Yerevan /Mediamax/. Fitch Ratings says in a special report published today that the Armenian banking system has been relatively resilient amid the global financial crisis.

“Nevertheless, the sharp downturn of the highly undiversified Armenian economy, a decline in the volume of transfers and investments, especially from Russia, and the 20% devaluation of the Armenian dram in March 2009 have negatively affected Armenian banks’ asset quality and performance. In addition, banks’ very small size and limited diversification of risks and revenues remain an underlying credit weakness.

The banking system’s aggregate capital adequacy ratio remained at a solid 28% at end-H109 as new equity injections, de-leveraging and still positive pre-impairment profit have offset the impact of higher provision charges and devaluation. Previous rapid asset growth, generally unseasoned loan books, expansion into new segments and a high level of FX lending (in particular to the corporate sector) have coupled with weakened economic fundamentals to drive significant growth in loan impairment in H109. NPLs could rise further from their still moderate reported levels, but capital bases provide considerable capacity to absorb loan losses.

The liquidity positions of Armenian banks have generally been adequate due to substantial holdings of liquid assets, and these strengthened further in H109 through reduced lending activity. Prior to and following the devaluation of the dram, customer funding (the main source of liabilities for Armenian banks) remained reasonably stable in aggregate terms. However, increased dollarization of customer funding led the banks to temporarily open short FX positions and record losses as result of the devaluation. Foreign funding is important, but mostly comes from parent banks or international financial institutions, and so is not viewed by Fitch as a source of significant refinancing risk”, the report reads.

Fitch Rating notes that four largest banks account for about 43% share of the system’s assets. “HSBC Armenia is the leading player in the retail deposit segment with a 23% market share at end of the first half of 2009”, the reports reads. Fitch Ratings notes that about 70% of the sector’s assets are held by banks with majority foreign ownership, although international shareholders are not always highly-rated foreign banks.