Armenian banks’ credit metrics will remain better than historical averages for at least 2024-2025, supported by Armenia’s buoyant economy, Fitch Ratings reported.

“In particular, we expect profitability, capitalisation, funding and liquidity ratios to stabilise at above-average levels after the strong boost in 2022 due to immigration and capital inflows from Russia.

Bank credit metrics have been supported by Armenia’s strong GDP growth, improved sovereign credit profile and local-currency resilience following the extraordinary inflow of human and financial capital, mainly from Russia. Fitch estimates Armenia’s GDP growth at 7.4% in 2023 and forecasts further robust growth of 6.0% in 2024.

Armenian bank revenues spiked dramatically in 2022, with the pre-tax average return on equity increasing to 28%. The ratio eased to 17% in 2023, but this is still far above the 2018-2021 average of 9%. The extremely strong 2022 performance was driven by non-interest income from money transfers and currency-conversion operations, mainly due to the immigration from Russia. The effect moderated in 2023 as immigration slowed, but non-interest income remained significant and profitability was underpinned by higher interest rates.

We expect capital ratios to remain high due to continued strong profitability supported by the booming economy and wide interest margins, and higher regulatory capital requirements.

Loan quality ratios have also improved as a result of the strong economy and local currency. The Armenian dram was 16% stronger against the US dollar at end-2023 than at end-2021.

Meanwhile, high loan dollarisation, which is one of the sector’s key weaknesses, has decreased. The Armenian government’s assumption of debt related to the liquidated political entity of the Republic of Nagorno-Karabakh in 4Q23 (representing just below 5% of banking system assets) has also benefited the sector’s asset quality.

Foreign-exchange-adjusted deposit growth was a strong 43% in 2022, bringing the sector loans/deposits ratio down to a historical low of 82% (end-2023: 91%). We do not expect a significant reversal of deposit inflows in 2024-2025, given the high granularity of deposits and non-residents’ commitments to Armenia through rental and employment contracts, and family ties. Also, Russian immigrants are likely to retain their Armenian bank accounts to be able to carry out certain foreign-currency transactions that are restricted through Russian banks due to sanctions”, Fitch says.