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Moody's Reports: Negative outlook for Armenian banking system

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  • Moody's Reports: Negative outlook for Armenian banking system

    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.
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