M. Galstyan: In 2021, the potential of bank lending will be lower  than in previous years, NPL will increase and profit decline may  continue

ArmInfo. In 2021, the potential  of bank lending will be lower than in previous years, NPL will  increase and profitability may continue to decline. This forecast,  answering the question of ArmInfo, was given by the Chairman of the  Central Bank of the Republic of Armenia Martin Galstyan, who  refrained from voicing specific numbers.

"There are signals from the banking system that this year some banks  will try to reduce their balance sheets, which will lead to a slight  slowdown in lending growth. We must try to ensure that banks revise  their balance sheets downward on a small scale. The key in this  regard will be the desire of banks to find funds for the  implementation of new projects. And if such clients appear, the banks  will finance them, and an increase in the refinancing rate from 5.25%  to 5.5% will not become an obstacle to this. Restrained approach of  banks in lending will depend on the needs of clients " , he  explained.  The share of non-performing loans in the loan portfolio  (NPL) increased back in 2020 amid the coronavirus crisis and the  accompanying negative impact on the economy. "As a result of the  meeting of the Central Bank with the banks, it was decided to  transfer part of the burden of defaults to 2021. Thus, some inertial  problems have passed from 2020. But, according to banks and the  Central Bank, the level of capital adequacy is sufficient to overcome  these risks. The decline in profits may continue in 2021, but this  may not happen if new projects are launched, "M. Galstyan said.

According to him, the banks' conservatism in lending is justified,  which in the current situation is welcomed by the Central Bank.

He expects that during 2021 there will be banks whose capital  adequacy will decrease due to write-offs of toxic loans or an  increase in the proportion of non-performing loans. "But even in such  a situation, there are no threats to the financial stability of the  system. The central bank provides banks with the necessary liquidity.  The main thing is that it is imperative to catch this thin line, when  on the one hand it is very important to continue lending, and on the  other, it must be balanced and healthy without threats to the  financial system in particular and the economy in general. The  Central Bank, being a conservative institution, tried to reserve a  certain amount, which made it possible to cope with risks without  creating threats to financial stability, "he stated.

Regarding the standards planned for implementation in 2021, M.  Galstyan said that the liquidity coverage ratio (LCR - established by  Basel3) will be introduced, and it is not excluded that a number of  other standards will be launched for a certain time (including the  net stable funding ratio - NSFR - ed . note).

To note, back in early September 2020, M. Galstyan predicted that NPL  in the loan portfolio will exceed 10%. According to the actual  balance sheet data of banks, as of September 30 of the same year,  this figure had already reached 9% in the loan portfolio and 6.1% in  assets. It is noteworthy that according to the Express Ranking of  Banks of Armenia as of December 31, 2020, prepared by ArmInfo IC, the  net profit of the Armenian banking system dropped by 20% over the  year, and in the IV quarter alone - by 89.5%.  Moreover, the profit  subsidence for 2020 was observed in 12 banks, and in the IV quarter  alone- in 11 banks (8 of them with a loss). As a result, the net  profit of the banking system in 2020 amounted to 60.4 billion drams  ($ 115.7 million). The banking system assets amounted to $ 12.7  billion, loans and other loans - $ 7.8 billion, investments in  securities - $ 1.9 billion, total liabilities - $ 11 billion,  liabilities to clients - $ 6.8 billion. The annual growth of assets  slowed from 17.3% to 14.6 %, loan investments - from 15.4% to 5.4%,  total liabilities - from 18.2% to 16%, and liabilities to clients  changed their dynamics from 22% growth to 5.6% decline. Annual growth  in investments in securities accelerated from 7.7% to 35.7%.  Total  capital slowed down annual growth from 12% to 6.2%, amounting to $  1.7 billion. The level of total capital adequacy decreased in 2020  from 27.57% to 24.21%, total liquidity - from 31.92% to 29.46% ,  current liquidity - from 158.6% to 145.57%, with the required  minimum, respectively, 12%, 15% and 60%.