Friday, May 21 2021 20:33

ArmInfo.In the banking system of Armenia, the accelerated growth of non-performing loans (NPL) in 2020 continued in Q1 2021. In such a situation, the "indulgences"  undertaken by the regulator to shift part of the burden of bad loans  from 2020 to 2021 are likely to weigh down the already toxic loan  portfolio, as a result of which profits will linger in the downturn.

Thus, the share of NPL in the loan portfolio increased in the first  quarter of 2021 to 10.5% from 7.6% in the first quarter of 2020, and  in assets - from 5.2% to 6.8%. This phenomenon was observed against  the background of a significant slowdown in the y-o-y growth of  credit investments from 22.1% to 7.6% and a less noticeable slowdown  in asset growth from 15.3% to 12.7%. Moreover, in the first quarter  of 2021 alone, the deterioration of lending dynamics from 2.5% growth  to 1.1% decline slowed down the growth of assets from 5.7% to  stagnant 0.2%.

These indicators are given from the Financial Rating of Banks of  Armenia as of March 31, 2021, prepared by ArmInfo IC on the basis of  financial reports, which include a new format for presenting credit  risk (according to IFRS9). However, this international format does  not fully reflect the situation of the real quality of the loan  portfolio 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.

Profits keep declining

The accelerated growth of toxic loans is eating up profits. Thus, the  aggregate net profit of the banking system of Armenia, amounting to  19.4 billion drams ($ 36.5 million) in the first quarter of 2021,  decreased by 17% per annum (against 39.9% growth a year earlier),  which was 48% (against the miserable 3.5% decline a year ago).  Moreover, profit avoided a more tangible drawdown thanks to the  freezing, within the framework of the regulator's "indulgence", of  part of the burden of defaults for the year.

This factor even allowed profits in the Q1 alone to jump 10 -fold  (from an 89.5% decline in the Q4), despite the continuing  double-digit growth in NPLs, which, in all likelihood, will be  observed until banks will manage to resolve the issue of the part of  the toxic load "frozen" for a year. Nevertheless, it was this  proposal of the regulator that allowed 8 banks to get out of loss for  profit in the reporting quarter, which in turn turned the quarterly  trend of total profit in the market from a weighty downward to a  noticeably upward trend.

This was accompanied by a 1.7% decline in the amount of healthy  (standard) loans in Q1 (after a stagnant 1.3% growth in Q4) with a  noticeable slowdown in y-o-y growth from 18% to 3.2%. It is pertinent  to note that last year's upward trend of the same period was ensured  by banks initiating credit payment holidays from March 13 to June,  implying the renegotiation of agreements with an extended maturity,  as well as due to the active participation of banks in the 1st and  2nd anti-crisis state programs on social - economic assistance to  business entities affected by the consequences of the coronavirus.

The dominant of NPLs in consumer loans is approaching 50%

About 66% of NPL are of dubious and hopeless risk groups, with the  last tangible dominant growing in volume. Broken down by industry,  over 47% of overdue loans "stuck" in consumer loans (including  mortgages), with an annual increase in the volume of non-performing  loans by 49%, while healthy loans declined by 7.7%.

The second place in terms of NPL share is occupied by the trade  sector, where more than 14% of non- performing loans (mostly bad)  have accumulated, with an annual growth of 17.7%, with a decline in  healthy loans by 0.2%.

The third place in terms of the share of NPL is occupied by  agricultural loans - about 10%, with an annual decline in the volume  of non-performing loans by 8.1%, while the growth of healthy loans  accelerated to 16.4%. Then, in terms of the share of NPL, loans in  the field of catering and services follow - about 8%, with an annual  growth of 3.1% with a weak 0.8% growth in healthy loans.

The share of NPL in loans to the industrial sector is slightly lower  - about 7%, with an annual growth of 4.9% with a stagnant 0.04%  growth in healthy loans.

The lowest share of NPLs is among loans to the construction sector  (over 4%), with an annual growth in volume by a meager 0.7%, with a  noticeable slowdown in the growth of healthy loans to 18.4%.

The abovementioned segments dominate in the portfolio in terms of the  share of credit investments as well:  consumer loans - 25.8%, trade -  17.6%, industrial sector - 14.7%. At the same time, mortgages account  for 11.9%. And the shares of lending to catering / services and the  construction sector equaled - 6.9%, and the agricultural sector was  5.4%.

Meanwhile, the volume of consumer loans slowed down the annual growth  from 31.3% to stagnant 0.9%, with a more restrained deceleration of  mortgage growth from 45.2% to 24%.

A slowdown in growth was also observed in lending to the catering /  service sector - from 12.6% to 4.1%, the retail sector - from 16.9%  to 12%, the agricultural sector - from 14.5% to 12%, and the  construction sector - from 37.2% to 19.6%. And the acceleration of  the upward trend was seen in lending to the industrial sector - from  5% to 13%.

At the same time, the volume of lending to SMEs continued to grow  moderately - by 11% (against 9% a year earlier).

By April 1, 2021, the total loan portfolio of Armenian banks exceeded  4.3 trillion drams ($ 8.1 billion), and assets reached 6.7 trillion  drams ($ 12.5 billion). At the same time, a noticeable slowdown in  the y-o-y growth of the first mentioned, with a moderate deceleration  in the growth of the latter, reduced the share of loans in assets  from 66% last year to the current 65%.

"Concealment" of toxic loans reduces the transparency of banks 

Analysts of the national rating agency AmRating note: "With the  transition to the new reporting under IFRS9, the transparency of the  banking system has decreased, since the new format does not fully  disclose the structure of loan quality, calling into question the  usefulness of the portfolio classification by risk groups. The  absence in the new format of the most formidable and dangerous  article on bad loans for assessing the reliability of banks causes  the most concern. And as a result, the abovementioned 66% do not  fully reflect the toxicity of the portfolio. Nevertheless, the  "massive" presence of bad loans is indicated by a noticeable  deceleration in the rate of interest income from lending, which  entered into recession phase within quarter, and an annual decline in  profits. "

Still a year ago, analysts of the agency suggested that the process  of writing off bad loans from the balances after the credit payment  holidays (from March 13 to June) would continue, the actual  implementation of which over the next months began to "push" the  level of profitability of the banking sector up to a 20% decline for  2020.This trend has spread to 2021, during which the situation may  become even more complicated as soon as banks begin to "unfreeze"  part of the burden of defaults transferred within the framework of  regulatory "concessions" from last year to this year.

Earlier it was reported that 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  introduce the maximum debt burden ratio (DBR) in 2021, but the  Central Bank did not specify from which month. With the introduction  of the personal income tax ratio, designed to exclude over-lending of  borrowers, a real recovery of the loan portfolio will be outlined.   In the meantime, low interest rates, even after meager growth  attempts, still do not allow margins to return to the pre-crisis  level, in addition to which weakening interest incomes are moving ROA  and ROE ratios from their previous high levels. At the end of the  first quarter of 2021, the return on assets (ROA) of the banking  system decreased to 1.2%, and the return on equity (ROE) - to 8.65%,  from 1.6% and 11.1% a year earlier in the same period.

Recovery prospects are questionable even until 2023

The likelihood of rectifying the situation and restoring the  pre-crisis indicators in the short term is not visible, but reaching  the previous levels in the medium term is quite realistic.

Socio-economic difficulties began in 2020 from the surging  coronavirus pandemic, which, as it turned out later, showed an  undulating current. So, the second wave of the virus of greater  strength in the fall of 2020, coupled with martial law due to the  hostilities in the zone of the Nagorno-Karabakh conflict, and the  third wave of the rise of the pandemic in the spring of 2021 with the  circulation of new more active strains, questioned the previous  prospects for economic recovery in 2021. And the belated vaccination  process, with a sluggish current pace, suggests that the economy has  a weak chance of recovering even in 2022, as evidenced by the latest  forecasts of the World Bank - the return of the Armenian economy to  the pre- COVID level of production until 2023 is doubtful.

And as soon as the economy reaches the previous growth rates, it will  be easier for the financial sector to cope with the problems  accumulated during the crisis, the solution of which will allow it to  confidently develop and grow steadily, as it was before.

It's enough postponing; it's time to implement

This is the decision of the Central Bank of Armenia with regard to  some Basel requirements, the implementation of which has been  postponed over the past two years. Considering the current situation  as a threat to the stability of the banking sector due to the  coronavirus crisis, the Central Bank announced the phased  implementation of a number of Basel 3 requirements in 2021. In  particular, it is planned to introduce a liquidity coverage ratio  (LCR), in parallel with which it is not ruled out that a number of  other standards will be launched for a certain time, incl. net stable  funding ratio (NSFR). At the same time, as usual, the liquidity risk  ratios for total and current liquidity will continue to operate at  the level of min 15% and 60%, respectively.

At the same time, the regulator, taking into account the indicators  of banks weakened from the prolonged confrontation to the crisis,  which is difficult to curb, still refrains from tightening the  countercyclical capital buffer - CCyB), keeping it throughout 2020  and to this day at the level of 0% of the risk-weighted assets.  With  this decision, the Central Bank mitigates the negative consequences  of the coronavirus and martial law on the financial system, and  contributes to the continuity of lending to the Armenian economy.

The Central Bank also resumed from 2020, after a 12-year hiatus (then  at the level of min 8%), the capital adequacy ratio, first at the  minimum 10%, subsequently reduced in May to 9%, along with which the  current general capital adequacy ratio was maintained at the level of  min 12%.

Thus, according to AmRating analysts, the regulator is signaling 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 April 1, 2021, on average in the banking market, the level of  total capital adequacy decreased to 24.1% from 26.3% a year earlier,  and the level of fixed capital adequacy - from 30.6% to 22%.

The level of total liquidity on average in the banking market  increased in y-o-y terms from 31.5% to 32%, while current liquidity,  on the contrary, decreased from 166.1% to 158.3%. This is explained  by a significant 34% increase in highly liquid assets with a moderate  13-15% growth in assets and liabilities on demand.

Economic outlook is subdued

The World Bank (WB), in its March new forecast of the outlook for the  economic development of Europe and Central Asia, improved its  expectations for GDP growth in Armenia in 2021 from the previous 3.1%  to the updated 3.4% (after an actual 7.4% decline in 2020), with an  acceleration in 2022 to 4.3%.

In the sectoral breakdown, the WB forecasts acceleration of growth in  Armenia in 2021-2022 in the agricultural sector - from 1.3% to 2.2%  (against the actual 1.4% growth in 2020), in the industrial sector -  from 1.2% to 2.4 % (against the actual 0.9% decline in 2020), the  service sector - from 5.1% to 5.8% (against the actual 14.7% decline  in 2020).

The WB also predicts an 8.7% growth in exports of goods and services  from Armenia for 2021, with an acceleration rate to 12.2% in 2022,  while imports will accelerate from 8.3% in 2021 to 9.2% in 2022,  against the actual decline in 2020 in exports by 3.9% and imports by  17.7%.

In Russia, which is Armenia's main trading partner, the WB forecasts  GDP growth in 2021 by 2.9%, with an acceleration in 2022 to 3.2%  (against an actual 3.1% decline in 2020).

Meanwhile, the Central Bank of Armenia in March presented a very  restrained forecast for 2021: GDP growth in Armenia by 1.4%, export  growth by 1-3% and import decline by 2-4%, private transfers growth  by 7-9%.

But the IMF's May forecast for Armenia turned out to be more  conservative: GDP growth in 2021 by 1% with an acceleration in 2022  to 3.5%. In terms of exports, the IMF predicts growth in 2021-2022  from $ 4.1 billion to $ 4.8 billion, and in terms of imports, growth  from $ 5.6 billion to $ 6.4 billion.

The WB forecast report indicates that the recovery will be slow - the  economy is unlikely to return to pre- covid production levels until  2023. According to WB expectations, private consumption and the  service sector will gradually recover. Private investment is likely  to remain subdued, reflecting weak investor confidence. High  post-conflict spending and ambitious public investment plans,  constrained by implementation constraints, will keep the budget  deficit high and push the public debt-to-GDP ratio above 70% in the  medium term.

Average inflation, according to the WB forecasts, will remain in 2021  near the target threshold of 4%, but may rise sharply if the  unexpected growth in world food and fuel prices continues. The WB  predicts current account deficit at about 5-6% of GDP in 2021-2023,  as the recovery in demand stimulates the growth of imports, and the  global recovery stimulates exports and remittances. FDI inflows are  expected to remain subdued, but government borrowing will keep  reserves at a comfortable level over the medium term.

The WB estimates that the outbreak of COVID-19 has had a devastating  impact on vulnerable households.  Projections suggest that in 2021  48% of the population (versus 51% in 2020), due to loss of income,  will remain below the poverty line, calculating the PPP-based poverty  rate at a cost of $ 5.5 per day. Risks are tangibly weighted downward  and include: uncertainty about progress in containing the pandemic  and the rate of vaccination; weak economic recovery from key trading  partners such as Russia; geopolitical fragility and heightened  political uncertainty.

In the previous forecast, the World Bank drew attention to the  economic landscape that has changed after the devastating  coronacrisis, which must be accepted by both governments and business  entities, noting that the world economy seems to be emerging from one  of its deepest recessions and starting a restrained recovery. At the  same time, the World Bank called the policy of central banks and  ongoing structural reforms as a desire to provide the basis for  accelerating the pace of this fragile global recovery and preparing  the ground for sustainable growth and development in the long term.  The WB advised policymakers to strengthen the supervisory assessment  of credit quality.

As the analysts of AmRating forecasted, Armenia, a recipient country  with a weak and unbalanced economy, was negatively affected by the  recession under the influence of the covid crisis in the economies of  donor countries. And the most aggravated influence - the pushing of  the main macroeconomic indicators of Armenia - came from the  deterioration of the economic situation in Russia, which  traditionally holds high dominance in them. At the end of 2020, the  share of the Russian Federation was: in non-trade turnover - 30.3%  (in exports - 26.6%, in imports - 32.4%), in total investments -  37.4% (in FDI - 75.1% ), in remittances - 64% in net inflow (45% in  inflow, 36% in outflow). Given the conservative forecasts for the  prospects for the economy of Russia and other donor countries to  grow, AmRating analysts are inclined to the likelihood of a slowdown  in the decline of macroeconomic indicators in Armenia in 2021.  Moreover, the trend in remittances will be upward, signs of which  have already begun to be seen in February-March, when labor migrants  managed to go abroad to work. The recovery of key macroeconomic  indicators at the pre-covid level is possible in the medium term.