with the banks’ merger in 2016?

Certainly, I think the system consolidation process has had a relevant effect on the overall growth of the forex balance of some banks , but this could not be the main driver of such a significant increase in the aggregate loan book. This conclusion is also suggested by the fact that not all players had to replenish their capital because their capital was sufficient and not all of them participated in mergers and acquisitions, due to which the number of the banks in the country dropped from 21 to 17. Here one can speak about both organic and quite successful and significant growth and growth related to the consolidation process in one way or another. In both cases the banking system has worked splendidly.

For instance, one can point at the dynamics of Ameriabank, which has taken the lead in the market in terms of all indicators amid organic growth. The growth of the bank's assets made up 39.2% with the growth of lending being 63.6%. At the same time, the general liabilities increased by 43.2%, while time deposits and call liabilities rose by 41%. To answer the question how effectively the bank worked on the credit market, one can take one indicator for a rough estimate – the matter concerns the level of generation of interest income. It makes up almost 80% of the bank’s total income, with a nearly 20% year-over-year growth. Over the past year the bank’s lending amounted to 501.4 billion drams, or $ 1.04 billion. It should be noted for comparison that a year earlier, in 2015 the growth was less tangible: the assets increased by only 29%, and the loan book - by 12.4%.

These indicators are very important if we talk about the condition of the loan market.  It is especially important to take into account that for the first time over the crisis-affected years the growth dynamics of interest income of Armenian banks, that is, the income received from lending began to return to its normal course. That is to say, this dynamics stopped to yield to the growth dynamics of interest expenses. Thus, the profitability loss risk, which has been exacerbated amid the credit market shrinkage in the crisis situation, has weakened. Of course, not all the banks were able to overcome this situation, which threatened to put them into a trap in the course of time, but most of them managed to overcome this situation.

Has a new pool of the major banks been determined after the consolidation? Have the roles been redistributed in the system?

I do not like to talk on this topic because I think it is wrong to say the larger the bank, the reliable it is. The US giants that exploded in 2009 are a bright example of it. Therefore, it is necessary to speak of the banks with the highest level of assets. Though, looking through the preliminary statistics, I can only say that due to the CB requirement to ensure a six-fold increase in the minimum regulatory capital by 1 Jan 2017 to 30 bln AMD, Armenia got rid of the conditional concept of “small banks”. These banks were most risk-affected. The CB predicted further deterioration of the economic environment in the country and took a decision to oblige the banks’ shareholders to increase the liquidity. This was very important for our small and weak economy, which needed to be protected against emergency situations. At the same time, the country came across reputation-related expenses. Some investors - German ProCredit Bank and Russian Gazprombank - had to sell their shares and leave the country. These are serious losses. On the other hand, obvious outsiders have left the market by being acquired by stronger, aggressive and healthy players. When the number of banks is 17, one cannot worry about deterioration of the competitive environment in the sector of banking services.

It is very important that the pool of the banking system leaders has not changed after the consolidation. I spoke of Ameriabank, which is a leader and has the highest indicators. But Ardshinbank, which is another large bank, follows Ameriabank too closely. Ardshinbank ensured double – both organic, by tangibly increasing its indices due to an active credit policy and through actual acquisition of Areximbank-Gazprombank Group. The transactions will strengthen Ardshinbank’s positions on the market, increase the level of asset diversification and give new customers to the bank. By the way, the fight for corporate customers has become the key strategic line for the system over the past 5 years. The economy stagnation hinders emergence of new economic entities in the country, therefore it is the seizure of the customer base rather than the balance sheet of the acquired bank that has become the driver of merger transactions. As a result, the total capital of the bank grew to 54 bln AMD. In 2016 Ardshinbank’s assets increased by 26% to 504.7 bln AMD and the loan book grew by 23% to 337.7 bln AMD. The total liabilities rose by 28% and the total deposits – by 23%.

Can we say that these two banks are currently the pillars of our banking system?  

Probably, you are guided by the structure of the Russian banking system, which is actually based on three state-controlled giants. Armenia lacks such banking pillars and I think it would be wrong for our country. The economy structure is different and the cash flow sources are also different. Traditionally, analysts speak of top five banks, with ArmBusinessBank, ACBA Credit Agricole Bank and Anelik Bank being the third, the fourth and the fifth on that list. But this classification is conventional. Any bank has its strong and weak sides. I do not think I should name the other banks, which operated quite successfully in 2016. I think everyone can look through the statistics. The most important thing is that the banking system of the country should get rid of the “problematic” banks hindering the system’s recovery.

As I have already mentioned, due to the process of consolidation, Armenia has two groups of banks – conventionally “large” and conventionally “medium-sized”. The latter contains banks, whose shareholders should look for their own niches on the market. Otherwise, these banks will also shortly have to leave the market.

So, you think the consolidation process is not over, don’t you?

Yes, I do. Let me explain why. When the decision on the new capital standard was being taken, the country’s economy was not brilliant, but it was far from being in the depressive condition it got into due to the lack of development-oriented reforms and “thanks to” the new external shocks. The matter concerns unprecedented drop of foreign investments and domestic capital investments, as well as unprecedented decline of foreign transfers. The decrease of the aggregate demand and consumer expenses as well as other negative factors considerably reduced the margin of banking operations and decreased the yield. The lending market kept “breathing”, but the success mostly depended on “the lung volume”. The CB staked on that. The banks that lacked relevant niches on the market and lacked poorly diversified operations came across certain difficulties and started yielding their positions to the larger players. So, the process of mergers and acquisitions is not over. At least three-four more banks may leave the market. It is a matter of price. It would simply be unprofitable to sell a bank in the depressive year 2016. It would be easier to replenish the total regulatory capital with subordinated loans for instance than to sell the bank at a low price. As soon as the situation in the economy stabilizes, we will witness new transactions.

It is no wonder that despite the tangible growth in liabilities and assets and first of all lending, the net profit of the banking system in 2016 dropped by 29.9%. In Q4 2016 alone, this indicator fell by 82.1% versus Q4 2015 given that the balance sheets got rid of toxic loans. Thus, things are not unambiguous though they seem to be stable and reliable.