Forbes, NY
Dec 26 2007

Armenian banks’ credit outlook stable – Moody’s
12.26.07, 12:20 AM ET

MUMBAI (Thomson Financial) – Moody’s Investors Service the credit
outlook for rated Armenian banks is stable, reflecting an evolving
regulatory framework, buoyant credit growth, low banking penetration,
robust aggregate capitalisation and good asset quality.

In its new banking system outlook for the country, the ratings agency
said these strengths are offset by the challenging operating
environment, potential for accelerated asset quality deterioration
due to the unseasoned nature of loan portfolios, and real concerns
regarding operating risk due to under-developed infrastructure.

Moody’s (nyse: MCO – news – people ) said the Armenian banking sector
has undergone considerable consolidation in the past decade after the
banking sector turmoil of the mid-1990s and subsequent tightening of
prudential regulations.

Moody’s said it notes that the system, comprising twenty-one banks,
remains highly fragmented, however, the four largest banks control
45.54 pct of total banking system assets and the ten largest banks
79.61 pct.

The ratings agency said the Armenian banking sector lacks economies
of scale in its current structure, resulting in low productivity and
thereby raising the potential for further market consolidation.

Moody’s said it notes that Armenia’s regulation is improving from a
historically low base, and could benefit from further refinement and
better infrastructure and risk controls.

Moody’s said it maintains a generally positive view regarding banks’
efforts to expand their retail and mortgage lending operations,
although the rating agency emphasises that fast credit expansion
could result in elevated non-performing loans (NPLs) for the system
in an economic downturn, particularly as loan portfolios are not
seasoned.

As the country’s nascent banking sector evolves and the sector’s loan
book term structure lengthens, Moody’s said it expects NPLs to grow
to levels observed in other countries at similar stages of
development.

The weight of foreign-currency loans as a proportion of total loans
has decreased significantly in recent years, from a high of 78 pct of
total loans in 2002 to around 42 pct towards the end of 2007.

‘If the weight of foreign currency-denominated loans continues to
contract at current rates, our concerns are likely to be alleviated,’
Fimi Gostanian, a Moody’s senior associate said.