Thursday, November 28 2019 20:17
Karine Melikyan

Is the recession of bad loans real? The new reporting standard once  and for all blurred the possibility to assess the reliability of  banks

Is the recession of bad loans real? The new reporting standard once  and for all blurred the possibility to assess the reliability of  banks

ArmInfo.The transition of Armenian banks to a new format for presenting credit risk (according to IFRS9) completely blurred the picture of the real quality of the  loan portfolio and the presence of toxic loans (NPL), experts of at  the national Rating Agency AmRating are of such an opinion.

Thus, judging by the data published in this format as of October 1,  2019, y-o-y decline in the volume of overdue loans by 11% was  recorded (against growth by 31.4% a year earlier), which, in essence,  was supposed to improve the dynamics of profit. However, the real  trend of profit, namely, a sharp slowdown in growth from 81.5% to  18%, suggests an assumption of write-offs of toxic loans from the  balance sheet, rather than improvement of the portfolio due to the  return of accumulated debts.

According to the Financial Rating of the Banks of Armenia, prepared  by IC ArmInfo on the basis of published reports and indicators  requested on credit risk, the share of NPL in the loan portfolio  decreased from 11.5% to 9% in y-o-y terms, and from 7.5% to 5,8%  in  assets. Moreover, in the structure of overdue loans, the most risky  groups continue to dominate - doubtful and bad ones, whose share in  total exceeds 66% (against about 70% a year earlier). Consumer loans  (incl. mortgages) make the lion's share of these loans, and the rest  of the volume are mainly loans to the trade sector, the agricultural  sector and the industrial sector. This is happening against the  background of a slight acceleration in the y-o-y growth of the  standard group of loans- from 17% to 18%, with a slowdown in the  growth of the total loan portfolio from 17% to 13.5%, and assets -  from 15% to 14%.

In the structure of credit investments, which exceeded 3.5 trillion  drams by October 1, 2019, 36.5% accounted for consumer loans together  with a mortgage (over 1 trillion drams), 19.1% were loans to the  industrial sector (669.3 billion drams), 17.3 % - on loans to the  commercial sector (606.4 billion drams), 7.3% - on loans to catering  / services (258 billion drams), 5.5% - on loans to the construction  sector (192.7 billion drams), 5.2% - on loans to the agricultural  sector (183.3 billion drams) and 3.1% for loans to the transport and  communications sector (110.2 billion drams).

It is noteworthy that, despite the continuing deterioration in the  quality of consumer loans, this particular portfolio remains the  leader in terms of y-o-y growth - by 38.3%. This is followed by loans  to the transport and communications sector - by 33%, catering /  services - by 24.4%, the industrial sector - by 18% and the trade  sector - by 11%. The growth in lending to construction and the  agricultural sector turned out to be the most modest - by 2.6% and  2.5%, respectively.

According to experts, the government initiative for the amnesty of  fines / penalties for bad loans with concomitant refinancing, which  banks began to implement without delay from July 2018, using this  opportunity until December 31 of the same year, only for a short time  (before the beginning of 2019) allowed to support significant  dynamics of growth in bank profits. However, the bank's continued  focus on consumer loans, which contain the largest share of overdue  ones with the dominance of doubtful and risk groups, has suspended  the growth dynamics observed during the amnesty of fines / penalties  for bad loans.

According to analysts, the process of writing off expired bad loans  from the balance sheets will push through the profitability of the  banking sector. Together with low interest rates, a significant  decrease in margins and a weak increase in interest income, which  cannot be compensated for now due to the declining growth in  non-interest income, the level of return on assets (ROA) of the  banking system will freeze at around 1.5%, and return on equity  (ROE), most likely will not exceed 9.5%. According to the results of  9 months of the current year, the ROA amounted to 1.56%, and the ROE  - 10.35%.

The experts4 regret that the transparency of the banking system, with  the transition to new IFRS9 reporting, has decreased due to the  "concealment" of the loan quality structure, namely, the  classification of the portfolio by risk group. Independent analysts  are most worried about the absence in the new format of the most  formidable and dangerous article for assessing the reliability of  banks - bad loans. Unfortunately, the regulator has taken a neutral,  indifferent position on the issue of disclosing credit risks for the  expert and investment community.

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