ArmInfo.Against the background of political turbulence associated with the "velvet revolution" in April-May 2018, the Armenian banking system demonstrated high reliability, maintaining a previously reached sufficient level of liquidity, strong capitalization, healthy loan portfolio, substantial deposit base and moderate profitability, this is stated in the regular industry research of Armenia's banking system prepared by experts of AmRating national rating agency in cooperation with European Rating-Agentur Expert RA GmbH ( https://raexpert.eu/files/Industry_report_Armenia_Banks_27.05.2019.pdf ) As it is noted in the report, the new economic policy of the government, headed by the leader of the "velvet revolution" and Prime Minister Nikol Pashinyan, differs in many ways from the former highly corrupt system, which was built up with the existence of the so-called "shadow economy". The new policy's significant adjustments of ingrained economic life affected some spheres of the economy and, as a result, influenced to some extent macroeconomic indicators.
The priority to maintain the Rule of Law, the real struggle against corruption in the sphere of the existing informal "contracts" of the authorities with business and against monopolies, the tough implementation of environmental legislation for mining projects are factors that can be characterized as the main drags of the transition economy. According to the experts of the agency, despite the revolutionary events and the electoral period of 2018, the financial authorities of Armenia managed to distance themselves from the ongoing political processes and preserve stability in the implementation of fiscal and monetary policies. Over the past year, the government has slightly increased budget revenues by improving tax administration, and the Central Bank of Armenia (CBA) has successfully continued the policy of low-interest rates to maintain activity in the credit market.
According to the report, in the current low-interest rates environment and in the hope of increasing the profitability of operations due to future economic activity, banks continue to strengthen their positions, expanding and looking for new niches in the low- profitable and limited retail market. In this sense, their goals are to increase non-interest income through effective technological solutions, products, and innovations, associated mainly with card products and online banking services.
"The sector's liquidity position remains satisfactory, despite the decline in key ratios in 2018, as compared to 2017. Just as in the case of profitability indicators, we observed high disproportionality in the distribution of liquidity", analyst f AmRating Karina Melikyan notes. The funding base was characterized by a gradual increase in the share of individuals' funds by 4,6p.p. up to 40,5% from 2014 to 2018, as well as a decrease in the average level of interest rates by 2,4p.p. down to 5,33% over the same period. In general, the volume of individuals' funds slowed growth in 2018 to 9% from 20,6% in 2017, while deposits and current accounts of corporate clients, on the contrary, accelerated growth to 13% from 3,2% in 2017. The latter grew partly due to the intensification of the activities of two private foreign pension funds, and the introduction of a mandatory accumulative retirement system in 2017.
The stable situation in the currency market of Armenia gradually lowers the traditionally high level of dollarization of the economy. Banks intensively increase the share of assets and liabilities in national currency.
Meanwhile, AmRating analysts express particular concern related to IFRS 9, as the format of disclosing information under this standard does not provide a complete picture for assessing the quality of the loan portfolio since the classification by risk groups is significantly blurred. Moreover, IFRS 9 does not imply a specific industry breakdown by risk groups, which ultimately makes it impossible to assess the real picture of asset quality and, accordingly, the degree of resource efficiency.
According to the analysts' forecast, it is expected that 2019 will be a transition period and will be characterized by weak growth both in economic activity in the country as a whole and in the sphere of bank lending. Despite the above-mentioned imbalances that pose some additional risks, the banking system, in the presence of substantial cushions of capital adequacy and excessive liquidity, will continue to operate in a stable manner even in the event of unforeseen external shocks. The guarantees of the functioning in the transition period were laid down in the IMF policy, which has recently approved a credit line as part of a preventive stabilizing three-year standby program for a total of around USD 248,2 m.
As AmRating Director Emmanuil Mkrtchyan notes, the overall domestic political and economic situation in Armenia by the beginning of 2019 is still characterized by a "general turbulence" with uncertainties and restrained optimistic expectations. Nevertheless, the intensification of international donor interest in the programs and ideas of the government, the political will to transform against the background of lack of management experience, allow to characterize the year 2019 as a period of accumulation of the potential for further qualitative new movement towards increasing the competitiveness of the Armenian economy.
To note, AmRating is an affiliated company with ''Agency of Rating Marketing Information - ArmInfo'' and has 12 years of experience in the market of financial analytics, reviews and credit ratings.
Rating-Agentur Expert RA GmbH is a European division of an international group of RAEX rating agencies with more than twenty years of experience in the rating industry. The agency is accredited by the European Securities and Markets Authority (ESMA) and has the official status of an External Credit Assessment Institution (ECAI).