ArmInfo.In the banking system of Armenia, after a five-year reduction in the cost of loans and deposits, with the achievement of the "bottom" rates, in the first months of 2021 a slow rise in the cost of loans was outlined, moreover, AMD loans were more pronounced.
This, in turn, will soon lead to growth in deposit rates. According to the Central Bank of the Republic of Armenia, in January-February 2021, interest rates on loans increased to an average of 10.29%, and on deposits decreased to 4.83%, against 10.11% and 5.20%, respectively, in the same period of 2020. And judging by the cost of attracted and placed funds, banks have pushed a little from the maximum 5% margin to 5.5%. Moreover, now most of them give preference to corporate lending, while in retail lending they focus on mortgages. This very positive trend is due to the forecasted prospects for the growth of the Armenian economy, mainly due to the recovery of the volumes of basic industries (industry, agriculture, construction).
The signal had an effect
The signal for a reversal of the rate vector was given by the regulator back in December 2020, predicting a certain acceleration of inflation and inflationary expectations due to supply factors. It was then that the Central Bank significantly tightened monetary conditions, raising the key rate by 1 percentage point at once. - from 4.25% to 5.25%. The Central Bank continued this policy in 2021, but already more restrainedly raising the refinancing rate from February to 5.5%, respectively, with which the rates on lombard repo decreased - from 6.75% to 7%, and on deposits attracted from banks - from 3.75% to 4%. But after a long five-year decline, the rate reaction to the regulator's signal began to manifest itself only now. True, so far only on loans, which for some time will allow banks to increase margins, at least until deposit rates begin to rise. However, in the long term, the situation is reversed, namely, deposits for more than a year began to rise in price, while similar loans are getting cheaper, but rates on dollar loans nevertheless began to grow.
Long deposits began to rise in price
In terms of currency components, rates on placed funds started to grow both in AMD and USD, and more pronounced in the former. At the same time, the rates on attracted funds lingered in the decline, but already with a negligible difference from the level of a year ago, which suggests the likelihood of their growth by the end of the first quarter. So, on loans, rates increased on an annual basis (January-February 2021 to January-February 2020) both for drams - from 11.63% to 11.84%, and for dollar loans - from 8.58% to 8.73% , while deposits continued to decline - in AMD from 8.11% to 7.8% and in USD from 2.3% to 1.85%. It is noteworthy that only on loans with a maturity of more than 1 year, rates are still in decline, but already strongly slowed down, while deposits of a similar duration have begun to rise in price. In particular, rates on long-term loans decreased in January-February to an average of 10.74% from 10.93% a year earlier, due to a negligible decrease in the price of AMD loans from 13.31% to 12.79%, while the price of USD loans increased from 8.55%. up to 8.68%. And on time deposits with a maturity of more than 1 year, rates increased in January-February to an average of 7.06% from 6.9% a year earlier, and the growth was recorded both in AMD - from 9.48% to 9.71%, and dollar - from 4.32% to 4.4%.
Yield of government bonds also went up
The yield on government bonds, after declining in 2020 to an average of 6.3%, increased to 7.6% by March 2021, and to a greater extent this came from medium-term and long-term securities (GSO and GDO) and to a lesser extent from short-term (GKO) ... In particular, the yield on GKOs increased from 5.7% in 2020 to the current 6.7%, GKOs - from 6.8% to 8.4%, GDOs - from 8.6% to 9.7%. As a comparison, we note that in 2019 the yield on government bonds decreased to 6.7% from 6.8% in 2018..
Banks strength test year
According to forecasts of the Central Bank, in 2021 the lending potential will be lower than in previous years, the portfolio of non-performing loans (NPL) will increase, and the profit of the banking system may continue to decline. Moreover, the share of NPL in the loan portfolio increased already in 2020 (up to 9.5% - FinRating ArmInfo) against the background of the coronavirus crisis and the accompanying negative impact on the economy.
The Central Bank, having discussed the current situation with bankers, decided to transfer part of the burden of defaults to 2021, believing that the level of capital adequacy is sufficient to overcome these risks. According to the Central Bank's expectations, 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, according to the regulator, there are no threats to the financial stability of the system, especially since the banks are provided with the necessary liquidity.
The main thing is that it is imperative to grasp this fine 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 as a whole. And the Central Bank, for its part, tried to reserve a certain amount, thereby allowing it to cope with the risks without creating threats to financial stability.
And this will happen against the background of too restrained forecasts for 2021 on the prospect of economic recovery in Armenia: according to the World Bank - GDP growth will be 3.1%, and according to the Central Bank - the previous 2% growth has been reduced to 1.4%.
Moreover, the Central Bank does not expect inflationary impact from the domestic economy, but continues to expect inflationary impact on the Armenian economy from the external sector. The Central Bank intends to pursue a monetary policy aimed at neutralizing any risk of accelerating inflation expectations, if possible without harming the recovery of domestic demand.
The regulator believes that, in conditions of high uncertainty of economic prospects, the risks of inflation deviating from the projected medium-term rate are balanced, nevertheless, if they occur, it is ready to react accordingly to ensure price stability.
Loans are dominated by drams, while deposits are dominated by foreign currency
The banking system of Armenia increased credit investments in February 2021 by 11% per annum or by 375 billion drams. According to the Central Bank of Armenia, the portfolio of corporate loans for this period increased by 11.3%, and retail - by 9.4%. At the end of 2020, the volume of loan investments increased by 16.7% over the year - up to 4.4 trillion drams ($ 8.4 billion). And as evidenced by the data of the Financial Rating of Banks of Armenia as of December 31, 2020, prepared by ArmInfo IC, in their structure the share of corporate loans increased from 59.3% to 61%, amounting to 2.7 trillion drams ($ 5.1 billion) in absolute terms, and retail loans, on the contrary, decreased from 38% to 36.5%, amounting to 1.6 trillion drams ($ 3.1 billion) in absolute terms. In 2020, the growth of the corporate loan portfolio accelerated from 7.7% to 14.5%, while the growth of the volume of retail loans slowed down from 30% to 12%.
Moreover, the activity of corporate lending in 2020 is due to the increased participation of banks in the 1st and 2nd anti-crisis state programs to assist business entities. At the same time, in the total deposit portfolio (urgent and on demand), which reached 3.6 trillion drams ($ 6.9 billion), a decrease in the share was recorded both for time deposits - from 42.8% to 36.6%, and for additional demand deposits - from 27 , 7% to 26%. This was due to a deterioration in the dynamics of the volumes of both term deposits - from a 14% growth to a 1% decline (due to a decrease in household funds), and demand deposits - the growth slid from 35% to 8%.
As a result, the share of credit investments in the structure of assets increased from 64.5% in 2019 to 65.8% in 2020, while the share of deposits (time and demand) in total liabilities decreased from 70.5% to 62.6 %. In the loan portfolio, the share of foreign currency loans exceeded the dram component - 52.3% against 47.7%, with an annual increase in the volume of the former by 10.5%, while the latter grew by 15%.
A more visible gap in favor of the currency component was also observed in the total deposit portfolio (fixed-term and demand), which reached 3.6 trillion drams ($ 6.9 billion) - 53.8% against 46.2% in drams, and this despite the 3% decline of the first with a 9.4% increase in the latter. But in total, the dram component continues to dominate in assets (53%), while foreign exchange attracts keep the same dominant in liabilities (against a higher 55% in 2019).
