YEREVAN, March 29. /ARKA/. In the Banking System Outlook for Armenia, Moody’s Investors Service said its positive outlook for Armenian’s banking system is driven by robust economic growth which leads to asset quality improvements. It said also strong economic conditions will stimulate business activity and credit demand, helping strengthen banks’ profitability.

According to Moody’s, robust economic growth will benefit banks with GDP growth remaining robust at around 4.5% in 2019-20.

Economic growth in Armenia (B1, positive) will continue to be underpinned by household consumption and exports, which will drive strong credit growth of about 12%-15%. Growth in consumer loans in particular will remain strong. Growth in corporate loans will continue to be relatively modest.

Also, asset quality will continue to improve. Robust economic growth and a stable exchange rate will lead to further improvements in loan quality over the next 12-18 months. Moody’s projects the system wide ratio of problem loans will decline to about 6% by the end of 2020 from 7.9% at the end of 2018.

However, a high level of dollarization and rapid growth in retail loans pose a long-term risk to asset quality. According to Moody’s, capitalization will remain broadly stable. Asset growth will marginally outpace internal capital generation. As a result, it expects the systemwide ratio of tangible common equity (TCE) to risk-weighted assets (RWAs) to slightly decline to about 13.5%, still a solid level, from 14% over the two years to the end of 2020.

Banks’ increasing focus on higher-yielding retail loans will boost margins, and as a result the sector’s return on average assets (ROAA) will rise to 1.6% in 2019-20 from 1.3% in 2018.

A large stock of liquid assets and intense competition will continue to constrain profitability. Ample liquidity, stable customer deposits and limited refinancing risks will support banks’ funding and liquidity profiles.

Banks are mainly funded with customer accounts, which comprised 70% of non-equity funding at the end of 2018. Despite ongoing de-dollarization, foreign-currency deposits, which are mostly in US dollars, accounted for 60% of total system deposits at the end of 2018.

The government’s capacity to support banks when needed is improving. This is reflected in Moody’s positive outlook on the sovereign ratings. Its outlook on Armenian banking system is positive. The outlook expresses Moody’s expectation of how bank creditworthiness will evolve in this system over the next 12 to 18 months. -0-