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Moody's reports: Negative outlook for Armenian banking system

January 06, 2009 | "Moody’s"

Limassol, December 31, 2008 -- 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

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 capitalisation 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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