YEREVAN, June 18, /ARKA/. Fitch Ratings has affirmed Armenia’s Ardshinbank CJSC’s (Ardshin) Long-Term Issuer Default Rating (IDR) at ‘B+’ with a Negative Outlook.
It said Ardshin’s IDRs and senior debt rating reflect the bank’s intrinsic strength, as captured by its Viability Rating (VR) of ‘b+’.
The VR is significantly influenced by Fitch’s assessment of the potentially cyclical operating environment in Armenia and resulting credit risks from the highly-dollarised and concentrated local economy.
The Negative Outlook on the Long-Term IDR reflects residual downside risks to the bank’s credit profile from the lag effect from the economic downturn, keeping asset quality and solvency metrics under pressure in the near term.
The Armenian economy has been significantly affected by the coronavirus pandemic and the military conflict between Armenia and Azerbaijan in late 2020, leading to a real GDP contraction of 7.6% in 2020 (vs. the ‘B’ median contraction of 4.2%). Fitch expects the economy to recover moderately by 3.2% in 2021 and 4.0% in 2022, which should improve prospects for banks’ credit growth and revenues. At the same time, we believe that the downturn has not yet been fully captured by banks’ asset quality metrics reported in 2020-1Q21 and problem loan recognition will continue in 2021 and potentially in 2022. Some risk aversion and continuing business uncertainty still weigh on growth appetite, further constraining potential for near-term profitability improvements.
Credit risk at Ardshin mainly stems from its loan book, which accounted for 62% of total assets at end-1Q21. Impaired loans (Stage 3 and purchased or originated credit impaired under IFRS 9) were a moderate 7.6% of gross loans at end-1Q21, up from 6.0% at end-2019, largely driven by unsecured retail lending segment (13% of end-1Q21 loans).
Coverage of impaired loans by total loan loss allowances (LLAs) was only modest at 42% as management relies on collateral to a large extent. However, in Fitch’s view, realisation of collateral could be challenging and prolonged, so additional provisioning could be required if prevailing conditions persist. Furthermore, Stage 2 exposures were equal to 7% of loans at end-1Q21 and were by 10% covered by specific LLAs. -0-
