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 %.