ArmInfo FinRating: Armenian banks are trying to return to stable  profit growth through lending

ArmInfo.The profits of Armenian banks, which sharply increased over the past year by leaps  and bounds in foreign exchange transactions, are beginning to slow  down significantly in growth rates.

Attempts to return it to stable growth through lending did not achieve the desired result due to weak  impulse from economic entities. In addition, retail lending, which  continues to grow at an accelerated pace, threatens even the current  weak profit growth, since it is this portfolio that contains a  dominant share of high-risk toxic loans, the write-off of which from  the balance sheet negatively affects the financial result.

According to the Financial Rating of Banks of Armenia as of September  30, 2023, prepared by the ArmInfo Information Company, in the banking  system of Armenia, net profit slowed down significantly in y-o-y  growth to 11% (after last year's 3-fold increase), amounting to 215  billion drams ($546.4 million) for the 9 months of 2023. But it is  noteworthy that interest income, rather than non-interest income,  began to support growth again, as it was during the previous year,  when profits were generated through currency transactions and card  transactions actively carried out by immigrants. This is evidenced by  the decline in the share of profit from foreign exchange transactions  to 41% from 65% last year, which was the result of a 30% drop in  absolute value (profit from foreign exchange transactions) after a  5.3-fold increase in the previous year.

This led to a 39% reduction in non-interest income and allowed  interest income growth to accelerate to 25%, while the nearly 4-fold  increase in non-interest income a year ago was accompanied by a  slowdown in interest income growth to 10%.

However, it should be clarified that lending is not yet the driving  force of interest income growth at this stage. The growth is dictated  to a greater extent by with nostro accounts and interbank  loans/deposits, income from which increased 3-fold (from 72.3% of the  previous year), and to a relatively lesser extent by transactions  with securities and lending.

 In particular, the growth of interest income from securities  transactions accelerated from 28% to 34%, and from lending - from  4.4% to 15%. In terms of commission income, the upward trend in card  transactions continues to gain momentum - from 35% to 78%, in  parallel with which the growth in income from money transfers has  stalled greatly - from 75% to 7%, the volumes of which are declining.

Despite the modest pace, lending retains its dominance in income -  74% in interest and 45% in total. The second place is held by  transactions with securities - 22% in interest and 14% in total, and  the share of nostro accounts and interbank loans/deposits is  insignificant - 5% in interest and 3% in total. In commission income,  the share of card transactions is 23%, and money transfers - 12%.

So, the volume of lending accelerated in y-o-y growth from 12% to  15.4%, reaching 5.3 trillion drams ($13.4 billion) by October 1,  2023, which in relation to GDP is 81.5% against last year's 79.3%. At  the same time, y-o-y GDP growth for 9 months of 2023 slowed from 21%  to 12%, almost returning to the rate of two years ago (11%).  The  leader in terms of volume in GDP is the trade sector, the service  sector ranks 2nd, the the industrial sector ranks 3rd, the  agricultural sector ranks 4th  and the construction sector ranks 5th.  Consumer loans continue to dominate the banks' loan portfolio with  more than 40% and mortgage loans with more than 19% and the largest  share of the economic sectors is the trade sector with 13%, followed  by the industrial sector with 10% and the construction sector with 9%  , agriculture sector and catering/service sector - 5% each.

The share of loans to SMEs over the past two years has more or less  stabilized, fluctuating from quarter to quarter within the range of  22-23%, but within the GDP, whether it will be possible to reach the  planned 55% by 2026 is hard to believe, especially since the  situation with SMEs in Armenia has remained practically unchanged  over the past five years, which confirms the slight increase in the  share in GDP from 25% to 28%.

In terms of lending to economic sectors, we can already affirmatively  mention the top two. The industrial sector: Ameriabank (24% on the  market) and Ardshinbank (14.4% on the market), in the same order they  are leaders in financing the construction sectors (20% and 16% on the  market) , transport and communications (41.4% and 12.6% of the  market). Trade sector: Ameriabank and Armbusinessbank (19% and 18% of  the market). As for agriculture, the undisputed leader in lending to  this sector, Acba Bank, having reduced its volume by 31% per annum,  reduced its market coverage from 54% to 35% of the market, and  Ameriabank, which followed, doubled its volume and increased its  market coverage from 17% to 31%, thereby coming in second place. In  terms of net profit, the first two places continue to be occupied by  Ardshinbank and Ameriabank, changing the lead between each other from  quarter to quarter, and Acba Bank has secured the 3rd place. And  these same three banks are also in the TOP-3 in terms of loan income.

In Armenia, since November 2022, the number of banks has increased  from 17 to 18. The former Fast Credit Capital Universal Credit  Organization CJSC received bank status, renaming itself Fast Bank. A  year later, in November 2023, Armbusinessbank rebranded, renaming  itself AMIO Bank. Among the 18 banks operating in Armenia there are  subsidiaries of foreign banks: (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   bank- Ameriabank.