Armenian Banking system exhausted its limits as a cash cow

Stagnation of the lending market of Armenia with the signs of recession against poor quality of portfolios prevents gaining of the banking revenues from the negative dynamics: the revenues are dwindeleing. According to the data of the Financial Rating of the Banks of Armenia, prepared by the Agency of Rating and marketing information (ArmInfo), in the Q1 of 2015 the aggregate net revenue of the banking system lost grounds for 54.4% in the annual break down against the 14% of the previous year. After the devaluation shock of December, which in fact have frozen the lending and driving the banking system at a loss, in the first quarter of this year a minor upraise is seen, which allowed to end up in gain retaining the slow growth pace in the Quarter 2 as well.

Nonetheless, these progress is not optimistic considering accumulated economic problems, the level of toxicity of the credit portfolios is still high under narrowing credit market.  This is proven by the levels of negative dynamics (around 5%) of standard, i.e. operating credit investments ensuring revenues.  Moreover, the level of non-operating loans burdening the balance- sheets and sending down the capitals down the throat is having greater progress. In the retrospective it is rather not optimistic the dark features of which were seen back in 2011: if in the Q1 2008 the annual progress of lending have grown for 78%, then by 2014 they slowed down up to 9% (at slowing of GDP growth from 13.7 to 3.5%).  Insignificant amplification of the dynamic indicator of the current year to 11.3% (under the economic activity of 4.2%) is not a proof of improvement of the situation, since in the Q2 the accreditation worsened for 3.3% and no activation is visible in Q2 (0.6%).

According to the Analysts from ArmRating agency, under continuation of this lowering trend during the next Quarters the situation may affect such fundamentals as capital sufficiency and liquidity level.  Currently, the level of capital sufficiency is retained not through the increase of the number of high liquidity assets that would ensure the sound growth of the system, but exclusively through topping-up of the foundation capital of the banks. If this trend will continue the investments in the foundation capitals of the banks will be covering their losses, which is not reasonable in the long-term perspective.  The resolution out of this magic circle is seen through the urgent measures of state support of the banks, including through their "make-up" by a resource base through long-term state loans and even subordinated credits. These funds may be used out of USD 300 million, which Armenia would receive from the Eurasian fund of sustainability and development (EFSD) until the end of 2015. Part of these funds will b streamlined to the support of the Bank corporate clients, as it was made during the second global financial crisis of 2008 - 2009, to the representatives of both major businesses and the SME. Also, special attention shall be given to the mining companies, having significant losses due to the global drop of the prices of metal.  These measures that are already addressed by the apologists of the monetary policy, represented by the IMF and WB, would be way more efficient than the recent mitigation of the money and credit conditions (lowering of the base rate from 10.5 to 10.25%) and limited State subsidy of the interest rates, which are as good for the economy today "as the hole in the head".

The Analysts think that so far the banks are exhausting their trading portfolios of their securities by avoiding expensive borrowings both from the abroad and inside the country, as well as funds available on their correspondent accounts (nostro) and are even enforced to use the cash, grouped drop of which will decrease the portfolio of high liquidity assets, which is impacting the level of capital sufficiency. All this is happening at a time of devaluation of AMD, which the banks have to confront to performing de- dollarization of the portfolio in order to vivify the lending.

Moreover, the aggregate credit portfolio of the banks the share of outstanding credits is around 9%, which is fairly close to the global critical limit (10-15%) and the "migration" of the bad loans from one group to another demonstrates worsening rather than improvement of their quality. The actual supports the banks rendered to the representatives of the real sector of economy during the financial crisis burdened the banks couple of years after, but with double load due to refinancing of the loans. And if the real sector by then had a support of the banks allowing not to sink, the banks have now to find a way out of the current situation - burdened by the low quality of the portfolios. And they have to resist the second Regulatory burden, i.e. increase of the level of the total capital up to AMD 30 billion by the year 2017.

According to ArmRating, under such slow growth of economic development, pessimistic forecasts on GDP, cut of the number of transfer deeds, export and import, drop of the global ore product prices, it is hard to imagine the banking system of Armenia with the current number of participants by 2017. Even though, all the banks intend to fulfill the CBA requirements on capital there is a huge possibility that certain banks would take active steps to merge by then or be acquired by major players or, in the worst case, would undergo the painful procedure of curing under CBA close eye. It would be clear in less than half year, who of the current representatives of the banking system would make this rigid regulatory norm and how right the main bank was in its projections to establish a small but powerful team of players retaining the rules of competition without the signs of monopolization.