Saturday, July 10 2021 11:13
Karine Melikyan

High growth of mortgage portfolio supports the loan activity of  banking system

High growth of mortgage portfolio supports the loan activity of  banking system

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. 


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