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 %.