AmRating: Asset quality of Armenian banks is still stable, but there  is a risk of renewed growth of overdue loans in both retail and  corporate portfolios

ArmInfo.Despite the fact that Armenia is now seen as a "safe haven" for the relocation of a considerable number of small and medium-sized businesses, especially in the field of IT, the aggravation of the external background associated with sanctions  restrictions could create serious problems in the medium term.

In this vein, the impact of anti-Russian sanctions on the Armenian  banking sector can be smoothed out and even neutralized through the  successful overcoming of currency and credit risks, as well as  liquidity risk. The experts of the AmRating National Rating Agency,  affiliated with ArmInfo IC expressed this opinion in the annual  review on the state of the country's banking system (Industry report  of Armenian banks).

According to the agency, the quality of banks' assets is still  stable, but there is a risk of renewed growth in overdue loans in  both retail and corporate portfolios. The capital adequacy ratio in  2021 has outlined a weak growth. But the likely deterioration in the  quality of the loan portfolio, especially in terms of high- risk  loans that are gaining momentum, may resume the subsidence of  profits, as a result of which capital adequacy will begin to decline  again. The profitability of banks in 2021 improved slightly due to a  tangible increase in profits, thanks to an increase in interest  income from securities transactions and commission income by banks.  At the same time, a significant portion of the banking sector's  profits is still generated by the three major players. However, the  short-term uptrend of profit with a reversal of the vector in the  direction of subsidence may resume the fall in ROE and ROA.

It is noted that despite limited government measures to support  vulnerable segments of the population and businesses through  subsidizing interest rates and leasing during the acute stage of the  coronavirus pandemic, the activity of retail bank lending in 2021  significantly decreased, and measures to stimulate corporate lending  only supported the credit market, preventing it from declining  significantly.

In 2021, assets continued to grow with a slowdown to 6.7%, but the  volume of lending to the economy decreased by 8.3%. The key  components of the upward dynamics of assets were, to a greater  extent, bank investments in securities (mainly government bonds), and  to a lesser extent, loans to individuals and consumer loans (mainly  due to high growth in mortgages). Thus, in the reporting year,  investments in government bonds grew by 35.1%, while the total loan  portfolio fell by 4.3%. In 2021, retail lending grew by only 6%,  moreover, this portfolio kept growing due to the growth of mortgage  loans by 35.4%, mortgage loans rose by 24%, car loans by 10% with a  double-digit decline in loans by purchase of goods by installments,  card overdrafts and pawn loans.

According to analysts, stagnation in the credit market amid the  ongoing economic crisis could lead to a noticeable decline in the  quality of bank portfolios by 2023.

At the same time, the funding base of banks was characterized by a  gradual decrease in the share of funds from individuals by 6.5% to  36.1% in 2017-2021. And deposits and current accounts of corporate  clients over the years have grown inconspicuously from 3.2% to 5.3%.  Their slight difference from the pace of 2020 (5.1%) indicates a  noticeable slowdown in attracting funds from economic entities.