Wednesday, March 20 2024 13:57

ArmInfo. In the banking sector of Armenia, the volume of lending accelerated in growth in 2023 from 13%  to 21%, reaching 5.8 trillion drams ($14.2 billion). But this was not enough to save profits from the decline, which, after a 3-fold jump in 2022, decreased by 9.2% in 2023, amounting to 229.9 billion drams ($567.9 million). This is evidenced by the data of the Financial Rating of Banks of Armenia as of December 31, 2023, prepared by  ArmInfo. 

Most likely the reason is that the limit on refinancing toxic loans  has been exhausted, which made it possible to improve their health at  least for a short-term period. As a result of the abandonment of this  method, the portfolio of overdue loans began to increase, in the  structure of which the dominance of the high-risk group of bad loans  increased even more. In this context, it is worth recalling that  consumer loans have the largest amount of overdue loans. Of course,  as a result, write-offs of toxic loans began to push through profits,  which in 2023 no longer had the same fuel from transactions with  currency, cards and transfers against the backdrop of the flow of  relocants, which made it possible to earn excess profits in 2022.  "Easy money," coupled with high lending rates, made it possible to  temporarily forget about the main and stable source of income -  lending. As a result, a year later, profits from foreign currency  transactions dropped by 35.3%. The growth of overdue loans resumed,  forming the share of NPL in the loan portfolio at the level of 6%, of  which about 40% are classified as bad.

Since lending activity depends on the cost of money, in the event of  a further reduction in interest rates, against the backdrop of the  general global trend of easing monetary policy, one can expect its  noticeable growth, however, this will most likely be expressed in  short-term financing of the trade and speculative segment , in food  service and services, government-backed mortgages, but not in  long-term industrial financing with low margins and distant returns.

The growth of corporate lending is supported by all areas except the  industrial sector

However, it is somewhat encouraging that banks managed to take  corporate lending from a 4% decline to 23% growth in 2023. But at the  same time, it is worth paying attention to the accelerated  double-digit growth in retail lending from 14.5% to 18%. As a result,  the volume of the former reached 2.9 trillion drams ($7.2 billion),  and the latter - 2.3 trillion drams ($5.6 billion), the share of  which in the loan portfolio amounted to 50.7% and 39.6%,  respectively. Moreover, 37-30% of the total volume of both corporate  and retail lending is covered by the first two - Ameriabank and  Ardshinbank.

However, it should be noted that such growth in corporate lending was  largely supported by the construction sector (+41%) and  catering/services (+34%), to a lesser extent by the trade sector  (+18%), the agricultural sector (+17%) and transport and  communications (+14%). Lending to the industrial sector finally,  after 2 years, came out of the recession, but unlike other areas, the  growth rates here turned out to be too meager, or, more precisely,  stagnant (0.4%).  A double-digit growth of 14.5% was also recorded in  interbank lending, which is fully explained by the readiness of  mutual assistance between banks in conditions when attractions from  international financial institutions are in a passive phase. In this  way, banks feed each other with resources, but only for a short- term  period, in contrast to international loans, characterized by longer  repayment periods and attractive terms, which increased by only a  meager 1.2%.

Against this background, consumer lending accelerated in growth from  11% to 24%, occupying a significant 40% of total credit investments.  But this growth does not look healthy, judging by the continued  deterioration in portfolio quality. 44% of toxic loans have  accumulated in retail credit. Moreover, in overdue consumer loans,  the high-risk group outweighs - the hopeless group, whose share  already exceeds 50%.

However, despite the acceleration in lending growth, asset growth  slowed year-on-year from 18.1% to 9.5%, amounting to 9.2 trillion  drams ($22.7 billion). The slowdown in the upward pace of assets is  due to a decline in the volume of investments in government bonds by  3%, balances in correspondent accounts with the Central Bank of the  Republic of Armenia - by 25%, balances in nostro accounts in banks -  by 4%, cash - by 5%.

Time deposits began to quickly regain their dominance

In total liabilities, the annual growth of time deposits noticeably  accelerated - from 3% to 12%, in parallel with which the growth of  demand liabilities sharply slowed down - from 67.2% to 8.6%, the  volume of which at the end of 2023 amounted to 2.7 trillion and 2.9  trillion, respectively. drams ($6.6 billion and $7.2 billion). Along  with this, as noted above, the dynamics of funds attracted from  international financial organizations improved - with a 14.2% decline  emerging from a 1.2% increase, the volume of which exceeded 1.3  trillion drams ($3.3 billion). This allowed total liabilities to  maintain growth, the rate of which slowed from 15.1% to 8.8%,  providing a volume of 7.7 trillion drams ($19 billion).

It is worth noting that in demand liabilities the growth of both  funds of individuals - from 2 times to 19%, and funds of legal  entities - from 49% to 1.1%, sharply slowed down, while in time  deposits the growth of funds of individuals accelerated from 1 .3% to  14.4%, and the growth of funds from legal entities remained at 6%. It  should be noted that after demand liabilities became dominant in  2022, as a result of the large- scale opening of current accounts in  Armenian banks by relocants and the movement of serious funds, in  2023 their share still exceeded the share of time deposits in total  liabilities - 38% against 35%, whereas previously time deposits  traditionally dominated - 38% versus 26% in 2021. But the strong  slowdown in the growth of demand liabilities, as a result of the  subsided rush of relocant actions, the manifestation of which is  unlikely to be expected, suggests that time deposits will be able to  restore their leading position already in the first half of 2024 and  will serve as a sustainable support for funding credit operations.

The volume of funds raised from the placement of own bonds also  showed a double-digit 13% growth, reaching 389.7 billion drams  ($962.7 million). Moreover, of the 13 issuing banks, the first three  positions in terms of volume are held by Ameriabank, Ardshinbank and  Armswissbank, whose total market share is 66%.

Income from lending and card transactions accelerated in growth, and  from transfers decreased. Income from lending for 2023 accelerated in  growth more moderately - from 6.2% to 17.4%, than from card  transactions - from 41.2% to 56. 7%, and from remittances dropped by  16.8% (after a 2.4-fold jump in 2022). 

The growth of income from operations with securities slowed down  slightly securities - from 31.1% to 28.4%. At the same time, the  growth rate of income on interbank correspondent accounts and  loans/deposits remains at a high level - 2.4 times (versus 2.6 times  in 2022).

As a result, interest income began to restore the positions lost  during the commission boom, accelerating in growth from 15.4% to  22.6%, while non-interest income, on the contrary, dropped by almost  2 times. At the same time, the growth of interest and non-interest  expenses has noticeably stalled.

It is worth noting that in non-interest expenses, as in the case of  income, costs for remittances decreased by 30%, while in 2022 they  showed a high growth of 93%. The reduction is due to a decline in the  total volume of transfers.

In interest expenses, a decline was recorded in transactions with  securities - by 17.1% (against an increase of 9.1% in 2022).

In parallel with this, there was a slowdown in the growth of expenses  on interbank correspondent accounts and loans/deposits - from 14.2%  to 9.3%. Expenses on loans and card transactions accelerated in  growth, and, as in the case of income, the former - less noticeably -  from 8.4% to 12.3%, and the latter - very significantly - from 28.8%  to 87.7%.

The dominance of the dram component in the loan portfolio is  increasing

In the loan portfolio (excluding international loans), the dram  component already reaches 64% (versus 63% in 2022), with the annual  volume growth accelerating from 11% to 23%. But the trend of the  foreign exchange component also improved, despite its smaller share  in the loan portfolio (36%, versus 37% in 2022), with a 17% increase  from a 22% decline.

The increase in the level of dramization of the loan portfolio is  due, no less, to the introduction of amendments to the law "On  Currency Regulation and Currency Control" from February 2023, which  provide for issuing mortgage loans to residents of the country  exclusively in the national currency - drams.  Thus, in addition to  consumer lending, mortgages are also becoming dram-denominated, the  share of which in the loan portfolio has increased to 40% and 19%,  respectively (from 38% and 18% in 2022).

In parallel with this, the annual growth of the dram component in  liabilities to clients accelerated quite noticeably - from 7.7% to  22.3%, and the trend of the currency component, on the contrary,  turned from 30.3% growth towards 1.7% recession. This increased the  dominance of the dram component in obligations to clients to 51%, and  accordingly the remaining 49% fell on the foreign currency component,  while a year ago foreign currency obligations to clients prevailed  over dram ones - 55% versus 45%.

As a result, in terms of currency risk, the final net position slowed  down significantly in growth from 45% to 13%, which is associated  with the stagnation of foreign currency assets and liabilities, while  the double- digit growth of dram assets and liabilities continued.

In terms of liquidity risk, a stronger slowdown in the growth of  financial liabilities from 16.3% to 9.1% than in financial assets  from 17.8% to 10.7% maintained the gap in favor of the latter,  thereby keeping the cumulative GAP in double-digit positive  territory, an increase of 21%.

Total capital growth has stalled

Total capital slowed down significantly in growth from 38% to 13.5%,  amounting to 1.5 trillion drams ($3.7 billion). This is due to the  slowdown in growth of both accumulated profit from 75% to 27.4% and  authorized capital from 28.5 to 0.8%. Regarding the latter, it is  worth noting that in 2023, only 3 banks replenished their authorized  capital (by 11-0.2%) - Armeconombank, Unibank and Ameriabank, while  in 2022 there were twice as many of them and the volumes of  replenishment were more significant - especially AMIO Bank and FAST  Bank distinguished themselves, each increasing their authorized  capital by more than 4 times. As a result, in 2023, in the structure  of total capital, the share of authorized capital decreased from  55.6% to 49.7%, and the share of accumulated profit increased from  38% to 43.2%.

In terms of total capital and accumulated profit, Ameriabank holds  the lead, and in terms of authorized capital, AMIO Bank has secured  the lead. But in terms of net profit, Ardshinbank occupies the first  position for the second year in a row.

One of the reasons for the decline in profits is the damage suffered  in Artsakh

We would like to pay special attention to the halving of the total  capital of Artsakhbank due to a significant decline in accumulated  profits, including the "transformation" of 7 billion net profit into  a 24 billion loss (in drams). The deterioration of these and other  balance sheet indicators of Artsakhbank is explained by the  curtailment of activities in Artsakh due to the tragic events of  September 2023 - the forced resettlement of Artsakh residents to  Armenia. And of course, Artsakhbank suffered incomparably greater  material and non- material damage than the other six Armenian banks  operating there through single branches - AMIO Bank, Ardshinbank,  Unibank, Converse Bank, Araratbank, Armeconombank. These seven banks  had a total of 20 branches and over 55 ATMs in Artsakh.

But the presence of Artsakhbank's seven Yerevan branches, as well as  the operational support from these six banks, to some extent made it  possible to alleviate the plight of the "dispossessed" refugees from  Artsakh, in addition to which monetary government assistance  followed. As part of force majeure, banks took the following steps:  credit holidays, loan extension without accumulating fines and  penalties, free annual maintenance and zero commission on payment  cards. But first of all, the gold pledged under pawn loans was  returned to the borrowers, with the loan agreement annulled, and this  process began in Artsakh as soon as it became clear that the exit of  the Artsakh people was inevitable, and then was continued in Yerevan.  The issue of mortgage loans for which housing was purchased in  Nagorno-Karabakh remains open. Thus, the prompt actions of the banks  indicate unconditional support for the people of Artsakh, who in a  matter of days were deprived of their historical homeland, housing  and means of livelihood.

The Central Bank continues to reduce the key rate, guided by the new  system for monetary policy

The Central Bank has been easing monetary conditions for the second  year in a row, reducing the key rate seven times during this period -  from a historically high 10.75% (in December 2022) to 8.5% (in March  2024). But since February of this year. The regulator is already  guided by a new improved system (FPAS MARK II) for developing  monetary policy (MP) and making decisions. In other words, from now  on the Central Bank will build the process of making decisions on  monetary policy and calculating forecasts in accordance with several  Case A and Case B scenarios.

Thus, Case A scenarios assume monetary policy rates that exceed  market expectations, given that risk and uncertainty factors may  create a more highly inflationary environment in the economy. Case A  scenarios involve expansion of demand and contraction of supply.

Case B scenarios assume lower monetary policy rates than market  expectations, given that risk factors and uncertainties can create a  deflationary or low-inflationary environment in the economy. Case B  scenarios involve curbing demand and expanding supply.

And based on these scenarios, the Central Bank of the Republic of  Armenia predicts for 2024 GDP growth of 5.3% or 6.4% - up to  10.4-10.5 trillion drams (against 8.7% growth - up to 9.5 trillion  drams in 2023), depending from the formation of either a high or low  inflationary environment in the economy. In a sectoral breakdown, GDP  growth will largely come from the construction sector - 10.8-12.8%  (versus 15.7% in 2023), and slightly less from the industrial sector  - 5.7-6.2% (versus 1 .7% in 2023) and the service sector - 5.4-5.7%  (versus 11.4% in 2023), and the agricultural sector will accelerate  in growth to 2.5% (from 0.2% in 2023).

It is noteworthy that inflation under scenarios Case A and Case B is  projected for 2024 at an equally low level of 1.3% (versus  deflationary 0.6% in 2023). The dynamics of exports and imports,  according to the forecast of the Central Bank, after almost identical  growth in 2023 by 28.7-28.3%, will worsen in 2024 to a decline of  11-7.8% (for exports) and 3.2-7. 5% (for imports).

The ratio of remittances to GDP, according to the Central Bank's  forecast, will continue to decline - in 2024 to 3.5 -3.3% (from 4% in  2023), thereby fixing the duration of the weakening economic effect  in terms of the impact of transfers on the economy.

International financial institutions expect a more noticeable  slowdown in Armenia's GDP growth in 2024

The International Monetary Fund (IMF) and the World Bank (WB) predict  a more pronounced slowdown in GDP growth for Armenia in 2024 - to 5%  and 4.7%, respectively. International rating agencies' forecasts for  Armenia's GDP growth for 2024 look a little more optimistic; in  particular, S&P Global Ratings expects the pace to slow down to 6.2%,  and Fitch Ratings - to 6%.

The World Bank believes that long-term growth will continue to be  hampered by dependence on raw materials, weak transport  communications and logistics, as well as the likelihood of escalation  of relations between Armenia and Azerbaijan.

The IMF, expecting Armenia's economic growth to reach its medium-term  growth potential of approximately 4.5%, believes that the  authorities' efforts to increase labor force participation and reduce  structural unemployment, facilitate access to finance, diversify  exports and strengthen governance will increase economic  sustainability and potential growth.

Fitch also believes that long-term expansion of the workforce and  improved productivity through expansion of high-productivity sectors  such as information and communications technology are likely to boost  Armenia's GDP growth potential. But Fitch does not expect significant  diversification of the Armenian economy at the expense of Russia in  the near future, while noting the worsening of relations with Russia.   Fitch also drew attention to the strong support of Armenia by  external creditors.

According to S&P, uncertainty remains regarding Armenia's growth  prospects over the next few years, with downside risks stemming from  global macroeconomic developments and, more importantly, ongoing  regional geopolitical instability.