YEREVAN, December 23. /ARKA/. Armenia’s banking sector in the outgoing year has faced a string of serious challenges - slower economic growth, weak economic activity and the worsening solvency of the population have affected the main indicators of banks. At the same time the banks have managed to withstand the arising risks and take steps for improvement. In a bid to comply with new realities the banks have begun the process of replenishment of their authorized stock capital, seeking simultaneously new ways of development and shaping their own business models.

1. Consolidation of banks

The most important event of the year was consolidation of banks. On December 8 Armeconombank and Kazakh BTA Bank officially announced a merger. Two days later it emerged that Inecobank acquired 100% shares of ProCredit Bank, a subsidiary of ProCredit Holding AG&Co.KGa A. This deal was financed by a loan Incobank received from the EBRD. The consolidation of banks was spurred by the Central Bank’s decision to increase from 1 January 2017 the minimum amount of the total capital of commercial banks to 30 billion drams from the current 5 billion drams.

2. Initial public offerings

In May Armeconombank announced the issue and public offering of 416,670 ordinary shares in the amount of 5 billion drams. The subscription to the bank's shares will last till the 30th of December 2015. Another IPO was announced in September by Unibank. The shares will be placed at NASDAQ OMX ARMENIA stock exchange. This is the first IPO made via stock exchange. Unibank plans to offer 14.5 million ordinary shares to raise 3.335 billion drams. Ameriabank also said it plans to conduct an IPO in 2016. At the same time Araratbank announced its intention to conduct an IPO on an alternative market, and has already reached a preliminary agreement with London Stock Exchange.

3. Banks raise the amount of insured deposits 2.5 times

On October 26 the Armenian parliament passed a bill to revise the law "On guaranteeing compensations for bank deposits of natural persons", providing for an increase in the size of insured deposits of individuals by 2.5 times. As a result, the maximum amount of insured bank deposit in Armenian currency grew to 10 million drams from 4 million drams, while the amount of deposits in foreign currency has been raised to the equivalent of 5 million drams from 2 million drams. According to the regulator, the move allows to insure 95% of all deposits.

4. Decline of banking sector

The deterioration of the economic situation has naturally affected the performance of the banks. In the first 9 months of 2015 their net profit reduced by 53.3% to 13.129 billion drams against 28.160 billion drams from the year before. In January-September their total assets decreased by 2.1% from the beginning of the year to 3.318 trillion drams; their liabilities fell by 3.6% to 2.807 trillion drams, credit investments dropped by 4.3% to 2.074 trillion drams. The major indicators of the banks worsened in the first quarter of this year, when the impact of a sharp devaluation of the Armenian dram at the end of 2014 was still strong. Thus, in the first quarter their liquidity fell from 26-27% to 24.5% and capital adequacy - from 16% to 14.6%, although in the third quarter the situation leveled off. Among other negative trends the share of non-performing loans grew from 6% in 2014 to 8-9% in the current year.

5. Moody’s and Fitch Rating’s forecasts

According to Moody’s Investors Service, Armenia's (Ba3, negative) low economic diversification, weakened domestic demand, and trade and financial exposures to Russia will lead to lower growth in 2016. "Armenia's weak domestic demand holds back consumption and investment, while Russia's worsening economic climate has led to sharp declines in remittances. Given that remittances account for around 15% of GDP, Armenia is significantly exposed to the Russian growth cycle," says Evan Wohlmann, Assistant Vice President -- Analyst at Moody's. However, the rating agency also notes Armenia's credit strengths, which relate to the government's commitment to fiscal prudence, high debt affordability and macroeconomic stability, together with a supportive business environment.
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 dollarized (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 stabilization in 9M15, in part due to the Central Bank of Armenia’s (CBA) interventions.’ -0-