ArmInfo. The level of dollarization of the loan and deposit portfolios of Armenian banks continues to decline due to the active participation of the financial sector in the implementation of state programs to support the economy, including in the fight against the consequences of the coronavirus crisis.
In addition, banks promptly initiated independent steps to support their clients in this force majeure situation, using from March 13 to June loan payment holidays with prolongation of the maturity, which allowed lenders to avoid the risk of non-payment, and saved borrowers from worsening credit histories, the experts of the Rating Agency AmRating share such an opinion.
As a result, as the analysis of the data shows, the significant prevalence of the growth rates of AMD loans and deposits (24.2% and 28%) over foreign currency (15.4% and 0.9%) reduced the level of dollarization in the respective portfolios by August 1, 2020 to 49,7% and 53.5% respectively. But this result is nevertheless higher than the level of the historical minimum of dollarization: on loans - in the crisis year of 2008 - 38.5%, and on deposits - in 2007 - 42.5%. During the period of another crisis shock in 2014, provoked by a strong fall in the currency of the country's main trading partner - the Russian ruble, the dollarization level in the loan and deposit portfolios of Armenian banks jumped to 66% and 72%, respectively, further showing a decline every year. To note, according to the Central Bank of Armenia, the total loan portfolio of Armenian banks at the end of June exceeded 3.531 trillion drams ($ 7.275 billion, with a y-o-y growth of 20%), in the structure of which the volume of dram loans reached 1.8 trillion drams ($ 3.7 billion), and foreign currency loans - 1.7 trillion drams ($ 3.6 billion). And the portfolio of deposits amounted to 3.528 trillion drams ($ 7.269 billion, with a y-o-y growth of 12%), in the structure of which the volume of dram deposits reached 1.6 trillion drams ($ 3.4 billion), and foreign currency deposits reached 1.9 trillion drams ($ 3.9 billion).
AMD loans attempt to strengthen dominance
In the total loan portfolio, the dominance of AMD loans over foreign currency at the level of 50.7% began to be observed from April 2020, but the subsequent monthly volatility narrowed the gap to 50.3% and 49.7% by August 1. According to analysts of the AmRating agency, with such a weak prevalence, even in the mid-term, it is unlikely that AMD loans will be able to restore the dominant position of 2007-2008 (60.5-61.5%), but it is quite possible to secure 51-52% if the volume growth does not yield. However, the predicted wave-like development of the coronavirus pandemic with a concomitant negative impact on the activities of borrowers in various industries suggests that the dominant position for AMD loans will not last long - until business entities reach the pre-crisis pace of development. In the meantime, the dram component dominates due to consumer loans (implemented in drams by law), mortgages and agricultural loans, the latter being mainly carried out under state subsidy programs.
In particular, the share of AMD consumer loans exceeds 85%, AMD mortgage is 67.3%, and AMD agricultural loans - 63.5%, while currency component strongly dominates in the loans to the industrial sector, trade, construction, services, transport and communications - 72-85%.
Growth in consumer loans slows down
Thus, agricultural lending accelerated y-o-y growth from 0.8% to 18%, mortgages maintained 37% growth, and the leading consumer lending in terms of volumes, on the contrary, slowed down growth from 30.4% to 18%. However, in terms of the share in the loan portfolio, consumer credits held the lead - 27.1%, the second place remained with loans to the industrial sector - 15.9%, the third place continues to be occupied by the trade sector - 15%, the fourth was held by the mortgage - 12%, and the service sector retained the fifth place - 8,3%. It is noteworthy that lending to the industrial sector reversed its y-o-y dynamics from 11.8% decline to 17.6% growth, while lending to the trade and service sectors showed an acceleration of growth to 15.5-14.4% from 8-6.5% a year earlier. But the most significant growth acceleration was recorded in lending to the construction sector - from 17.8% to 34.3%, and the most significant growth slowdown was in the transport and communications sector - from 31% to 10.8%.
The total volume of consumer loans and mortgages reached 1.4 trillion drams ($ 2.8 billion) by August 1, 2020, or 39% of the total loan portfolio, of which over 27% is purely consumer loans. Then, in terms of lending, the industrial sector follows - $ 1.2 billion and the trade sector - $ 1.1 billion.
According to AmRating analysts, against the background of the continuing increase of the dominance of toxic loans in consumer loans (up to 8% of the loan portfolio), further preservation of the emphasis on retail lending by banks threatens a deterioration in the quality of the portfolio, a slowdown in asset growth, and a possible drop in profits. It is possible that this very prospect prompted the Central Bank to introduce new regulations to contain risks for consumer loans, the borrowers for which, judging by the Central Bank's prompt response, are already so over-credited that they cannot cope with the debt burden. But the coefficient for calculating the maximum debt burden (in international practice - PTI, payment to income - Ed. note), introduced by the regulator, will protect only new borrowers from risks. In relation to over- credited clients, this adjustment is likely to push banks to a new round of large-scale refinancing, and in hopeless cases - to write-offs and loss of profit. Analysts at AmRating fear that this time too, a short-term effect is inevitable, as it happened with the amnesty of fines / penalties for bad loans, which means that another capitalization of banks may follow in the near future to maintain the liquidity buffer.
In deposits, the dominant position of foreign exchange funds is weakening
In contrast to the loan portfolio, the foreign exchange component continues to dominate in deposits - 53.5% as of August 1, 2020, but a comparison of this level with 73.4% recorded in 2009 testifies to the dramization of deposits, the share of which in the decade increased from 26, 6% to 46.5%.
The y-o-y growth of foreign currency deposits slowed from 16% to stagnant 0.9%, while similar loans showed much higher growth rates (15.4%) after the decline recorded a year earlier. On the other hand, for AMD deposits, there was a significant acceleration in growth from 18% to 28%, which turned out to be higher than the growth rates of similar loans (24.2%). This kept the overall portfolio of deposits growing by 12%.
In the total portfolio of deposits (demand and term), which exceeded 3.5 trillion drams ($ 7.3 billion) by August 1, 2020, the volume of foreign exchange deposits amounted to 1.9 trillion drams ($ 3.9 billion), and the amount of deposits in drams reached 1.6 trillion drams ($ 3.4 billion). It is noteworthy that in term deposits the volume of attracted AMD funds increased by 28% with a stagnant 0.5% growth of foreign currency attracted, and in the portfolio of demand deposits the impressive growth in the volume of AMD funds by 29% was accompanied by a 6% decline in foreign currency attracted.
And the rates are going down
The dominance of AMD loans in the loan portfolio and the narrowing of the gap with the foreign exchange component in deposits took place against the backdrop of the continuing decline in interest rates. According to the Central Bank of Armenia, interest rates on loans decreased by August 2020 to an average of 9.95%, in particular, on AMD - to 11.55%, and on USD - to 8.36%, against 14.31%, 17, 68% and 10.94% respectively in 2015.
At the same time, interest rates on deposits decreased by August 2020 to a historic minimum - on average to 4.81%, in particular, the minimum 2.18% were recorded on dollar deposits, while 7.43% on AMD, against 9.51%, 5,4% and 13.62% in 2015 respectively, and 10 years ago they looked like this: 7.22%, in particular 8.37% for AMD loans and 6.07% for USD ones.
This reduced the margin over 10 years from 9% to 5%, and continued the trend of lower rates will further narrow the possibilities of banks to increase interest income, especially against the backdrop of the outlook for deterioration of loan portfolio quality aggravated by uncertainty of the coronavirus pandemic with a concomitant negative impact on the economy and population income.
According to experts, this is a mirror image of the refinancing rate, which has dropped from 10% to 4.5% since 2015. In fact, against the backdrop of the coronavirus pandemic, in order to stimulate the economy, rates decreased even more, almost reaching the bottom, to which only some 0.25% remain, which may still be reduced. Until the pandemic subsides, rates will remain at this level, but in an inflationary environment, they will rise. To this it is appropriate to add that in Russia the base rate has been reduced even more (from March 6% to July 4.25%) than in Armenia (from March 5.5% to June 4.5%), in Europe and Japan negative rates are already in force that do not help revive the economy. And in the US, the base rate has reached a historic low of 0-0.25% and the Fed rejects the scenario of its reduction to minus values, proposing to fight the risks of a deep recession with the help of fiscal stimulus.
