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Armenian Banks Suffer At The Hands Of Real Economy

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  • Armenian Banks Suffer At The Hands Of Real Economy

    ARMENIAN BANKS SUFFER AT THE HANDS OF REAL ECONOMY

    http://hetq.am/en/economy/14231/
    2009/08/ 05 | 16:28

    Economy

    The following article appeared in today's businessnewseurope website.

    Armenia has been hit by the crisis, but the blow was not to the nose,
    rather it came under the belt: all the problems the banking sector
    is suffering have been passed on to them by a slowdown in the real
    economy.

    "We were lucky not to be as integrated into the international capital
    markets as Russia or Kazakhstan," says Tigran Davtyan, deputy executive
    director of ConverseBank, who adds wryly that Armenia had been trying
    to develop the local capital markets beyond the government securities
    one and some corporate bonds, but "luckily, we failed."

    The government was fairly optimistic the crisis would pass by Armenia
    at the start of the year, predicting a relatively mild contraction
    in GDP of 7-8%. So when the Central Bank of Armenia (CBA) was forced
    to devalue the dram by 22% at the start of March, followed by a 15%
    fall in GDP at the end of the first quarter, the state went into
    emergency mode.

    The CBA slashed rates and pumped liquidity into the banking system
    in the hopes of buoying economic activity.

    Interest rates have been cut several times and the repurchase agreement
    (repo) deal on government securities has been extended from one week
    to up to several months. Now businessmen are a lot more pessimistic
    about the prospects for a fast recovery. "Growth was fast in the
    last few years and we were growing 10-15% every year for about eight
    years, but the growth was already starting to fall in 2008 before the
    worst of the crisis hit," says Robert Petrosyan, head of strategy at
    Armeconombank (AEB). "Now we are only expecting the strong growth
    to resume in 2011," expressing an opinion shared by almost all the
    businessmen interviewed for this article.

    Still, the worst seems to have past. Economists are predicting that
    the economy will only contract by 2% in the third quarter and may be
    back in the black by the last quarter in quarter-on-quarter terms. "We
    can already see the beneficial effects of these changes in the real
    economy," says Davtyan. "The dram is already appreciating."

    Sheltered from the storm Thanks to the very conservative policies of
    Armenia's central bank, coupled with the sector's relative isolation
    from the international capital markets, the Armenian banking sector
    was sheltered from the worst of the international financial storm.

    Today, the level of non-performing loans is relatively low at 6.5%
    of total loans, while the average capitalisation of banks is a very
    high 25-30% of total assets. "Most of the NPLs are in the real estate
    and construction sector, but it has also hit the small and medium-sized
    enterprises. In June, the NPLs were 10-11% of the total loan portfolio,
    but against this we have a very high [Capital Adequacy Ratio], which
    provides a cushion," says ConverseBank. "NPLs could go as high as 20%
    before we start to have any real problems in the bank sector."

    The upshot is that the sector could bear very high bad debt levels
    before any bank would run into a shortage of capital. At the same time,
    the CBA reserves of $25bn-30bn is enough to bail out any bank that
    gets into problems. "The [International Monetary Fund] and Russia
    between them have given Armenia loans of over $1bn, which is a very
    large sum for us, and so we are not anticipating any macroeconomic
    problems either," says Petrosyan.

    The growth of banks like AEB has slowed considerably, but
    they are still in profit and see 2009 as a hiccup rather than a
    disaster. Armenian banks find themselves in a frustrating position now:
    they have the liquidity to make loans, but they can't find anyone to
    lend to. "This year is a write-off, but there is some optimism that
    the economy will start growing next year. Still, there could be a 'W'
    style crisis this autumn, but if that happens, it will be mild. By
    2011, everyone is pretty sure we will return to strong growth as we
    saw before 2007, with some differences as the system has changed,"
    says Petrosyan

    Amongst the most painful changes was the popping of a bubble on the
    real estate market and prices aren't expected to return to their
    previous levels any time soon. However, the damage was limited by
    the CBA's tight regulation and the almost complete lack of exposure
    of the bank sector to the international capital markets.

    "We are not afraid of capital flight, as the Armenian banking sector
    is a closed system so there were no speculative capital inflows to
    leave again. Foreign investment is not big here and what there is
    tends to be direct investment," says Dr Konstantin Saroyan, member
    of the board responsible for development at ArmSwissbank.

    What capital flight there has been was internal, as residents switched
    their deposits from dram-denominated to dollar- or euro-dominated
    ones, which led to the devaluation. However, the switch of currencies
    has put the banks in a difficult position as they rely heavily on
    deposits to fund credits; with the volume of drams draining out of
    their coffers, the banks were squeezed and so credit volumes fell,
    but not catastrophically.

    "The volumes of credits were reduced but the banks still have liquidity
    and they want to lend," says Agricol bank. "NPLs are up a little in
    the sector, but not at our bank. The problems are not really in the
    bank sector, but in the real economy. This is a psychological crisis
    in Armenia more than anything else."
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