Negative outlook for Armenian banking system

ss_and_Finance/13375
January 02, 2009

The fundamental credit outlook for the Armenian financial institutions
is negative, reflecting the operating environment’s potential
volatility and lingering political tensions, Moody’s Investors Service
in its new Banking System Outlook.
"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," explained Stathis
Kyriakides, 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," said Kyriakides.
Moody’s said 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 capitalisation
and good domestic franchises to be able to successfully steer
themselves through any difficulties, while there may be an acceleration
of market consolidation.