Armenia`s banking system starts active lending to economy and  population

ArmInfo. The banking system of Armenia has begun actively lending to the economy and population, but the industrial sector remains the 'Achilles heel' of the loan  portfolio, according to the data of the Financial Rating of Banks of  Armenia as of March 31, 2024, prepared by ArmInfo.

Agency analysts note that the so-called indicator of transformation  of attracted client funds into credit investments has balanced at  around 100% for the first time. This was achieved as a result of an  increase in funds attracted from clients (time deposits, and demand  deposits) by 10% and an increase in the loan portfolio (considering  interbank loans and deposits) by 17% -up to the identical 5.7  trillion drams or $14.4 billion.  Analysts pay special attention to  the fact that such a "comfortable" level of transformation of raised  funds into placed ones began to be observed when the y-o-y dynamics  of corporate lending changed from a 4.5% decline to a double-digit  growth of 20.3%, with  a noticeable acceleration in the growth of  retail lending from 12.1% to 23.8%. At the same time, there was a  sharp slowdown in the growth of demand liabilities from 65.2% to  10.6% and time deposits maintained a moderate growth of 8.6%.  Interbank loans and deposits in the loan portfolio (13.4%) lingered  in the recession.

However, the level of investment activity, which also considers the  credit resources received by banks from external sources and the  funds raised from the placement of their own bonds, remained at the  level of 76%.  Although the volume of credit resources received from  external sources increased by 5.4% over the year, and funds raised  from the placement of own bonds by 9%.

Notably, the dominant position in attractions (7.5 trillion drams),  is almost equally maintained by demand liabilities and time deposits  - 40% and 36%, respectively (2.97 trillion and 2.7 trillion drams),  and the share of loans received from external sources and attracted  from placement own bonds of funds account for 19% (1.4 trillion  drams) and 5% (388.7 billion drams) respectively.

Improved dynamics in corporate and retail lending allowed interest  income to maintain double-digit growth of 22%, while interest  expenses, dominated by customer time deposits and current accounts,  grew more subdued at 15%.  At the same time, liquidity ratios began  to decline: total liquidity - from 37.9% to 36.7%, current liquidity  - from 169.5% to 127.4%, short-term liquidity - from 362.7% to 260%,  long-term liquidity - from 159.2% to 145.4%. And here it is worth  noting that among highly liquid assets, the y-o-y dynamics of  correspondent accounts at the Central Bank (from 7% growth to 11.2%  decline), cash and cash equivalents (from 24% growth to 11% decline)  and the growth of investments in government bonds noticeably worsened  (from 37% to 10%).

Notably, in terms of the volume of credit investments (considering  interbank loans and deposits) and funds raised (considering  obligations to clients, loans from external sources, received from  the placement of own bonds of funds), the TOP-5 continues to be  represented by Ameriabank, Ardshinbank, Acba Bank , AMIO Bank and  INECOBANK.

Of these, Ardshinbank, AMIO Bank and Acba Bank are in the TOP-5 in  terms of the volume of loans attracted from external sources , and  Ameriabank, Ardshinbank and Acba Bank -in terms of funds received  from the placement of their own bonds .

In terms of time deposits, the TOP-5 includes: Ameriabank, Acba Bank,  AMIO Bank and Ardshinbank, in terms of demand deposits: Ardshinbank,  Ameriabank, INECOBANK and Acba Bank; in terms of corporate and retail  loans: all the abovementioned 5 banks, moreover, in both cases the  first two positions are occupied by Ameriabank and Ardshinbank, and  in terms of placed interbank loans and deposits Ardshinbank and Acba  Bank are in the lead.

These five banks completed Q1 2024 with a profit, but four of them  were in the TOP-5 - Ardshinbank, Ameriabank, INECOBANK and Acba Bank,  which account for about 62% of the total net profit of the banking  sector, with 46% generated by the first two banks.   According to  analysts of the AmRating, with the acceleration of the growth of time  deposits, which are the main source of funding for the loan  portfolio, the latter will accelerate in growth even more, and as can  be seen now, it will be supported no less by the activity of  corporate lending, which differs from retail in terms of long-term  placement and low interest rates. This, in turn, will allow the  relatively recently earned excess profits to be maintained in growth  while maintaining double-digit y-o-y rates, but now through active  lending to the economy rather than foreign exchange transactions, as  was practiced in the turbulent 2022 and partly in 2023. However, the  acceleration in lending may slow down profit growth due to a  resurgence in non-performing loans. But so far, despite the slight  increase, the share of toxic loans remains at 6% in the loan  portfolio and 4% in assets.  However, as noted by AmRating analysts,  the riskiest groups of doubtful and bad loans in the risk  classification continue to grow at double-digit rates, their share in  the total volume of overdue loans is 66%, and their lion's share  continues to accumulate in consumer loans.

At the same time, the volume of loans classified by risk group as  "standard" increased by 29% y-o-y, which was largely provided by  consumer loans, and to a lesser extent by lending to economic  sectors. The exception is the industrial sector, lending to which  remains in decline, and the reduction in the standard group is  accompanied by an increase in delinquency, where the riskiest groups  are strengthening their dominance.

Whether banks will be able to maintain the achieved double-digit  growth in corporate lending in the context of slowing economic  growth, as analysts believe, time will tell. But the fact that the  forecast GDP growth (according to the Central Bank of Armenia within  5.3-6.4%) is supported by non-key areas of the real sector suggests  that the lending preferences of banks will continue to move away from  the industrial sector, which is only statistically growing solely due  to re-exports and re-import of jewelry products.

However, if lending activity in other areas of the economy does not decline, banks will  most likely be able to keep their loan portfolio growing. Moreover,  regulatory easing of monetary conditions signals a reduction in  interest rates. The only question is to what extent representatives  of the real sector of the economy will be able to apply for new  loans, especially since the level of non-repayment in the industrial  sector is quite high, 10% of the total overdue loans. Moreover, in  such active sectors of the economy as construction and trade, the  level of toxic loans in total exceeds 21%.