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Stiff competition among banks in Armenia downs their profitability

YEREVAN, March 26. /ARKA/. Reduction of interest spread under a stiff competition among Armenia’s banks downed their profitability.

In particular, the banks’ ROA (return on assets) shed 3.3 times over the last decade from 3.01 in 2005 to 0.91 in 2014.

The banks’ aggregate loan portfolio grew about 11 times from AMD 194.4 billion to AMD 2 188.4 billion, and deposits 6.6 times from AMD 267.2 billion to AMD 1 757.5 billion.

Difference between interest rates on deposits and loans has significantly narrowed causing reduction in profitability.

In particular, average interest rate on loans slid from 17.29% to 16.26% over the mentioned period, while interest rate on deposits leapt from 6.45% to 10.95%.

It means that the difference between average interest rates on loans and deposits narrowed about two times.

In 2015, the spread remained unchanged, though amounts of attracted deposits and extended loans slightly contracted.

According to official figures, Armenian banks’ aggregate loan portfolio shrank 1.6% in January 2015, compared with the previous month, to AMD 1 729.5 billion, and deposits reduced 2.5% to AMD 2 134.1 billion.

An average interest rate on loans rose 0.51 percentage points to 16.77% and that on deposits jumped 1.11 to 12.06%.

This increase in interest rates was mainly due to the increase of the central bank’s demand to banks’ obligatory reservation from 12% to 20% and the high refinancing rate set by the regulator at 10.5%.

Some experts think the regulator’s decision to increase minimum size of general capital (it will amount to AMD 30 billion against the present 5 billion) may weaken competition at the country’s banking sector, and this will for sure impact interest rates, widen interest spread and drive the banks’ profitability up.
However, it is still not clear how strong this effect will be, since it is not known yet how many banks will manage to build up their capital and how many of them will remain at the market as players.

It is also worth to be mentioned that the banks have already embarked on attracting additional capital.
In particular, Armeconombank added AMD 1.2 billion to its capital by taking a subordinate credit and built it up to AMD 12.3 billion, Prometey Bank filled its capital with extra AMD 4.2 billion to have AMD 23 billion and Artsakhbank increased its capital by AMD 4.5 billion to AMD 11 billion.

Twenty one commercial banks operate in Armenia now. The aggregate capital of five banks alone meets and even exceeds the central bank’s requirement.

Other 13 banks have their capital amounting between AMD 10 billion and AMD 30 billion. And there banks’ capital is smaller than AMD 10 billion.

So, 16 banks have to find ways within two years for ensuring the amount required by the regulator either at own account or by merging with other banks.  —–0—–

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