ArmInfo.The high growth of the mortgage portfolio by June 2021 by 37.2% per annum to 544.2 billion drams ($ 1.05 billion) supported the loan portfolio of the Armenian banking system in 6.4% growth, exceeding the absolute value of 3.6 trillion drams ($ 6.9 billion). The growth of mortgages increased its share in the total loan portfolio of banks from 11.7% last year to the current 15.1%. This is evidenced by the data of the RA Central Bank.
The high activity of mortgages is also indicated by cadastral data, according to which the number of mortgage transactions increased by 45.8% per annum - up to 1956 transactions in January-May 2021 in the country as a whole. Their share in the total number of mortgage transactions with real estate increased on a y-o-y terms terms from 17% to 22%. Moreover, traditionally, the largest number of mortgage transactions (1279 or 65.4%) is carried out in Yerevan with y-o-y growth of 55.4%.
The dominant number - 1,393 transactions, or 71.2%, were concluded for housing in multi-apartment buildings (a y-o-y increase of 39%), 319 transactions or 16.3% - for private houses (a y-o-y increase of 36.3%). And although the share of land mortgages accounts for a small percentage - 3% or 58 transactions, but the significant y-o-y growth of 87.1% and the primary focus on agricultural land are impressive.
Such an increase in mortgage transactions is observed against the background of a continuing, but already slower decline in the value of residential real estate by June by 3.1-4.5% per annum - to 96-330 thousand AMD / 1 sq. m. (in the regions and the capital). And, judging by the decline in real estate prices, the high activity of mortgages will presumably persist for a short time, since already on a monthly terms since April, the cost of housing has begun to grow, though weakly expressed, but with an acceleration rate from month to month.
In the same context, it is worth paying attention to the high growth (the second fastest) of lending to the construction sector - 28.5% per annum, with a collateral of 285.8 billion drams by June of this year ($ 549 million), and an increase from 6.6% to 7.9% of the share in the total loan portfolio.
Consumer loans are shrinking
The third place in terms of growth rates was taken by loans to the transport and communications sector - by 26.9% per annum, the volume of which in the industry portfolio is the smallest - 133.9 billion drams ($ 257 million). The fourth place in terms of growth is occupied by agricultural loans - by 17.2% per annum to 194.1 billion drams ($ 373 million). And loans to the industrial sector, occupying the second position in terms of volume - 570.3 billion drams ($ 1.1 billion), in terms of growth rates, were in fifth place - 11.3% per annum. A more modest growth is demonstrated by loans to the trade sector - by 8.1% per annum to 539.7 billion drams ($ 1.04 billion), and to the services sector - by 7.3% to 312.2 billion drams ($ 600 million).
Against the background of the intensification of lending to sectors of the economy, there is a decline in consumer lending by 5.3% per annum (including a 3.8% decline in 5 months of this year), the volumes of which, despite this, continue to lead (893.5 billion drams or $ 1.7 billion). But the reduction in the portfolio of consumer loans has reduced their dominance in total loan investments from last year's 27.8% to the current 24.7%. At the same time, by sectors of the economy, the share of lending in the total portfolio increased: the industrial sector - from 15.1% to 15.8%, the trade sector - from 14.7% to 14.9%, the agricultural sector - from 4.9% to 5.4 %, transport and communications - from 3.1% to 3.7%. And the share of lending to the service sector remained at the level of 8.6%.
Term deposits flow into demand deposits
The total deposit portfolio, exceeding AMD 3.7 trillion ($ 7.2 billion) by June 2021, increased by 9.1% on a y-o-y terms, which was largely ensured by an increase in funds attracted from resident clients (by 11.5% to $ 5.4 billion) than from non-residents (by 2.5% - up to $ 1.8 billion). Moreover, in January-May alone, the total deposit portfolio showed a stagnant 0.9% growth, due to the decline in non-resident funds by 9.4%, while resident funds grew by 4.9%. And the five-month decline in non-resident funds could have been higher, if not for a serious increase in the AMD component by 19.3%, along with a decrease in the foreign currency by 14.3%.
In the data published by the Central Bank, the breakdown by time deposits and demand liabilities is given only by funds of resident clients. Thus, the y-o-y growth of funds attracted from resident clients is supported by a 34% increase in demand liabilities, while time deposits slowed down to a paltry 1.7%, amounting to AMD 1.03 trillion and 1.8 trillion ($ 2 billion and $ 3.4 billion, respectively).
Moreover, for the funds of resident individuals, there is a deterioration in the y-o-y dynamics of time deposits from growth to a decline of 1%, in parallel with which additional demand the volume of the first is several times higher than the volume of the second - 1.3 trillion and 438.7 billion drams, respectively ($ 2.4 billion and $ 843 million).
The overflow from term deposits to demand deposits was also observed in the funds of resident legal entities, as evidenced by the y-o-y increase in demand liabilities by 48%, while the growth of term deposits slowed from double-digit 20.3% to a modest 7.8%. As a result, demand deposits again began to dominate over time deposits, and now more significantly - 592.1 billion against 504.9 billion drams ($ 1.1 billion and $ 970 million, respectively).
Rates are raised slowly
This year, the Central Bank of Armenia has already raised the refinancing rate three times from the initial 5.25% to the current 6.5% (the decision was made on June 15 this year), signaling the need to gradually neutralize the stimulating effect of monetary conditions, in the context of the expected tangible inflationary influence from the external sector and the domestic economy.
Single banks have already reacted to the signal of the regulator by raising deposit rates, and if this trend is picked up by the rest of the sector, it will provide a visible upward trend in the market. In the meantime, the five-month change in rates looks sluggish, but already with symptoms of growth. And the Central Bank for the current year predicts a more pronounced increase in interest rates in the banking system. According to the chief banker, the banks' conservative behavior will push rates to a gradual increase.
So, in January-May 2021, lending rates slightly increased to 10.21%, and deposit rates, still being in a downtrend, severely slowed down the pace to 4.72%, after a decrease in lending rates in 2016-2020 from 14.26% to 9.93% and deposit rates from 9.57% to 4.82%.
Moreover, according to lending rates, it is clear that both dram and dollar loans have risen in price - up to 11.77% and 8.66%, respectively, after a five-year decline from 17.67-10.86% to 11.63-8.23%. At the same time, AMD deposits rose in price to 7.73% against the background of the continued depreciation of the dollar to 1.84%, after a decline in 2016-2020 from 13.69-5.44% to 7.45-2.18%.
GDP recovery potential is weak
Experts keep repeating this, pointing out the low level of 16.6% of fixed capital in the structure of GDP that has persisted over the past 5-6 years, i.e. for a long time Armenia has had problems with the restoration of the GDP potential. And this weak bar is holding back the recovery of the Armenian economy in the long term. As a comparison, they name the countries where the progressive growth rates of this indicator are kept at the level of at least 30%, while the "Asian tigers" have even more - over 40% of GDP. Even in the neighboring countries of Armenia, this threshold is higher.
Experts are inclined to predict GDP growth in Armenia in 2021 by 4.5-5% or 4.3-4.8%. The Central Bank's updated forecast is also in line with these expectations, predicting a 4.6% GDP growth in 2021 (versus an actual 7.4% decline in 2020 and a 7.6% growth in 2019). At the same time, the World Bank in its updated forecast did not change expectations, assessing the possible growth of Armenia's GDP in 2021 at 3.4%. But the Armenian government went to increase the GDP growth rate budgeted for 2021 from the previous 3.2% to 6%, which the Ministry of Economy considers conservative, continuing to adhere to its forecast for the end of this year with double-digit economic growth.
And banks have to work in such difficult conditions of the socio-economic situation, the falling incomes of the population, the expected increase in inflation with pressure from both outside and from the domestic economy, with indicators weakened due to the coronavirus crisis. Banks, sluggishly, but are increasing their performance.
The Central Bank, for its part, in the interests of maintaining the positive dynamics of banks' profits, made a concession in December 2020 - giving the command to freeze part of loan defaults for a year. But the situation in the economy and with the incomes of the population is improving too slowly, and, according to the WB forecasts, the restoration of the pre-COVID level of production until 2023 is doubtful. This gives the analysts of the national rating agency AmRating the right to assume that banks at the end of 2021 and in 2022 will still have to face the problem of increased defaults, which at that time will already consist not only of accumulated bad loans, but also of a "unfrozen" toxic portfolio. And as a result of write-offs, which is inevitable in such a situation, profits will be squeezed out, with an accompanying negative impact on the capital of banks.
Central Bank of Armenia neutralizes liquidity shocks
The risks of an outflow of funds against the background of the crisis, associated with the uncertainty of the timing overcoming the coronavirus pandemic, and domestic and foreign policy shocks, predetermined the steps of the Central Bank of Armenia to take early proactive measures to neutralize short-term and long- term shocks of liquidity of the financial system.
Within the framework of these measures, the Central Bank of the Republic of Armenia introduced new prudential liquidity ratios recommended by Basel III - short-term (LCR - Liquidity Coverage Ratio) and long-term (NSFR - Net Stable Funding Ratio) from 2021 (ahead of the planned date - from January 2023), the minimum level which was originally set at 60%, from July followed by an increase to 80%, and from January 1, 2022, the level of 100% will enter into force. Along with them, the ratios of total and current liquidity continue to operate, the minimum level of which has not changed- 15% and 60%, respectively.
Prior to that, from August 2020, one of the three capital adequacy premiums - the countercyclical capital buffer (CCyB) - began to operate for all banks - set at that moment at the level of 0% and so far maintained at this level (subject to a phased increase to 2.5% ). And the introduction of two other premiums - to maintain capital adequacy (0.5% with a phased increase to 2.5%) and for systemically important banks (0.5% with a y-o-y increase to 1.5%) - is still being postponed, since the Central Bank does not yet see the need for their implementation. And the Central Bank still does not consider it expedient to raise the CCyB from the zero level. However, in case of preconditions, the Central Bank is ready to introduce these two premiums, but for now, the regulator estimates the capital buffers of the banking sector to be sufficient to maintain the stability of the financial system.
The Central Bank also refrains from introducing the maximum debt burden ratio (DBR) due to the difficulties of accounting in the calculation of the recorded and unaccounted income of a potential borrower. But discussions continue and various kinds of calculations are carried out to find the correct option for using this standard, but in return, it prepared the LTV standard (Loan-to-Value Ratio - loan / collateral) for implementation from July 2021. And with regards to the DBR, the Central Bank explained that it is trying to develop such a mechanism that will not put banks in a stalemate, realizing, nevertheless, that the introduction of this standard for some types of loans, such as mortgages, is very important. Work on this task does not stop - the Central Bank wants to be as careful as possible so as not to harm and not introduce a mechanism that can impede the natural development of the market.
Undoubtedly, experts believe that the measures taken have a positive meaning and, first of all, contribute, first of all, to an increase in the coverage of risk by bank capital, and second, to an increase in the quality of capital, as well as to smooth the cyclical development of the banking sector and increase the liquidity of banks.
In general, in the opinion of experts, the regulatory measures being taken are aimed at implementing the basic functions of banking capital (its protective and operational functions), increasing the liquidity of the banking sector, strengthening supervision and transparency of banking activities, and improving risk management in the monetary sphere.
Experts also believe that against the backdrop of the coronavirus crisis, with the ensuing serious socio- economic consequences, the measures of containment taken by the regulator turned out to be very useful in terms of neutralizing short-term and long-term liquidity shocks and in order to support the stability of the financial sector.