NPL still exceeds 9% of loan portfolio in Armenian banking system

ArmInfo.. Overdue loans in the banking system of Armenia, despite the slowdown, still exceed 9% of the loan portfolio. According to the Financial Rating of the Banks of  Armenia as of June 30, 2019 prepared by ArmInfo IC, their volume in  the reporting period increased by 5% per annum, against the 14%  growth a year earlier.

The slowdown in growth of overdue loans slightly reduced the share of  NPL in the loan portfolio - to 9.2% by July 1, 2019 from 9.7% as of  the same date in 2018. Overdue loans accounted for over 309 billion  drams (about $ 648 million) in the loan portfolio of 3.4 trillion  drams ($ 7.1 billion, with an annual growth of 10.8%), of which the  dubious group accounted for 33%, more than 29% to the hopeless share,  against which less risky groups have a modest share: controlled -  13.3% and non-standard - 8.9%. A year earlier, the lion's share in  the structure of overdue loans was accounted for by a hopeless group  - over 37%, and the proportion of the dubious group was relatively  more modest - a little more than 27%, against their background loans  of the other less risky groups were: controlled - about 21% and  non-standard - almost 9%.

According to analysts at the AmRating Rating Agency, the annual  growth in the volume of overdue loans was provoked by an increase in  the doubtful group by 22%, where, most likely, some of the loans from  the controlled group migrated, as evidenced by a decrease in the  volume of the latter by 35.2%. It is not necessary to assume that the  reduction in the controlled group is the result of an improvement in  quality towards the standard one, with the almost constant weak  growth of the latter. Against this background, an annual decline in  the hopeless group by 21.2% would be wrong to consider as the  recovery of these loans, as evidenced by a sharp slowdown in profit  growth to 6.2%, most likely due to write-offs of toxic loans.  As a  comparison, analysts note that a year earlier, bad loans showed a  decline of 26.5%, against the backdrop of the growth of the dubious  group by 64.2% and the growth of less risky non-standard and  controlled - by 58.4% and 43%, respectively, with a significantly  modest the growth of the standard group - by 9.8%. At that time,  annual growth in profit was 2 times, but judging by the meager upward  dynamics of lending income, the conclusion was that there was no  improvement in the quality of the loan portfolio.  The bulk of bad  loans settled in consumer loans (including mortgages) - over 40%, in  the retail sector - over 19%, in the agricultural sector - about 17%  and industry - about 10%. These areas also dominate the total volume  of overdue loans: consumer loans (including mortgages) - 31%, trade -  more than 13%, agricultural sector - about 12% and industry - 8%.

In fact, launched last year, the government's initiative to amnesty  fines / penalties for bad loans with their attendant refinancing,  which banks began to implement without delay since July, did not save  the delay from growth. And since the banks announced the deadline for  accepting applications for amnesty on December 31, 2018, in 2019 the  growth in arrears continued, sharply slowing down the profit growth  in the first half of the year.

As AmRating analysts expected, the impact of an amnesty of bad loans  on improving the quality of the loan portfolio, especially by  refinancing only without taking into account the accumulated fines /  penalties, turned out to be short-term, having worked for a little  more than six months. "And it is possible that in the second half of  2019, the growth inhibition of profits will be more noticeable, and  subsidence as a result of concomitant write-offs of toxic loans is  also possible," experts say.

Interestingly, the statement made by the two banks at the beginning  of 2019 to extend the deadline for accepting applications for amnesty  of fines / penalties for bad loans even before August-September did  not find the "understanding" of the other banks, which further  confirms the probability of a situation with overdue loans worse side  and the negative impact of the accumulated on the level of  profitability.

It should be noted that according to the results of 2018, the total  net profit of Armenian banks increased by 79%, which, in all  likelihood, occurred as a result of the "salvation" of an amnesty of  a certain mass of bad loans. But since the continuation of this  policy in 2019 is not expected, it is likely that profit under the  pressure of toxic loans will begin to lose ground.