Analysts Opinion on Central Bank Report 

ArmInfo. The total loan portfolio of Armenian banks as of November 1, 2019 exceeded 3.1 trillion drams ($ 6.5 billion), slowing annual growth from 21% to  15%. At the same time, the volume of dram loans reached 1.5 trillion  drams ($ 3.2 billion), and foreign currency loans -1.6 trillion drams  ($ 3.3 billion). According to the Central Bank of the Republic of  Armenia, in the structure of the loan portfolio, a slowdown in annual  growth was observed both in terms of the dram component and the  currency component. Nevertheless, dram loans showed a high growth of  32.1% (against 40.5% a year earlier), while foreign currency growth  turned out to be meager - 2.1% (against 9.6% a year earlier).

Distribution of consumer loans and  risks overlapping . 

A significant decrease in foreign currency lending growth rates  almost equaled them with the share of drams - 50.7% versus 49.3%.  Moreover, the gap narrowing was already observed in 2018 - 57.1% of  the currency versus 42.9% of the drams, while 2 years ago, in 2017,  the gap was impressive - 62.2% against 37.8%. Armenian banks had a  total loan portfolio close to this structure 10 years ago, in the  crisis year of 2009, when the ratio of foreign currency and dram  loans was 51.9% versus 48.1%.

According to analysts at the national  Rating Agency AmRating, the de-dollarization of the loan portfolio is  mainly associated with a significant increase over the past 2 years  in the volume of consumer lending legally assigned to the national  currency and due to a significant increase in subsidy programs for  mortgages.According to the agency's analysts, against the backdrop of  the ongoing deepening situation with the growth of toxic loans in  consumer loans, the banks' continued focus on retail lending  threatens to worsen the quality of the portfolio, slow down the  growth of assets and possible sagging profits. It was such a prospect  that pushed the regulator to introduce new regulations to contain  risks on consumer loans, borrowers for which, judging by the  operational response of the Central Bank, are too over-credited. 

However, according to analysts, the coefficient for calculating the  maximum debt load (in international practice - PTI, payment to income  - Ed.), Introduced by the regulator, will protect only new borrowers  from risks. Therefore, most likely, in the near future we can expect  a new round of large-scale refinancing by banks of already issued  classified loans, and in case of hopeless ones, to new write-offs and  loss of profit. AmRating analysts fear that such a scenario of a  short-term effect is inevitable, as it was in 2018, due to an amnesty  of fines / penalties for bad loans, which means that in the medium  term a new decision by the financial regulator to further capitalize  banks to maintain a liquidity buffer may follow, in accordance with  new tighter  regulations of  .

Deposit gap  is of additional concerns 

According to the reports of the Central Bank, in contrast to the  funds placed, the gap (GAP) in the total deposit portfolio of banks  between the currency component and the dram component is kept at a  relatively high level: by November 1, 2019, the share of foreign  currency in the structure of deposits amounted to 58.6%, and dram  share - of  41.4%. Analysts are especially worried by the fact that  over the year the dynamics of the gap did not change significantly:  in 2018, banks had 60.9% of foreign currency deposits and 39.1% of  drams in their portfolio.

The discrepancy between the growth dynamics  of the currency structures of the deposit base and credit investments  also creates some, albeit quite manageable risks. Meanwhile, analysts  admit that over the past 10 years since the global financial crisis,  the deposit portfolio of Armenian banks has been significantly  balanced, including thanks to the Central Bank's adjustments.  Analysts recall that in 2009 in the structure of the deposit  portfolio 73.4% accounted for the currency component and 26.6% for  the AMD component.

A certain imbalance in the picture in terms of attracted and  allocated resources is also given by the fact that the growth of  foreign currency deposits, unlike loans, over the past year has  accelerated from 9.9% to 12.5%. And dram deposits, despite the  acceleration of growth from 17% to 23.8%, are much inferior to the  growth of similar loans. According to AmRating analysts, such  multidirectional dynamics is not critical at the moment and is still  quite manageable by banks and does not need additional adjustments.   Moreover, in the total volume of deposits (demand deposits and term  deposits), which amounted to 3.3 trillion drams ($ 7 billion) by  November 1, 2019, the volume of currency deposits slightly exceeds  1.9 trillion drams ($ 4.1 billion), and drams - reached 1.4 trillion  drams ($ 2.9 billion), which indicates a quite healthy portfolio.

Rates decrease keeps swallowing the margins

The gap between the dram and foreign exchange components in both the  loan portfolio and deposits was reduced against the backdrop of a  stable decline in interest rates. Moreover, in loans and in deposits,  rates on dram resources decreased more significantly.

According to the Central Bank of the Republic of Armenia, interest  rates on loans fell to an average of 10.41% by November 2019, in  particular for drams - to 11.91%, and for dollars - to 8.92%, against  an average of 14.35 %, dram - 17.85% and foreign exchange - 10.85% in  2015. According to analysts, the dynamics of changes over 10 years  has changed significantly: average interest rates on loans in 2009  amounted to 16.59%, on allocated AMD funds they amounted to 18.41%,  and on dollar funds - up to 14.78%. At the same time, interest rates  on deposits also fell dynamically and in November 2019 averaged  5.27%, in particular, for drams - up to 7.75%, and for dollar ones -  up to 2.78%, against the corresponding average of 9.47 %, currency -  13.61% and dram - 5.34% in 2015. 10 years ago they looked like this:  7.3% on average, 8.46% on drams and 6.15% on dollar deposits.

As a result, over the previous 10 years, the margin between borrowed  and placed funds has decreased in terms of the dollar component -  from 9% to 6%, and in dram terms - even more - from 10% to 4%.   According to the agency's analysts, due to the sluggish unbalanced  economic growth in the country, the gradual narrowing of the credit  market of corporate clients, which account for the bulk of foreign  currency lending, significantly increased the risk of loss of bank  profitability, and too low dram margin limits the ability to increase  interest income even for account mass issuance of consumer loans to  the population. This circumstance, against the backdrop of a poorly  recovering economy, may serve as another worrisome argument about the  further deterioration in the quality of loan portfolios.  

Either/Or....

The global trends of a continuous decrease in interest rates in  Russia, in Europe, and since 2019, and a significant decrease in  interest rates in the USA, create a rather delicate task - is it  possible to at least stop the undesirable downward trend for Armenian  banks? The macroeconomic equilibrium and the absence of inflationary  pressure both inside Armenia and from outside, today does not give a  definite answer to this question. According to AmRating analysts,  most likely, we will witness a long-term sideways trend, the end of  which will be determined either by internal positive factors of  aggregate demand growth, or factors undesirable for us by external  shock.

Emmanuil Mkrtchyan

Karina Melikyan