Overview of the Financial Sector in Armenia

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he financial sector in Armenia is dominated by banks with an T 83.8% share in total financial sector assets. Other financial institutions such as credit organizations, pension funds, insurance companies, etc. are rather small and do not have a significant impact on the overall health of the financial system. Therefore, the following analysis will focus on commercial banks. Figure 1. The structure of financial sector assets in Armenia, June 2020 4,1% 0,8% 0,9% 0,9%

9,4% Banks Overview Credit Organizations Insurance Companies

83,8% Investment Companies of the Pension Funds Other financial institutions financial Source: Financial stability report 2020-I, Central Bank of Armenia

he size of the banking sector in Armenia is large relative to the sector Teconomy, as banks’ total assets to GDP equals 108%, a level that is close to the average for BSTDB member countries. The banking system in Armenia comprises 17 commercial banks with strong market competition as the concentration of banks’ assets is very low, with the 3 largest banks holding less than 50% of total in Armenia banking sector assets and with individual shares of less than 20% each. According to the Central Bank of Armenia, the HHI index of market concentration is around 9% for assets, which is a relatively low number compared to peer countries1. Foreign participation in banks capital is around 60% as at the end of 2020. Figure 2. Total Loans to Customer Deposits (%)

Source: Financial Soundness Indicators, IMF database

1 Website of the Central Bank of Armenia: https://www.cba.am/en/SitePages/fscintroduction.aspx AR

13% 18% Industry Banks 83,8% 25 Agriculture Credit Organizations 9,4% 15 5% Insurance Companies 0,9% Construction 15 13 12 Investment Companies 0,8% 10 Services 9 9 25% 10 8 7% Pension Funds 4,1% 6 7 Other Other ﬁnancial institutions 0,9% 5 Consumer loans

0 Mortgages 6% 26% -5 -3 AR 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

AR 160 Local currency loans FX loans 137 140 140 134 20 117 117 13% he loan book120 accounts for around111 60% of total banking sector ne of the challenges9 of the banking sector in Armenia is a 18%18 8 100 95 Industry assets. The share of liquid Banksassets in88 total91 91assets83,8% has declined relatively high level of8 NPLs. The quality of the credit portfo- 16 T O 7 80 25 7 Agriculture from 32% in 2017 down to 26%Credit in Organizations2020. However, 9,4% liquidity buffers lio started to deteriorate 7during the regional shock of 2014-2015 13%7 14 60 18% 15 6 12 5% are still more than enough to coverInsurance short Companies term liabilities 0,9% as the ra- when NPLs increased to 68% of gross loans. In later years NPLs5 ConstructionIndustry 40 Banks 83,8% 15 13 12 5 4 5 10 tio of liquid assets20 to short termInvestment liabilities Companies stands 0,8% at 109%. Banks’ 25declined somewhat but from 2019 onwards they10 started to in- ServicesAgriculture Credit Organizations 9,4% 4 9 9 25% 8 0 10 4 3 7% funding mostly consists of deposits,Pension Funds as they account4,1% for around crease again.15 The COVID pandemic7 and an economic8 contraction 5% 2011 2012 2013 2014Insurance2015 2016 Companies2017 2018 2019 2020 0,9% 6 6 OtherConstruction 15 13 12 3 2 60% of total liabilities and aroundOther ﬁnancialhalf of institutions these are 0,9% retail deposits. related to it, together with military conflict in Nagorno Karabakh , 4 Investment Companies 0,8% 5 10 ConsumerServices loans 2 9 9 25% Borrowings from other financial institutions are also an important 10will probably feed NPLs further, as the full impact8 of these events 2 7% Pension Funds 4,1% 6 1 7 Other source180 of funding as they accounted for more than 20% of total is0 not yet reflected in the asset quality. The level of NPLs is on the 0 Mortgages Other ﬁnancial institutions 0,9% 0 5 6% 26% Consumer loans liabilities160 as of end 2020. The loan to deposit ratio dropped from high side compared with regional2011 peers2012 2013and the2014 coverage2015 2016 of NPLs2017 2018 2019 2020 -5 Jul-20 Jul-19 Jul-18 Jul-17 Jul-16 140 -3 Jul-15 Jan-20 Jan-19 Jan-18 Jan-17 Jan-16 Jan-15 Oct-20 Oct-19 Oct-18 Oct-17 Oct-16 Oct-15 Apr-20 Apr-19 Apr-18 Apr-17 Apr-16 134% in 2014 down to 88% in 2017 as deposits grew much faster with loan loss provisions remains modest at around 60%. Apr-15 Mortgages 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 than loans.120 However, since 2017 the loan to deposit ratio has in- 6% 95 Figure 5. Evolution of NPLs in Armenia and regional 26% 100 -5 10 creased and it further accelerated in 2020, reaching 95%, a figure -3 9 comparison (% of total gross9 loans) which is80 close to the average of peer countries in the region. 2011 2012 2013 2014 2015 20168 2017 2018 2019 2020 60 8 7 7 160 Local currency loans FX loans 7 137 140The banking40 system in Armenia has solid capital buffers as the 7 140 134 6 6 20 ratio117 of20 regulatory117 capital to risk weighted assets has stayed well 6 120 111 9 5 5 18 160 8 100 0 95 5 Local currency loans FX loans above the required88 minimum91 91 of 12% over the last decade. In 2020, 8 4 137 140 16 140 134 7 4 80 capital adequacy declined slightly to 17%. The strong capital posi- 7 3 20 117 117 7 7 143

120 Israel

111 Malta 60 Latvia 9 Russia 3 18 Bosnia Turkey Cyprus Poland Greece Croatia

Kosovo 2 Finland Estonia Belarus 12 Ukraine tion of the banking system highlights a capacity to absorb Georgia poten- 6

Bulgaria 8 95 Slovakia 6 5 Armenia Romania 100 Moldova 91 91 40 88 Lithuania 8 2 5 16 Czech Rep. 10 80 tial losses in case a negative scenario materializes. 5 4 7 1

Montenegro 7 20 7 1 7 14 N. Macedonia N. 8 60 4 4 0 3 12 2011 2012Figure2013 2014 3. 2015Regulatory2016 2017 2018 Capital2019 2020 to Risk-Weighted Assets (%) 6 0 5 6 6 40 3 5 5 4 104 20 2 4 4 28 0 3 Russia Turkey Croatia Iceland Belarus Albania

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Georgia 1 Bulgaria 6 Hungary Armenia Romania 180 3 Moldova 0 25 0 4 160 2 Montenegro 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Macedonia N. 2 20 Jul-20 Jul-19 Jul-18 Jul-17 Jul-16 140 Jul-15 Jan-20 Jan-19 Jan-18 Jan-17 Jan-16 1 Jan-15 Oct-20 Oct-19 Oct-18 Oct-17 Oct-16 Oct-15 Apr-20 Apr-19 Apr-18 Apr-17 Apr-16 19 Apr-15 180 20 18 18 18 0 120 17 17 16 17 0 160 95 14 100 15 10 2011 2012 2013 2014 2015 2016 2017Loan dollarization2018 2019 2020Deposit dollarization Jul-20 Jul-19 Jul-18 Jul-17 Jul-16 140 9 Jul-15 Jan-20 Jan-19 Jan-18 Jan-17 Jan-16 Jan-15 Oct-20 Oct-19 Oct-18 Oct-17 Oct-16 Oct-15 Apr-20 Apr-19 Apr-18 Apr-17 Apr-16 9 Apr-15 80 8 75% 120 10 60 95 8 7 7 100 10 70% 40 7 9 7 80 5 9 6 6 20 6 8 65% 60 8 7 5 5 0 5 7 40 0 7 7 60% 4 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 4 6 6 3 20 6 3

Israel 55% Malta Latvia

Russia 3 5 Bosnia Turkey Cyprus Poland 5 Greece Croatia Kosovo 2 Finland Estonia Belarus Ukraine Georgia Bulgaria 0 Slovakia 5 Armenia Romania Moldova Lithuania 2 50% 4 Source: FinancialCzech Rep. Soundness Indicators, IMF database 4 1

Montenegro 3 1 3 N. Macedonia N. Israel Malta Latvia 45% Russia 3 Bosnia Turkey Cyprus Poland Greece Croatia Kosovo 2 Finland Estonia Belarus Ukraine Georgia Bulgaria Slovakia 0 Armenia Romania Moldova Prior to shocks in 2014-2015, the banking sector in Armenia re- Lithuania 2 Czech Rep. 40% 1 ported strongMontenegro profitability as the ROE ratio averaged 13% per year. 1 N. Macedonia N.

Russia 35% Turkey

In 2014-2015, as economic growth slowed and the local currency Croatia Iceland Belarus 0 Albania Georgia Bulgaria Hungary Armenia Romania Moldova 25 depreciated, banks’ profits declined, and in 2015 profits went into 30% Montenegro

negative territory. Since then the profitability of the banking sec- Macedonia N. Russia Turkey Croatia 20 Iceland Belarus Albania Georgia Bulgaria Hungary Armenia Romania Moldova 20 18 19 Jul-20 Jan-20

tor has recovered somewhat but not to pre-2014 levels. In 2020 Jun-20 Oct-19 Oct-20 Apr-20 Sep-19 Feb-20 Sep-20 Dec-19 Dec-20 Aug-19 18 Aug-20 Nov-19 18 Nov-20 Mar-20 25 17 17 16 17 May-20 the ROE for the banking system was 9%, which is equivalent to Montenegro 14 Loan dollarization Deposit dollarization Macedonia N. 15 the average 20profitability for the period since 2015. At these levels, 20 18 19 18 AR 17 17 18 17 75% 10 the profitability16 of the banking sector in Armenia is relatively low 14 15 compared to peer countries with similar creditworthiness. Source:70% Financial SoundnessLoan dollarization Indicators,Deposit IMF database dollarization Annual growth rate of deposits Annual growth rate of loans 5 65%75% 10 Figure 4. Return on Equity (%) 30% 0 60%70% 13% 18% 5 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 55%65% 25% Industry Banks 83,8% 25 Agriculture Credit Organizations 0 9,4% 50%60% 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 20% 15 5% Construction Insurance Companies 0,9% 45%55% 15 13 12 Investment Companies 0,8% 10 15% Services 9 40%50%25% 10 9 7% Pension Funds 4,1% 7 8 6 45% Other 35% 10% Other ﬁnancial institutions 0,9% 5 Consumer loans 30%40% 5% Mortgages 0 35% 6% Jul-20

Jan-20 26% Jun-20 Oct-19 Oct-20 Apr-20 Sep-19 Feb-20 Sep-20 Dec-19 Dec-20 Aug-19 Aug-20 Nov-19 Nov-20 Mar-20 -5 30% 0% May-20 -3 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Jul-20 Jan-20 Jun-20 Oct-19 Oct-20

-5% Apr-20 Sep-19 Feb-20 Sep-20 Dec-19 Dec-20 Aug-19 Aug-20 Nov-19 Nov-20 Mar-20 May-20 Source: Financial Soundness Indicators, IMF database Annual growth rate of deposits Annual growth rate of loans Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Sep-16 Sep-17 Sep-18 Sep-19 Sep-20 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 160 Local currencyMar-16 loans Mar-17 FX loans Mar-18 Mar-19 Mar-20 137 140 30% 140 134 20 117 117 120 111 9 18 Annual growth rate of deposits Annual growth rate of loans 8 100 95 25% 88 91 91 8 30% 16 7 80 7 7 7 14 60 20% 6 5 6 25% 12 40 2 5 4 5 “Loans10 by banks operating in the Republic of Armenia to the NK are 20 15% 4 estimated20% 8 at about 3 percent of Armenia’s GDP (3.3 percent of total Ar- 0 4 3 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 menia’s banking6 sector assets) as at end-2019.” – Staff Report, December 3 10% BSTDB_Overview of the financial sector in Armenia 2020, IMF4 2 15% 2 1 5% 180 10% 0 0 160 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 0% Jul-20 Jul-19 Jul-18 Jul-17 Jul-16 140 Jul-15 Jan-20 Jan-19 Jan-18 Jan-17 Jan-16 Jan-15 Oct-20 Oct-19 Oct-18 Oct-17

5% Oct-16 Oct-15 Apr-20 Apr-19 Apr-18 Apr-17 Apr-16 Apr-15 120 95 -5% 100 10 0% 9 80 9 8

8 Jun-16 Jun-17 Jun-18 Jun-19 Jun-20

60 Sep-16 Sep-17 Sep-18 Sep-19 Sep-20 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 7 Dec-15 Mar-17 Mar-18 Mar-19 Mar-20 7 -5% Mar-16 40 7 7 6 6 20 6

5 Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Sep-16 Sep-17 Sep-18 Sep-19 Sep-20 5 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 0 5 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 4 4 3 3 Israel Malta Latvia

Russia 3 Bosnia Turkey Cyprus Poland Greece Croatia Kosovo 2 Finland Estonia Belarus Ukraine Georgia Bulgaria Slovakia Armenia Romania Moldova Lithuania 2 Czech Rep. 1 Montenegro 1 N. Macedonia N. 0 Russia Turkey Croatia Iceland Belarus Albania Georgia Bulgaria Hungary Armenia Romania Moldova 25 Montenegro N. Macedonia N. 20 19 20 18 18 18 17 17 16 17 14 15 Loan dollarization Deposit dollarization 75% 10 70% 5 65%

0 60% 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 55%

50%

45%

40%

35%

30% Jul-20 Jan-20 Jun-20 Oct-19 Oct-20 Apr-20 Sep-19 Feb-20 Sep-20 Dec-19 Dec-20 Aug-19 Aug-20 Nov-19 Nov-20 Mar-20 May-20

Annual growth rate of deposits Annual growth rate of loans 30%

25%

20%

15%

10%

-5% Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Sep-16 Sep-17 Sep-18 Sep-19 Sep-20 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 AR

0 Mortgages 6% 26% -5 -3 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

160 Local currency loans FX loans AR 140 137 140 134 20 117 117 120 111 9 18 8 100 95 88 91 91 8 16 7 80 7 7 7 14 60 13% 6 5 6 12 18% 40 Industry Banks 83,8% 5 4 5 10 20 25 4 8 Agriculture 0 Credit Organizations 9,4% 4 3 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 15 6 5% Insurance Companies 0,9% 3 Construction 15 13 12 4 Investment Companies 0,8% 2 10 Services 9 9 25%2 10 1 8 7% 180 Pension Funds 4,1% 6 7 0 Other 0 Other ﬁnancial institutions 0,9% 160 5 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Consumer loans Jul-20 Jul-19 Jul-18 Jul-17 Jul-16 140 Jul-15 Jan-20 Jan-19 Jan-18 Jan-17 Jan-16 Jan-15 Oct-20 Oct-19 Oct-18 Oct-17 Oct-16 Oct-15 Apr-20 Apr-19 Apr-18 Apr-17 Apr-16 Apr-15 Mortgages 120 0 6% 100 95 10 26% -5 9 80 9 8 -3 nother2011 2012important2013 2014challenge2015 for2016 the2017 banking2018 system2019 2020 in Arme- orporate borrowers accounted for 62% of the total credit port- 60 8 7 7 40 Ania7 is a relatively high7 level of dollarization both for loans and Cfolio in Armenia in 2020, with the services sector having the 6 6 20 deposits.6 Over the past five years, dollarization in Armenia has de- largest share in the corporate loan book. Services were followed 5 5 0 clined5 and, despite the pandemic, it continued to decline in 2020. by industry and construction with a 13% and 7% share in the to- 160 4 Local currency loans FX loans 140 137 134 Overall,4 for the period from 2015 to 2020, dollarization3 declined by tal credit portfolio respectively. Consumer loans accounted for 140 3 20 Israel Malta Latvia 117 117 Russia 3 120 Bosnia Turkey Cyprus 111 Poland 16-17 percentage points and was 50% and 54% for loans and de- 25% of the total loans in 2020, while the share of mortgages was Greece Croatia

Kosovo 2 Finland Estonia Belarus 9 18 Ukraine Georgia Bulgaria Slovakia Armenia Romania Moldova

Lithuania 8 100 95 88 91 91 posits2 respectively, at the end of 2020. Still, dollarization remains 13%. Loans to households, both consumer loans and mortgages, Czech Rep. 8 1 16 80 Montenegro 1 7 7 N. Macedonia N. at a7 high level, exposing the banking system to exchange rate7 fluc- are mostly14 denominated in the local currency with dollarization 60 0 tuations.6 It should be noted though that for5 loans to 6households standing12 at 15% and 31% respectively. Households with foreign 40 (including5 mortgages),4 that are more vulnerable5 to exchange rate exchange10 debt are more exposed to exchange rate risk, togeth- 20 8 Russia 4 Turkey Croatia 4 Iceland Belarus 0 risk, dollarization3 Albania is much lower at 23% at the end of 2020. er with the borrowers operating in the agriculture sector where Georgia Bulgaria Hungary Armenia Romania 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Moldova 6 25 3 dollarization is also relatively low at 36%. Other corporate loans, Figure 6. Evolution of dollarizationMontenegro for loans and deposits in 4 2 Macedonia N. excluding loans to agriculture, are mostly granted in FX with dol- 20 the banking sector of Armenia 2 20 18 19 18 1 180 17 17 18 17 larization0 exceeding 70%. AR 16 0 14 15 160 2011 2012 2013Loan 2014dollarization2015 2016Deposit2017 dollarization2018 2019 2020 Figure 8. The structure of the credit portfolio as of end 2020 Jul-20 Jul-19 Jul-18 Jul-17 Jul-16 140 Jul-15 Jan-20 Jan-19 Jan-18 Jan-17 Jan-16 Jan-15 Oct-20 Oct-19 Oct-18 Oct-17 Oct-16 Oct-15 Apr-20 Apr-19 Apr-18 Apr-17 Apr-16 75% Apr-15 10 120 100 95 70%10 9 13% 5 80 65%9 18% 8 Industry 60 Banks 83,8% 8 7 7 0 60% 40 257 7 Agriculture 2011 2012 2013 2014 2015 2016 2017 2018 2019 Credit2020 Organizations 9,4% 6 6 20 55%6 15 5% Construction Insurance Companies 0,9% 15 13 5 5 0 5 12 Investment Companies 0,8% 50% 4 10 Services 9 25% 104 9 3 7% Pension Funds 4,1% 45% 7 8 3

Israel 6 Malta Other Latvia

Russia 3 Bosnia Turkey Cyprus Poland Greece Croatia

Kosovo 2 Finland Estonia Belarus Ukraine AR Georgia Bulgaria Slovakia Armenia Romania Moldova Other ﬁnancial institutions 0,9% Lithuania 40%52 Consumer loans Czech Rep. 1 Montenegro 1 N. Macedonia N. 35% Mortgages 00 30% 6% 26% -5 13% -3 18%

Russia Industry Turkey Croatia Iceland Belarus

2011 Albania 2012 2013 2014 2015 2016 2017 2018 2019 2020 Jul-20 Georgia Bulgaria Jan-20 Hungary Armenia Banks 83,8% Jun-20 Oct-19 Oct-20 Apr-20 Sep-19 Feb-20 Sep-20 Romania Moldova Dec-19 Dec-20 Aug-19 Aug-20 Nov-19 Nov-20 Mar-20 25 May-20 Agriculture 25 Credit Organizations 9,4% Source: Central Bank of Armenia Montenegro

15 Macedonia N. 5% 20 Insurance Companies 0,9% Construction 19 15Source:13 Central Bank of Armenia 20 18 18 18 12 s expected, monetary policy easing in 2015-2019 resulted in 17 16017 Investment17 Companies 0,8% 10 16 25% Local currency loans FX Services loans 140 9 9 lower lending rates for domestic7% currency loans. Interest rates 137 14 134 10 A 140 8 15 Pension Funds 4,1% Loan6 dollarization 7 Deposit dollarization 20 Other 117 117 Annual growth rate of deposits Annual growth rate of loans for US$ denominated loans declined also, mainly due to relaxed 120 111 9 18 Other ﬁnancial institutions 0,9% 75% 8 100 95 5 30%fter the regional shock of 2014-2015, credits and deposits financial conditions globally. As the central Consumerbank started loans tighten- 10 88 91 91 8 16 80 70%grew rapidly at an average7 annual rate of 13-14% and this ing the policy in the late 2020 its effect on lending rates is not yet A 7 7 7 14 Mortgages 0 5 60 trend25% continued in the first half of 2020. Deposit and credit growth seen and as a result the declining trend for interest rates contin- 65%6 5 6 126% 26% 40 -5were 5supported by accommodative4 monetary policy5 as the Central ued further10 in 2020 both for local and FX denominated loans. 0 20 20%60% -3 Bank2011 of Armenia2012 20134 cut2014 the policy2015 2016 rate 2017gradually2018 from2019 10.5%2020 down 8 2011 2012 20130 2014 2015 2016 2017 2018 2019 2020 4 3 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 55% Figure 9.6 Interest rates for loans with maturity of more than to 4.25%3 in this period. It was accompanied by strong economic 15% 1 year 4(%) growth50%2 as real GDP growth from 2016 to 2019 averaged 5% per 2 year.10%45% 1However, as depreciation of the local currency fed inflation, 180 160 0 Local currency loans FX loans 140 0 137 134 monetary authorities started tightening policies in the second 160 140 40% 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 20 117 117 120 111 half5% of 2020, which together with contraction in economic activity Jul-20 Jul-19 Jul-18 Jul-17 Jul-16 140 9 18 Jul-15 Jan-20 Jan-19 Jan-18 Jan-17 Jan-16 Jan-15 Oct-20 Oct-19 Oct-18 Oct-17 Oct-16 Oct-15 Apr-20 Apr-19 Apr-18 Apr-17 Apr-16 Apr-15 95 35% 8 100 91 91 translated into a slowdown of growth rates of both credits and de- 120 88 8 16 80 95 0% 7 100 posits.730%10 By the end of 2020 annual growth7 of loans was 14%7 while 14 60 9 12 80 the6 growth9 of 8deposits was up only 4%. In5 2021 the CBA6 continued 40 -5% Jul-20 5 10

8 Jan-20 Jun-20 Oct-19 Oct-20

60 Apr-20 Sep-19 tightening of monetary policy,Feb-20 something which willSep-20 put further Dec-19 7 Dec-20 Aug-19 5 4 Aug-20 Nov-19 Nov-20 Mar-20

7 May-20 20 8 40 downward4 73 pressure4 on credit7 growth. 0 6 6 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 6 6 Jun-16 Jun-17 Jun-18 Jun-19 20 Jun-20 Sep-16 Sep-17 Sep-18 Sep-19 Sep-20 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 3 Dec-20 Mar-16 Mar-17 Mar-18 Mar-19 Figure 7. Annual growth of loans and5 deposits5 for 2015-2020Mar-20 4 0 2 5 4 2 1 4 3 3 0

180 Israel

Malta Annual growth rate of deposits Annual growth rate of loans Latvia

Russia 3 Bosnia Turkey Cyprus Poland Greece Croatia

Kosovo 2 Finland Estonia 0 Belarus Ukraine Georgia Bulgaria Slovakia Armenia Romania 160 Moldova Lithuania 30%20112 2012 2013 2014 2015 2016 2017 2018 2019 2020 Czech Rep. 1 Jul-20 Jul-19 Jul-18 Jul-17 Jul-16 140 Jul-15 Montenegro Jan-20 Jan-19 Jan-18 Jan-17 Jan-16 Jan-15 Oct-20 Oct-19 Oct-18 Oct-17 Oct-16 Oct-15 Apr-20 Apr-19 Apr-18 Apr-17 Apr-16 1 Source: BankApr-15 of Albania N. Macedonia N. 120 25% 0 100 95 10 9 Source: Central Bank of Armenia 80 920% 8 Russia Turkey Croatia Iceland Belarus Albania

60 8 Georgia 7 Bulgaria Hungary Armenia Romania 7Moldova 2540 715% 7 6 6Montenegro 20 6 Macedonia N. 20 5 he financial sector in Armenia is dominated by commercial 19 5 200 18 18 18 510% banks. Banks have solid capital and liquidity buffers that high- 17 17 16 17 4 T 14 4 3 15 Loan dollarization Deposit dollarization3 light the strong shock absorbing capacity of the system. At the Israel Malta Latvia

Russia 35% Bosnia Turkey Cyprus Poland Greece Croatia

Kosovo 2 Finland Estonia Belarus Ukraine Georgia same time, the banking sector is quite competitive as market con- Bulgaria Slovakia Armenia Romania Moldova 75% Lithuania 2 10 Czech Rep. 1 centration is very low with the 3 largest banks holding less than Montenegro 10% N. Macedonia N. 70% 50% of the total banking sector’s assets. The main challenges of 0 5 65% -5% the banking sector are (i) a relatively high level of NPLs, that may 0 60% potentially increase, as the full impact of the pandemic related Russia Turkey Croatia Iceland Belarus Albania

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Georgia Bulgaria Hungary Armenia

Romania crisis is not yet reflected in the asset quality, and (ii) a high level of 55% Moldova Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Sep-16 Sep-17 Sep-18 Sep-19 Sep-20 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 25 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

Montenegro dollarization that, although on a declining trend, remains elevated.

50% Macedonia N. 20 20 18 19 18 18 Source:45% Central Bank of Armenia 17 17 16 17 14 BSTDB_Overview of the financial sector in Armenia 15 40% Loan dollarization Deposit dollarization 75% 10 35% 70% 30% 5 65% Jul-20 Jan-20 Jun-20 Oct-19 Oct-20 Apr-20 Sep-19 Feb-20 Sep-20 Dec-19 Dec-20 Aug-19 Aug-20 Nov-19 Nov-20 Mar-20 0 60% May-20 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 55%

50%

45% Annual growth rate of deposits Annual growth rate of loans 40% 30% 35% 25% 30% 20% Jul-20 Jan-20 Jun-20 Oct-19 Oct-20 Apr-20 Sep-19 Feb-20 Sep-20 Dec-19 Dec-20 Aug-19 Aug-20 Nov-19 Nov-20 Mar-20 May-20 15%

10%

5% Annual growth rate of deposits Annual growth rate of loans 30% 0% 25% -5% 20% Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Sep-16 Sep-17 Sep-18 Sep-19 Sep-20 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Mar-16 Mar-17 Mar-18 Mar-19 15% Mar-20

10%

-5% Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Sep-16 Sep-17 Sep-18 Sep-19 Sep-20 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20