AmRating: Many Armenian banks face a serious test as CBA requires ba

AmRating: Many Armenian banks face a serious test as Central Bank of
Armenia requires banks to meet a new lower limit of total capital by
2017

by ArmInfo

Saturday, January 17, 16:44

As the Central Bank of Armenia requires the banks to meet a new lower
limit of total capital by 2017, many Armenian banks face a serious
test, the analysts of AmRating national rating agency have told
ArmInfo’s correspondent. AmRating experts believe that the CBA’s
decision on increase of the lower limit of total capital from the
current 5 bln AMD to 30 bln AMD by 1 Jan 2017 will not only boost the
long-expected process of Mergers and Acquisitions (M&A) on the banking
market, but will probably oust some weak and dangerous participants
from the market due to the big amount of hidden toxic assets on their
balance sheets.

The analysts point out that at the moment the banking system of the
country can conventionally be divided into 4 categories of its
participants in terms of assets and efficiency.

Traditionally, the top-5 lenders to economy top that list. Their total
capital and assets make up nearly 47% of the aggregate capital and
nearly 49% of the aggregate assets of the total banking system of the
country. The capitals of these players long ago exceeded the new lower
limit (30 billion AMD) introduced by the CBA. This changeless top-5
that was formed as early as over 5 years ago includes ACBA-Credit
Agricole, Ardshinbank, HSBC Bank Armenia, VTB Bank (Armenia), and
Ameriabank. The experts believe that the specified top-5 is a kind of
a guarantor of the system stability because they own almost half of
the market and have a stable and high funding potential at the expense
of both accumulated profit and their shareholders. Thus, the top-5 has
the most reliable mechanisms to resist the risks even in case of
further unfavorable economic climate in the country.

The second group of the banks with medium total capital and assets
secure 37% of the aggregate total capital and 36% of the aggregate
assets of the system. This group may include ArmBusinessBank,
INECOBANK, Converse Bank, ArmSwissBank, Prometey Bank, ARARATBANK,
Areximbank- Gazprombank Group and Unibank. To meet the new lower limit
of total capital, each of these banks will have to increase it by 3-10
bln AMD. The analysts think that the overwhelming majority of the
specified banks enjoy the support of the shareholders, including
institutional and strategic investors. This considerably facilitates
the process of further capitalization of the banks. However, it is
this group that is expected to be especially active to enhance its
positions on the market due to synergy of capital and assets via
murder and acquisition of weaker players of the third and the fourth
groups. In the meantime, it is not ruled out that some members of the
second group will manage to enlarge by attracting foreign, most likely
strategic investors, such as Russian banks controlled by the
organizations “with Armenian roots”, which is a quite popular
precedent in the history of the Armenian banking system. In the light
of mergers, one can also expect business optimization by means of
merger of various banks controlled by one and the same shareholder.
Moreover, it should be noted that some of the banks of the second
group have regularly enhanced their capitalization for the past few
years, which demonstrates serious ambitions to enhance their positions
on the market.

The third group consists of small banks in terms of both total capital
and assets. The share of their total capital slightly exceeds 10% on
the market and the share of their assets insignificantly exceeds 11%.
This group includes Anelik Bank, Artsakhbank, Armeconombank, Mellat
Bank. To meet the lower limit of total capital by 2017, they need to
increase their total capital at least 2-3-fold. Anelik Bank has the
strongest positions in terms of possible capitalization due to the
potential of the Lebanese shareholder – CreditBank S.A.L., which has
recently taken full control over the Anelik money transfer system and
which has subsidiaries in a number of foreign countries. The fate of
the Iranian Mellat Bank will mostly depend on the Armenian-Iranian
economic ties and softening of the Western sanctions, which are still
seriously hindering development of the Armenian subsidiary.
Artsakhbank, which has a special mission and specializes in servicing
the NKR economy, is likely to have three scenarios to meet the new
total capital requirement. It may join the capital of the bank of the
state in the person of the Nagorno-Karabakh Republic; merge with
another banking structure affiliated through the shareholder; or
receive from the CBA a special regime of operation in relation to the
important state mission of the “lead bank” of Nagorno-Karabakh.
Armeconombank may cause a serious interest in M&A owing to a number of
important parameters: traditionally large branch network and
involvement in most of the international loan projects being
implemented in Armenia. Notwithstanding its low indices, the Bank has
firm positions on the card market of the country. One of the Bank’s
majority shareholders is the European Bank for Reconstruction and
Development (EBRD), so any scenarios of meeting the new lower limit of
total capital are possible with the consent and fulfillment of
requirements of that serious institutional investor, which certainly
lays down its own tough conditions.

The fourth conventional micro-group of Armenian banks includes
Armenian Development Bank, ProCredit Bank, Byblos Bank Armenia and BTA
Bank. The share of their capital on the market is 7% of the aggregate
index, and the share of their assets is 5% of the aggregate index. To
comply with the new standard by 2017, these banks will have to
increase their capital at least 3-6-fold. The Armenian ProCredit Bank
is especially singled out in this group. It is a member of the
international ProCredit Holding and its special mission, which
resembles a donor mission, is to develop the small and medium
businesses in the host countries. The Bank’s participation in M&A is
low probable, however, the fact that the Bank has strong institutional
investors such as EBRD and KfW allows supposing that the bank will
continue operating in Armenia and performing its key mission. It is
not ruled out that the mission of the Bank and its strong
authoritative owners will allow the Regulator to take a special
decision concerning the bank. In any case, AmRating analysts think
that the withdrawal of ProCredit Bank from the Armenian market is
unacceptable, because it will deliver a strong blow on the
international investment image of Armenia. Moreover, despite the
obstacles in development of small and medium businesses in the low
competitive, monopolized economic environment of Armenia, the Bank
holds one of the leading positions in the banking segment of SME
financing. Kazakh BTA Bank’s fate remains uncertain after its
erstwhile powerful parent bank fell victim to the financial crisis of
2008-2009. The Bank still operates in a limited regime though its
shareholder has undergone an uneasy procedure of rehabilitation held
by the state of Kazakhstan. It is unclear what decision the major
shareholder – National Welfare Fund “Samruk-Kazyna – will take on its
Armenian subsidiary. On the one hand, Armenia is becoming Kazakhstan’s
partner within the Eurasian Economic Union, but on the other hand, the
level of development of the trade and economic cooperation inspires no
hopes yet. Therefore, under one of the scenarios, the Bank may be sold
if a buyer is found. Byblos Bank Armenia also has strong major
shareholders such as EBRD, OPEC and Byblos Bank S.A.L., which has
assets worth over 16 bln USD and offices in 12 countries.
Nevertheless, the analysts think that the shareholders’ current low
support to the Armenian subsidiary can demonstrate the insufficient
interest in the subsidiary’s development due to the low investment
attractiveness of Armenia and the problems in the economy. In that
case, the matter may concern either sale of the bank or withdrawal
from the market. Nevertheless, one more option is possible: the Bank
may enhance its capitalization in case the shareholders arrive at a
conclusion that the risk will be justified and that the investments
will be applied properly. In the case of the Armenian Development
Bank, the capitalization growth task is at least to triple the
capital. The lack of strategic and institutional investors in the
capital and the lack of competitive and attractive advantages for
investors somewhat complicates the task lay down by the CBA.
Fulfillment of this task will depend exclusively on the individual
approach of the Bank’s real majority shareholder, who is a major
Armenian businessman.

AmRating analysts explain the CBA’s decision to increase the lower
limit of the total capital so sharply with the need to take immediate
measures so that the economy of Armenia is able to meet the emerging
serious risks and challenges. The analysts outline such problems as
the deteriorating economic and investment situation in Russia – the
key trade and economic partner of Armenia, the reducing money
transfers to Armenia, which negatively affects the aggregate demand in
the country and GDP growth rates. All this affects the payment
balance and increases the foreign trade deficit. Furthermore, as
international rating agencies reduce Armenia’s sovereign ratings,
foreign funding and credit resources may rise in price, which cannot
but affect the country’s banking system. A strong and highly
capitalized banking system is what may become a guarantee for the
sustainable financial market in Armenia, amid hardly predictable
global changes.

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