Armenian banks` profit growth rates have slowed down significantly

ArmInfo. The profit growth rates of Armenian banks slowed down significantly amid the ongoing serious slowdown in lending to the economy. Thus, the net profit of Armenian  banks increased by 24.8% per annum inH1 2023 (against a 2.8-fold jump  in the same period in 2022), reaching 73.6 billion drams ($367.8  million), while slowing down strongly in quarterly growth from  3.4-fold to 5.2% alone.

According to analysts of AmRating, a rating agency (CRA) affiliated  with ArmInfo, this trend of a significant decrease in profit growth  is likely to continue, as lending to the economy is still, and  foreign exchange transactions in the volume that were carried out  last year by immigrants are hardly expected.  Thus, fees for services  and commission payments will remain the main source of income for  banks. 

According to the Express Ranking of Armenian Banks as of June 30,  2023, prepared by ArmInfo, some acceleration in the y-o-y growth in  the volume of credit investments and other loans from 1% to 14.3%,  reaching 4.5 trillion drams ($11.7 billion), continues to be  supported by retail loans, rather than corporate loans. At the same  time, funds on nostro accounts in banks (mainly foreign ones) slowed  down in growth - from 19% to 14.5%, while investments in securities,  on the contrary, accelerated in growth from 11.6% to 28.8%, the  volume of which almost equaled by July 1, 2023, reaching 1.8 trillion  and 1.7 trillion drams ($4.8 billion and $4.5 billion), respectively.

According to analysts, as a result, the y-o-y growth of interest  income by 24% to 347.4 billion drams was accompanied by a decline in  non-interest income by 32.1% to 128.6 billion drams, while a year  earlier non- interest income demonstrated progressive growth, jumping  3.5fold with a modest increase in interest income by only 7.7%. And  if interest incomes increased more due to transactions with  securities and to a lesser extent - due to lending transactions, then  the reduction in non-interest incomes was is caused by the slowdown  in foreign exchange transactions, as well as money transfers and card  transactions.

As a result, assets accelerated in y-o-y growth from 7% to 17.2%,  reaching 8.5 trillion drams ($22 billion).  In their structure, the  dominant of credit investments decreased over the year from 54.7% to  53.3% (against 57.9% in 2021), in parallel with which, the share of  investments in securities increased from 18.6% to 20.5% and the share  of funds on nostro accounts in banks slightly decreased - from 22.2%  to 21.7% (against 17.8% and 19.9% in 2021).

In parallel, total liabilities accelerated in y-o-y growth from 4.2%  to 15.8% (with a 0.3% decline in the quarter), reaching 7.1 trillion  drams ($18.3 billion). In their structure, 72.3% or 5.1 trillion  drams are accounted for by liabilities to customers, and 24.3% or 1.7  trillion drams - by liabilities to banks and other organizations  (taking into account the attraction from the placement of corporate  bonds), with  the acceleration of  y-o-y growth of the former  accelerates from 9.2% to 29.4% and the deepening of the decline of  the latter from 6.1% to 10.2%.

According to AmRating analysts, the continued growth of liabilities  to clients is explained by the presence of numerous accounts opened  by immigrants (mainly from Russia) since last year, who moved their  capital and business here after moving to Armenia. It was then that  the presence of a large number of immigrants (estimated at over 110  thousand people) "shifted" the priorities of Armenian banking from  traditional lending to card and foreign exchange transactions.  Moreover, due to the latter, against the backdrop of high volatility  of the exchange rate, the financial sector of Armenia received  quarterly excess profits last year, which at the same time was  supported by income from the high tariffs set for non-residents on  cards and on opening accounts, as well as the overall increase in  commissions on financial transactions. However, after the immigrants  settled in Armenia finished transferring their funds to the accounts  opened here, the hype of currency and card transactions subsided, the  exchange rate more or less stabilized, and as a result, the growth of  profits slowed down, which, moreover, is not properly supported by  lending and, in addition, "melts" from write-offs of toxic loans.

However, even modest growth in net income allowed accrued profits to  increase by 61% per annum to 578.9 billion drams ($1.5 billion),  which in turn supported the double-digit growth of the total capital  of the banking system by 24.4% to 1.42 trillion drams ($3.7 billion).  In the structure of the total capital in the market, the dominant  partof the authorized capital decreased from 61% to 52%, while the  share of accumulated profit increased from 32% to 41%.

Regulatory requirements were changed in Q2 2023. In particular, as a  result of the increase of the allowance from May 1 - the  Countercyclical Capital Buffer (CBC) from 0% to 1%, the minimum size  of the capital and total capital adequacy ratios and the methodology  for their calculation have changed. Thus, the total capital adequacy  ratio has been reduced to 11% from the previous 12%. Subsequently,  from August this year, another increase in the CBC markup is planned  from 1% to 1.5%, which implies a reduction in the total capital  adequacy ratio from 11% to 10.5%.

It is worth noting that the average market indicator of precisely  these ratios increased year-on-year as a result of a double-digit  growth in capital against a weakening dynamics of risk-weighted  assets. In particular, the capital adequacy ratio (N1/1 min 6.2%)  increased over the year from 25.3% to 28.5%, and the total capital  adequacy ratio (N1/2 min 11%) - from 26.7% to 31.2%. In parallel,  there was a decrease in the average market liquidity ratio - current,  short-term and long-term, and the level of total liquidity alone  (N2/1 min 15%) rose imperceptibly - from 35.5% to 36%. Thus, the  market average current liquidity ratio (N2/2 min 60%) decreased over  the year from 144.1% to 137%, short-term liquidity ratio (LCR min  100%, N2/3) - from 341.6% to 270.8%, long-term liquidity ratio (NSFR  min 100%, N2/4) - from 157.5% to 147.2%. Moreover, the average  current liquidity ratio for the market went down due to the weak  dynamics of highly liquid assets with a significant increase in  demand liabilities. As for the two standards introduced later (in the  middle of 2022) (N5/1 max 10% and N5/2 max 5%), designed to contain  the risks on mortgage loans, their average market indicator this  year, after growing in Q1, respectively, from 1.95% and 1.63% to  2.19% and 7.55%, decreased in Q2 to 2.18% and 0.65%. A less  noticeable decrease in the ratio for AMD mortgage loans may be due to  the legislative restriction on the issuance of foreign currency  mortgages.

According to the results of H1 2023, the TOP-5 banks in terms of  assets includes Ardshinbank, Ameriabank, Armbusinessbank, ACBA Bank  and INECOBANK, in terms of credit investments - Ameriabank,  Ardshinbank, ACBA Bank, Armbusinessbank and INECOBANK, in terms of  investments in securities - Ardshinbank, Armswissbank,  Armbusinessbank, Ameriabank and Converse Bank, in terms of  liabilities to customers - Ar dshinbank, Ameriabank, Armbusinessbank,  ACBA Bank and INECOBANK, in terms of total capital - Ameriabank,  Ardshinbank, Armbusinessbank, ACBA Bank and INECOBANK.  In terms of  net profit for H12023, Ardshinbank held the leadership, Ameriabank  secured the second place, INECOBANK advanced to the 3rd place, ACBA  Bank secured the 4th place, and Converse Bank jumped to the 5th  place.

It should be noted that with the advent in November 2022 of a new  participant in the person of FastBank, 18 banks already operate in  Armenia, including the subsidiaries of foreign banks HSBC (UK), VTB  (RF), Mellat (Iran), Byblos Bank (Lebanon). International  institutional investors represented by the European Bank for  Reconstruction and Development (EBRD) and the Asian Development Bank  (ADB) are present in the capital of only one of the abovementioned  banks, Ameriabank.