YEREVAN, December 11. /ARKA/. Fitch Ratings downgraded its outlook for Armenian banks in 2016 to negative.

The rating agency says this negative outlook is driven by the weaker operating environment in Armenia, with an economic slowdown (Fitch forecasts slower 1.5% GDP growth in 2015, down from 3.4% in 2014, before a moderate recovery to 2.5% in 2016), depreciation pressures and higher interest rates.

Decelerating credit growth, weaker asset quality and softer financial performance in 9M15 indicate the effects are being felt by the banking sector.

“We do not expect a material improvement in operating conditions over 2016,” Fitch says in its report.

‘The sector is highly dollarised (66% of loans and 65% of deposits were in FX at end-3Q15) and therefore is highly susceptible to the Armenian dram exchange rate. The dram fell by 17% against the dollar in 4Q14, causing moderate funding volatility and higher funding costs, before some stabilisation in 9M15, in part due to the Central Bank of Armenia’s (CBA) interventions.’

The effects of depreciation on the sector’s financial metrics have been moderate so far, although vulnerabilities remain high due to dollarisation and dram pressures.

The rating agency sees weaker growth prospectsfor economic growth. Credit growth has slowed, in part due to the CBA’s emergency measures introduced during the market volatility of 4Q14. Fitch analysts also expect asset quality pressures to persist over 2016.

They also forecast weakening profitability. Margins are constrained by weaker credit growth and higher funding costs (the net interest margin declined to 4.7% in 9M15 from 6% in 2013). “We anticipate further volatility in performance in 2016, resulting from asset-quality trends,” the agency analysts say.

The agency predicts moderate capital ratios. It also says the sector’s external debt remains large (33% of liabilities, or USD2bn), in particular compared to the country’s official international reserves of USD1.6bn. However, 70% of external liabilities were long-term loans raised from international financial institutions and nonresident related parties, including parent bank institutions, reducing refinancing risks.

“A revision of the sector outlook to stable would require a stabilisation of the country’s economic prospects, driving a stabilisation of asset quality and easing pressures on the capital, liquidity and performance of the sector,” Fits says in its report. “A sharp deterioration in banks’ asset quality, performance and capital metrics driven by the weaker economy and dram instability could result in rating downgrades.” ($1 – AMD 485.24). ---0----