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AmRating: Many Armenian banks face a serious test as Central Bank of Armenia requires banks to meet a new lower limit of total capital by 2017

19.01.2015   13:14

As the Central Bank of Armenia requires the banks to meet a new lower limit of total capital by 2017, many Armenian banks face a serious test, the analysts of AmRating national rating agency have told ArmInfo’s correspondent. AmRating experts believe that the CBA’s decision on increase of the lower limit of total capital from the current 5 bln AMD to 30 bln AMD by 1 Jan 2017 will not only boost the long-expected process of Mergers and Acquisitions (M&A) on the banking market, but will probably oust some weak and dangerous participants from the market due to the big amount of hidden toxic assets on their balance sheets.   

The analysts point out that at the moment the banking system of the country can conventionally be divided into 4 categories of its participants in terms of assets and efficiency.

Traditionally, the top-5 lenders to economy top that list. Their total capital and assets make up nearly 47% of the aggregate capital and nearly 49% of the aggregate assets of the total banking system of the country. The capitals of these players long ago exceeded the new lower limit (30 billion AMD) introduced by the CBA. This changeless top-5 that was formed as early as over 5 years ago includes ACBA-Credit Agricole, Ardshinbank, HSBC Bank Armenia, VTB Bank (Armenia), and Ameriabank. The experts believe that the specified top-5 is a kind of a guarantor of the system stability because they own almost half of the market and have a stable and high funding potential at the expense of both accumulated profit and their shareholders. Thus, the top-5 has the most reliable mechanisms to resist the risks even in case of further unfavorable economic climate in the country. 

The second group of the banks with medium total capital and assets secure 37% of the aggregate total capital and 36% of the aggregate assets of the system. This group may include ArmBusinessBank, INECOBANK, Converse Bank, ArmSwissBank, Prometey Bank, ARARATBANK, Areximbank- Gazprombank Group and Unibank. To meet the new lower limit of total capital, each of these banks will have to increase it by 3-10 bln AMD. The analysts think that the overwhelming majority of the specified banks enjoy the support of the shareholders, including institutional and strategic investors. This considerably facilitates the process of further capitalization of the banks. However, it is this group that is expected to be especially active to enhance its positions on the market due to synergy of capital and assets via murder and acquisition of weaker players of the third and the fourth groups. In the meantime, it is not ruled out that some members of the second group will manage to enlarge by attracting foreign, most likely strategic investors, such as Russian banks controlled by the organizations “with Armenian roots”, which is a quite popular precedent in the history of the Armenian banking system. In the light of mergers, one can also expect business optimization by means of merger of various banks controlled by one and the same shareholder. Moreover, it should be noted that some of the banks of the second group have regularly enhanced their capitalization for the past few years, which demonstrates serious ambitions to enhance their positions on the market. 

The third group consists of small banks in terms of both total capital and assets. The share of their total capital slightly exceeds 10% on the market and the share of their assets insignificantly exceeds 11%. This group includes Anelik Bank, Artsakhbank, Armeconombank, Mellat Bank. To meet the lower limit of total capital by 2017, they need to increase their total capital at least 2-3-fold. Anelik Bank has the strongest positions in terms of possible capitalization due to the potential of the Lebanese shareholder – CreditBank S.A.L., which has recently taken full control over the Anelik money transfer system and which has subsidiaries in a number of foreign countries. The fate of the Iranian Mellat Bank will mostly depend on the Armenian-Iranian economic ties and softening of the Western sanctions, which are still seriously hindering development of the Armenian subsidiary. Artsakhbank, which has a special mission and specializes in servicing the NKR economy, is likely to have three scenarios to meet the new total capital requirement. It may join the capital of the bank of the state in the person of the Nagorno-Karabakh Republic; merge with another banking structure affiliated through the shareholder; or receive from the CBA a special regime of operation in relation to the important state mission of the “lead bank” of Nagorno-Karabakh.  Armeconombank may cause a serious interest in M&A owing to a number of important parameters:  traditionally large branch network and involvement in most of the international loan projects being implemented in Armenia. Notwithstanding its low indices, the Bank has firm positions on the card market of the country. One of the Bank’s majority shareholders is the European Bank for Reconstruction and Development (EBRD), so any scenarios of meeting the new lower limit of total capital are possible with the consent and fulfillment of requirements of that serious institutional investor, which certainly lays down its own tough conditions. 

The fourth conventional micro-group of Armenian banks includes Armenian Development Bank, ProCredit Bank, Byblos Bank Armenia and BTA Bank. The share of their capital on the market is 7% of the aggregate index, and the share of their assets is 5% of the aggregate index. To comply with the new standard by 2017, these banks will have to increase their capital at least 3-6-fold. The Armenian ProCredit Bank is especially singled out in this group. It is a member of the international ProCredit Holding and its special mission, which resembles a donor mission, is to develop the small and medium businesses in the host countries. The Bank’s participation in M&A is low probable, however, the fact that the Bank has strong institutional investors such as EBRD and KfW allows supposing that the bank will continue operating in Armenia and performing its key mission. It is not ruled out that the mission of the Bank and its strong authoritative owners will allow the Regulator to take a special decision concerning the bank. In any case, AmRating analysts think that the withdrawal of ProCredit Bank from the Armenian market is unacceptable, because it will deliver a strong blow on the international investment image of Armenia.  Moreover, despite the obstacles in development of small and medium businesses in the low competitive, monopolized economic environment of Armenia, the Bank holds one of the leading positions in the banking segment of SME financing. Kazakh BTA Bank’s fate remains uncertain after its erstwhile powerful parent bank fell victim to the financial crisis of 2008-2009. The Bank still operates in a limited regime though its shareholder has undergone an uneasy procedure of rehabilitation held by the state of Kazakhstan.  It is unclear what decision the major shareholder – National Welfare Fund “Samruk-Kazyna – will take on its Armenian subsidiary. On the one hand, Armenia is becoming Kazakhstan’s partner within the Eurasian Economic Union, but on the other hand, the level of development of the trade and economic cooperation inspires no hopes yet. Therefore, under one of the scenarios, the Bank may be sold if a buyer is found.  Byblos Bank Armenia also has strong major shareholders such as EBRD, OPEC and Byblos Bank S.A.L., which has assets worth over 16 bln USD and offices in 12 countries. Nevertheless, the analysts think that the shareholders’ current low support to the Armenian subsidiary can demonstrate the insufficient interest in the subsidiary’s development due to the low investment attractiveness of Armenia and the problems in the economy. In that case, the matter may concern either sale of the bank or withdrawal from the market.  Nevertheless, one more option is possible: the Bank may enhance its capitalization in case the shareholders arrive at a conclusion that the risk will be justified and that the investments will be applied properly. In the case of the Armenian Development Bank, the capitalization growth task is at least to triple the capital. The lack of strategic and institutional investors in the capital and the lack of competitive and attractive advantages for investors somewhat complicates the task lay down by the CBA. Fulfillment of this task will depend exclusively on the individual approach of the Bank’s real majority shareholder, who is a major Armenian businessman. 

AmRating analysts explain the CBA’s decision to increase the lower limit of the total capital so sharply with the need to take immediate measures so that the economy of Armenia is able to meet the emerging serious risks and challenges. The analysts outline such problems as the deteriorating economic and investment situation in Russia – the key trade and economic partner of Armenia, the reducing money transfers to Armenia, which negatively affects the aggregate demand in the country and GDP growth rates.  All this affects the payment balance and increases the foreign trade deficit. Furthermore, as international rating agencies reduce Armenia’s sovereign ratings, foreign funding and credit resources may rise in price, which cannot but affect the country’s banking system. A strong and highly capitalized banking system is what may become a guarantee for the sustainable financial market in Armenia, amid hardly predictable global changes. 

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