Amid the crisis, the level of dollarization of Armenian banks  portfolios continues to decline

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.