Armenia`s banking sector to tighten capital buffers

ArmInfo. In the banking sector of Armenia, the regulator continues to tighten the standards for capital buffer indicators. Thus, from May 1, 2025, the Central Bank of the Republic of Armenia increased the countercyclical capital buffer (CCB) from 1.5% to 1.75% of risk- weighted assets, as well as the capital conservation buffer (protective) from 2% to 2.5%. It is known  that an additional capital buffer of 1.5% is already in effect for  systemically important banks. This is noted in the annual report of the Central Bank of the Republic of Armenia "Financial Stability 2024".

According to this report, the grouped requirement for capital buffers for systemically important banks is already 5.75% (taking into account the additional buffer of 1.5%), and for other banks the standard is 4.25%.

According to analysts from the ArmInfo financial analysis service, the Basel recommendations for the above-mentioned buffers, proposed several years ago but postponed until "better times", are already in full force. The use of these surcharges - capital buffers - is aimed at supporting the stability of the banking sector.

Unlike the conservation and systemic importance buffer standards, which were launched in the pandemic year of 2020, the countercyclical capital buffer (CCB) shifted from zero much later - at the beginning of 2023. In particular, the CCB is necessary to cover bank losses in the event of extreme systemic risk in the banking sector. Since May 2023, the CCB standard was set at 1% and in the same year, in August,  it was increased to 1.5% with this level maintained in 2024, after which, in May 2025, the standard was increased to 1.75% of risk-weighted assets.

As for the capital conservation buffer (protective), this standard  acts as a shock absorber for banks, i.e. it provides a buffer cushion so that banks can continue to lend and absorb losses in difficult times. This buffer was first introduced in the pandemic year of 2020 at 0.5% and was then increased to 1% of risk-weighted assets in 2021, to 2% in 2023, followed by another increase to 2.5% in May 2025.

The purpose of the additional capital buffer for systemically  important banks (systemic importance buffer) is to further strengthen the ability of such banks to mitigate the negative impacts on the banking system caused by external and internal shocks. This buffer was also first applied in the pandemic year of 2020 to 0.5%, remaining at the same level in 2021. From January 2023, this standard was increased to 1.5%, maintaining this level in 2024 and 2025.

ArmInfo analysts draw attention to the fact that the Central Bank assesses the level of capitalization and liquidity of the banking system as sufficient, but meanwhile, according to the Financial Rating of Armenian Banks as of December 31, 2024, prepared by ArmInfo Investment Company, the adequacy of total capital for 2022-2024 on average in the market decreased from 29.91% to 26.81%, the adequacy of core capital - from 28.55% to 24.44%. A downward trend is also  observed in the level of liquidity: total - from 37.61% to 34.27%,  current - from 205.95% to 122.96%, short-term - from 381.73% to 242.35%, and long-term - from 161.64% to 139.44%.

During this period, total capital slowed in annual growth from 38% to 20%, amounting to $4.5 billion, and lending accelerated in growth from 13% to 22%, reaching $17.7 billion. The net profit of the banking system, after a 3-fold jump in 2022 and then a deterioration in dynamics in 2023 to an 11% decline, came out in 2024 at 61% growth, amounting to $915.7 million. This naturally affected the return on equity (ROE) and return on assets (ROA), which first decreased in 2023 from 21.52% and 3.33% to 16.28% and 2.61%,  respectively, after which they increased to 23.71% and 3.76% in 2024. But it is worth mentioning that in the turbulent 2022, banks received  superprofits due to a sharp increase in non-interest income (foreign exchange transactions, card transactions, money transfers due to the wave of relocators), while significantly reducing lending activity. In 2023, when the excitement from the actions of relocators began to subside, banks again turned their attention to lending, but the delayed reaction cost them a drop in profits, which they managed to bring to growth only in 2024 and already due to active lending, a significant part of which is refinancing due to a significant reduction in the key rate of the Central Bank.