Interfax, Russia
Sept 18 2009
Fitch says Armenian banks cushioned against crisis
LONDCOW Sept 18
The Armenian banking system has been relatively resilient amid the
global financial crisis due to its low integration into international
capital markets, substantial capital and liquidity buffers and
increasing foreign ownership, Fitch Ratings said in a report.
Nevertheless, the sharp downturn of the highly undiversified Armenian
economy, a decline in the volume of transfers and investments,
especially from Russia, and the 20% devaluation of the Armenian dram
in March 2009 have negatively affected Armenian banks’ asset quality
and performance. In addition, banks’ very small size and limited
diversification of risks and revenues remain an underlying credit
weakness, the report says.
The banking system’s aggregate capital adequacy ratio remained at a
solid 28% at end-H109 as new equity injections, de-leveraging and
still positive pre-impairment profit have offset the impact of higher
provision charges and devaluation. Previous rapid asset growth,
generally unseasoned loan books, expansion into new segments and a
high level of FX lending (in particular to the corporate sector) have
coupled with weakened economic fundamentals to drive significant
growth in loan impairment in H109. NPLs could rise further from their
still moderate reported levels, but capital bases provide considerable
capacity to absorb loan losses.
The liquidity positions of Armenian banks have generally been adequate
due to substantial holdings of liquid assets, and these strengthened
further in H109 through reduced lending activity. Prior to and
following the devaluation of the dram, customer funding (the main
source of liabilities for Armenian banks) remained reasonably stable
in aggregate terms. However, increased dollarization of customer
funding led the banks to temporarily open short FX positions and
record losses as result of the devaluation. Foreign funding is
important, but mostly comes from parent banks or international
financial institutions, and so is not viewed by Fitch as a source of
significant refinancing risk.
The Armenian banking system is highly fragmented, with 22 banks – all
privately owned – sharing a sector balance sheet of just USD3.2bn at
end-H109 and serving a population of 3.2 million. The four largest
banks account for about 43% share of the system’s assets, while HSBC
Armenia is the leading player in the retail deposit segment with a 23%
market share at end-H109. About 70% of the sector’s assets are held by
banks with majority foreign ownership, although international
shareholders are not always highly-rated foreign banks.
Fitch views the regulation and the supervision of the banking system
as reasonable for a small emerging market, supported by a relatively
sophisticated regulator, accounting standards in accordance with IFRS
and generally conservative prudential requirements.