Wednesday, March 10 2021 11:51

ArmInfo.In Armenia's banking system, the growth of non-performing loans (NPL) accelerated significantly in 2020, despite regulatory "concessions" in terms of  shifting part of the burden of non-performing loans to 2021.

Thus, the share of NPL in the loan portfolio increased in 2020 from 8% to  9.5%, and in assets - from 5.2% to 6.3%. This phenomenon was observed  against the background of a weak acceleration of the annual growth of  loan investments from 15.4% to 16.7% and a slowdown in asset growth  rfrom 17.3% to 14.6%, with sluggish quarterly growth in both cases  (loans - by 2.5 %, assets - by 5.7%).  These indicators are given  from the Financial Rating of Banks of Arrmenia as of December 31,  2020, prepared by ArmInfo IC based on financial reports, which  include a new format for presenting credit rrisk (according to  IFRS9). However, this international format does not fully reflect the  real picture of the real quality of the loan rportfolio and the  presence of toxic loans (NPL) in it. This fact has been repeatedly  noted in their reports by the world's largest rating agencies. As a  result, the rating service of ArmInfo IC asks the banks for the  necessary additional data, which makes it possible to more accurately  calculate the total volume of overdue loans and, consequently, their  share in the loan portfolio and banks' assets.

As analysts of the company note, the accelerated growth of toxic  rloans, in turn, could not but affect the "drawdown" of profits.   rThus, the total net profit of the banking system of Armenia,  ramounting to 60.4 billion drams ($ 115.7 million) in 2020, decreased  by 20% per annum (against an increase of 34% in 2019), which was  robserved against the background of an increase in the volume of  overdue loans by 38.4% ( against a paltry 3% decline in 2019).

Moreover, in the IV quarter alone, the profit dynamics sharply went  into an 89.5% decline (from 3.5% growth in the III quarter) with the  rcontinued double-digit growth of overdue loans, which could have  been higher if not for the regulator's proposal to "freeze" for a  year, part of the toxic load, which, nevertheless, did not save  profits from subsidence, including for 8 banks that received a  significant loss.

This was accompanied by an approach to stagnant growth in the amount  of healthy (standard) loans in Q4 to 1.3% (from 3.5% in Q3), with a  rslowing annual growth to 10.3% (from 13.3% in 2019). The annual  upward trend of this portfolio, presumably, was preserved due to the  renegotiation of agreements during the credit holidays (from March 13  rto June) and the active participation of banks in the 1st and 2nd  anti-crisis state programs.

The toxicity of consumer loans is growing at an outstripping pace.

Around 64% of NPL is in dubious and hopeless risk groups. Moreover,  the latter retains a tangible dominant with a growing volume. By  rindustry, about 47% of overdue loans "stuck" in consumer loans  r(including mortgages), with an annual increase in the volume of  non-performing loans by 46%, while healthy loans declined by 9.3%.

The second place in terms of the share of NPL is occupied by the  trade sector, where about 15% of non-performing loans (mostly bad  ones) have accumulated, with an annual growth of 17.2%, while healthy  loans grew by only 2.1%.

The third place in terms of the share of NPL is occupied by  agricultural loans - over 9%, with an annual decline in the volume of  non-performing loans by 11.1%, while growth is accelerating healthy  up to 24.2%. Then, in terms of the share of NPL, there are loans in  the sphere of catering and services - about 8%, with an annual growth  of 4.2% with a weak 1.8% growth in healthy loans.  The share of NPL  in loans to the industrial sector is slightly lower - over 7%, with  an annual growth of 17.3% with healthy loans growing by 5.7%. The  smallest debts accumulated in portfolios in the construction sector  (over 4%), with an annual growth of 11.7% with a "compensatory" jump  the volume of healthy loans by 37%. 

The above segments dominate in the portfolio and in terms of the  share of credit investments: consumer loans - 25.8%, trade - 17.5%,  industrial sector - 14.7%. At the same time, mortgages account for  11%. And the share of lending to the catering / service sector was  7%, the construction sector - 6.8%, the agricultural sector - 5.2%.   Meanwhile, the volume of consumer loans slowed down the annual  decline from 36.2% to 32.3%, while mortgage growth slowed down from  39.6% to 26.8%.  Acceleration of growth was observed in lending to  the catering / services sector - from 23.6% to 27.7%, the retail  sector - from 16.1% to 30.5%, the agricultural sector - from 10.9% to  30.1% and construction sector - from 26.4% to 72.4%.  And a trend  reversal from downtrend to upward was recorded in lending to the  industrial sector - from a 5% decline to 16.5% growth.  At the same  time, the volume of lending to SMEs continued to grow weakly - by  10.2% (against 7.8% in 2019).  By January 1, 2021, the total loan  portfolio of Armenian banks reached 4.4 trillion drams ($ 8.4  billion), and assets - 6.6 trillion drams ($ 12.7 billion). At the  same time, a weak acceleration of the annual growth of the former  with a slowdown in the growth of the latter increased the share of  loans in assets from last year 64.5% to the current 65.8%.  

Profit  pushed through by portfolio toxicity

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 of the most  formidable and dangerous article on bad loans in the new format for  assessing the reliability of banks.

The above 64% does not provide a  complete picture of portfolio toxicity. However, despite This, about  the "massive" presence of bad loans, is evidenced by the moderate  growth of interest income from lending (and a modest one for the  quarter) and a drop in profits.  This confirmed the earlier  assumption by analysts that the process of write-offs of bad loans  after the credit holidays will continue, which actually happened,  thereby significantly "pushing" the level of profitability of the  banking sector.  

At the same time, analysts predicted that this  process will continue, at least until the moment when the maximum  debt burden ratio (MPI) will be applied, designed to exclude  over-borrowing of borrowers, with an accompanying real recovery of  the loan portfolio. In order to avoid a critical deterioration in the  quality of the loan portfolio and to maintain the proper level of  capital adequacy, the regulator is set to commission the personal  income tax in 2021.  

In the meantime, according to analysts of the  agency, low interest rates, a significant decrease in margins and  weak growth in interest income restrain expectations for the release  of ROA and ROE ratios to a high level. At the end of 2020, the return  on assets (ROA) of the banking system decreased to 0.98%, and the  return on equity (ROE) - to 6.77%. In 2020, all this was complicated  by the economic and social consequences of the coronavirus pandemic  with uncertain forecasts on the timing of the exit from the current  situation. And the second wave of the virus that surged in autumn  with greater force, coupled with martial law due to hostilities in  the zone of the Nagorno-Karabakh conflict, even questioned the  prospects for recovery of the economy in 2021.  

According to  analysts, the economy will be able to grow, at best in the second  half of 2021, and at worst in 2022, and then the financial sector  will be able to withstand the crisis without tangible losses.  

The  Central Bank decided to introduce the previously postponed Basel requirements

Against this background, the Central Bank had a  restrained attitude towards Basel III requirements in 2020, but,  seeing the current situation as a threat to the stability of the  banking sector, decided in 2021 to start a phased implementation of  the previously postponed Basel requirements (Basel 3). In particular,  the Central Bank intends to introduce a liquidity coverage standard  (LCR) and does not exclude the launch of a number of other standards  for a certain time, incl. purely stable funding standard (NSFR).

At  the same time, as usual, the liquidity risk-regulating ratios of  total and current liquidity at the level of min 15% and 60%,  respectively, continue to operate.  Nevertheless, realizing the  difficulties of coping with the crisis by banks with slightly  weakened indicators, the regulator refrained from tightening the  countercyclical capital margin (countercyclical capital buffer -  ABK), keeping it at 0% of risk-weighted assets throughout 2020.

The  purpose of this decision of the Central Bank is to mitigate the  possible negative consequences of the coronavirus and martial law on  the financial system, to promote the continuity of the process of  lending to the Armenian economy.  At the same time, since 2020, after  a 12-year hiatus (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%.

According to AmRating analysts, these steps by  the regulator are signals to banks to use capital buffers to ensure  the continuity of banking operations in order to withstand stressful  situations and absorb losses during the economic downturn.  By 2021,  on average in the banking market, the level of total capital adequacy  decreased to 24.2% from 27.6% in 2019, and the level of fixed capital  adequacy - from 30.6% to 22.7%.  

The level of total liquidity in the  banking market on average amounted to 29.5%, and current liquidity -  145.6%, which in both cases, compared with the indicators of a year  ago, fixes a decrease from 31.9% and 158.6%, respectively. Moreover,  the decline was observed during 2017-2020, after the jump recorded in  2016.  

Economic outlook is subdued

The World Bank (WB), in the October updated forecast of the prospects  for the development of the economy of Europe and Central Asia,  worsened expectations for Armenia's GDP for 2020 towards recession -  by 6.3% against the previously predicted 2.8%. At the same time, for  2021, the WB foreshadowed an exit in growth of 4.6%. But already in  January 2021, the World Bank, in its forecast of global economic  prospects, further worsened expectations for Armenia's GDP for 2020  to a decline of 8%, also narrowing expectations for GDP growth in  2021 to 3.1% with an acceleration in 2022 to 4.5 %.  

The actual  statistics recorded a 7.6% decline in Armenia's GDP in 2020 (against  7.6% growth in 2019). Among the growth sectors were only the energy  complex and the agricultural sector (1.2-1.4%).

The rest of the  industries went into recession: the service sector - by 14.7%, the  trade sector - by 14%, the construction sector - by 9.5%, and the  industrial sector - by 0.9%, against the forecast by the World Bank  for the industrial sector and the service sector by 2,4% and 9.9%, respectively.  

In Russia, which is Armenia's main trading partner,  the WB softened the projected decline in GDP in 2020 to 4% from the  previously expected 5-6%, but the actual decline was lower - 3.1%,  and for 2021-2022 it predicted an increase of 2.6 -3%.  

Meanwhile,  the main bank of Armenia (CBA) was more restrained in its forecasts  for 2021: GDP growth in Armenia by 2%, export growth by 4-6% and  imports by 7-9%, private transfers decline by 4-6%.

And the  latest forecast of the Central Bank for 2020 on the decline in GDP  turned out to be very close to the actual level - 7.8% versus 7.6%,  which cannot be said about exports and imports, the real decline of  which looked much more modest - 3.9% and 17.7%. % than the predicted  29-32%.

The forecast for 2020 and the real dynamics of private  transfers also significantly distinguished, in particular, against  the expected decline of 19-22%, the inflow actually decreased by only  6%, while the net inflow increased by 14%.  The World Bank, drawing  attention to the economic landscape that has changed after the  devastating coronavirus crisis, which both governments and businesses  must accept, figuratively speaking as a "black swan", notes that the  world economy seems to be emerging from one of its deepest recessions  and begins to be restrained. recovery.

The WB emphasizes that central  bank policies and ongoing structural reforms are trying to provide  the foundations for this fragile global recovery to gain momentum and  lay the foundation for sustainable growth and development over the  long term.  

“Protecting the most vulnerable will require successful  policies that allow capital, labor, skills and innovation to move  towards new targets to create a greener and stronger economic  environment after the coronavirus. For the rest, the changes are  especially important now, when the financial position is greatly  stretched by the pandemic, and other drivers of long-term growth have  weakened, "the World Bank recommends, noting that investments  collapsed in 2020 in many emerging market and developing countries  after a decade of weak manifestations will resume growth in 2021.  

But the experience of past crises causes the WB one more concern -  without an urgent correction of the exchange rate, the weakness of  investments will persist for many years. And in order to withstand  the headwind, according to the WB, significant efforts are needed to  improve the business environment, increase the flexibility of the  labor and goods market, as well as strengthen transparency and  governance.  

“Even before the pandemic, already at record levels,  both domestic and foreign debt burdens have become much heavier due  to devastating income cuts in emerging market and developing  countries. Addressing the external debt burden requires a  comprehensive set of policies: broader participation of all private  and official bilateral creditors in debt relief efforts; deep debt  reduction in countries in debt distress; debt transparency practices  to overcome constraints in debt contracts; legislative reforms to  accelerate private sector debt restructuring; and clearer sequencing  of these processes.

The problem of debt sustainability is complicated  by the possible burdening of already high public debt with contingent  liabilities from growing private debt, "the WB report says.  As the  health and economic crisis eases, the WB recommends that governments  periodically review their lending support policies to firms to remove  liquidity constraints to ensure transparency in asset quality and  avoid undermining bank capitalization.

WB policymakers are advising  to strengthen supervisory assessments of loan quality and improve  debt settlement and collection regimes to address potential problems  associated with rising corporate debt levels. "With the growth of  overdue loans, faster bankruptcy and domestic debt settlement  processes will be essential to freeing assets from litigation and  repurposing them for new purposes. Adding new investment to existing  productive assets is vital for sustainable development," WB report,  which also notes the growing climate and environmental problems, the  solution of which is to invest in green economy projects and provide  incentives for environmentally sustainable technologies.  

Consequently, as previously suggested by AmRrating analysts, Armenia,  being a recipient country with a weak and unbalanced economy,  painfully suffered the downturn in the donor economies. Moreover, the  deterioration of the economic situation in Russia in 2020 affected  Armenia especially negatively, since the main macroeconomic  indicators in which the dominant of the Russian Federation is high: foreign trade turnover (30%), investments (over 34% in the total  volume and more than 65% in the volume FDI), remittances (45%).

In  such a squeezed state, experts of the company believe, the main  macroeconomic indicators of Armenia are likely to remain in 2021  against the background of the expected weak growth of the Russian  economy, as well as of the economies of other donor countries.