ArmInfo.The growth of non-performing loans resumed in the banking system of Armenia. Thus, the share of NPL in the loan portfolio changed in Q2 from 8% to 8.3%, and in assets from 5.2% to 6.3%, against 9.2% and 5.9%, respectively, recorded a year earlier. This was observed against the backdrop of accelerating y-o-y growth in loan investments from 11% to 19% and a slowdown in asset growth from 17% to 14%, with strongly weakened quarterly growth in both cases.
These indicators are given from the Financial Rating of Banks of Armenia as of June 30, 2020, prepared by ArmInfo IC based on financial reports, which include a new format for presenting credit risk (according to IFRS9), which does not fully reflect the real picture of the quality of the loan portfolio and the presence of toxic loans (NPL). However, ArmInfo IC requests the necessary data from banks, which allow calculating the total volume of overdue loans and, consequently, their share in the loan portfolio and banks' assets.
The rise in toxic loans, in turn, has prevented profits from accelerating growth. Thus, net profit, amounting to 40.6 billion drams ($ 84.2 million) in the first half of the year, increased by 6% per annum, similar to the rate of a year ago, which was observed against the background of an increase in the volume of overdue loans by 8.2% (with a quarterly growth of 10.1%). And this was accompanied by a decline in the value of healthy (standard) loans for the reporting quarter by 0.5% (from 5.1% growth in the first quarter) with a y- o-y growth of 15.3%, presumably to a greater extent due to the renegotiation of contracts during payment holidays (from March 13 to June) and active participation in the 1st and 2nd anti-crisis state programs.
Consumer loans and trade ''stuck'' in high toxicity
Doubtful and bad loan risk groups account for about 56% of NPL, and the latter retains a tangible dominant. In terms of industries, over 34% of overdue loans are consumer loans (including mortgages), with a y-o-y increase in the volume of non-performing loans by 33% with a slightly less modest growth in performing loans (by 28%). Moreover, half of the total volume of consumer loans are doubtful and bad ones, the latter prevail.
The retail sector is ahead of consumer loans in terms of NPL share, which amounts to 35%, with a y-o-y growth of their volume by 3%, but with an increase in performing loans by 19%.
The share of NPL in loans to the industrial sector is somewhat more modest - about 28%, with a y-o-y growth of 23% with a moderate increase in performing loans (by 10%). The volume of non-performing loans in the agricultural sector significantly slowed down the y-o-y growth to 5%, while the growth of performing loans accelerated to 17%. Among the loans to the construction sector, volume of NPL fell by 1% year over year, while performing loans increased 38%. And in the field of catering and services, on the contrary, the volume of NPL increased - by 31% per annum with a meager 3% growth in performing loans.
It is noteworthy that these same sectors also dominate in terms of the volume of credit investments: consumer loans - 28.7%, trade - 17%, industrial sector - 14%. The mortgage accounts for 10%. The share of lending to the catering / service sector was 7%, the agricultural and construction sectors - 5-6%.
The volume of consumer loans slowed down the y-o-y growth from 38% to 28%, while the mortgage remained in growth at 36%. Lending to the catering / services sector sharply slowed down growth from 34% to 8%, the retail sector accelerated growth from 13% to 16%, and the industrial sector came out of the 14% decline by 12% growth. Investments in the construction sector (from 7% to 31%) and in the agricultural sector (from 5% to 14%) also registered growth with a sharp acceleration in pace. At the same time, the volume of lending to SMEs continues to lose growth, slowing down from 15% to 5%.
By July 1, 2020, the total loan portfolio of Armenian banks exceeded 4 trillion drams ($ 8.3 million), and assets reached 6 trillion drams ($ 12.4 million), and the acceleration of the annual growth of the former, while the growth of the latter slowed, increased the share of loans in assets from 64.3% last year to 67.1%.
Hiding portfolio toxicity amid the crisis decreases profit
Analysts of the national rating agency AmRating note that the transparency of the banking system, with the transition to the new reporting under IFRS9, has decreased due to the "concealment" of the structure of the quality of loans, namely the classification of the portfolio by risk groups. Independent analysts are most concerned about the absence in the new format of the most formidable and dangerous article for assessing the reliability of banks - bad loans. And the above 56% does not reveal the full picture of portfolio toxicity. However, despite this, weak growth in interest income from lending (which was stagnant during the quarter) and deceleration of profit growth for the second year in a row at the same low rate speaks of the "significant" presence of bad loans. According to analysts' forecasts, the process of write-offs of bad loans from the balance sheets after the payment holidays will continue, thereby decreasing the level of profitability of the banking sector, at least until the moment when the maximum debt ratio is applied, designed to exclude over-borrowing of borrowers, with an accompanying real recovery of the loan portfolio. In the meantime, according to the agency's analysts, low interest rates, a significant decrease in margins and weak growth in interest income restrain expectations for the ROA and ROE ratios to reach a high level: by the end of the first half of 2020, the return on assets (ROA) of the banking system fell to 1.4 %, and the return on equity (ROE) - to 9.4%. In 2020, all this is complicated by the economic and social consequences of the outbreak of the coronavirus pandemic with uncertain forecasts on the timing of overcoming the current situation, and the forecasted undulating course of the epidemic may even worsen the prospects for economic recovery in 2021.
The Central Bank fulfills Basel requirements with restraint in order to preserve buffers According to the requirements of Basel III, a number of new standards were to come into force as early as 2020, but the pandemic crisis has made adjustments to the timing of their implementation. Moreover, the Central Bank reacted to these innovations very restrainedly in order to ensure a smooth transition to the new regulatory field in the interests of preserving the formed capital and liquidity buffers. So, since 2020, after a 12-year break (then at the level of min 8%), the capital adequacy ratio came into force again, reduced in May from a minimum 10% to 9%, which was used on a par with the current total capital adequacy ratio at the level min 12%. The countercyclical capital buffer (CCyB) introduced in accordance with the Basel requirements of 0% of risk-weighted assets was left at this level. And the Central Bank, making this decision, was guided by the goal of mitigating the possible negative consequences of the spread of the coronavirus on the financial system, as well as promoting the continuity of the process of lending to the Armenian economy. In addition to this buffer, it was planned to introduce two more: a capital adequacy buffer (0.5% with a phased increase to 2.5%) and a buffer for systemically important banks (0.5% with an annual increase to 1.5%). Thus, the Central Bank sent appropriate signals to banks to use the built-up capital buffers to ensure the continuity of banking operations, to withstand stress situations and absorb losses during the economic downturn. Similar instruments are capital buffers set in addition to capital adequacy ratios and designed to contain risks (including systemic ones) inherent in a stressful period. In addition, the Central Bank for the smooth implementation by banks of financing the real sector of the economy, postponed the implementation of two new liquidity standards established by Basel III - the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR), which will come into force in January 2021. At the same time, the general and current liquidity ratios that regulate banks' liquidity risk continue to operate as usual at the level of min 15% and 60%, respectively. As of July 1, 2020, on average in the banking market, the level of total capital adequacy amounted to 27.13%, which is lower than a year ago (28.88%), and the level of capital adequacy was 27.56% (against 30.6% for April 1 this year). The level of total liquidity in the banking market on average amounted to 31.05%, and current liquidity - 167.72%, and in both cases, comparison with the indicators of a year ago records a decrease from 31.94% and 172.88%, respectively.
Forecasts for the economy are becoming more negative
On June 8, the World Bank updated the forecast of global economic outlook, adjusting the expectations for country GDP for 2020 towards a decline, in particular in Armenia, predicting a decline in GDP by 2.8%, and in neighboring countries and the EAEU - a more significant decline. Moreover, in Russia, the World Bank predicts a decline in GDP in 2020 by 6%, in Georgia- by 4.8%, and for the economies of the USA and the Eurozone, the projected decline is even higher - 6.1% and 9.1%, respectively. The updated forecast took into account the situation around the coronavirus pandemic and related disruptions to services and supply chains. "This impact will be most severe in countries that are highly dependent on tourism and commodity exports, capital flows, and those deeply integrated into global value chains. The risk of a full- fledged financial crisis could weaken foreign direct investment and remittance flows, which will be due to the growth of unemployment in the recipient countries, " the World Bank notes.
The Central Bank of Armenia, which previously predicted a slowdown in GDP growth in 2020 to stagnant 0.7%, in June revised this forecast towards a decline by 4% (from 7.6% growth in 2019), expecting the largest decline in the construction sector - by 11.2%, as well as in the service sector - by 4.3%, in the industrial sector - by 2.2%, and in the agricultural sector - by 0.4%. In parallel, the Central Bank of Armenia has worsened the forecast towards a decline in a number of macroeconomic indicators: for exports - by 12-15% (from 10.3% growth in 2019), for imports - by 15-17% (from 9.1% growth in 2019), on the inflow of private transfers - by 22-25% (from 9.7% growth in 2019), on the ratio of the current account deficit to GDP - 6-7%, on the ratio of the budget deficit to GDP - deepening to 5% (from 1% in 2019), unemployment - 20.4% (from an average annual 18.9% in 2019).
Considering the fact that the lion's share of remittances comes to Armenia from Russia (54% in 2019), Russia also holds the lead in foreign trade turnover (27-28% in 2019 for exports and imports), in terms of investments, Russia also holds the lead (34, 3% in the total volume and 65.2% in the FDI volume), therefore, as a recipient country, Armenia will suffer especially painfully from the deteriorating economic situation in donor countries, since the latter threatens to strike simultaneously from different directions.