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.