Armenian banks are returning to lending to keep profits up

ArmInfo. Armenian banks are reviving their credit policy after "resting on immigrants' laurels".  This must be done quickly and competently in order to maintain profit growth and avoid its serious decline.

Thus, against the backdrop of an increase in the y-o-y growth of the loan portfolio from 1.7% to 20.5% over the 9 months of 2023, the growth of net profit began to slow down significantly - from 3-fold to 11%, while in Q3 it began to sag, according to the data of the Express Ranking of Armenian Banks as of September 30, 2023, prepared by ArmInfo IC.

According to analysts, such a deterioration in profit dynamics can be  explained not only by the belated steps of banks to revive the credit  market, moreover mainly due to retail, but also by the ongoing  write-offs of toxic loans. The second reason may be the cancellation  of the contracts of pawn loans to the residents of Artsakh by some  banks at the end of September and the writing off of a part of the  obligations.

However, the trend of slowdown in profit growth is likely to continue  since lending to the economy remains stagnant, as before, and foreign  exchange transactions in the volume that were carried out by  immigrants last year are no longer expected.

As a result, net profit for 9 months of 2023 amounted to 215 billion  drams ($546.4 million), and the loan portfolio reached 4.7 trillion  drams ($12 billion), continuing to be supported to a greater extent  by retail loans rather than corporate ones.  At the same time, the  growth of funds in nostro accounts in banks (mainly foreign) has  stalled greatly - from 36% to 1.3%, while investments in securities  have only slightly slowed down in growth - from 25% to 20%, the  volume of which by October 1, 2023 almost equaled, reaching 1.9  trillion and 1.8 trillion drams ($4.9 billion and $4.5 billion),  respectively.

As a result, the annual growth of interest income by 25%, up to 537.6  billion drams, was accompanied by an almost 2-fold decrease in  non-interest income, totaling 191.5 billion drams. A year earlier,  non-interest income showed a 4-fold progressive growth, with a modest  increase in interest income of 9.7%. alone. And if interest income  increased due to lending and transactions with securities, then a  significant reduction in non-interest income was provoked by  a  slowdown in foreign exchange, money transfers and card transactions,,  which were very actively carried out by immigrants last year.

As a result, assets accelerated in y-o-y growth from 12% to 14%,  reaching 8.8 trillion drams ($22.3 billion).  The dominance of credit  investments increased over the year from 52% to 54%, in parallel with  which, the share of investments in securities increased from 19.5% to  20.3%, and the share of funds by nostro accounts in banks, on the  contrary, decreased from 24.4% to 21.7%.

In parallel, total liabilities accelerated in y-o-y growth from 9.1%  to 12.1%, reaching 7.3 trillion drams ($18.5 billion). In addition,  73% or 5.3 trillion drams are liabilities to clients, and 24% or 1.8  trillion drams are obligations to banks and other organizations  (taking into account the proceeds from the placement of corporate  bonds), with the y-o-y growth of the obligations to clients  accelerating from 16.2% to 23.3% and a deepening decline in the  liabilities to banks other organizations from 3.7% to 8.5%.

According to analysts of the AmRating rating agency affiliated with  ArmInfo, the continuing growth of obligations to clients is explained  by the large number of accounts opened by immigrants (mainly from  Russia) since last year, who moved their capital and business to  Armenia with them. It was then that, due to the large number of  immigrants (about more than 110 thousand people), the priorities of  Armenian banking activities were "transferred" from traditional  lending to the card and currency transactions.  Moreover, due to the  latter, against the background of high volatility of the exchange  rate, the financial sector of Armenia last year began to receive  excess profits on quarterly terms, which at the same time was  supported by income from high tariffs on cards and for opening  accounts established for non-residents, as well as a general increase  in commissions on financial transactions. However, after the  immigrants who settled in Armenia finished transferring their funds  to the accounts opened here, the rush of foreign exchange and card  transactions died down, the exchange rate more or less stabilized,  and as a result, the growth of profits slowed down, which is not yet  supported by proper lending and is "melting" from write-offs of toxic  loans.

However, even such an increase in net profit made it possible to  increase the accumulated profit by 49.7% per annum - to 640.5 billion  drams ($1.6 billion), which in turn supported the double-digit growth  rate of the total capital of the banking system at the level of 23.4%  - to 1.5 trillion drams ($3.8 billion). As a result, the share of  accumulated profit in the total capital increased from 35.5% to  43.1%, and the dominant share of the authorized capital decreased  from 58% to 49.5%.  As for regulatory requirements, the only the  Countercyclical Capital Buffer (CBC)  was affected by the change in   Q3, which was increased from 1% to 1.5% in August.

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 fixed capital adequacy ratio (N1/1 min  6.2%) increased over the year from 27% to 29%, and the total capital  adequacy ratio (N1/2 min 11%) - from 28% to 32%. In parallel, there  was a decrease in the average market indicator of liquidity standards  - current, short-term and long-term, and  the level of total  liquidity alone (N2/1 min 15%) increased imperceptibly - from 38% to  38.3%. Thus, on average, the market current liquidity ratio (N2/2 min  60%) decreased over the year from 139.2% to 138.6%, the short-term  liquidity ratio (LCR min 100%, N2/3) - from 350.3% up to 283.5%, net  stable funding ratio (NSFR min 100%, N2/4) - from 162.6% to 148.2%.  Moreover, the current liquidity ratio on average in 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 mid-2022) (N5/1 max 10% and N5/2 max 5%)  designed to contain risks on mortgage loans, their average market  indicator this year showed growth only in Q1, after which began to  decline quarterly - to 1.9% and 0.6%, more noticeably for foreign  currency mortgages.

Based on the results of 9 months of 2023, the TOP-5 by assets  included 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 obligations to clients - Ardshinbank,  Ameriabank, Armbusinessbank, ACBA Bank and INECOBANK, in terms of  total capital - Ameriabank, Ardshinbank, Armbusinessbank, ACBA Bank  and INECOBANK.  In terms of net profit for 9 months of 2023,  Ardshinbank retained the leadership, Ameriabank secured the second  place, ACBA Bank moved to the  3rd place, displacing INECOBANK to   the4th place, and IDBank moved  to the 5th place..

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.