Fitch Rating: Stronger Capital Buffers, Growth Prospects Moderate

ArmInfo. International rating agency Fitch Rating  released new review on 

Armenian Bank System. Particularly it notes.  

Recapitalisation  Completed:

The Armenian banking sector has entered 2017 in better  shape as the recapitalisation required to meet the increased minimum  capital standard from 2017 has been completed. Sector capital grew by about AMD164bn in 2015-2016 (36% of the end-2014 stock), following  the central bank's announcement of new capital requirements in 2014. As a result, capital buffers have improved markedly: the total  capital adequacy ratio (CAR) was up to 20% at end-2016 from 16.2% at  end-2015 and 14.5% at end-2014.  

Sector Consolidation:

The  recapitalisation requirements mostly affected the mid-sized and small  banking segments, triggering M&A activity. In 2016, the number of  banks decreased to 17 from 21, and we view further consolidation as  likely as competitive pressures intensify.  Market shares of the top  10 banks grew most notably in 4Q16, driven by very rapid credit  growth at Ameria and Anelik (mainly cash-backed transactions with  related parties and/or clients) and, to a lesser extent, by M&A deals  involving Ardshinbank and Ararat. 

Growth Trends Mixed: Credit growth has been moderate (6% in 9M16) and  uneven across the sector. Foreign-owned lenders were mostly  deleveraging, focusing on asset quality issues, but expansion by a  few domestically owned banks added a further 10% to sector loan  growth in 4Q16. Transactions with non-residents accounted for over  70% of this. 

Underlying credit demand has yet to recover in line with improving  macro trends (Fitch forecasts GDP growth of 2.0% in 2017 and 2.9% in  2018, up from 0.2% in 2016) and new lending will remain moderate.

Asset Quality Stabilisation: The NPL ratio was down to below 7% at  end-2016 (end-3Q16:  9.7%), reflecting both the denominator effect  from portfolio growth in 4Q16 and balance- sheet clean-up activity  accompanying recent M&A deals. Borrower performance remains sensitive  to recovery in domestic demand and stability of the dram (63% of  loans are in foreign currency). 

Profitability Modest: Improving profitability remains a challenge,  and will be dependent on growth potential and asset quality trends.  Returns on equity are likely to stay low, prompting owners to take  strategic decisions on the development of their banking businesses. 

What to Watch

Economy, Currency Stability: We expect a further  reduction in sector vulnerabilities, underpinned by the recovering  economy and relative currency stability, while stronger capital  buffers provide resilience against any recurring pressures on asset  quality.  

Ratings Impact: Neutral 

Improvements in the economy would be supportive of banks' credit  profiles, although upgrades are unlikely in the near term, given that  the banks are rated in line with the sovereign.