NPLs of half of Armenian banks exceed upper ceiling of critical threshold

ArmInfo. Share of non-performing  loans (NPLs) in loan portfolio of half of Armenian banks has exceeded  upper ceiling of critical threshold-upper than 16% versus  international critical threshold of 10-15%. There are large creditors  to the country's economy among them. 

According to the Financial Ranking of Armenian Banks prepared by  ArmInfo, NPL in aggregate loan portfolio of the banks reached 13.2%  by July 1 2016 from 10.5% in 2015 and 6.6% three years ago. As of  July 1 2016 the share of NPL in total assets of the banks reached 9%  versus 7.3% in 2015 and 4.5% three years ago. 

In absolute terms overdue loans grew by 37% y-o-y to 310.3 bln AMD  versus 52% y-o-y growth in H1 2015. Slackening of their growth was  ensured due to writing-off bad loans in large amounts. Thus, if three  years ago only two banks had the share of NPL exceeding 15% in loan  portfolio, the number of such banks grew to 10 as of first half of  2016.  In the structure of NPL 67% accounts for doubtful and bad  loans, the share of the latter exceeded 47% as a result of  significant growth in absolute terms. 5 banks hold more than 76% of  bad loans. 

Amid problematic credits only supervised loans registered y-o-y  decline by 34.3% (versus 42.1% growth a year ago). At the same time  non-standard loans grew by 52.9% (versus 6.6% drop in 2015), doubtful  loans by 6% (versus 83.6% growth in 2015), while bad loans grew 2.2  fold (versus 2.3-fold growth in 2015). At this background standard  loans have demonstrated y-o-y growth only by 5.6% compared to 12.2%  growth in the previous year. In 3-year term NPL grew 2.7-fold in  absolute terms, which was mainly caused by several-fold growth of bad  loans-5.7-fold, doubtful loans-2.7-fold, non-standard-3.5-fold, amid  decline of supervised loans by only 10%, at the background of which  growth of standard loans by 26.4% was too moderate. 

Trade sector (21%), industry (17%), agriculture (16%) and  construction and services (between 4-8%) hold the major share of NPL.   There are 22% of bad loans in consumer portfolio, fifth part of it  being mortgage loans. Bad loans in industrial sector grew by 26%  y-o-y in absolute terms, in agriculture-6-fold, in trade-more than  3-fold, in construction-by 31% and in the field of services and  public catering - more than 2-fold, in consumer loans-2.2-fold, in  mortgage lending-2- fold. In three year period deterioration of bad  loans is even more depressive: in industry -5-fold growth, in  agriculture-9-fold, in trade- more than 5-fold, in  construction-10-fold, in services and catering-7- fold, at the same  time bad loans in consumer lending grew 5-fold, from which in  mortgage-3-fold. 

According to experts of Financial Information Service and Analysis of  ArmInfo current situation is mainly determined by slackening of  growth of economic activity for the recent five years from 7.8% to  4.7% (in the H1). Thus, within five years industrial output slackened  growth rates from 13% to 8.9%, gross agricultural output-from 8.1% to  3.3%, services-from 12% to 8.3%, trade turnover-from 2.4% growth to  0.3% decline, energy sector-from 9.1% growth to 4.9% decline, and in  construction sector decline accelerated from 6.7% to 7.8%. At this  background growth rates of export accelerated from 13.5% to 16.7%,  while import changed 6.7% growth rates to 3.7% decline, which caused  slackening of Armenia's foreign trade turnover growth from 8.3% to  2.7%. In H1 2015 industrial output and services registered more  moderate growth-5.1% and 3.3% respectively, while agriculture on the  contrary accelerated growth to 14.5%, construction and energy sector  were in positive trend-0.6% and 1.5% respectively, while trade  demonstrated significant decline-5.1%. At this background export and  import demonstrated downward trend-1.3% and 27.2% respectively.  Mining industry sharply slackened y-o-y growth rates from 34.8% to  18.8%, processing industry demonstrated 5.1% growth following 2.1%  decline, metallurgy experienced 15% decline after 17% growth, textile  industry had 6.4% decline following 16.1% growth, chemical industry  demonstrated 47.7% growth from 18% decline. 

Growth rates of lending to industry accelerated to 14% from 9%,  agricultural sector-2% decline after 27% growth, construction-0.2%  decline versus 8% growth, trade-1% decline following 12% growth,  services and catering sharply slackened growth rates from 63% to 8%.  At this background consumer lending insignificantly slackened growth  rates from 8% to 6%, while in mortgage lending alone growth rates  slackened to 6.5% from 16.3%. SME lending grew in y-o-y terms by 12%,  versus 1.2% growth a year before, however there is still quarterly  drop despite some slackening. 

According to Ranking of Armenian Banks prepared by ArmInfo, assets of  the country's banking system totaled 3.5 trillion AMD as of July 1,  2016 with slackening of y-o-y growth to 9.1% from 12.2%. In their  structure share of credit exposures was 67.6% or 2.4 trillion AMD  versus 65.9% in previous year. In absolute terms loan portfolio grew  by 12.3% y-o-y (versus 12% growth in 2015) amid slackening growth  rates of retail lending from 11% to 4%. As of the first half of 2016  Armenian banks had net profit amounted to 12.4 bln AMD with 58.7%  y-o-y growth versus 55.6% decline a year before. 56% of it was  ensured due to foreign currency transactions. Income from lending  grew by 4% in y-o-y terms amid growth of expenses on deposits by 19%.  At the same time income from inter-bank lending and nostro-accounts  demonstrated quite a higher rate of growth.  

To note, there are 19 banks currently operating in Armenia and only 7  of them currently meet the Central Bank's requirement of minimal  total capital of 30 bln AMD to come into force from Jan 1 2017,  versus current 5 bln AMD. Total capital of the banks reached 582.6  bln AMD as of July 1 2016, with 19.4% y-o-y growth due to growth of  registered capital by 28% (to 368.6 bln AMD) amid drop of accumulated  profit by 3.5% (to 152.5 bln AMD). In y-o-y terms 9 banks underwent  capitalization including INECOBANK and Armeconombank via merger with  ProCreditBank and BTA Bank respectively. Although none of 12 banks  has announced about merger yet consolidations will further take place  to meet the new requirement and 5 banks with the smallest capital  need to solve this task more urgently.