ARMENIAN BANKS ARE FALLING HOSTAGE TO ECONOMY
By Emmanuil Lazarian , Karina Melikyan , And Tigran Khachatryan
ARMINFO
Monday, March 18, 21:07
The Corporate Customers Of Armenia’S Banks Are Still Unable To overcome
the consequences of the crisis. Their solvency has dropped, their
account balances are shrinking. As a result, corporate lending is
on decline. Being a driving factor for Armenia’s economy before the
crisis, the financial sector is now falling increasingly dependent
on economic conditions and may prove to be no longer able to foster
economic growth unless some tougher things are done.
In 2012 the growth in corporate lending slumped from 41% to 18%
due to 16.4% decline in corporate account balance (against 51%
growth in 2011). Borrowings from external sources grew by just 13.4%
against 42% growth in 2011 due to growing risks, limited solvency and
falling yield. Profit grew by just 7.4%, while in 2010 it more than
redoubled due to anti-crisis donations from international financial
organizations and Russia. The post-crisis SME support boom was just
a stopgap – a measure that changed little on the market. Poor control
of the real sector, no anti-monopoly policy, no understanding of what
should be done first, unbearable tax burden forcing SMEs to resort
to double entry bookkeeping, frozen 8% official rate keeping loan
interests stably high, no certainly as to how the global economy will
behave – all this is making it increasingly hard for the Armenian
banks to assess the solvency of their corporate borrowers and their
own credit risks.
Though quite justified, the CB’s tough financial rating requirements –
especially the loan loss provision – are yet another factor that is
discouraging the banks from active corporate lending. In 2008 the loan
loss provision grew by 30%, while in 2011-2012 it grew by as much as
40%. In 2008 overdue loans redoubled, in 2009 they grew by 5 times,
in 2011 by 51%, in 2012 by 20%. So, in 2008-2012 the share of loan
loss reserves grew from 1% to 2%, while the share of overdue loans
from 1% to 5%. The lower growth in overdue loans in 2011-2012 was due
to the measures to write off part of them and also to the efforts to
improve the loan book in general. Though most of overdue loans are
still consumer loans, their share in the lending of trade, industry,
agriculture and construction is also high. In 2012 prime loans grew by
22% against 74% growth in 2012. Thus, in order to boost the economy,
the banks need constructive partnership with the real sector. And
even though their economy lending is growing faster than the GDP is
(21% against 7.1%, respectively), this does not mean that their role
in the economy is also growing. What it means is that for the moment
the cooperation between the banks and the sector is ineffective,
and the key reasons are growing overdue loans, poor credit scoring,
no long-term lending, limited corporate clientele, low capitalization
and cash outflow. Having seen the best way out in SMEs, almost all
banks rushed to support them. SMEs are an ideal way to keep the yield
high and the risks low without reducing the volumes. This market is
quite capacious while the big clientele has already been shared. As
a result, the top five banks ensure over 50% of SME lending. In 2010
SME lending grew by almost 50% against just 14% growth in 2012 due
to the borrowers’ post- crisis insolvency.
International crisis of liquidity has affected also the Armenian market
of corporate lending and project financing. Obviously, banks cannot
provide more significant financing of these projects than standard
lending of floating capital implies. In addition, the crisis has been
protracted and there is no light at the end of tunnel yet.
Banks have no opportunity to plan financing and are mainly committed
to conservative policy. In this light, the government support to
farming enterprises through the state program of agricultural loan
subsidies launched in 2011 has opened a small window of fresh air for
banks making it possible for them to revise the priorities in favor
of the agricultural sector, which they avoided to invest in before
due to high risks and low-liquidity. Thanks to that, banks speeded
up agricultural lending growth rates in 2009-2011 from 20% to 36% and
than slowed down to 22% in 2012. This decline, like in the case of SME,
is a result of accumulation of non-performing loans and unfavorable
weather conditions that caused damaged to the subsidized farming
enterprises, which have failed to fulfill their loan commitments
to creditor-banks. It is noteworthy that state subsidies applied to
operating farming enterprises only. In fact, an army of farmers that
most of others needed state support have found themselves aside of
the government subsidies.
As a result of the crisis, the share of overdue agricultural loans in
total overdue loans grew from 4% to 9% in 2008-2012, with most of the
overdue loans bring in the categories of doubtful or non-performing
ones. Solution to the given problems may just partially contribute
to interaction of the real and banking sectors, which is especially
relevant in the current situation. Efficient interaction may bring
positive results in case of a single approach to all sectors and
programs. Facing a problem of insolvency of corporate customers,
which has resulted in deterioration of the loan portfolio, banks
have recently become more active in the retail-lending segment
after the crisis and ensured a 30% growth for 2011-2012. However,
retail lending (except refinanced mortgage and international mortgage
programs) requires, first, sufficient capitalization, as it implies
large-scale lending of own funds, and second, a well-organized system
of risk management, which very few local banks can boast of. Today,
retail lending is concentrated on micro-lending (large-scale effect),
overdraft card products, consumer loans on mortgage. In the meanwhile,
before the crisis, retail lending was concentrated on mortgage, car
loans, and consumer loans for acquisition of product by installments.
Replacement of retail lending on mortgage with mortgage-free
retail lending may also lead to deterioration of the quality of
loan portfolios amid decreasing real incomes of the population. The
current processes at banks pursue their reorientation from the market
of customers to the market of services via expansion of the product
line for private customers and general technological modernization.
Approaches and requirements to corporate customers have not changed.
In addition, banks competing with each other have tangibly reduced the
cost of placed resources at the expense of the margin coming closer
to the cost value. As a result, some big banks have even resorted to
some non-standard steps reducing staffs and, first of all, to little
justified and inadequate scenario minimizing their marketing and
analytical departments focusing on micro-risks and expansion of the
branch network. Anyway, even in conditions of poor visibility of the
perspectives of economic development vectors, Armenian banks display
incredible vitality. Though in conditions of limited funding, one
can expect further and more intensive consolidation of the country’s
banking system.