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Armenian Banking Sector Has Proved Resilient To The Crisis

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  • Armenian Banking Sector Has Proved Resilient To The Crisis

    ARMENIAN BANKING SECTOR HAS PROVED RESILIENT TO THE CRISIS

    ArmInfo
    2010-04-23 11:26:00

    ArmInfo. The Armenian banking sector has proved resilient to the
    crisis, says the International Monetary Fund's Third Review under
    the Stand-By Arrangement.

    Substantial capital and liquidity buffers, due in part to low leverage
    ratios, have enabled the banking sector to absorb shocks. Despite a
    significant increase in Non-Performing Loans (NPLs) and considerable
    losses from the dram depreciation last March, the aggregate capital
    adequacy ratio remained strong at 28.3 percent at end-2009, more than
    double the prudential minimum of 12 percent. As of end-December 2009,
    only 3 of the sector's 22 banks had capital ratios below 20 percent.

    Liquidity ratios remained well above minimum prudential requirements
    throughout the year. On top of an effective supervision framework,
    the authorities have implemented measures to help contain the
    negative impact of the crisis. For example, they have strengthened
    the financial safety nets (lender of last resort facility and deposit
    insurance scheme), tightened prudential regulations (reinstating
    foreign currency exposure limits), and encouraged capital injections
    to provide increased cushion through its subordinated debt facility.

    Banking sector balance sheets have improved since September 2009.

    After a marked deterioration during the first 8 months of 2009, NPLs
    under both the CBA and the IMF definitions have fallen to 7 percent
    in January 2010. Profitability improved, but remains low. Profits
    turned positive in September 2009 for the first time since March
    2009, although the ROA and ROE at end-2009 were 0.75 and 3.4 percent
    respectively, still significantly less than the figures of 3.1 and
    13.6 percent at end-2008.

    Latest stress test results indicate that banks are able to withstand a
    variety of shocks, thanks to the relatively high capitalization. The
    large capital cushion allows most banks to absorb losses and remain
    adequately capitalized even under extreme credit shock scenarios.

    Under all scenarios except for combined shocks, the CAR would decline
    by no more than 4 percentage points for the system as a whole. A few
    banks, however, appear to be more vulnerable than others to various
    risks, due to their relatively low capitalization level. However,
    the risks are contained and low, as capital injections appear to
    be readily available for these banks. The CBA is closely monitoring
    these cases. However, continued vigilance is still needed as risks to
    balance sheets from indirect foreign currency exposure remain. Since
    March 2009, deposit and loan dollarization have stabilized at around
    70 and 50 percent, respectively. Exposure to unhedged borrowers
    represents a main source of vulnerability in the banking sector,
    especially in light of increased exchange rate flexibility. The CBA is
    in the process of strengthening prudential regulations to specifically
    address indirect FX risks by increasing provisioning requirements and
    risk weights in capital requirements for foreign currency loans. This
    will also provide the CBA with adequate information on the extent of
    unhedged lending by banks to enhance supervisory monitoring.

    The high capital or low leverage in the banking sector is a source of
    resilience, but it has led to high interest rate spreads and hampered
    financial deepening. By regional standards, financial intermediation in
    Armenia is relatively low, with bank loans-to-GDP ratio at 22 percent
    in 2009, up from 17 percent in 2008 largely as a result of GDP decline.
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