IPR Strategic Business Information Database
January 1, 2009
MOODY’S REPORTS: NEGATIVE OUTLOOK FOR ARMENIAN BANKING SYSTEM
The fundamental credit outlook for the Armenian financial institutions
is negative, reflecting the operating environment’s potential
volatility and lingering political tensions, says Moody’s Investors
Service in its new Banking System Outlook on Armenia. Moody’s negative
outlook for the Armenian banking system expresses the rating agency’s
view on the likely future direction of fundamental credit conditions
in the industry over the next 12 to 18 months. It does not represent a
projection of rating upgrades versus downgrades.
"Given that the Armenian banking sector is still at an early stage of
development, its banks have not been exposed to US sub-prime risk,
failed western banks or other international risky asset classes and,
during 2007 and 2008, were able to weather the international credit
crisis relatively unscathed. Nonetheless, local banks remain reliant
on international institutional funding to finance domestic lending
and, subsequent to the disruption in international credit markets,
particularly in Q4 2008, were faced with increasing spreads for
whatever little funding they could access," explains Stathis
Kyriakides, a Moody’s Assistant Vice President and author of the
report. Moody’s negative outlook reflects concerns over potentially
rising asset quality problems as a result of the projected slowdown of
the domestic economy and, equally importantly, of the economies of
Armenia’s main trading partners during 2009. Concerns over asset
quality (which is currently still very good) are compounded by the
unseasoned nature of loan portfolios (and the consequent potential for
accelerated deterioration under less favourable market conditions) in
Moody’s view and borrowers’ potentially unhedged foreign currency
positions translating into currency-induced credit risk for
banks. Moody’s cautions that operational risk also remains heightened
for banks in Armenia, among other reasons as a result of the country’s
developing technical infrastructure, as does political risk, as shown
by the events surrounding the general election in March 2008. In
particular, the controversy over the result and the subsequent riots
and state of emergency highlight the still material political risks in
the country. "Nonetheless, Moody’s notes that as the climax of the
turmoil during March 2008 was short-lived, customers maintained their
confidence and the banking sector was largely unaffected," says
Mr. Kyriakides. Moody’s recognises that the sector benefits from high
levels of aggregate capitalisation (although this varies significantly
between financial institutions) and high but declining liquidity (both
of which are shields against deteriorating market conditions), and
still good prospects for growth for banks with access to capital funds
as the level of financial intermediation (despite increasing) remains
low and demand for credit reportedly is higher than supply. Going
forward, and depending on the extent of any economic slowdown, Moody’s
expects the better positioned banks with strong capitalization and
good domestic franchises to be able to successfully steer themselves
through any difficulties, while there may be an acceleration of market
consolidation.