Monday, December 17 2018 15:23
Emmanuil Mkrtchyan

Expert: Despite the adequacy of Armenian banks` capitals, the  opportunities for its optimal use are severely limited

Expert: Despite the adequacy of Armenian banks` capitals, the  opportunities for its optimal use are severely limited

ArmInfo. Despite the high  ratioof capital adequacy, at least among the largest players in the  Armenian banking market, the opportunities for its optimal use are  severely limited, Financial Director of one of the largest banks in  Armenia, former Minister of Finance David Sargsyan stated at a  banking conference organized by Fitch Ratings international agency  last week in Yerevan.

According to Sargsyan, when drawing up plans for strategic  development, commercial banks consider the level of profitability of  various business areas and their investment attractiveness in order  to secure optimal investment sectors 2for ensuring profit. However,  over the past 7-8 years, there are less and less of such areas, while  the yield on government bonds remain at the average level of the  return on equity rate (ROE), which is about 9-10%.

"When we have to discuss the issue of additional investments in the  capital of banks or other economic agents from various fields of  activity, including entities of the new digital economy, the question  always arises of the level of profitability and, as a result, the  deadlines of the return on investment. Today we are spinning around  9%, but in any case it is lower than 10% per annum. This limits  investment in all areas of business. That is, an insufficient level  of profitability, as a problem, exists", Sargsyan stressed.  In this  vein, answering the question of the conference moderator about the  assessment of the further possibility of consolidating the banking  system of Armenia, the expert stressed that with such low  profitability, bank owners do not want to increase capital, because  there is a question about securing profitability for this capital.  Therefore, the expert believes, the largest banks of Armenia in  conditions of strong competition are trying with all their might to  strengthen their positions and expand their niches in the low-yield  limited market. At the same time, the goal is set to increase  non-interest income through effective technological solutions,  products and innovations; however, this market in the country has  certain user limitations.

The expert noted that the majority of banks today have a ratio of  operating income to operating profit of 40%, which is slightly lower  than a year earlier, but this is the minimum below which to achieve  in today's environment is not possible. In turn, such a reduction in  the ratio of operating efficiency, primarily affecting increase of  risk of loss of profitability, forces banks to look for other ways to  increase the profitability of active operations.

Leveraged retail business is one of these areas. Last year, the  country's banking system registered an unprecedented 20% growth in  this area and most analysts belive that this trend will continue in  2019.  ''However, we are all concerned, at least with an answer to  the important question of what type of growth this will be,  associated with optimistic expectations in the market in terms of  improving households, or it will be growth, which, on the contrary,  will increase the debt burden of households. In the latter case, we  are faced with the danger of entering the next cycle of increasing  NPLs. This is the question that we ask ourselves and have not yet  found the answer, "the specialist emphasized.

Speaking about the prospects for corporate lending, the expert  expressed rather restrained optimism, noting that the corporate  sector should develop more towards the implementation of efficient  investment projects.  "This is the main challenge for the real sector  of the economy that needs to be overcome," Sargsyan said, noting that  the time when corporations could get a bank loan at 7-8% has already  passed: "The cost of money in the country is rising. If the rate on  sovereign Eurobonds in Armenia is about 6% and the average return on  banks' capital is about 10%, this technically means that the bank  lending rate cannot be lower than 10%". And since banks compete for  large chunks of the market to secure profits, a noticeable growth in  loan portfolios may occur for another year, perhaps two years, but no  more than that, unless there is a radical change in the country's  economic policy based on increased domestic and foreign investments.   Moreover, the corporate sector should think about attracting funding  for investments not from the expensive banking sector,but from other  investment sources.

Summarizing, Sargsyan expressed the opinion that the current number  of banks is unjustifiably large for the low-capacity Armenian market  (16 banks - Ed. note). If the economy grows at double digit rates,  then there will be no problems and then each bank will find its place  under the sun and provide the desired level of profitability, but  with an average 5% GDP growth forecast, the profit for all will be  insufficient and consolidation will become mandatory market  requirement. ''However, if you ask whether there will be of mergers  and acquisitions (M & A) in the next 2-3 years I don't expect them,  since there are serious emotions behind each bank. At the level of  real feelings, I can say that the owners of banks that have recently  fulfilled the requirements of the Central Bank for additional  capitalization are not ready for this, " David Sargsyan said.

To note, the Armenian Central Bank is working on the issue of further  tightening the existing regulatory restrictions, especially for the  core banks. There is a discussion about the further increase for the  minimum total capital to 50bln AMD. To recall, at the end of December  2014, the Central Bank of Armenia decided to tighten the standard  minimum amount of total capital for banks from the current 5 billion  AMD to 30 billion AMD, with entry into force on January 1, 2017. In  this regard, over the next two years, enhanced capital increase was  observed in the banking system, including through mergers and  acquisitions. At the end of 2015, ProCredit Bank Armenia and BTA Bank  withdrew from the market, merging with INECOBANK and Armekonmobank  respectively, and in December 2016, Areximbank-GPB Group and Armenian  Development Bank merged with Ardshinbank and Araratbank. As a result,  out of 21 functioning banks, 17 remained in 2017.

According to the Financial Rating of Banks of Armenia, prepared by  the ArmInfo IC, the net profit of Armenian banks grew over 9 months  of 2018 by 81.3% y-o- y to 51.7 billion AMD or $ 107.1 million. This  happened against the background of a meager acceleration of asset  growth from 14% to 15 % and slowdown in the growth of total capital  from 11.5% to 10%, which increased the level of efficiency ratios.   The level of return on assets (ROA) increased y-o-y from 0.91% to  1.53%, and return on equity (ROE) increased from 5.46% to 9.42%. The  slowdown in capital gains amid continued growth in risk-weighted  assets was the main reason for the decline in capital adequacy (N1 =  min 12%) - from 34.74% on October 1, 2017 to 29.08% on October 1,  2018. According to ArmInfo analysts, the deterioration in the  dynamics of a part of the components of highly liquid assets against  the backdrop of a restrained ascent of total assets and a slowdown in  the growth of demand liabilities pushed the overall and current  liquidity to a moderate decrease. Thus, in y-o-y terms the level of  total liquidity (N2 / 1 = min 15%) decreased from 36.1% to 32.1%, and  current (N2 / 2 = min 60%) - from 219.2% to 190.42 %. 

POST A COMMENT
Input digits     


News
Water tariff to not change in Armenia in 2024 at expense of subsidies  from state treasuryWater tariff to not change in Armenia in 2024 at expense of subsidies  from state treasury
Armenia`s gross international reserves even farther from historical  maximumArmenia`s gross international reserves even farther from historical  maximum
Armenia to take out EUR 92.3mln from WB to cover budget deficit  Armenia to take out EUR 92.3mln from WB to cover budget deficit  
Armenia, Kazakhstan to establish joint business club  Armenia, Kazakhstan to establish joint business club  
Bolat Imanbayev: Armenia-Kazakhstan trade and economic relations are  developing dynamically; nevertheless, they do not reflect  countries`  full economic potentialBolat Imanbayev: Armenia-Kazakhstan trade and economic relations are  developing dynamically; nevertheless, they do not reflect  countries`  full economic potential
Kazakhstan offers Armenia to consider new alternative logistics routeKazakhstan offers Armenia to consider new alternative logistics route
Dependence of Armenia`s economic activity on jewelry industry could  cause problems - Luys FoundationDependence of Armenia`s economic activity on jewelry industry could  cause problems - Luys Foundation
AraratBank places its 27th issue of dollar bondsAraratBank places its 27th issue of dollar bonds
Viva-MTS changes its company name to Viva ArmeniaViva-MTS changes its company name to Viva Armenia
Deputy Minister of Economy: Armenia-Russia cooperation potential may  be realized through cooperation projects in production sectorDeputy Minister of Economy: Armenia-Russia cooperation potential may  be realized through cooperation projects in production sector
Team Systems contributes to smart technology development Team Systems contributes to smart technology development 
Who will be beneficiaries of tax amnesty in ArmeniaWho will be beneficiaries of tax amnesty in Armenia
Belarus bans import of Ararat Brandy Company products Belarus bans import of Ararat Brandy Company products 
5 000 dram Bonus from IDBank for Pension Card Holders5 000 dram Bonus from IDBank for Pension Card Holders
Armenia`s public debt reaches $12 billionArmenia`s public debt reaches $12 billion
Price index of industrial products is decreasing in ArmeniaPrice index of industrial products is decreasing in Armenia
Industrial sector driver of economic activity in Armenia Industrial sector driver of economic activity in Armenia 
Armenian CB issue s new collector coins Armenian CB issue s new collector coins 
99.8% defense budget performance in 202399.8% defense budget performance in 2023
IDBank issues the 1st tranche of dollar bonds of 2024IDBank issues the 1st tranche of dollar bonds of 2024
AFD delegation presented with details of Vedi reservoir construction  and irrigation network modernization projectAFD delegation presented with details of Vedi reservoir construction  and irrigation network modernization project
Parliamentarian: Armenia attaches great importance to using  opportunities of digital transformationParliamentarian: Armenia attaches great importance to using  opportunities of digital transformation
DPM: we need not only quantitative increase, but also qualitative  changes in urban development field DPM: we need not only quantitative increase, but also qualitative  changes in urban development field 
​​​​​​​IDBank as a Participant in the Conference of My Forest Armenia NGO​​​​​​​IDBank as a Participant in the Conference of My Forest Armenia NGO
ENA bonds quotation in volume of AMD 32 billion to start on AMX from  March 27ENA bonds quotation in volume of AMD 32 billion to start on AMX from  March 27
Switzerland launches SIGMA program with total budget of CHF 12  million Switzerland launches SIGMA program with total budget of CHF 12  million 
Armenia`s State Revenue Committee launches e-system of income  statement presentation  Armenia`s State Revenue Committee launches e-system of income  statement presentation  
Armenia`s ranking in Index of Economic Freedom decreased by 0.2 pp  over yearArmenia`s ranking in Index of Economic Freedom decreased by 0.2 pp  over year
France to sponsor establishment of cheese-making school in Armenia`s  Tavush France to sponsor establishment of cheese-making school in Armenia`s  Tavush 
The South Caucasus Railway will suspend the sale of tickets using MIR cards The South Caucasus Railway will suspend the sale of tickets using MIR cards
Azerbaijan continues attempts to Azerbaijan continues attempts to "hit" Armenian nuclear power plant
Armswissbank participates in gcf regional dialogue in skopjeArmswissbank participates in gcf regional dialogue in skopje
IDBank issues the 1st tranche of dollar bonds of 2024IDBank issues the 1st tranche of dollar bonds of 2024
Extending ANPP`s lifetime until 2036 will lay solid foundation for  smooth transition to new power unit - Pashinyan at Nuclear Energy  SummitExtending ANPP`s lifetime until 2036 will lay solid foundation for  smooth transition to new power unit - Pashinyan at Nuclear Energy  Summit
Armenia`s government approves order of quality prize awards Armenia`s government approves order of quality prize awards 
International Client’s Day at IDBankInternational Client’s Day at IDBank
Germany to provide loan for Armenia`s renewable energy sector Germany to provide loan for Armenia`s renewable energy sector 
2023 lending growth insufficient to prevent decline in profits -  Financial Rating of Banks of Armenia2023 lending growth insufficient to prevent decline in profits -  Financial Rating of Banks of Armenia
Iran interested in cooperating with Armenia in mining industry Iran interested in cooperating with Armenia in mining industry 
Armenian government plans to introduce SAFE format Armenian government plans to introduce SAFE format 
Service of Armenian ArCa cards in Russia and of Russian MIR cards in  Armenia to be suspended Service of Armenian ArCa cards in Russia and of Russian MIR cards in  Armenia to be suspended 
Termination of service of MIR cards. IDBankTermination of service of MIR cards. IDBank
Economic modernization programme portfolio AMD 228bln as of March 1,  2024Economic modernization programme portfolio AMD 228bln as of March 1,  2024
Mobile trade regulations to be in effect throughout Armenia Mobile trade regulations to be in effect throughout Armenia 
Official cites financial reasons for suspension of Fly Arna airline  operation Official cites financial reasons for suspension of Fly Arna airline  operation 
Subsidiary of Public TV of Armenia to have right to nationwide  broadcasting  Subsidiary of Public TV of Armenia to have right to nationwide  broadcasting  
About 700 Armenian heavy cargo trucks waiting to pass through Upper  LarsAbout 700 Armenian heavy cargo trucks waiting to pass through Upper  Lars
Armenian Economy Ministry, several U.S. government departments form  specific action program Armenian Economy Ministry, several U.S. government departments form  specific action program 
Public TV`s First News Channel to be broadcasted not only in Yerevan,  but also throughout countryPublic TV`s First News Channel to be broadcasted not only in Yerevan,  but also throughout country
Ardshinbank cardholders can now enjoy a 10% cashback!Ardshinbank cardholders can now enjoy a 10% cashback!
“G20/OECD Principles of Corporate Governance” workshop“G20/OECD Principles of Corporate Governance” workshop
ECC, EDB to coordinate funding of joint projects ECC, EDB to coordinate funding of joint projects 
Broadcasting of Russian TV channels to be discussed in Moscow soon Broadcasting of Russian TV channels to be discussed in Moscow soon 
Armenia to host World Wine Tourism Conference,Armenia to host World Wine Tourism Conference,
CBA forecasts 5.5% or 6.4% GDP growth for 2024 depending on inflation  rate  CBA forecasts 5.5% or 6.4% GDP growth for 2024 depending on inflation  rate  
Three Sad Stories about FraudstersThree Sad Stories about Fraudsters
Rafayel Gevorgyan: Armenia`s economic growth potential is 6%Rafayel Gevorgyan: Armenia`s economic growth potential is 6%
TEAM already has over 1 million mobile subscribersTEAM already has over 1 million mobile subscribers
Armenia`s ministry of economy proposes new SAFE format Armenia`s ministry of economy proposes new SAFE format 
CBA Governor: Over 11 thousand Artsakh refugees employed in ArmeniaCBA Governor: Over 11 thousand Artsakh refugees employed in Armenia
Read more


Exchange rates
28.03.2024
RUB4.270.00
USD394.46-0.25
EUR425.62-1.93
GBP497.65-0.91
CAD290.11-0.27
JPY26.06-0.05
CNY54.57-0.05
CHF435.72-0.13