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Since 2002, the Armenian economy has recorded double-digit GDP growth rates. Consequently, the banking sector benefited from economic growth and showed a relative increase in total assets from 19,3% to 25% of GDP. Strong policies and correct vision contributed to the success of Armenia’s banks. At times of financial turmoil, Armenian banks successfully demonstrated growth in total assets and profits. The slowing down in the Armenian economy nevertheless pulled the banking system down with it. Furthermore, the economic slowdown in Russia and neighboring countries and liquidity problems at foreign banks will have a negative impact on Armenian banks. Preliminary analyses show that 2009 will be the harshest year for Armenian economy.
BACKGROUND: The Armenian banking system has reached considerable results over the past decade, and despite of its relatively small size, it has evolved as the most advanced and efficient sector of the country’s economy. The banking sector holds more than 90% of system assets and has experienced Compound Annual Growth Rates (CAGRs) of capital and assets at 34% and 25%, respectively, since 2002. Undoubtedly, by now the development pace of Armenia’s banking system can be considered as far surpassing most other post-Soviet countries. These results were obviously the result of reforms in the banking system carried out by the Central Bank of Armenia. Since the Central Bank tightened bank capitalization requirements and pushed weak and undercapitalized banks into merging with stronger banks, the number of banks decreased by over 40. Currently, there are 22 registered banks with 367 branches operate in Armenia. The top ten banks are Ardshininvest Bank, HSBC Armenia Bank, ACBA-CreditAgricol Bank, VTB Armenia Bank, Uni Bank, Converse Bank, Armeconom Bank, Ameria Bank, Ineco Bank and Armbusiness Bank.
In the beginning of this year Araratbank, VTB bank and HSBC banks became member of NASDAQ OMX. Membership of NASDAQ OMX will enable banks to carry out exchange transactions in all corporate securities listed on NASDAQ OMX Armenia, as well as in Government bonds, REPO and foreign currency.
From merely US$ 500 million in 2002, banking assets rose to more than US$ 2,5 billion in 2007. According to the chairman of the Central Bank of Armenia Arthur Javadyan, the net profit of Armenian banks grew by US$ 23 million, reaching US$ 86 million in 2008. According to the Central Bank’s preliminary data, the assets of the Armenian banking system grew by 33% in 2008 to US$ 3.3 billion, and capitalization by 40%. The crediting of the economy reached US$ 2 billion by late 2008 against US$ 1.5 billion earlier this year. International financial institutions repeatedly pumped in millions of U.S. dollars into the economy of Armenia until 2008, allowing Armenian banks to maintain a high level of liquidity. The current liquidity crisis will put Armenian banks into a more challenging position, whereas international financial institutions should allocate limited funds to a growing number of banks facing liquidity problems.
IMPLICATIONS: According to the Central Bank of Armenia, the banking system is currently moving towards Basel II standards, the new international standard to ensure banks have sufficient capital to support their market, credit and operating risks. Yet meanwhile, it is obvious that Armenian banks are still at an early stage of development. The only reason why Armenian banks were not badly hit by the global credit disaster is the low levels of Armenia’s integration to international capital markets. However, Armenian banks are not secured from indirect effects of the financial crisis that has already affected the Armenian economy. GDP growth in 2008 was 6,8%, the lowest since 2002. Moreover, even thought the Central Bank of Armenia forecast a GDP growth rate of 1,5-3,5% in the first half of 2009, the real scenario might be worse. In line with less optimistic forecasts, Armenia already started the year with a GDP decrease of 0,7%.
The current financial crisis is causing dwindling demand which is translating into a shrinkage in the price of products and services. Particularly, the price of metals decreased by about 50% in early 2008. This is not good news to Armenia, as 11% of all exports are related to the mining sector. The scenario worsens even further, if one considers that remittances make up close to 20% of the country’s GDP. Russia’s predicted zero or negative GDP growth for 2009 will have a negative impact on future remittance inflows to Armenian banks. Moreover, the number of unemployed reached 75,700 in Armenia by February 2009. This is 4.7% more than the same figure last year. Further, the liquidity measures already started to diminish. It particularly was felt at the end of 2008, when banks faced enhancing spread and were looking for additional funds to finance their activities. This once again proves how dependent the Armenian banks are for funding from international institutions. Furthermore, the number of tourists visiting Armenia is likely to diminish drastically in 2009.
The widespread effect of the financial crisis on the world economy, with forecasted world GDP growth at zero to half a percentage point, hinders international financial institutions from saving all the sinking ships at a time. World Bank intended to give US$525 million within four years but it is not specified how much will be allocated for 2009.
CONCLUSIONS: Despite the financial crunch, Armenian banks demonstrated growth of 33% in 2008, which is 11,1% less than the growth rate recorded in 2007. The profits for 2008 are mostly due to the favorable policies set by the Central Bank of Armenia and the low level of politicization of the country’s banking system. But in spite of the favorable policies, Armenia is not secured from the global downturn, as falling prices and job cuts eventually lead to a slowdown of the economy. The economic slowdown in 2008 and the beginning of 2009, compounded with Moody’s negative outlook gives no room for Armenian banks for an escape from financial turmoil. Lastly, 2009 is one of the difficult years ahead for Armenian banks. There is little to no hope that Armenian banks will score half of the growth rate that was demonstrated this year.
AUTHOR’S BIO: Hushnudbek Yulchiev is a Financial Analyst at Ansher Holding investment bank, Tashkent, Uzbekistan.