Central Bank identifies two main risks threatening Armenia`s  financial stability

ArmInfo.The Central Bank has identified two main groups of risks threatening the financial  stability of Armenia. The first is the risk of escalation in conditions of high geopolitical uncertainty. The second is the risk of possible overheating in the mortgage lending market.  

This is noted in the recently published "2023 Financial Stability Report.  Development and Risks", where the Central Bank presented the current  development and possible risks of the banking system, and through  stress tests assessed the ability of banks to withstand these risks.  In particular, the first group concerns risks associated with the  further prospects of economic activity in the world and in the  domestic market, as well as the risks of revising the policy in the  event of new inflationary pressure from the external sector. In this  regard, the Central Bank considered several scenarios for the  possible development of the situation, one of which assesses the  extent to which the banking system is able to withstand emerging or  potential challenges with its capital.

The second group concerns the risks of maintaining long-term high  growth in mortgage volumes and real estate prices. Based on 2023  results, the regulator notes: "The growth in the volume of financial  debt on mortgages and the growth in real estate prices complement  each other, which may indicate possible risks of overheating in the  mortgage lending market." The extent to which mortgage borrowers are  over-indebted is evidenced by the results of the microdata analysis  conducted by the credit register, presented by the head of the  Central Bank at the presentation of this report, according to which  the share of those with 1 or more mortgage loans has increased  significantly since 2017-2018. In particular, at the end of 2022, the  share of borrowers with 2 mortgage loans amounted to about 14% in the  portfolio, and those with 3 mortgage loans - 4% in the portfolio.

Nevertheless, the chief banker described the banking system in terms  of capital and liquidity as a sector with sufficiently high reserve  buffers. "The results of macro stress testing of banks indicate that  even in a very negative scenario, the system is able to absorb  possible losses while maintaining the continuity of the financial  intermediation mission," he emphasized. In particular, capital  adequacy and liquidity levels remained at a level well above the  required minimum threshold during 2023 (24.82% -for core capital  adequacy, with the required 6.2% of risk-weighted assets, 27.28% -for  total capital adequacy, with the required 11% of risk-weighted  assets, 35.52% -for total liquidity, with the required 15%, 125.37%  -for current liquidity, with the required 60% - ed. note). This  indicates a high capacity of the banking system to absorb losses. The  increase in the level of capital and liquidity was largely  facilitated by both the gradual introduction of requirements for  strengthening buffers and the willingness of banks to meet the  requirement for the formation of additional reserves at the maximum  scale (most likely, we are talking about the LCR and NSFR standards -  short-term and long-term liquidity, introduced at the beginning of  2021, which banks began to comply with immediately from the highest  minimum threshold of 100% - ed.  note). In other words, banks decided  not only to comply with the regulator's requirements, but <to  approach this issue wisely> and immediately take the highest bar for  the formation of additional reserves. At the same time, M. Galstyan  drew special attention to the growing uncertainty, in which  conditions there is a high probability of materialization of systemic  cyclical risks. In this context, the Central Bank considers it  important for banks to adhere to a balanced approach in managing the  risks of active-passive operations, capital and other main management  components.

"With the development of lending, cyclical risks were mainly balanced  during 2023, i.e. not underestimated or overestimated, except the  mortgage market, where there was a tendency to maintain high growth  in volumes from previous years. In 2023, activity in the consumer  lending market also continued.  As a result of the continued growth  rates of mortgages and the renewed growth of consumer loans, the  financial cycle index remained almost unchanged during 2023," M.  Galstyan noted. As for the Central Bank's policy in terms of  introducing macro-prudential instruments, in the context of high  geopolitical uncertainty, the regulator, attaching importance to the  approach of prospective systemic risk management, increased the  capital adequacy ratio supplement - the countercyclical capital  buffer (CCB) during 2023 from 1% in May to 1.5% of risk-weighted  assets in August. The latter is aimed at increasing the stability  reserves of the banking system and will avoid the accumulation of  risks in the sector. Before this, since April 2022, the Central Bank  introduced the LTV (loan-to-value) standard to avoid the accumulation  of risks in mortgage loans, setting a maximum threshold of 70% for  foreign currency and 90% for dram loans.  The Central Bank used this  macroprudential instrument seeing the continued high growth rates of  mortgage loans accompanied by a noticeable y-o-y increase in prices  in the real estate market, as a result of the complementary impact of  which the possibility of a significant accumulation of risks in  mortgage loans was visible. The Central Bank's "2023 Financial  Stability Report. Development and Risks." provides specific figures  on the performance of banks for the reporting year. Thus, bank assets  grew by 9.4% over the year, and by 13% on average over the past 5  years,  to 9.2 trillion drams or 83.2% of the assets of the entire  financial system.

During 2023, credit investments increased by almost 21%, to about 5  trillion drams. Activity in the credit market was observed in all  areas. Consumer loans, agricultural loans and business loans  increased by 20- 21%. Mortgage loans, despite some slowdown in the  growth rate due to the base effect, nevertheless continue to show  high growth - almost 28%. With high economic growth, the increase in  credit investments was also accompanied by an improvement in the  quality of the portfolio, in particular, non-performing loans remain  below the long-term average threshold.

Deposits increased by 9.2%, which was due exclusively to an increase  in resident deposits by almost 18%.  The profitability of assets and  capital of banks for 2023 decreased to a certain extent, which was  due to large write-offs by some banks. Moreover, the level of ROA and  ROE was stable during the year, and due to the abovementioned  circumstance a decrease was recorded in December alone. It is  noteworthy that, unlike 2022, in 2023, banks' profits grew due to  interest income. This is the result of both the growth of interest  rates in the global and domestic markets and the dramization of the  loan portfolio.  According to the Financial Rating of Armenian Banks  as of December 31, 2023, prepared by ArmInfo, the return on assets  (ROA) decreased over the year from 3.3% to 2.7%, and the return on  equity (ROE) - from 21.5% to 16.6%.  Net profit totaled 229.9 billion  drams or $568 million for 2023, having decreased by 9.2% over the  year (against a 2.9-fold increase in 2022), and the profit dropped to  an impressive negative level for two banks (including Artsakhbank).  Interest income increased by 22.6% in 2023 to AMD 743.1 billion ($1.8  billion), in the structure of which loan income accelerated in growth  to a double-digit 17.4% to AMD 550.6 billion ($1.4 billion).

Total capital totaled AMD 1.5 trillion ($3.7 billion), slowing in  y-o-y growth from 38% to 13.5%. Assets totaled AMD 9.2 trillion  ($22.7 billion), slowing in growth from 18.1% to 9.5%.

The level of short-term (LCR) and long-term (NSFR) liquidity  decreased to 286.89% and 147.33% on average in the banking system in  2023, respectively, (from 381.73% and 161.64% in 2022). The level of  total liquidity and current liquidity also decreased, with the latter  more pronounced, while in the previous two years these indicators  were on the rise.