YEREVAN, December 25. /ARKA/. Fitch Ratings’ bank sector outlook for Armenia in 2018 remains stable.
“The stable sector and ratings outlooks reflect our view that banks’ performance will benefit from continued healthy economic growth (we forecast GDP to expand by 3.6% in 2018 after 4.3% in 2017), driven by stronger exports and improving domestic demand, and relative currency stability as external pressures have eased,” the rating agency says in its report.
“We expect further reduction in sector vulnerabilities in 2018, although still high loan and deposit dollarisation levels (both 60%) remain a structural weakness.”
The agency says that credit growth accelerated to about 12% yoy in 1H17 from 3% in 2016 (net of FX effects and a temporary spike in 4Q16), as underlying demand recovered and banks started easing credit conditions.
It believes these trends will continue in 2018 with lending prospects benefiting from stronger economic activity and falling market interest rates. Growth will be driven by the corporate segment, with demand from households yet to pick up as the labor market is weak and remittance flows are only gradually recovering.
Fitch expects generally stable asset-quality trends in 2018 given more favorable macro conditions. Regulatory NPLs (loans up to 270 days’ overdue; loans overdue by more than 270 days are written off) averaged close to 7% at end-3Q17 (end-2016: 9.4%), although these levels do not capture loan restructuring. Reserve coverage of NPLs improved to 53% at end-1Q17 (the last date when this was publicly reported) from 41% at end-1Q16.
Unreserved NPLs were a moderate 17% of regulatory capital. Modest Profitability: Pre-impairment profitability was stable in 1H17 despite growing lending volumes. Tighter interest margins (due to a falling policy rate and increased competition), sizeable non-earning assets (due to high central bank mandatory reserve rates) and still elevated risk costs (2.4% of average gross loans in 1H17) weigh on profitability.
“We expect operating returns to remain modest in 2018, with improvements dependent on growth and continued stabilization in asset quality, the agency says in its report.
The sector’s regulatory CAR improved to 20% at end-2016 from 14.5% at end-2014 following a completion of recapitalization measures required to meet the increased minimum capital standard from 2017, but then dropped moderately to 19.1% at end- 3Q17 as growth accelerated.
“We expect a further reduction by up to 100bp in 2018 as a result of loan growth in line with recent trends but only modest positive profitability,” Fitch says.
The sector recapitalization process triggered M&A activity with the number of banks reducing to 17 from 21 in 2016 and larger banks growing their market shares. Further sector consolidation is possible in 2018 and beyond given the still large number of banks for a small market and increasing competitive pressures.
The sector’s external debt remains large (31% of liabilities at end-1H17, or USD2.2 billion), equivalent to the country’s official international reserves (end- 10M17: USD2.1 billion). The long-term maturity profile of external borrowings, mainly raised from international financial institutions and non-resident related parties, limits refinancing risks. Liquidity positions should remain manageable, helped by generally stable deposit funding and high obligatory reserves.
The rating and sector outlooks are sensitive to the performance of the domestic economy and the stability of the Armenian dram.
Continued improvements in the economy would support banks’ credit profiles, although upgrades are unlikely in the near term, given that the banks are rated in line with the sovereign.
“A deterioration in operating conditions, resulting in a marked weakening of asset quality or capitalization, could result in rating downgrades and the sector outlook being revised to negative,” the Fitch says.
On December 19, Fitch Ratings revised Armenia’s Outlook to Positive from Stable, while affirming the sovereign’s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at ‘B+’. -0—
