Interview of International Fitch Ratings Agency’s Analyst on CIS Financial Organizations Nelli Badalian and Fitch Ratings’ Managing Director on CIS Financial Organizations James Watson to Mediamax Agency and Banks.am portal

- What is your assessment of the current state and prospects of the Armenian banking system?

Nelli Badalian: Armenian banks endured March devaluation of AMD with significant dignity. Back before the start of the global crisis, the Armenian banking system stood out by quite high capital sufficiency and this fact also helped banks during the national currency devaluation. Besides, banks have a quite comfortable liquidity cushion, and this is the second positive factor, given which the Armenian banks met the global crisis.

Among the negative factors of the Armenian banking system, one can note the very big market share of USD funding from the population and international financial organizations. Consequently, banks with unbalanced currency position demonstrated significant losses.

At present, capital sufficiency has not gone down, and even improved in II quarter of year 2009. Banks became more conservative in their credit policy, growth of crediting interrupted. It is more preferable for banks to issue foreign currency loans, however there is no demand for such loans.

Funding in national currency at the volume of 60bln AMD, which the government is going to allocate for banks, may become an impetus for growth of banks’ credit portfolios. We expect that banks will issue loans, but one should not expect impetuous growth, a least before beginning of the next year.

James Watson: One should realize that Armenian banks have undergone quite serious tests this year. According to our assessments, this year 15% decline is expected in Armenian economy, the fact being the third worst result among all countries, which are provided Fitch rating. The forecasts are more pessimistic only for Latvia and Lithuania. Besides, AMD devaluation and the vivid tendency of change in customer financial means from AMD to USD have taken place.

The level of problematic loans, which is demonstrated by banks, is yet moderate, but it provokes a number of questions: for an economy, which experiences such serious decline, 5-6% level of problematic loans is quite a low index. If the given index is trustworthy and if it remains at a relatively low level, the fact may be assessed as a relatively positive result in existing economic situation. 

But if we compare Armenian banks with banks in other CIS counties, the first ones were in quite good pre-crisis state. Armenian banks enjoyed quite high coefficients of capitalization and liquidity, and correspondingly, they possessed more considerable opportunities to cover losses, cope with potential outflow of deposits.

Besides, the comparative advantage for Armenia’s banking system in crisis conditions was the fact that it enjoyed quite a small volume of foreign market funding; banks did not issue Eurobonds, they almost did not attract financial means through syndicated loans. The funding of Armenian banks from abroad was realized either from parent banks or from international financial institutions, with which it is far easier to come to an agreement on possible prolongation of loans.

- Are there grounds to expect certain Armenian banks going broke as a result of the crisis?

James Watson: I would not say that such expectations are absolutely ungrounded. There may be individual banks, which developed with quite high speeds in the previous years, took upon themselves quite major credit risks, and today they do not reveal all the problems of their credit portfolio.

Nevertheless, we believe that there should not be many of such banks anyway, and even if serious problems occur in their credit portfolios, almost all those banks have quite a solid reserve of strength in the form of capital, which may help them cope with problems. 

- Can credit portfolio problems in Armenian banks lead to mergers and takeovers?

Nelli Badalian: The banking system of Armenia is quite fragmented and consolidation of banks would be a proper stage of development. 22 banks, given population of 3.2 million, is a very big figure. We know that the Central Bank (CB) of Armenia supports the process of consolidation and is ready to provide long-term loans for that purpose; consequently, such a development scenario for events is possible.

Banks now try to realize what is happening, to wait, to understand what problems they have concerning balance. Banks have become more conservative, and merger is quite a risky process. This is why such deals are possible; however those will be single instances.

James Watson: We believe that small sizes of Armenian banks and fragmentariness of the system are one of the basic weaknesses of Armenia’s banking system. It is far more difficult for banks to reach diversification of their risks, incomes, given such fragmentariness. Of course, for banking system stability in general and for individual banks in particular, consolidation would be quite suitable. 

- Fitch provides ratings for two banks functioning in Armenia: “ACBA-Credit Agricole Bank” and “VTB Bank (Armenia)”, the individual ratings of which are assigned at the levels of “D” and “D/E” respectively. What are such low individual ratings for the given banks conditioned by?

James Watson: We clearly distinguish two aspects of the bank’s creditworthiness. The first aspect is the assessment of the bank’s own stability without taking into account support from outside, and this is reflected in Individual Rating, and the second aspect is the assessment of the likelihood of receiving support in case of necessity, basing on which the Support Rating is assigned.

But our basic rating, the Issuer Default Rating (IDR), is assessed basing on the stability of the bank as such and the support that the bank can count on. As to both Armenian banks, given rating by us, IDR rating -- “BB”-- reflects quite a high level of likelihood of receiving support from shareholders.

Nelli Badalian: As to Individual Ratings, “ACBA-Credit Agricole Bank” has a quite diversified business, there is no concentration on borrowers in the credit portfolio, diversified funding, stable liquidity position, high capitalization, and as of today, quite a good quality of assets.

Last year, “VTB Bank (Armenia)” improved the results of its activity, strengthened its management team, however the bank has inherited an inefficient regional network; the credit portfolio is more concentrated, and it has more loans to construction sector, and the bank is more dependent on funding from the parent bank.

Individual ratings of the banks -- “D” and “D/E” -- are also conditioned by small sizes of the banks themselves. Fitch ratings are international; they should be comparable for all banks, which we provide ratings worldwide.

James Watson: Besides small size, ratings of any bank, which functions in Armenia, are limited by country risks. Armenia, just like other developing countries, is a market of quite high risks. What concerns the level of Individual Ratings, assigned by us to two Armenian banks, they cannot be considered as being very low for developing markets.

- What similarities and differences are there among the banking systems of the South Caucasus counties?

James Watson: Let’s begin with similarities. First of all, banks of three countries grew quite swiftly in pre-crisis years, and certain risks were created by exactly those high speeds of increasing credit portfolios.

Secondly, despite the speedy growth, the size of the banking sectors, as compared to GDP, was still quite low in all three countries. As to its size, the banking sector is developed in Georgia the most. Crediting in Georgia has reached about 30% of the GDP. In Armenia and Azerbaijan, the given index is below 20%.

The first difference of the banking systems is how they have been funded. Georgian banks had quite many foreign market borrowings, which they managed to refinance in 2009 mainly at the expense of new borrowings from international financial institutions.

Azerbaijani banks entered foreign markets, but later than the Georgian ones. They attracted mainly bilateral loans, as well as a few syndicated loans, but, nevertheless, Azerbaijani banks enjoyed less foreign funding than the ones in the Georgian banking system.

For Armenian banks, foreign funding was quite significant, but it was of somewhat different nature. Funding was attracted more from parent banks and international financial institutions.

Concerning the quality of assets, in Armenia the state of affairs is far better yet than in other countries of the region. Georgian banks quite actively credited construction and the real estate market, as a result of which its banks accumulated quite a large number of problematic loans. 

The Azerbaijani banks also experience problems with the quality of assets, since banks in that country grew with extremely high speeds and credited mainly the non-oil sector, which suffers decline.

Nelli Badalian: One should emphasize the fact that, as to its structure, the Armenian banking system differs from the ones in Georgia and Azerbaijan. There is no definite leader in the banking system of Armenia, but there are 4-5 banks, which occupy approximately identical shares in the sector.

James Watson: Process of banking market consolidation in Georgia has advanced more: 6 major banks occupy 85% of the market.

In Azerbaijan, the market structure is defined by the fact that the state International Bank of Azerbaijan occupies almost 40% of the market. The rest of the Azerbaijani banking market is quite similar to the Armenian one as to its structure: there are more private banks there, and none of those banks has a significant market share.