BANKING SYSTEM OF ARMENIA AMONG MOST RELIABLE ONES IN CIS AREA: STANDARD & POOR’S

YEREVAN, DECEMBER 16. ARMINFO. The Banking system of Armenia is
considered one of the most reliable ones in the CIS area, say
specialists of the international agency Standard Poor’s.

According to the rating, as to the total system regulatory capital
as a % of risk weighted assets (BIS ratio), the banking system of
Armenia showed 34% in late 2003, yielding only to Tajikistan (44.7%)
and Kyrghyzstan (34%). Total banking system regulatory capital of the
baking system of Armenia in late 2003 was $79 mln (20 banks) leaving
behind Kyrghyzstan ($49 mln – 20 banks) and Tajikistan ($35 mln – 14
banks). At the end of 2003 Armenia ranked the first as to the capital
share controlled by foreign capital, including other CIS investors –
47%, leaving behind Kyrgyzstan – 29% amd Tajikistan 26.6%. As to the
total banking system assets, the banking system of Armenia showed
$498 mln, then goes Kyrgyzstan and Tajikistan, $258 mln and $147 mln,
respectively.

The specialists of the agency say that over the past decade, the number
of banks in most CIS countries has decreased significantly as a result
of bank failures, mergers, and license withdrawals. Restructuring
measures, as well as increases in minimum bank capital requirements
and capital adequacy ratios, have been effective instruments to
fortify banking systems and encourage consolidation. This process
is continuing today. For example, Armenia is increasing the minimum
required capital level to $5 million from the current $2 million,
effective July 1, 2005. This is largely above a minimum capital level
of ?1 million required in Russia, but still below a limit of $7 million
required in Kazakhstan. In Russia, the number of banks dropped from
2,300 in 1995, to nearly 1,300 banks today. Azerbaijan and Georgia
have seen a decline to about 50 banks in each country from almost
250 in each. Since 1994 in Kazakhstan, the number of banks fell to 36
from more than 180. Despite the growing divergence of policies and in
the performance of the CIS banking systems, one thing they share is
exposure to a variety of common risks. In addition to factors already
mentioned, such as shadowy economies, they include:

High economic and industry risks;

Volatility to economic cycles;

Low population wealth and high income inequalities;

Underdeveloped regulatory and legal systems;

Varying accounting practices; and

Limited confidence in the banking system.

In addition, the financial profiles of banks are characterized by weak
capital; lack of core deposits; weak credit culture, vulnerability
to asset quality risks; and low operating efficiency. Liquidity and
financial flexibility of CIS banks remain limited.

The population remains suspicious of banks and unwilling to trust
them with its savings Responding to the lack of confidence in their
banking systems, some CIS countries have sought to introduce deposit
insurance schemes. At the end of 1990s, Kazakhstan and Ukraine set up
deposit insurance systems, followed more recently by Moldova. In July
2004, amid the turmoil in the banking sector, the Russian government
adopted a law guaranteeing retail deposits in banks not admitted to
the retail-deposit insurance system introduced in December 2003 (whose
selection process has yet not been completed). Armenia set up a deposit
insurance system in 2003, which should start operating in 2005. The
Kyrgyz Republic is only preparing deposit insurance legislation.

The CIS banking systems mirror many of the high concentration
problems of their economies, particularly regarding the high
dependence on commodities in exports: oil for Russia and Kazakhstan,
gas for Turkmenistan, gold for the Kyrgyz Republic, aluminum for
Tajikistan, and diamond polishing for Armenia. With limited industry
diversification and natural-resource dependent and agriculturally
dominant economies, the CIS economies are fairly correlated in their
risks and economic cyclicality. Due to growing regional cooperation
and trade, the growth of many smaller CIS countries depends partly
on the performance of the large economies in the region–Russia,
Kazakhstan, and Ukraine.

Many privately owned CIS banks are closely connected to industrial
and trade groups. Beneficial owners, often hiding behind numerous
nominee or operating companies, are not publicly disclosed. This
raises critical information and corporate governance risks, which could
lead to understated related-party exposures. There is also a lack of
certainty about the owners’ ability and willingness to inject fresh
capital into the banks. Ultimate ownership and interrelationships
between borrowers and industries are difficult to discern. Opaque
ownership structures favor related party lending, with its attendant
risks. This results, in part, from the lack of enforcement and
monitoring of “fit and proper” criteria, and inhibits the emergence
of a market for corporate control. The lack of such a market is one
key reason for the lack of market-driven bank reorganizations in the
CIS countries, including the entry of foreign banks, mergers, and
acquisitions. The CIS banking systems have combined assets of around
$240 billion, which is less than half the size of Dresdner Bank AG
(A/Negative/A-1) or Barclays Bank PLC (AA/Stable/A-1+) and a third
of the size of ABN AMRO Bank N.V. (AA-/Stable/A-1+).