Exclusive interview of Fitch Ratings International Rating Agency’s Analyst on CIS Financial Organizations Nelli Badalian to Mediamax Agency and Banks.am portal

- How was the year of 2009 for the banking system of Armenia? What risks were there for the banking system this year? How justified was the policy of Armenian banks in conditions of the crisis?

- Armenian banking system faced quite serious trials in 2009. First of all, abrupt devaluation of AMD in the first quarter of 2009 led to significant losses among banks with unbalanced currency position and increase of the unit weight of currency liabilities. Secondly, it was the expected 15% decline in economy, which is one of the best results among all countries, rated by Fitch. Thirdly, the country experienced sharp decrease in the volume of private transfers from abroad.

All the above-mentioned factors negatively influenced quality of Armenian banks’ assts and the volume of problematic loans increased in the system in general, although initially it was at a very low level.

In the formed situation, banks made their credit portfolios smaller, made requirements for potential borrowers stricter in the second quarter, 2009. They basically interrupted issue of new loans. At that, they were storing liquidity cushion and closed their currency positions. Such a conservative policy, carried out by banks, was conditioned by the economic situation, which had been formed in Armenia.

- How do the events develop in two Armenian banks, rated by Fitch? Do they plan revision of their ratings?

- There are two banks rated by Fitch in Armenia: “ACBA-Credit Agricole Bank” and “VTB Bank (Armenia)”. The situation in both banks is stable. 

In the formed complex economic conditions, “ACBA-Credit Agricole Bank” managed to consolidate its positions in the market and occupy leading positions as to some indices. Although the level of problematic loans increased, however, it remains at a quite low level. The bank managed to preserve high profitability, stable liquidity position and high capitalization level.

“VTB Bank (Armenia)” significantly improved its management team, actively dealt with optimizing and updating its largest branch network in Armenia, modernized its IT system. All the above-mentioned factors may positively influence future development of the bank. However, the bank bore significant losses in 2009 as a result of AMD devaluation, and the speeds of asset quality deterioration were quite high. At the same time, the bank managed to preserve high level of capitalization and stable liquidity position, while support from the part of the shareholder – the Russian VTB bank”, is an important factor for the Armenian bank’s rating.

All ratings are under constant monitoring and are revised upon necessity. However, stable forecast on both banks shows that we do not expect change in their ratings at the moment.

- Within the framework of crisis prevention measures, Armenian CB is carrying out extension monetary-credit policy, consistently decreasing the refinancing rate. Nevertheless, no significant stirring up is registered in Armenian crediting market. How do you assess the efficiency of CB crisis preventive measures in general?

- In 2009, CB undertook a number of preventive measures, aiming at supporting the banking sector. To preserve liquidity, CB insured all interbank operations, and the fact contributed to stirring up in the domestic interbank market, as well as increased the terms on collateral loans.

At the same time, in order to support capitalization of banks, CB allowed including subordinated loans into the capital and obliged providing sub-loans to banks in case of receiving new capital from their shareholders. Since banks were mainly well capitalized in Armenia before the crisis, provision of subordinated loans were of singular nature. 

At the same time, the given measures and implementation of loan insurance system in 2005 contributed to increase of confidence for the banking system and its stability, and these are important factors for assessing the efficiency of Armenian CB’s policy.

One should realize that crediting volumes do not depend only on the refinancing rate. In the second half, 2009, not only banks occupied a more conservative stance as to borrowers, but the general demand for loan means decreased as well also because the cost of loans grew as a result of significantly increased risks because of aggravation in the operational environment.

- As we know, one of the largest GDP declines among countries, rated by Fitch Ratings, is observed in Armenia. Did this have deeper influence on bank establishments in Armenia, as compared to banks of other countries of the region?   

- Significant decline in economy naturally influences the banking system, mainly, through deterioration in assets’ quality, decrease in crediting and decline in profitability of banking business.

However, the influence on the system was in general more moderate, than in other CIS countries. This was conditioned by a few factors. First of all, reduction of construction volumes, which makes a significant share of GDP, played a significant role in economy decline. At the same time, construction projects were mainly funded by investors from own means, while the total volume of loans, issued by banks to construction companies, made only 6% from the issued loans by the end of the second quarter, 2009.

Secondly, despite the high speed of growth in crediting in the recent years, correlation of loans to the GDP at the level of 19% as of the end of 2008 was one of the lowest even among CIS countries. 

Thirdly, Armenian banks entered the crisis with stability reserve in the form of high capitalization and liquidity coefficients and, correspondingly, they possess significant opportunities to cover losses and manage potential outflow of deposits.

Fourthly, as opposed to banks in Kazakhstan and Ukraine, Armenian banks have a very low volume of foreign market funding, which significantly reduced refinancing risks. 

- What forecasts does Fitch provide as to development in Armenian banking system in 2010? How likely is aggravation of problems in credit portfolios of banks?

- Fitch forecasts moderate revival of economy in 2010 and 2.5% growth of GDP. Improvement of operational environment and Armenian government’s efforts on supporting economy (such as placement of the Russian stabilization loan through the banking system, founding of the “National Hypothec Company”) will contribute to revival also in the banking sector, however the growth will be moderate as compared to previous years. It will supposedly make 10-15%.

In 2010, we expect also improvement of profitability indices, as compared to 2009. The increase of problematic loans, probably, will continue, however growth speeds will significantly yield to the ones registered in 2009, and stability reserve in the form of capital should help deal with possible problems.

- Do you expect mergers and consolidations in the banking system of Armenia in 2010?

- Our reports on the Armenian banking system, published in September, 2009, read that consolidation of banks through mergers would be a logical development, since the existing structure of the banking system is too fragmented. CB also supports this process, and such deals are possible.

- What is your attitude towards the All-Armenian Bank, which should start functioning in the nearest future?

- This project is at a very early stage of its realization and this is why it is very difficult to give any assessments, although this bank has an interesting concept and a business model.