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Research Update: Ameriabank Outlook Revised To Stable From Positive On Increased Downside Risks To Macroeconomic Growth; 'B+/B' Affirmed

Overview

  • On April 8, 2022, we revised the outlook on our Armenia long-term rating to stable from positive.
  • We also reduced our 2022 real GDP growth forecast for Armenia to 1.3% from 4.7% because we expect its largest trading partner, Russia, to enter a deep recession triggered by sanctions following its military actions in Ukraine.
  • In our view, lower macroeconomic growth prospects in Armenia are likely to reduce growth and profitability prospects in the banking sector, including for Ameriabank CJSC.
  • Therefore we revised our Ameriabank rating outlook to stable from positive and affirmed our 'B+/B' long- and short-term issuer credit ratings on the bank.
  • The stable outlook reflects our expectation that Ameriabank's sufficient liquidity, prudent risk management, and strong local brand will support its creditworthiness amid a low growth environment in Armenia over the next 12 months.

Rating Action

On April 12, 2022, S&P Global Ratings revised its Ameriabank CJSC rating outlook to stable from positive and affirmed its 'B+/B' long- and short-term issuer credit ratings on the bank.

Rationale

The revision of our Ameriabank rating outlook to stable from positive follows the same action on Armenia.  The rating on Ameriabank is constrained by our long-term foreign currency rating on Armenia (B+/Stable/B). Therefore, the 'B+' long-term rating on Ameriabank is one notch lower than our 'bb-' stand-alone credit profile (SACP) assessment. We do not rate Armenian banks above the sovereign because their exposures are predominantly in Armenia, with strong links to the domestic economy from a business, funding, and lending point of view.

We expect real GDP growth in Armenia to slow to 1.3% in 2022.  In our view, sanctions imposed on Russia after its invasion of Ukraine will cause a deep recession. This will have knock-on effects for Armenia, given Russia is its largest trading partner, accounting for about 25-35% of exports and imports (see "Armenia Outlook Revised To Stable From Positive On Increased Risks To Growth; 'B+/B' Ratings Affirmed," published April 8, 2022, on RatingsDirect). Weaker economic growth will hamper Armenia's fiscal trajectory because the government will need to use its fiscal buffers to support the economy, while missing the 7% growth target underpinning its budget. Higher import prices, especially for food, will widen the current account deficit. Meanwhile, price increases for other commodities such as copper, a key Armenian export, will not be sufficient to offset the terms-of-trade shock. Higher import prices will also lead to higher inflation, pressuring the Central Bank of Armenia to potentially raise interest rates further following its 125-basis-point hike on March 15, 2022.

We expect the Armenian banking sector experience low growth prospects for lending and profitability in 2022 and a moderate deterioration of asset quality. Following a few years of double-digit growth, loans in the banking sector contracted about 5% in 2021. We expect loan growth to resume only in 2023 due to the uncertain geopolitical and economic environment in Armenia this year. We also forecast some moderate growth in nonperforming loans (NPLs) in 2022-2023 from 3.9% as of Feb. 1, 2022, due to volatility in dram exchange rates and an expected reduction in remittances. The Armenian banking sector's exposure to Russia and Ukraine is relatively small with only one midsize subsidiary of sanctioned Russian group VTB Bank active in the country.

The ratings reflect Ameriabank's leading market position in Armenia and prudent risk management. Ameriabank's strong domestic brand, professional management team, advanced digitalization strategy, wealthy and supportive controlling shareholder, and adequate corporate governance, backed by minority shareholders--including the European Bank for Reconstruction and Development and Asia Development Bank--support its business position in the small Armenian banking sector. We believe that the bank's conservative and well-developed risk-management practices and sound business strategy will enable it to sustain asset quality at adequate levels in 2022.

Outlook

The stable outlook reflects our expectation that Ameriabank's sufficient liquidity, prudent risk management, and strong local brand will support its creditworthiness amid a low growth environment in Armenia over the next 12 months.

Upside scenario

A positive rating action could follow over the next 12 months if economic growth recovers faster than expected in 2022 and accelerates over the medium term or Armenia's external debt reduces faster than we forecast. This should translate in better growth and profitability prospects in the Armenian banking sector, supporting further profitability and the growth of Ameriabank's business.

Downside scenario

Conversely, a negative rating action could follow over the next 12 months if economic growth continues to weaken, with the country potentially falling into recession and requiring larger fiscal support than we currently anticipate, or if the external deleveraging trend reverses, potentially increasing risks for the Armenian banking system.

Ratings Score Snapshot

To From
Issuer Credit Ratings B+/Stable/B B+/Positive/B
Anchor bb- bb-
Business Position Adequate (0) Adequate (0)
Capital & Earnings Moderate (0) Moderate (0)
Risk Position Adequate (0) Adequate (0)
Funding and Liquidity Adequate and Adequate (0) Adequate and Adequate (0)
Potential CRA Adjustment 0 0
Stand-Alone Credit Profile bb- bb-
Support 0 0
GRE Support 0 0
Group Support 0 0
Sovereign Support 0 0
ALAC Support 0 0
Additional Factors (1) (1)
ESG credit indicators: E-2, S-2, G-2

Related Criteria

Related Research

Ratings List

Ratings Affirmed; Outlook Action
To From

Ameriabank CJSC

Issuer Credit Rating B+/Stable/B B+/Positive/B

Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. A description of each of S&P Global Ratings' rating categories is contained in "S&P Global Ratings Definitions" at https://www.standardandpoors.com/en_US/web/guest/article/-/view/sourceId/504352 Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following S&P Global Ratings numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; or Stockholm (46) 8-440-5914

Additional Contact:Financial Institutions EMEA;
Financial_Institutions_EMEA_Mailbox@spglobal.com

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