Central Bank of Armenia Releases 2014 H1 Financial Stability Report

CENTRAL BANK OF THE REPUBLIC OF ARMENIA
FINANCIAL
STABILITY
REPORT
2014
first half
2014
1
This Financial Stability Report presents an assessment of potential risks

that could threaten the stability of financial system of the Republic of
Armenia as well as the capacity of the financial system to absorb such
risks.
More detailed information on Armenias macroeconomic environment and
financial system analyses is available in the Central Banks periodicals,
such as Annual Report of the Central Bank, Status Report on Monetary
Policy Implementation and Armenian Financial System: Development,

Regulation, Supervision.
The data published in this report are as of 30.09.2014
The Central Bank of the Republic of Armenia

Vazgen Sargsyan 6, Yerevan 0010
Phone: (374 10) 58 38 41
Fax: (374 10) 52 38 52
Internet website: www.cba.am
TABLE OF CONTENTS
Preface ........................................................................................................................................... 5
1. Developments in the Global Economy ................................................................................. 8
1.1. Macroeconomic Environment .................................................................................... 8
1.2. International Financial Markets ................................................................................ 11
2. Macroeconomic Environment Developments in Armenia ................................................... 16
2.1. Macroeconomic Developments ................................................................................ 16
2.2. Foreign Trade ............................................................................................................... 18
2.3. Net Factor Incomes and Transfers ............................................................................ 20
2.4. Household Income and Debt Burden ....................................................................... 21
2.5. Real Estate Prices ........................................................................................................ 23
3. Financial Market Stability of Armenia ..................................................................................... 26
3.1. Money and Capital Market .......................................................................................... 26
3.2. Foreign Exchange Market ........................................................................................... 28
4. Stability of Financial Institutions of Armenia ........................................................................ 30
4.1. Commercial Banks ...................................................................................................... 30
4.1.1. Financial intermediation; concentration ......................................................... 31

4.1.2. Credit risk ........................................................................................................... 32
4.1.3. Liquidity risk ........................................................................................................ 34
4.1.4. Market risk .......................................................................................................... 35
4.1.5. Capital adequacy and profitability .................................................................. 38
4.2. Credit Organizations ................................................................................................... 39
4.3. Securities Market Participants ................................................................................... 40
4.4. Insurance Companies ................................................................................................. 41
5. Stability of Financial Market Infrastructures .......................................................................... 45
5.1. Interbank Payments via Electronic Payment System of Central Bank ................ 45
5.2. Guaranty of Deposits ................................................................................................. 49
5.3. Credit Registry and ACRA Credit Bureau ................................................................. 49
Charts .............................................................................................................................................. 52
Tables .............................................................................................................................................. 54
Glossary of terms ........................................................................................................................... 55
Abbreviations ................................................................................................................................. 56
Financial stability can be characterized as concurrence of financial and

macroeconomic conditions when the financial system, i.e. financial
institutions, markets and market infrastructures are capable to withstand
probable shocks and instability, in this way minimizing the probability of
interruption of intermediation function.
In defining the financial stability, what is taken into consideration is that
financial instability can emerge as a result of interruption of internal
functions of the financial system as well as unfavorable developments in
domestic and world economies, credit risk issues connected with major
borrowers and lenders, shifts in economic policies and infrastructures.
Maintaining the financial stability involves efforts for identifying main risk
sources, poor-managed financial risks, ineffective asset pricing and,
finally, implementation of the policy as appropriate.
PREFACE
The Financial Stability Report of the Central Bank of the

Republic of Armenia is prepared on a semiannual basis. It
contains a broad assessment of risks that could threaten the
stability of financial system as well as the capacity of
financial system to withstand such risks. Through publishing
of information concerning a variety of reviews on financial
stability, the Central Bank seeks to bring interested parties
attention to those risks and events that could undermine
financial stability of the Republic of Armenia as well as
provide an opportunity to debate on how to minimize such
risks.
The Central Bank has a task to maintain the stability and
functionality of the financial system of Armenia. The Central
Banks statutory responsibility for the countrys financial
stability is directly related to its primary goal of price stability.
Serious disruptions in the financial sector may create
impediments to effective implementation of monetary policy.
On the other hand, the monetary and macroeconomic
stability contributes to the minimization of risks threatening
financial stability. The financial sector plays an important role
in overall economic system, and the financial sector needs to
maintain continuity and sustainability of processes thus
contributing to the organic development of the entire
economy.
The Central Bank carries out an ongoing monitoring and
analysis of financial stability for early disclosure of any
changes and variations that could threaten financial stability.
The report refers to the risks revealed in macro-environment
and financial sector and their influence on the developments
in all sectors of the economy and financial system.
Risks affecting financial stability of Armenia can emerge in
the domestic economy, external economy and the financial
sector itself. In this sense, the main preconditions for
financial stability are:
a domestic and external macroeconomic environment
with sustainable development whereby households and
companies are creditworthy enough,
a stable and effective financial system with risks that are
prudent and manageable,
efficient financial infrastructures with operational
continuity to the benefit of functioning of the financial
system.
As presented in this report, risks that can potentially
undermine financial stability of Armenia derive from:
developments in world economy,
developments in macroeconomic environment in
Armenia,
developments in financial market in Armenia,
financial institutions of Armenia, and

financial infrastructures of Armenia.
The report addresses the risks revealed in those areas and
attempts to measure their possible impact on the
developments in the economy on the whole and all parts of
the financial sector. The report mainly focuses on the risks to
the banking sector and development trends: the role the
sector plays in overall financial system is vital as assets of
commercial banks account for almost 90 percent of entire
financial system assets. The banking sector as a principal
pillar to the financial system today determines overall
financial stability and development trends.
ABSTRACT
The set of risks threatening financial stability has not

changed in relation to the previous year, although
some risks go an upside track.
The first half of 2014 was prominent with downside

risks to the global economic growth.
Monetary authorities kept on implementing

expansionary policies for economic growth stimulation.
Economic developments in trade partners cannot be

described as positive, though their adverse impact on
the domestic economy is still negligible.
The main risks affecting financial stability of Armenia

persisted during the first half of the year while uncertainties
over the future developments added. Developed countries
saw their economic growth recovering further at an unsteady
pace though, while economic growth outlook in developing
countries is mostly unfavorable. Decreased prices of base
metals in international markets, a sluggish growth of the
Armenian industry and bad weather conditions contributed to
lower domestic economic growth. Geopolitical developments
created additional obstacles to Russia's economic growth,
which in turn can affect the inflow of private transfers to
Armenia and export volumes to Russia.
Global economic recovery continued during the first half
of the year, although suspended quantitative easing policy in
the U.S.A. as well as geopolitical developments added to
downside risks. Adverse climatic conditions in developed
countries and the Ukrainian crisis-related events resulted in
lower than expected economic growth. Developing countries
saw an even more persistent trend of slowing economic
growth, which in turn has contributed to dropped prices of
some exchange traded commodities.
Monetary authorities of developing and developed
countries continued pursuing an expansionary monetary
policy to shore up economic growth. In the period under
review, interest rates of monetary instruments remained at
extraordinarily low levels, while the U.S. Federal Reserve kept
on tapering the volumes of quantitative stimulus program as
was announced.
Economic developments in Armenia's main trade
partners some countries of the European Union and Russia
have been unexpectedly unfavorable, although their
impact on the domestic economy is still weak. In particular,
in the period under review growth rates of both commodity
exports and private remittances have been slower (see

details in section Developments in the global economy).
According to the first six months' data, economic growth
in Armenia was 3.4% (3.5% in the first half of 2013). The
slower growth rate was mainly due to the decline in industry
and decreases reported in other sectors of the economy (see
details in section Developments in macroeconomic
environment in Armenia).
During the first half of the year, capital adequacy reduced
at somewhat a slower pace along with slowing growth rates in
the credit portfolio. In the period under review, Armenian
banking system had capital adequacy and liquidity ratios
above the regulatory requirements, and manageable market
risks.
Armenia's economic growth stands below the projected

growth indicators and those of the previous year.
Slowing growth rates in the banking credit is mostly due

to wary credit policy commercial banks conduct.
Though in some cases on an upside track, risks in the

financial system remain manageable in terms of financial
stability (see details in sections Stability of financial
institutions of Armenia and Financial stability in market
infrastructures of Armenia).
1 . D E V E L O P M E N T S IN T H E G L O B A L
ECONOMY 1
1 . 1. M A CR O E C O N O MI C EN VI R ON M E N T
The first half of 2014 was marked with a number of

unexpected developments which have negatively
affected earlier optimistic expectations.
R eg i o n a l ec o n o mi c g ro w t h ra t es
%
2014*
2013
2012
2011
2010
2009
2008
2007
2006
2005
However, international organizations' and markets'

expectations and projections for the second half are more
optimistic.
2004
14
11
8
5
2
-1
-4
-7
-10
The first half of 2014 started with optimistic expectations,

but a bunch of factors including weak economic activity in
developed countries and geopolitical risks in developing
countries have led to the global economic slowdown and
more uncertainties.
USA
Euro area
Russia
China
World economy
Developed countries
Emerging countries
*
Indicators marked by asterisk in this chart and the ones

following thereafter are the IMF estimates (July 2014).
Source: IMF.
World economy recovery continued, although principal
risks remained alarming throughout the first half of the
year.
Global instability factors are persisting, and despite global

economic risks have reduced, a set of risks is still on agenda.
Trends typical to the first half of 2014 included further
rebounding economic activity in Euro-area (although at
different rates across countries), economic slowdown in the
United States and Russia, as well as domestic currency
depreciation pressures in developing countries and
insignificant variation of prices of the main exchange-traded
commodities.
2013 forecasts as
of 30.01.13
2013 forecasts as
of 30.04.13
2013 forecasts as
of 30.07.13
2013 assessment
as of 30.01.14
2014 forecasts as
of 30.01.14
2014 forecasts as
of 30.04.14
2014 forecasts as
of 30.07.14
IMF Overview of the World Economic growth Projections, %
World economy
3.5
3.3
3.1
3.0
3.7
3.7
3.4
Developed countries
1.4
1.3
1.2
1.3
2.2
2.2
1.8
USA
2.0
1.9
1.7
1.9
2.8
2.8
1.7
Euro area
-0.2
-0.4
-0.6
-0.4
1.0
1.1
1.1
Emerging countries
5.5
5.3
5.0
4.7
5.1
4.8
4.6
CIS
3.8
3.4
2.8
2.1
2.6
1.9
0.9
Russia
3.7
3.4
2.5
1.5
2.0
1.3
0.2
China
8.2
8.1
7.8
7.7
7.5
7.6
7.4
Indicator
(economic growth)
Notwithstanding weak activity reported in the first half of

the year, some key countries will be expecting more rapid
economic recovery during the second half. According to the
IMF, world economic growth for 2014 is estimated 3.4% (in
2013, economic growth was 3.0%). Economic growth in
1
International developments and predictions were based on information

taken from IMF, World Bank, Economist Intelligence unit, Financial times,
Bloomberg, RBC, the Institute of International Finance and other sources.
developed countries is expected to be 1.8%, 0.5 percentage

point higher compared to the previous year, whereas no
significant change will be observed in developing countries,
so economic growth will be around 4.6% 2.
Lower-than-predicted economic growth in the U.S.A.
hampered global economic growth in the first half of the
year. The economic growth of 3.2% reported in the second
half of 2013 was a pretty good prospect for 2014, but this
winter's severe weather conditions disrupted the optimistic
expectations. Moreover, large excess inventory, a 7.6%
decline in exports and reduced output pushed the economic
growth indicator down.
In the U.S.A., economic growth slowed down during the

first quarter of the year due to an unprecedented cold
weather but growth rebounded afterward.
Eased monetary conditions of the U.S. Federal Reserve

System, increased household income and facilitated terms of
lending by the banking system may contribute to further
economic growth in the United States. As the country posted
an economic growth, the unemployment rate dropped to
6.3%, the lowest level in the past six years. In the
meanwhile, no inflationary pressures from the labor market
were observed. In the U.S.A., the number of persons seeking
job for 6 months and farther remain high (3081 thousand 3),
which points to the fact that improvements in the labor
market are not fundamental yet. According to the IMF
estimates, economic growth in the U.S.A. will be 1.7% in
2014 and 3.0% in 2015.
Increased volumes of net export, stabilized domestic
demand and eased fiscal policy conditions in European
countries have contributed to the economic recovery.
Positive changes in debt management were observed in
peripheral Europe, including Greece and Spain, which
positively affected the yield on government bonds of these
countries.
Developments in Euro-area are positive, but low

inflation and weak lending hamper the economic
growth.
Despite positive developments mentioned above, a

handful of factors hindering economic growth - low demand
for credit, budgetary and debt problems, companies with
heavy debt burden among others - are further leaving
negative impact on macroeconomic stability. In Euro-area,
economic growth is predicted 1.1% for 2014 and 1.5% for
2015.
While economic growth recovered, the countries of
European Union faced with a weak inflationary environment.
Continued slowing of economic growth could lead to
deflationary expectations, which could adversely affect
economic growth in the medium run. The European
Commission's inflation forecast is 0.8% for 2014 instead of
formerly projected 1.0%, and is 1.2% for 2015 compared to
previous forecast of 1.5%.
2
All forecasts and estimations by the IMF are based on the World Economic
Outlook Update, July 2014 report.
3
http://www.bls.gov/bls/newsrels.htm
Slowing of economic growth in developing countries

continues.
A n n u a l g ro w t h ra t e o f w o rl d t ra d e
%
2014*
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
18
14
10
6
2
-2
-6
-10
-14
Import (developed countries)

Import (developing countries)
Export (developed countries)
Export (developing countries)
World trade
Source: IMF.
Developing countries, which generate 2/3 of global

economic growth, saw their economic growth slowing down
during the first half of 2014. Economic situation in
developing countries today is determined by export growth
amidst currency depreciation patterns and economic activity
trends in developed countries, on the one hand, and low
investment and long-term funding difficulties, on the other.
This prompted a number of developing countries to conduct
tightened monetary policies which, however, resulted in the
contraction of domestic demand. To some developing
countries, an abrupt increase of credit to the economy is also
an important concern in terms of maintaining the financial
stability. Particularly, strong growth in lending in China in
recent years may deepen the country's macroeconomic
imbalances, which may in turn affect economic
developments on a global scale. Given these developments,
economic growth in developing countries is 4.6% for 2014
and 5.2% for 2015, according to the IMF estimates.
With the current level of economic activity in the world,
there is a low inflation environment globally. Based on this
circumstance, the IMF's estimate of the 2014 annual inflation
is 1.5% for developed countries and 5.5% for developing
countries. Moreover, inflationary pressures are not expected
in the coming year.
Developments in commodity markets were largely in

line with global economic growth tendencies.
B ren t o i l p ri c es
(USD per barrel)

140
120
100
80
As economic activity grew stronger in late 2013, the

growth of world trade created favorable conditions for
expecting further expanding of world trade volumes in the
first half of 2014. The growth of world trade, however,
diminished during the first quarter of the year due to the
slowdown of growth in developing countries. According to
the IMF data, the annual growth of world trade volumes will
be 4.0% in 2014 and is forecast to reach 5.3% in 2015.
60
40
J S N J MM J SN J MMJ S N J MM J SN J MMJ S N J MM J SN J MM
08 09
10
11
12
13
14
Behavior of prices of base metals was determined

largely by economic and political developments.
Co p p er p ri c es
(USD per ton)
The first half of 2014 saw an increase of prices of basic

commodities in international markets, which was determined
by developments specific to some product markets.
The oil price trended upward from the start of the year.
Average semiannual price of Brent crude was USD 108.8 per
barrel, representing a 0.9% increase in relation to the same
reference period of the previous year.
10000
9000
Current geopolitical situation in the Middle East and

Russia brings in a probability that energy prices would
increase4.
8000
7000
6000
5000
4000
3000
J SN J MMJ SN J MMJ SN J MMJ SN J MMJ SN J MMJ SN J MM
08 09
10
11
12
13
14
Source: Bloomberg Data Warehouse.
During the first two quarters of 2014, prices of base

metals behaved differently, in response to economic and
political developments. Average semiannual copper price
4
In the second quarter of 2014, the energy prices went down attributable to
the shale gas mining by the USA and the unchanged volumes of gas mining
in the light of economic growth slowdown.
10
was USD 6884 per ton, dropping by 9.1% in relation to the

same reference period of the previous year, whereas average
semiannual molybdenum price posted a 4.3% increase
compared to the previous reference period's average.
Mo l y b d en u m p ri c es
(1000 USD per ton)

100
80
60
40
In the short run, other conditions being equal, base

metals prices will continue to be driven by development
trends in emerging economies and will not post an abrupt
rise.
International wheat prices performed in variance during
the first half of the year, hitting their peak, USD 9.4 per
bushel, in April. In the first half of 2014, average wheat price
was USD 8.4 per bushel, representing a 2.8% drop in relation
to the same reference period of the previous year. In the
short run, world wheat markets will have downside price
expectations, but prices are expected to stabilize in the
medium run.
In the first half of 2014, gold price was relatively stable,
with slightly an upward trend. Yet, economic activity of
developed countries, which is getting more impetus, has
forced investors out of the gold market in order to invest in
higher-earning assets.
Average semiannual gold price in 2014 was USD 1291 per
troy ounce, which represents some 15.3% decrease in
comparison with the same reference period of the previous
year.
20
0
J MMJ SNJ MMJ SN J MMJ SNJ MMJ SN J MMJ SN J MMJ SN JMM
08
09
10
11
12
13
14
The wheat prices have decreased.
Wh ea t p ri c es
(USD per bushel)

13
12
11
10
9
8
7
6
5
4
J S N J MMJ SN J MM J S N J MMJ S N J MMJ SN J MM J S N J MM
08 09
10
11
12
13
14
G o l d p ri c es
(USD per troy oz)

1800
1600
1400
1200
1000
800
600
400
J SN J M F AF AJ MMJ S N J MMJ SN J MMJ SN J MMJ S N J MM
08 09
10
11
12
13
14
In the short-term perspective, in view of optimism for

global economic recovery, sharp variation in gold prices is
not anticipated.
1 . 2. I N T E RN ATI O NA L FI NA N CI A L MA RK E T S
I n f l a t i o n i n s el ec t ed c o u n t ri es
%, annual average
USA
Russia
China
Developed countries
2014
2013
2012
2011
2010
2009
2008
2007
2006
18
15
12
9
6
3
0
-3
2005
The trend observed last year persisted over the first half of
2014: amid fears of unsteady financial situation in European
countries and slowing economic growth in developing
countries, investors further preferred mostly German bonds
The spread of interest rates of government bonds

of countries with debt problems and of German
government bonds widened.
2004
In the first half of 2014, relative to the previous

semi-annum, the situation in international financial markets
has somewhat improved. In particular, the U.S. economy has
entered a new phase of recovery, but this depends on how
financial markets will react to the decisive steps to terminate
the quantitative easing program. Termination of the QE
program will leave an influence on developing countries too,
as they have not yet fully recovered from negative effects of
the international financial crisis. The banking system's
stability has not been on a satisfactory footing.
Developing countries
Source: IMF.
11
and other highly liquid government bonds. However,

low-yields prompted investors to look for high-income
investment destinations. This resulted in narrowing spreads
on corporate and government bond yields, which was most
pronounced on the part of lower-rated bonds.
1 0 -y ea r g o v ern men t b o n d y i el d
%
6
5
4
3
2
1
0
J MMJ S N J MMJ SN J MM J S N J MMJ S N J MMJ SN J MM J
09
10
11
12
13
14
USA
Euro area
Great Britain
The central banks of main developing countries and of

all developed countries have carried out expansionary
monetary policies.
New enhancements of capital have contributed to better

capital adequacy at global systemically important banks
(G-SIB), and stress-tests conducted reported improved
results. On the other hand, profitability of the banking
system is still low; moreover some European countries
unfortunately retain high proportion of non-performing assets
in their loan portfolios5. The latter is partly attributable to the
fact that the European Central Bank that implements new
rules for measuring the quality of bank assets.
During the first half of the year too, key developed
countries continued implementing a low interest rate policy
amidst unstable global economic growth and major
economic challenges.
I n t eres t ra t e p o l i c i es o f c en t ra l b a n ks
In particular, in June the ECB did a 10-basis-point cut on

both Refinancing and Deposit rates down to 0.15% and
- 0.1%, respectively. Moreover, interest rate for banks
excess reserves with the ECB was also set to be negative,
- 0.1%. This action pursued the goal to promote the growth
of bank credits and combat the low inflation.
%
6
5
4
3
2
1
0
J MMJ SN J MMJ SN J MMJ SN J MMJ SN J MMJ SNJ MMJ SN J MMJ
08
09
10
11
12
13
14
Fed funds
Eur Refi rate
UK Refi rate
The Bank of England kept monetary policy rate at a low

level, revision of which, the Bank had announced, would not
only depend on the rate of unemployment but also on how a
wider spectrum of economic indicators would perform
further.
Though the U.S. Fed kept the policy rate at its lowest, it
further attempted tapering the QE program. During the first
half of the year, the Fed twice reduced the volumes of asset
purchases each time by USD 10 billion to USD 35 billion. The
QE program is intended to finally end after an October 2014
meeting of the Federal Open Market Committee, provided
that the U.S. economy is prepared for it.
Termination of the QE program will definitely influence
not only the U.S. economy, but it will also leave an impact on
both international financial markets and developed and
developing economies. Recently, some developing countries
have seen substantial capital flights (due to the geopolitical
situation in Russia and restrictive policy of Chinese
government for short-term capital inflows), which resulted in
a significant devaluation of currencies.
Favorable macroeconomic developments encouraged

the U.S. Fed to continue tapering the QE program.
It should be noted, however, that not all developing

economies suffered, since financial markets' response in
different countries depended largely on the economic policy
5
12
http://www.bankofengland.co.uk/publications/Pages/fsr/2014/fsr35.aspx
conducted in that particular country. According to Moody's,

an international rating agency, most sensitive to the tapering
and to an approaching termination of the QE program are
countries which consistently run current account deficit and
are dependent on external funding. Overall, in the short-term
perspective, developing countries will hardly anticipate
capital inflow to rebound to its pre-crisis level. According to
Moody's estimations, reduction of the inflow of capital will
cost developing countries a cumulative loss of 2.8-3.1% of
GDP growth in the period 2013-20166.
During the first half of the year, major currencies behaved
in volatile patterns. The U.S. dollar has repeatedly
depreciated and appreciated versus Euro, driven by
economic policies the United States and European countries
conducted as well as in response to the expectations.
Currencies of developing countries demonstrated mostly
depreciation patterns, attributable to both the Fed's policy
and domestic developments across countries. As a result, in
financial sectors of developing countries the foreign currency
risk derived from external funds has grown significantly.
Major currencies have been volatile.
US D ex c h a n g e ra t e v ers u s E UR a n d G B P
1.8
2.1
1.7
1.6
1.6
1.5
1.1
1.4
0.6
1.3
0.1
1.2
1.1
-0.4
J SN JMF AF AJMMJ SN J MMJ SN J MMJ SN J MMJ SNJ MM
08 09
10
11
12
13
14
USD/EUR
USD/GBP (right-hand scale)
Source: ECB.
I n t erb a n k i n t eres t ra t es
%
6
5
4
3
In developed and developing countries, economic

developments and expectations are uncertain while stock
indices remained volatile.
Low base rates and global economic imbalances
determined a down-sloping behavior of interbank interest
rates, with the exception of Russia's MIBOR 3m rate, which
rose by almost 2.0 percentage points during the semester.
2
1
0
J MMJ SN J MMJ SN J MMJ SN J MMJ SN J MMJ SN J MMJ SN J MM
08
09
10
11
12
13
14
Libor 3 month
Euribor 3 month
Box
Economic developments in main trade partner country
In the first half of 2014, the Russian economy continued to
grow at a slow pace, which reflects the negative effects of
geopolitical tensions associated with Ukraine, on the one hand,
and previous structural problems, on the other. The Russian
economy is still highly reliant on the energy sector, so economic
growth in this country greatly depends on how international oil
prices will develop. A non-competitive business environment and
low level of infrastructure development remain major
impediments to Russia's economic growth.
According to the Federal State Statistics Service of Russia,
despite negative growth in the first quarter of 2014, the Russian
economy bounced back to a positive growth territory in the
second quarter, thus avoiding a technical recession. Overall,
based on the first half 2014 results, the GDP growth was 0.8%.
However, such indicators as construction growth, investment
growth, as well as electricity, gas and water production and
distribution sector growth are still negative.
By semiannual results, capital investment plunge by 2.8% and
construction fell by 2.6%1. Both the trade and service sectors
kept on declining during the first quarter and could only track a
little positive growth in the second quarter, lagging behind the
data of the same reference period last year.
6
http://openmarkets.cmegroup.com/7847/qes-lingering-effect-on-emergingmarkets
13
According to semiannual data provided from the Federal State

Statistics Service of Russia, exports amounted to USD 255.6
billion, representing a 1.3% increase in relation to January-June
of 2013. Imports are an estimated USD 152.8 billion, which is a
5.1% y/y reduction. Thus, the positive trade balance amounted
to USD 102.8 billion2.
In June 2014, relative to December, inflation in Russia was
4.8% against a 3.5% figure reported last year. According to
preliminary data provided from the Russian Ministry of Economic
Development, the unemployment rate remains historically low,
which, ignoring the seasonal factor, is an estimated 4.9%.
In January-March of 2014, in the face of rising geopolitical
tensions and growing demand for foreign currency, the Russian
currency weakened against other currencies. To ease the
situation, the Central Bank of Russia intervened with the foreign
exchange market from time to time, as well as used a variety of
other tools. Although the Russian ruble started strengthening
from mid-March, this did not neutralize the currency depreciation
effect observed at the beginning of the year. Based on the first
half data, the official U.S. dollar exchange rate has appreciated
versus the Russian ruble by 3.6% to RUB 33.84, and the euro
exchange rate appreciated by 2.5% to RUB 46.18.
In January-June of 2014, the Russian banking sector assets
have grown by 6.9% to RUB 61385.2 billion, with the weight of 5
largest banks, which hold the biggest amount of assets, having
increased from 52.7% to 53.8% in total.
Credit rating of Russia remains BBB, with a negative
perspective3. A strong external balance Russia runs today is an
important support for its rating to remain unchanged:
international reserves reach USD 477 billion and net foreign
assets amount to 23.0% of the GDP.
As for geopolitical tensions associated with Ukraine, starting
from March 2014, the United States and the European Union
launched a series of trading and economic sanctions against
Russia. This has negatively affected the capital outflow, foreign
investment and domestic economic growth on the whole.
The announced sanctions apply to the financial, energy and
military industry sectors. In particular, restrictions were imposed
on ammunition, some articles of dual-use purpose, as well as on
export of a number of oil industry equipment and technology to
Russia. Any financial assistance that would be for trading of
items included in the list of restrictions has been prohibited.
Furthermore, restrictions were imposed on individual companies
and organizations active in financial, defense and fuel/energy
sectors, with the main stipulation that transactions with financial
instruments with 30-day and more maturity issued after
September 12, 2014 is prohibited.
1
Information on the Russian economic development, as well as estimates and

projections is from the periodical 2014
(Monitoring of the Results of Socio-Economic Development of the Russian
Federation in the First Half of 2014) issued by the Russian Ministry of Economic
Development.
2
http://www.gks.ru/wps/wcm/connect/rosstat_main/rosstat/ru/statistics/ftrade/
3
http://www.fitchratings.ru/rws/press-release.html?report_id=841761
14
SUMMARY
In the first half of 2014, the global economy continued
recovering, but it was slower than expected. With unstable
world economic growth, Armenia posted an increased trade
balance deficit due to a low growth rate in exports of goods.
In developed countries, issues like economic growth
slowdown, low inflationary environment remain on the
agenda. Under such conditions, developed countries kept on
implementing a low interest rate policy. Developing countries
encountered capital flight, which led to domestic currency
depreciation pressures. Apart economic risks hampering
growth in developing countries, risks associated with the
crisis in Ukraine got a particular emphasis. Russia's economic
growth slowdown somewhat decelerated the inflow of noncommercial remittances from this country; this may later on
affect the domestic household income and Armenia's overall
financial stability.
15
2 . M A C R O E C O N O M IC E N V IR O N M E N T
D E V E L O P M E N T S IN A R M E N IA
2 . 1. M A CR O E C O N O MI C D EV E L O P M E N T S
Weak investment climate, adverse weather conditions and

trends demonstrating economic activity slowdown in the
main partner countries all left their negative impact on the
economy of Armenia. It is noteworthy that adverse
developments of sanctions the West has imposed on Russian
Federation could lead to further deceleration of economic
growth rates in Armenia.
Implementation of moderate expansionary fiscal and
expansionary monetary policies has mitigated the negative
impact of these risks considerably.
Economic growth in Armenia in the first half of 2014 was
2.6% y/y, according to the National Statistical Service of
Armenia. The main contribution to the economic growth
came mainly from services, whereas decline in industry had
a negative impact on overall economic growth.
Th e a n u u a l g ro w t h o f ma i n s ec t o rs o f
ec o n o my
30%
20%
10%
According to the NSSA, in the first half of 2014 industry

reported a 0.8% y/y decrease in value added as a result of
contraction of value added in mining sector and reduced
electricity production. The decline in mining industry is
driven by the fall in international prices of non-ferrous metals
in global markets. In the meantime, processing industry
output and water production volumes have increased.
0%
-10%
-20%
-30%
-40%
The growth of value added in agriculture was 1.9%. This is

1.0 percentage point lower from the figure reported for the
same period last year, which is due mainly to unfavorable
weather conditions that resulted in damaged apricot and
other such crops.
Services
Construction
Agriculture
Industry
-50%
2007
2008
2009
2010
2011
2012
2013
30.06.2014
Source: National Statistics Service of Armenia.
G DP ex p en d i t u re c o mp o n en t s ( s h a re i n G DP )
140%
In the period under review, construction sector reported a

0.7% increase in value added, driven mainly by increased
volumes of construction funded by companies, international
loans, the central budget and local budgets. At the same
time, the volumes of construction funded by households and
resources of humanitarian aid have contracted.
120%
100%
The growth of value added in services sector was 4.1%

y/y, which is fuelled by services rendered as well as
increased trade turnover, particularly in retail and wholesale
trade.
80%
60%
40%
20%
0%
-20%
Public consumption
Gross savings
Net export
2013
30.06.2014
Private consumption
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
-40%
By GDP expenditures, private consumption grew by 1.4%

in the first half of 2014. The slow rate of growth is
attributable to weaker growth rates in transfers from Russia
as well as lower-than-expected domestic economic activity
and lesser public spending. The growth of public
consumption was 2.0% for the first half of the year.
Source: Central Bank of Armenia.

7
For details on the developments of macroeconomic environment in

Armenia, see the quarterly publication Inflation Report, Q2, 2014).
16
Investment activity in the economy was weak in line with

expectations due to persistently low output volumes in
construction sector and in the business activity on the whole.
In the period under review, the growth of private investment
was 2.2% y/y. Public investment reported a 15.6% y/y
decline.
According to the Republic of Armenia Ministry of Finance

data, foreign debt of the Republic of Armenia was USD
3,850.5 million, as of June 30, 2014. Compared to the
yearend, foreign debt has reduced by 0.8% to 36.2% of GDP.
Armenia's foreign public credit included funds disbursed
from international organizations (81.9%), foreign government
loans (17.6%), and loans provided from commercial banks
(0.5%). Moreover, the share of loans with a floating rate kept
on shrinking to 20.0% of total credit at the end of the
semester.
G ro w t h o f l en d i n g t o ma i n s ec t o rs o f
ec o n o my
100%
80%
60%
40%
20%
Construction
Services*
0%
Agriculture
According to surveys conducted by the Central Bank, in

the second quarter of 2014 Business Climate Indicator 8 rose
by 1.9 percentage point to 57.1, which is above the stability
range and points to the optimism of businesses for the
business environment.
In the first half of 2014, the volumes of credit to

agricultural and ore mining sectors grew.
Industry
In the first half of 2014, relative to the yearend, loans to

the economy have grown by 4.5%. Growth of the loan
portfolio was recorded in almost all sectors of the economy,
with the fastest growth rates of lending in public catering and
other services and agriculture, by 15.4% and 11.4%,
respectively. As loan portfolio grew, the share of nonperforming loans in total loans has risen by 1.3 percentage
point to 5.6%. Non-performing loans were relatively more in
construction, public catering and industry sectors, making up
10.4%, 7.9% and 5.8%, respectively.
2007
2008
2009
2010
2011
2012
2013
2014 1 H1
* In chart the sector of services includes trade and other

service sectors aggregate values.
Qualitative public debt indicators of the

Republic of Armenia
Indicator
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
H1
9.9% (less
indebted)
2.3% (less
indebted)
2.4% (less
indebted)
4.2% (less
indebted)
2.1% (less
indebted)
14.49%
(less
indebted)
11.1%
(less
indebted)
5.0% (less
indebted)
2.4% (less
indebted)
1.8% (less
indebted)
6% (less
indebted)
2.0% (less
indebted)
221.7%
(moderatel
y indebted)
170.31%
(moderatel
y indebted)
148.0%
(less
indebted)
150.0%
(less
indebted)
139.4%
(less
indebted)
128.7%
(less
indebted)
3.1% (less
indebted)
0.7% (less
indebted)
89.8% (less
indebted)
2.9% (less
indebted)
0.6% (less
indebted)
81.6% (less
indebted)
4.2% (less
indebted)
0.7% (less
indebted)
79.8% (less
indebted)
4.6% (less
indebted)
0.9% (less
indebted)
77.6% (less
indebted)
Debt
service/
Export
Interest/
Export
Debt/
Export
Debt/GDP
(limit 50%) 22.3% 18.2% 14.0% 13.6% 35.7% 34.2% 36.4% 37.6% 37.5% 36.2%
A composite economic index of business climate which the Central Bank

builds based on quarterly survey data obtained from different sectors of the
economy.
9
The above Debt Service/Export indicator does not include an advance
repayment of Russia Loan. When inclusion of the repayment is considered,
the Debt Service/Export indicator will reach 30.7%.
17
Almost all qualitative indicators of public debt of the

Republic of Armenia have improved, so Armenia
remained a country with a less debt burden
A rmen i a g o v ern men t b u d g et d ef i c i t ( -) /

s u rp l u s ( +)
The first half of 2014 marked an improvement in main

qualitative indicators of public debt of the Republic of
Armenia, which means Armenia remains a country with a less
debt burden.
Over the first six-month period, the actual figures of the
Republic of Armenia state budget were less expansionary
than planned.
(mln AMD)
50000
0
-50000
-100000
-150000
-200000
30.06.2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
-250000
Source: National Statistics Service of

Armenia.
According to the NSSA, in the first half of 2014 budget

revenues posted a 5.4% y/y growth10, which implies a
performance almost entirely in line with quarterly plans. The
growth was attributable to value added tax and income tax,
two sub-items holding a large share in total tax revenues,
which have increased by 7.2% and 24.0%, respectively.
Though an increase in expenditures is more remarkable,
8.97%, expenditures made were fallen short of the
expenditures plan.
Thus, an underperformed public spending encouraged the
state budget to generate AMD 10.9 billion of surplus in the
first half of 2014 in lieu of AMD 52.5 billion of deficit as had
been envisaged under the adjusted plan. The Surplus/GDP
ratio in the first half of 2014 was 0.64%.
In June of 2014, the 12-month inflation rate was 1.8%,

stepping below the lower bound of the confidence
band.
Given a notable falling of prices of some food products

during the semester, as well as a phase-out of the effect of
energy price increases in July of 2013, the inflation
environment in the first half of 2014 was low, with the 12month inflation rate reaching 1.8% in June, hitting the lower
bound of the inflation target.
2 . 2. F O R EI G N T RA D E
A rmen i a ' s i mp o rt s b y c o mmo d i t y g ro u p s

( ml n US D)
800
700
600
500
400
300
200
100
0
5000
4000
3000
2000
1000
0
2009
2010
2011
2012
2013
2014
H1
According to the Central Bank data, current account

deficit of the Republic of Armenia deteriorated during the
first half of 2014 by 16.6% y/y to USD 646.7 million. The
deterioration was driven largely by broadened deficit of trade
balance and reduced net incomes. In the period under
review, the Current Account Deficit/GDP ratio has risen by
0.5 percentage point y/y in relation to the same reference
period last year to 6.1%11.
Food for immediate consumption

Ores and minerals
Precious and semi-precious stones, metals and articles thereof
Base metals and articles thereof
In the period under review, the volume of foreign

commodity turnover has increased by 1.2% y/y to USD
2,723.0 million, according to the NSSA data.
Machinery and equipment

Transport
Other
Imports (right-hand scale)
Source: National Statistics Service of

Armenia.
Import of goods has grown by 1.2% y/y to USD 1,706.52

million, and import of services has grown by 39.7% y/y to
USD 727.1 million, according to the Central Bank data. Such
10
11
18
This includes working funds of project implementation units.

In the calculation, the GDP is annualized.
increase of services is due to the revised methodology of

calculation of item Travelling in the BOP.
A rmen i a ' s ex p o rt s b y c o mmo d i t y g ro u p s

( ml n US D)
300
By structure of imports, increases were reported in the

following items: precious and semi-precious stones,
precious metals and articles made thereof, transport
means and machinery and equipment.
2100
1800
1500
200
1200
900
100
600
300
The dollar value of exports of goods has decreased by 0.3

% y/y to USD 760.7 million. Meantime, the export of services
has increased by 60.8% to USD 689.4 million due to the
revised methodology mentioned above.
0
2009
2010
2011
2012
2013
2014
H1
Food for immediate consumption

Ores and minerals
Precious and semi-precious stones, metals and articles thereof
Base metals and articles thereof
By structure of exports, the main increases were in the

following items: products of prepared food, precious and
semi-precious stones, precious metals and articles made
thereof and transport means.
Despite reported small growths in import and export, in
the period under review the balance of trade deficit has
broadened by 2.5% to 8.9% of GDP in relation to the same
reference period last year.
Other
Exports (right-hand scale)
Armenia foreign trade, by country,

as of 30.06.2014
E x p o rt
As in previous years, foreign trade of the Republic of

Armenia in the first half of 2014 was again run with major
concentrations by country. Main trade partners included
Russia and the EU countries. The NSSA data suggest that the
share of exports to the CIS and EU countries has decreased,
respectively, by 2.4 and 2.8 percentage points, as economic
growth slowed down in these countries, whereas the share of
exports to other countries has grown by 5.1 percentage
points. Specifically, in the foreign trade structure China's
share grew by 5.8 percentage points; in terms of volume,
export of goods in the first half of 2014 reported almost a
2.5 times increase. Germany also remains a very important
destination for export: in the period under review, relative to
the same reference period last year, the growth of export of
goods to Germany has been impressive, 99.6%, which gave
this country a leading 2nd place in the foreign trade
structure.
Other
23%
CIS
countries
23%
China
10%
Iran
6%
EEC
countries
32%
USA
6%
I mp o rt
CIS
countries
28.0%
Other
23.0%
Turqey
5.3%
Iran
4.4%
USA
3.3%
China
9.3%
EEC
countries
26.7%
There have been changes in the export structure of

commodity groups: increases were reported in such items as
products of prepared food and precious and semi-precious
stones, precious metals and articles made thereof, but the
shares of items ores and minerals and non-precious
metals and articles made thereof posted decreases.
Concentration persisting at high levels further leaves the
Armenian mining and food sectors vulnerable to possible
shocks in any trade partner or the global economy on the
whole. By the import structure, main trade partners included
Russia, China, Germany and Turkey. The share of imports
from the CIS and EU countries has decreased, respectively,
by 1.2 and 0.3 percentage points while the share of other
countries, China and Turkey in particular, has increased by
1.5 percentage points.
19
2 . 3. N E T FA C T OR I NC O M E S A ND T RA N S FE R S
The remittances were of great importance in terms of
Non-commercial remittances from abroad are crucial for

maintaining the financial stability of the Republic of Armenia.
This explains the fact that these funds have a direct impact
on individual household's standard of living, spending, creditworthiness, hence macroeconomic and financial stability.
From the year 2008 onward, the share of private
remittances has been increasing in the structure of monthly
monetary income of both urban and rural households and it
now amounts to about 9% per household member 12.
According to the Central Bank surveys, around 16% of
respondents from urban households receive remittances
from abroad13.
During the first half of 2014, non-commercial

remittances of individuals grew, at a slower pace
though.
Net p ri v a te tra n s fers a n d i n c o me o f

s ea s o n a l emp l o y ees
(mln USD)
2000
35%
30%
25%
1600
1200
20%
15%
800
400
In the period under review, relative to the same reference

period last year, the Remittances/GDP ratio has risen by 0.4
percentage point to 16.8%, reflecting a slow growth rate in
remittances. Outbound workers' compensation and private
current transfers have increased by 7.4% y/y compared to a
14.8% y/y growth reported last year14. The inflow of net noncommercial transfers of individuals via the banking system
has grown slowly, either: in the first half of 2014 it grew
merely by 3.1% y/y compared to a 10.5% y/y growth
reported for the same reference period last year.
10%
5%
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
Net private transfers and income of employees, annual
Net private transfers and income of employees/GDP (righthand scale)

Net private transfers-employee income//GNDI (right-hand
scale)
Net private transfers and income of employees, H1
The bulk of non-commercial remittances of individuals

comes from Russia, and this amplifies the country's
economic dependence on the developments in Russian
economy.
Net n o n -c o mmerc i a l remi t t a n c es o f

i n d i v i d u a l s b y b a n ki n g s y s t em
(1000 USD)
180000
150000
120000
The slowing in growth rates of the abovementioned

indicators is primarily attributable a decelerated rate of
growth of remittances from Russia, which is mainly a result
of a 2.6% y/y decline in construction15 and Russian ruble's
11.3% y/y depreciation versus the U.S. dollar in the first half
of 2014. Although narrowed to some extent, the share of
inflows from Russia remains rather high, 81.2%, in total
remittances, which increases Armenia's economic
vulnerability to such non-commercial transfers.
The migration policy of the Russian Federation has
provided for some easing for Armenia citizens regarding their
stay in the country. In July of 2014, an arrangement was
concluded regarding the status of Russian citizens in the
territory of the Republic of Armenia and Armenian citizens in
the Russian Federation. It discharges citizens of the Republic
of Armenia, including outbound workers from Armenia, of
the obligation to register with relevant authorities within 30
days in the territory of the Russian Federation.
90000
60000
30000
0
Q 1
2008
2009
Q 2
2010
Q 3
2011
2012
Q 4
2013
2014
Source: Central Bank of

Armenia.
20
Given Russia's economic assessments by international

organizations, the Central Bank made a downside forecast of
the 2014 growth rates of non-commercial remittances to be
within a 1.0-3.0% range16.
12
Source: Social Snapshot and Poverty in Armenia, 2013, the NSSA.

Source: Consumer Confidence Index in Q1 and Q2, 2014, Central Bank of
Armenia, https://www.cba.am/am/SitePages/statsscci.aspx
14
https://www.cba.am/am/SitePages/statexternalsector.aspx
15
http://www.economy.gov.ru/wps/wcm/connect/economylib4/mer/activity/
sections/macro/ index
16
Source: Inflation Report, Q3, 2014, the Central Bank of Armenia.
13
Though, in the financial stability point of view, the growth

in non-commercial remittances contributed to the reduction
of risks arising from the household sector in the period
under review, persisting sluggishness in the growth rate of
transfers may later increase those risks.
(AMD)
2013*
Monthly average nominal wage
2014* I .
2012
2011
2010
30%
25%
20%
15%
10%
5%
0%
2009
180000
150000
120000
90000
60000
30000
0
2008
According to the Central Bank estimates, in the period

under review the unemployment rate has increased by 0.8
percentage point to 17.0%, as economic growth rate slowed
down. The employment of people aged 31-50 who seek job
more than 1 year remains a major problem in the labor
market. Long-term unemployment may drive this age group
out of the opportunity to find a relevant job, which will
possibly be associated with a loss of professional skills and
other expertise.
No mi n a l a v era g e w a g e a n d u n emp l o y men t
2007
The level of household income is an important aspect in

maintaining financial stability as not only it can directly affect
how properly households perform their credit obligations but
also is a primary source of bank savings.
The first half of 2014 saw a rise in both nominal wages

and household savings with the banking sector.
2006
2 . 4. H O U S EH O L D I NC O M E A ND D EB T B U RD E N
Growth of monthly average nominal wage (right-hand scale)

Unemployment rate (right-hand scale)
* The indicator is calculated according to the Republic of

Armenia Law on Income Tax, effective from 01.01.2013,
which stipulates that mandatory social charges payable by
the employer have been also included in salaries and salary
equivalents since January 1, 2013.
The nominal wage, which makes up a prevailing part of

nominal per capita household monetary income, has grown
by 7.1% y/y in both public sector (5.4% y/y) and private
sector (8.8% y/y). In the period under review, the level of
real wage has increased in relation to the previous reference
period. This, coupled with increased inflow of noncommercial remittances from abroad, has positively affected
households' living conditions and creditworthiness. However,
the level of both employment and nominal wages in some
regions remains low, which leaves an impact on living
standards of the people hence on the financial inclusion in
the regions.
F u t u re c o n d i t i o n s i n d ex a n d i t s c o mp o n en t s
65
60
55
50
45
40
35
I III I III I III I III I III I III I III I III I
06
07
08
09
10
11
12
13
14
Future conditions index
Expectation of major purchases compared to the current quarter
Expectations of financial conditions change in the upcoming quarter
Expectations of household employment change in the upcoming quarter
17
18
Ho u s eh o l d s ' d eb t a n d i n c o me i n d i c a t o rs , %
200
40
35
30
25
20
15
10
5
0
160
120
80
2013
2012
2011
2010
2009
2008
2007
2006
40
Debt/household deposits (left-hand scale)
2014 H1
Current conditions sub-index and future conditions subindex as two components of Consumer Confidence Index 18
are used to denote households economic conditions and
income. In the second quarter of 2014, the future conditions
Debt burden of the Republic of Armenia households

demonstrated a moderate growth.
2005
According to the Central Bank estimates, in 2014 nominal

wages will grow by 11.6% in line with expected acceleration
in the growth rate of nominal wages during the second half of
the year. This, combined with generally a low inflationary
environment, will lead to increases of real income. In 2014,
the unemployment rate is expected to rise by 0.3 percentage
point in anticipation of relatively an humble economic
growth. The unemployment rate, however, will decrease
gradually with the acceleration of economic growth in the
period 2015-201717.
Debt/assets of credit institutions (right-hand scale)

Debt/GDP (right-hand scale)
Source: Inflation Report, Q3, 2014, the Central Bank of Armenia.

Source: the Central Bank Quarterly Survey of Households, Q2, 2014.
21
sub-index dropped to 49.9. Mainly the sub-index of financial

situation change expectations on the next quarter fell, but
Th e s t ru c t u re o f h o u s eh o l d l i a b i l i t i es t o
fi n an ci al i n s ti tu ti o n s
(mln AMD)
the increase of the other indicators that denote future

conditions helped the future conditions sub-index stay within
a stability range.
1000000
800000
600000
400000
200000
Banks
Credit organizations
2014 H1
2013
2012
2011
2010
2009
2008
2007
2006
Pawn shops
Households liabilities to financial institutions have grown

by 19.3% y/y. A larger increase of household debt in relation
to the GDP growth has led to the rise in the Debt/GDP ratio to
19.9%, which is still quite low compared to European
countries.
Co n s u mer a n d mo rt g a g e l o a n p o rt f o l i o o f
b a n ks a n d c red i t o rg a n i z a t i o n s
(mln AMD)
700000
600000
500000
400000
300000
200000
100000
0
JMMJ SNJMMJ SNJ MMJ SNJ MMJ SNJ MMJ SN JMMJ SN JMM
08
09
10
11
12
13
14
Mortgage loan portfolio of banks and credit organizations
Consumer loan portfolio of banks and credit organizations
There has been an increase in household consumer

credit volumes.
Consumer loan portfolio structure of banks
and credit organizations of Armenia
As o f 31.12.2013
5
28%
1
34%
4
8%
3
5%
2
25%
As o f 30.06.2014
5
28%
1
33%
4
9%
3
5%
With a rise in nominal income and inflow of remittances,

there has been 19.7% y/y increase in households bank
deposits (the share of these deposits in total resident
deposits amounted to 68.6%). Foreign currency deposits
remained holding the biggest share, 66.9%, in the total
deposits portfolio, which limits the ability of commercial
banks to allocate financial resources in dram-denominated
assets.
2
25%
1. Card loans 2. Gold-backed loans 3. Car loans

4. Home appliance loans 5. Other consumer loans
In the period under review, compared to the previous two

years, both mortgage and consumer credit volumes have
grown more slowly. Growth in consumer loans has been
posted for all types of loan products, and the structure of
consumer credit remained virtually unchanged. The Central
Bank surveys showed that consumer credit remained a
preferred area for financial institutions and this made the
competition stronger19.
Improvement in lending procedures and terms and
conditions continued along with growing maturity of credits.
The year is expected to see a growth in consumer credit
owing to anticipated increases of demand and supply, which,
however, may add to the households' debt burden and result
in deteriorated quality of loan portfolio of banks and credit
organizations in the event real income is not high enough.
Mortgage loans for the purchase of real estate contributed
to the growth of mortgage lending on the whole. Foreign
currency loans constitute more than 50% of such lending,
which may increase foreign currency risk among borrowers
who receive dram incomes. Longer maturities of real estate
loans play a positive role in terms of financial stability, since
this contributes to the reduction of servicing debt burden of
mortgage loans and to higher loan repayment rates.
Undertakings such as Housing for Youth and the National
Mortgage Company also contribute to the development of
mortgage market by refinancing mortgage loans and making
them more accessible.
In the first half of 2014, the loans these companies
refinanced constituted nearly 20% of the total mortgage
portfolio. Notwithstanding an increase in demand for
19
Source: the Central Bank Quarterly Survey of Terms and Conditions of

Bank and Credit Organization Loans, 2014.
22
mortgage loans, there has been some slowing in the easing

of lending procedures20. The banks unfavorable
expectations of real estate market somewhat hamper further
activation of the mortgage market.
The shares of non-performing loans in consumer loans
and mortgage loans provided to households have grown to
some extent. The shares of NPL in both FX and AMD have
increased in consumer loans. The share of NPL has grown in
FX real estate purchase mortgage loans.
Risks deriving from the household loan portfolio quality

remain manageable.
2 . 5. R E A L E ST AT E P RI C E S
Developments in the real estate market are crucial for

financial stability and can substantially affect the households'
wealth and soundness of financial institutions. This explains
the fact that real property is an alternative to financial
investment, on the one hand, and serves a security for
credit, on the other.
In the first half of 2014, apartment prices were almost

the same.
A v era g e a p a rtmen t p ri c e i n d ex i n Yerev a n
(s q m)
600
500
400
300
0
I III I III I III I III I III I III I III I III I III I III I III I III I
02 03 04 05 06 07 08 09 10 11 12 13 14
A p a rtmen ts p ri c es b y c o mmu n i ti es i n
Yerev a n (s q m)
AMD
500000
7%
6%
400000
5%
300000
4%
3%
200000
2%
100000
Ajapnyak
MalatiaSebastia
Nubarashen
Average in
Yerevan
Shengavit
Avan
Erebuni
1%
Davtashen
In the period under review, there were more real estate

transactions in Yerevan than compared to the same
reference period last year. Relative to the first half of 2013,
the number of such transactions has increased by 23.3% but
decreased by 5.2% compared to the second half of 2013.
There were similar developments in regions: the number of
transactions has increased by 9.5% compared to the first half
of the previous year but decreased by 13.7% relative to the
second half of that year. According to the Central Bank
100
Arabkir
QanaqerZeytun
Nor-Norq
Responding to their risk management needs, commercial

banks were further conservative as they continued keeping
the Loan/Value ratio mostly in the 60-80% range. This is why
risks to real estate price fluctuations are not significant in the
financial stability point of view (see more in the subsection
market risk of commercial banks).
200
Center
In the first half of 2014, relative to the previous six

months and to the same reference period last year, prices 21
of multi-apartment homes in Yerevan have grown by 0.3%
and 1.3%, respectively, primarily attributable reported price
increases in Noubarashen, Ajapnyak and Erebouni
communities of capital Yerevan. Prices of apartments in
regions of Armenia remained almost unchanged.
0%
Average prices in H1 of 2013, AMD

Average prices in H1 of 2014, AMD
Growth 2014 (H1) to 2013 (H1)
Source: State Committee of Real Estate Cadaster

at the Government of Armenia.
There has been certain activity of real estate

transactions in the property market, yet risks
associated with the sale of collateral persisted.
20

21
In Armenia, an average composite real estate price index is lacking,
therefore the average price index of homes in Yerevan has been accepted as
a criterion for real estate price developments.
23
R ea l es t a t e s a l e a n d p u rc h a s e t ra n s a c t i o n s
i n d ex
150
130
110
90
survey22, trades were relatively active in the secondary

market of real estate, while the market of new-built
apartments is estimated to be quite low. According to
respondent organizations, risks associated with the sale of
collateral are persisting.
70
50
30
J MMJ SN JMMJ SN JMMJ SN J MMJ SN J MMJ SN J MMJ SN J MM
08
09
10
11
12
13
14
Source: State Committee of Real Estate Cadaster

at the Government of Armenia.
Low solvent demand for real estate restricts further

activation of the property market.
The volumes of residential houses commissioned to

operate have reduced.
In general, a slowing growth rate in real estate market

activity is mostly due to a low solvent demand attributable to
relatively a low level of household income growth. In this
context, real estate mortgage loans originated by financial
institutions were a major contribution (see more in
subsection household income and debt burden). Increased
maturities of mortgage loans, which has been the case since
2008, make a positive impact for stimulating demand. This
facilitates low income borrowers access to mortgage loans.
In the first half of 2014, the volumes of residential houses
commissioned to operate contracted by 10.7% y/y due to
reduced volumes of construction financed by organizations.
On the other hand, the volumes of household-funded
apartment operation have continuously increased in recent
years, and the share of the latter has grown to 88.6% in total
residential buildings operation.
V o l u me o f l o a n s t o rea l es t a t e ma rket
Percentage change in
H1 2014, y/y
Sources of financing
59782
100%
-10.7%
6802
11.4%
-53.5%
52980
88.6%
1.3%
2014 H1 completed
residential buildings
(sq. m)
In the first half of 2014, the share of non-performing

loans for construction of residential and non-residential
building shrank.
Share in total
Residential buildings completion by sources of financing
mln AMD
280000
Total, of which:
245000
State budget
210000
175000
Corporations funds
140000
105000
Household funds
70000
35000
Source: National Statistics service of Armenia.
0
J S N J M M J S N J M M J S N J M M
11
12
13
14
Real estate transactions
Residential and non-residential buildings construction
Real estate renovation mortgage loans
Real estate purchase mortgage loans
In the period under review, credit provided by banks and

credit organizations for construction of residential and nonresidential buildings has grown by 13.0%. In the meantime,
the share of non-performing loans in these loans has
dropped by 2.2 percentage points to 8.7% in total loan
portfolio. Given relatively a small share of credit for
construction of residential and non-residential buildings in
total loan portfolio, one may conclude that the risks
associated with these activities cannot leave a significant
impact on the financial stability of the Republic of Armenia.
22

24
SUMMARY
There was economic growth reported in the first half of
2014, with the growth rate slowed down due to sluggish
economic activity in trade partners' countries as well as weak
investment climate and bad weather domestically. Economic
growth was fuelled mainly by the services sector while growth
rate in other sectors has been relatively low. The first half of
2014 saw a low inflationary environment as prices of some
food products plunged considerably and the effect of energy
price increase in July 2013 phased out. The growth of noncommercial transfers which further had a significant impact
on living standards of households, was however modest in
comparison with previous years. Overall, there are risks to
economic growth slowdown in 2014 amidst external and
domestic developments, which may have a negative impact
on financial stability.
25
3 . F IN A N C IA L M A R K E T S T A B I L IT Y O F
ARMENIA
3 . 1. M O N E Y A ND CA PI TA L M AR K ET
Interest rates in the financial market further trended
down.
Mo n t h l y v o l u me o f rep o t ra n s a c t i o n s a n d
rep o i n t eres t ra t es
(bln AMD)
450
13
360
11
270
180
90
3
J M M J SN J M M J S N J MM J SN J M M
11
12
13
14
Volume of repo agreements with Central Bank
Volume of interbank repo agreements
Interbank repo interest rate (right-hand scale)
In the first half of 2014, inflation continued reducing at a

faster pace than expected, which was determined by a slow
arte of economic growth and seasonal decline in prices of
some food products. Under such circumstances, during the
first half of 2014 the Central Bank gradually lowered the
refinancing rate by a total of 0.75 percentage point to 7.0%
in late June. Reducing the dram reserve requirement ratio
from 4% to 2% in March 2014 was another action aimed at
easing the monetary conditions.
Interest rate of the Central Bank's main policy instrument
reduced along with dropping of the refinancing rate and the
aforementioned reserve requirement ratio, whilst short-term
interest rates continued trending down in the financial
market.
Refinancing rate (right-hand scale)

Repo interest rate of the Central bank (right-hand scale)
V o l u me o f t ra n s a c t i o n s o n c red i t res o u rc e
p l a t f o rm a n d w ei g h t ed a v era g e i n t eres t ra t e
(bln AMD)
800
700
600
500
400
300
200
100
0
12
The yield curve23 shows that at the end of the first half of
the year, relative to the yearend, yields of short-term treasury
bills narrowed but yields of long-term treasury notes grew in
the secondary market.
10
8
6
4
2
0
J M M J S N J M M J S N J M M J S N
11
12
13
Volume of transactions on credit resource platform (left-hand scale)
Weighted average interest rate (right-hand scale)

E x c es s f u n d s i n A MD ( res erv e f u n d s i n A MD/
a c t u a l res erv e f u n d s )
The narrowing of short-term interest rates was driven by

the effect of both the Central Bank's policy and public debt
management policy of the Ministry of Finance. The rising of
interest rates in long-term segment of the yield curve is
explained by the upside adjustment of previous year's
interest rates. As a result, the spread24 of short-term and
long-term interest rates grew during the semester by 1.0
percentage point to 3.5% at the end of the year.
For summarized illustration of what are the current trends
in the government securities market, the Central Bank
calculates indices of government bonds, which are presented
in the table below25:
120%
115%
110%
105%
100%
95%
23
01/05/2014
01/02/2014
01/11/2013
01/08/2013
01/05/2013
01/02/2013
01/11/2012
01/08/2012
01/05/2012
01/02/2012
01/11/2011
01/08/2011
01/05/2011
01/02/2011
01/11/2010
01/08/2010
01/05/2010
90%
8% reserve requirement for AMD funds, 3% reserve requirement for Fx funds

26
The yield curve involves dependence between the yields and maturities of
government bonds. Starting from July 2013, the Central Bank is using a new
approach to building the yield curve by applying the Nelson and Siegel
Model; this is a parametric statistical model and it approximates the yield
curve of all periods as a function.
24
Short-term treasury bills are considered to be 6-month bills and long-term
treasury notes, 10-year notes.
25
There are 5 indices calculated for government bonds_4 for coupon bonds
and 1 for discount bonds. The coupon bond indices are G03, G05, G5I,
which cover bonds with maturities, respectively, from 0 to 3 years, 0 to 5
years and 5 years and more; and GMI, which is a coupon bond index.
Indices include the bonds issued in AMD by the Ministry of Finance, with
semi-annual fixed coupons and AMD 1 billion and higher turnover. Discount
government bonds TBI include bonds with maturity of one week and more,
with AMD 400 million and higher turnover. For more details, please see the
CBA website.
Indices of government coupon bonds in circulation, by maturity

as of 30.06.2014
8.86
9.29
11.45
10.64
0.39
1.52
2.04
12.54
5.39
11.23
11.08
11.97
11.36
10200
138791
182237
87400
269637
37
1842
3113
5192
8305
Available for sale and held for

government bonds (million AMD)
Share in total portfolio (%)
9
8
01/12/2013
G03
G05
G5I
GMI
5819
63631
89471
30280
119791
6
5
4.9
53.1
74.7
25.3
100
1.58
2.00
5.53
2.89
Price change +/- (million AMD)
19.2
1004.5
1788.5
1675.4
3463.8
01/06/2014
S p rea d o f 6 -mo n t h a n d 1 0 -y ea r b o n d s
TBI
0.33
20 year
2038
15 year
1657
7 year
774
10 year
301
5 year
4 year
MD
Portfolio change in case of yield

change within the standard deviation
(million AMD)
11
10
Indices of government securities portfolio of comercial banks as of

30.06.2014
Index
12
3 year
Market price change of index in

case of yield change within the
standard deviation (million AMD)26
7.7
Yi el d c u rv e c h a n g e
2 year
Market price change of index in

case of +/-1% yield change
(million AMD)
GMI
3.08
1 year
Market Price of government bonds

(million AMD)
G5I
5.94
9 month
Average weighted coupon (%)
G05
1.71
6 month
Average maturity (year)
G03
1.32
3 month
Risk weighted yield
TBI
0.37
1 month
Modified duration
1 day
Index
Dynamic analysis of the yield curve shows that yields of

treasury bills in short-term segment have reduced.
4
3
4.2
186.6
481.8
505.9
788.9
As of the end of the first half of 2014, modified duration

of government coupon bonds outstanding was 3.08 years,
with an average maturity of 5.39 years. These indicators for
discount bonds were 0.37 and 0.39, respectively.
In case of a 1% change in the yield of government
securities, investors' likely loss / gain could be about AMD
8.3 billion or 3.0% of the market value of government
bonds. Moreover, a notable portion of the change might
come from long-term bonds, as they have greater sensitivity
to the interest rate change.
Operations in securities markets (including repo and
reverse repo transactions but excluding operations with the
Central Bank) carried out by investment service providers 27
during the first half of 2014 grew by 26.8% compared to the
same reference period last year and amounted to AMD 1
trillion 529 billion. Transactions involving securities trades
constituted 21.0% percent of the operations mentioned
above.
7/9/13
7/23/13
8/6/13
8/20/13
9/3/13
9/17/13
10/1/13
10/15/13
10/29/13
11/12/13
11/26/13
12/10/13
12/24/13
1/7/14
1/21/14
2/4/14
2/18/14
3/4/14
3/18/14
4/1/14
4/15/14
4/29/14
5/13/14
5/27/14
6/10/14
6/24/14

Trea s u ry b i l l s a l l o c a t i o n v o l u mes a n d
w ei g h t ed a v era g e y i el d
(bln AMD)
9
8
7
6
5
4
3
2
1
0
12
10
8
6
4
2
0
J M M J S N J M M J S N J M M J S N J M M
11
12
13
14
Treasury bills allocation volumes
Weighted average yield (right-hand scale)
S ec u ri t y t ra d es b y i n v es t men t s erv i c e
p ro v i d ers
(bln AMD)
100
80
60
In the first half of 2014, the government securities market

liquidity28 was less volatile (according to the indicator
describing the level of liquidity) compared to the previous
26
Standard deviation of risk weighted yield within 01/12/2013 30/06/2014.

27
As of 30.06.2014, investment service providers included 21 commercial
banks, 8 investment companies and 3 investment fund managers.
28
The liquidity of government securities market is calculated as a ratio
between an amount of monthly trade transactions executed by investment
service providers in the secondary market of government bonds and an
amount of government bonds outstanding.
40
20
0
J MM J S N J MM J S N J M M J S N J MM J SN J M M
10
11
12
13
14
Government bonds
Shares
Corporate bonds
27
reference period. As of June, 2014, the average liquidity has

been 1.8 points higher than the average semester liquidity
level.
V o l u me o f t ra n s a c t i o n s w i t h g o v ern men t
s ec u ri t i es a n d v o l u me o f t ra n s a c t i o n s w i t h
g o v ern men t s ec u ri t i es / o u t s t a n d i n g
g o v ern men t s ec u ri t i es ra t i o
40
35
30
25
20
15
10
5
0
(bln AMD)
50
40
30
20
The share of trades with medium-term and long-term

securities amounted to 59.2% and 34.6%, respectively, of
total transactions involving government securities trades. The
share of short-term securities reached 6.2%.
10
0
J MM J S N J MM J SN J M M J SN J MM J S N J MM
10
11
12
13
14
Government short-term bonds
Government mid-term bonds
Government long-term bonds
Volume of transactions with government bonds/ outstanding government
In the first half of 2014, relative to the same reference

period last year, the volume of repo and reverse repo
transactions (excluding operations with the Central Bank)
carried out by investment service providers has increased by
8.9% and amounted to AMD 1 trillion 208 billion. Again,
almost all repo transactions involved government securities.
Repo transactions with corporate bonds constituted a mere
0.1% in total.
bonds (right-hand scale)
In the first half of 2014, the total volume of securities

trades and repo operations in regulated market amounted to
AMD 54.1 billion, with securities trades constituting 98% in
total.

R ep o t ra n s a c t i o n s b y i n v es t men t s erv i c e
p ro v i d ers
(bln AMD)
800
700
600
500
400
300
200
100
0
JMMJ SN JMMJ SN JMMJ SN JMMJ SN JMM
10
11
12
13
14
Total repo transaction
The regulated market saw an increase in transactions.

S ec u ri t i es t ra d es a n d rep o t ra n s a c t i o n s a t
reg u l a t ed ma rket o f s ec u ri t i es ( ml n A MD)
9000
8000
7000
6000
5000
350
4000
3000
2000
1000
0
150
300
The share of regulated market in the structure of

securities trades by investment service providers has been
16.5% since the beginning of the year.
In the first half of 2014, the Securities Market
Capitalization/GDP ratio was 2.2%, up by 0.7 percentage
point against the end of the previous year. The increased
capitalization again was attributable to a replaced
shareholder of a reporting issuer. The Securities Market
Gross Turnover/GDP ratio stood at 7.32%.
250
200
100
50
3 . 2. F O R EI G N E XC HAN G E M A RK E T
0
J M M J S N J M M J S N J M M J S N J M M J S N J MM
10
11
12
13
14
Equity shares
Corporate bonds
Government bonds
Number of transactions (right-handed scale)
28
In the regulated market, transactions with shares were the

prevailing part, 52.3%, in the structure of securities trades
and repo transactions, which was attributable to a replaced
shareholder of a reporting issuer. The trades with
government and corporate securities constituted,
respectively, 33.4% and 14.3% in total.
During the first half of 2014, the Armenian dram / U.S.

dollar exchange rate did not see major fluctuations.
However, in light of monetary policies implemented by
governments as well as geopolitical developments, the
dram's exchange rate against other currencies (particularly,
Euro, Russian ruble, Turkish lira, the Ukrainian hryvnia) was
somewhat volatile. The average semiannual exchange rate
versus the U.S. dollar reached AMD 411.94, appreciating by
0.1% against the same reference period last year. The
average semiannual exchange rate depreciated versus Euro
but appreciated versus the Russian ruble by 4.1% and
12.9%, making up AMD 564.47 and AMD 11.77, respectively.
In 2014, compared to the same reference period last year,

the average semiannual nominal effective exchange rate and
the average semiannual real effective exchange rate of the
Armenian dram appreciated, respectively, by 8.4% and
8.1%29.
During the semester, gain from foreign currency trades by
the banking system amounted to AMD 6.5 billion.
V o l u me o f o p era t i o n s i n ex c h a n g e ma rket
o f A rmen i a a n d t h e ex c h a n g e ra t es
(mln USD)
600
440
500
420
400
400
300
380
200
360
100
340
320
J M M J S N J M M J S N J M M J SN J M M
11
12
13
14
Volume of stock exchange operations
Interbank purchases
SUMMARY
Interbank sales
Stock exchange rate (right-hand scale)
The Central Bank reacted to a rapid decline in inflation

rates and persistently low economic activity in early 2014 by
easing the monetary conditions: the Central Bank cut the
refinancing rate by a total of 0.75 percentage point to 7.0%.
Amid measures to ease the monetary conditions, the
financial market further saw a downward trend in short-term
interest rates. Interest rates of short-term government bonds
also reacted to the Central Bank's policy of interest rate
change.
Interbank purchase exchange rate (right-hand scale)

Interbank sale exchange rate (right-hand scale)

Tra n s a c t i o n s i n ex c h a n g e ma rket o f
A rmen i a b y c u rren c i es
(mln AMD)
900000
800000
700000
600000
500000
In the secondary market of securities, the volumes of

securities trades and repo transactions by investment service
providers have increased.
400000
300000
200000
100000
0
11
12
13
14
Developments in the currency market demonstrated

primarily appreciation patterns.
In the first half of 2014, developments in the financial
markets largely contributed to the maintaining of financial
stability, without creating new risks for financial stability.
Purchase, USD
Sale, USD
Purchase, RUB
Sale, RUB
Purchase, EUR
Sale, EUR

E x c h a n g e ra t es i n ex c h a n g e ma rket o f
A rmen i a ( A MD)
600
14
550
12
10
500
450
400
350
300
0
11
12
13
14
AMD/USD
AMD/EUR
AMD/RUB (right-hand scale)
29
To study the Armenian drams exchange rate behavior as well as external

competitiveness of the Republic of Armenia, both nominal and real effective
exchange rates are considered. These exchange rates are calculated on a
basis of country weight in proportion of the main twelve trade partner
countries (Euro-Area, Russia, Ukraine, South Korea, Bulgaria, Switzerland,
Iran, U.S.A., Turkey, Georgia, Japan, and China).
29
4 . S T A B IL IT Y O F F I N A N C I A L IN S T IT U T IO N S
OF ARMENIA
Banks continue to act as a major participant in the

financial system.
The structure of financial system assets, by financial
institutions
3 0 . 06.2014
3
1.4%
4
0.9%
5
1.5%
2
7.4%
1
88.9%
3 1 . 12.2013
3
1.5%
In the first half of 2014, relative to 2013, the financial

sector credit to GDP ratio has increased by 0.8 percentage
point to 43.6% while the assets to GDP ratio dropped by 2.3
percentage points to 74.8%. Armenia's banking sector
accounts for 88.9% of the financial system assets, and in this
context identifying and evaluating banking system risks is
vital for assessment of the domestic financial stability. The
share of insurance and securities market participants and
other players of the financial market remains small enough in
comparison with the banking sector, so their impact on the
stability of the financial sector is negligible.
Relative to the previous year, the growth rate of banks'
loan portfolio has reduced: this is a positive development for
financial sustainability in terms of credit risk mitigation.
4
0.8%
5
1.8%
2
6.4%
4 . 1. C O M M E R CI A L BA NK S
1. Banks,
2. Credit organizations,
3. Insurance companies,
4. Investment companies,
5. Other financial institutions
1
89.5%
Banking system stability map

A banking system stability map provides a general
understanding of the behavior of the banking system
stability. It denotes how values in the set of indicators of
banking risks changed relative to two previous periods.
B a n ki n g s y s t em s t a b i l i t y ma p
Capital adequacy
Foreign exchange
risk
Assets quality
Interest rate risk
Yield
In the 2nd quarter of 2014, relative to the 2nd quarter of

2013, the elements of the stability map30 incurred some
changes: there was a positive shift in asset quality,
profitability and liquidity indicators while the interest rate risk
indicator reduced somewhat. The capital adequacy and
foreign currency risk indicators remained unchanged (see
details in subsections Credit risk, Liquidity risk, Market risk,
Capital adequacy and Earnings).
Liquidity
30
30.06.2013
30
30.06.2014
The banking system stability map contains indicators denoting capital

adequacy, assets quality, liquidity, profitability, interest rate risk and foreign
exchange risk. These indicators were firstly measured on a 1 to 10 scale
basis and then calculated in accordance with the IMF methodology. Note
that the nearer the value to the center of the map, the lower the level of
risks associated with the indicator, and vice versa. The banking sector
stability map shall not be interpreted as an indication of the level of financial
stability, rather it provides a picture whether the level of risks involved has
increased or decreased.
4.1.1. Financial intermediation and concentration

F i n a n c i a l i n t ermed i a t i o n
2013
2012
Deposits/GDP
30.06.2014
Loans/GDP
2011
2010
2009
2008
2007
2006
2005
2004
43%
39%
35%
31%
27%
23%
19%
15%
11%
7%
3%
2003
During the first half of 2014, growth rates of indicators of

the banking sector lagged behind nominal GDP growth rate.
As a result, main prudentials of banking sector
intermediation have diminished, except for the Credit/GDP
ratio. Compared to the end of the year, such ratios as
banking sector assets/GDP, deposits/GDP and broad
money/GDP have dropped by 2.5, 0.7 and 2.5 percentage
points to 66.5%, 35.0% and 34.0%, respectively. The credit
to economy/GDP ratio has increased by 0.5 percentage point
to 40.6%.
Broad money/GDP
In the period under review, total capital of the banking

sector grew by 3.8% (AMD 17.1 billion) while total assets
reduced by 0.7% (AMD 20.6 billion). As a result, the total
assets to capital ratio (the leverage ratio) has increased by
0.7 percentage point to 16.2%. The growth of total capital
was largely due to net profit of AMD 18.3 billion. During the
semester, 4 banks added a total of AMD 19.8 billion to the
statutory capital, of which AMD 7 billion replenished from
external sources. Non-resident participation in the statutory
capital of the banking sector has reduced by 7.4 percentage
points to 67.2% due to changed residency resulting from a
shift in a center of economic interest of a bank shareholder.
S h a re o f 4 l a rg es t b a n ks ` a s s et s , l i a b i l i t i es
a n d c a p i t a l i n t o t a l b a n ki n g s y s t em
50%
40%
30%
20%
10%
0%
Assets
30.06.14
31.12.13
31.12.12
Indicators
31.12.11
The Herfindahl-Hirschman Concentration Index
Total assets
0.0775
0.0787
0.0699
0.0710
Total liabilities
0.0792
0.0705
0.0727
0.0734
Total capital
0.0644
0.0637
0.0613
0.0628
Liabilities
Capital
2008
2009
2010
2012
2013
30.06.2014
2011
F o rei g n i n v es t o rs ' p a rt i c i p a t i o n i n b a n ki n g
s y s t em c a p i t a l o f A rmen i a
100%
Source: Central bank of Armenia.

80%
40%
20%
Non-residents
Residents
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
0%
30.06.2014
Relative to the previous end-year, the share of assets,

liabilities and total capital of 4 largest banks out of 2232 in
Armenia has increased by 2.0, 2.2 and 1.2 percentage points
to 41.3%, 42.0% and 37.7%, respectively, at the end of the
reporting period.
60%
2003
The Herfindahl-Hirschman Index of Concentration31 for

some balance sheet items (assets, liabilities, capital, loans,
and deposits) denotes that concentration of the banking
system remained low, and this limits the likelihood of the
impact of concentration risk on the financial stability.
31
The Herfindahl-Hirschman Concentration Index varies between 0 and 1,

characterizing the level of concentration (values near to 0 denote lower
concentration).
32
There are 21 commercial banks and one development bank (PanArmenian Bank JSC) functioning in the Republic of Armenia.
31
4.1.2. Credit risk

The loan portfolio growth rate slowed down.
Th e s t ru c t u re o f ri s k w ei g h t ed a s s et s
c a l c u l a t ed i n b a n ki n g s y s t em c a p i t a l a d eq u a c y
i n d ex , a s o f 3 0 . 0 6 . 2 0 1 4
3
5.0%
2
0.4%
4
0.1%
5
3.3%
1
91.2%
1. Credit risk, 2. Interest rate risk, 3. Operational risk,

4. Foreign exchenge risk, 5. Price risk of capital
instuments
L o a n s t o ec o n o my
(bln AMD)
2013
30.06.14
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
80%
64%
48%
32%
16%
0%
2002
2100
1800
1500
1200
900
600
300
0
Loans to economy (left-hand scale)

Share of loans in total assets(right-hannd scale)
Loans to economy/GDP (right-hand scale)
Share of FX loans in total loans

The change of the share of NPLs in the loans to
different sectors of economy
Credit risk remains an important risk to the financial

stability of Armenias banking sector. The share of credit risk
in risk-weighted assets of commercial banks accounted for
91.2%, which was almost the same compared to year-end (as
of 31.12.2013, it was at 91.1%). In the context, prudent
credit risk management is extremely important.
In the first half of 2014, loans to economy by the banking
system grew by 4.5%.Growth of credit was reported for
almost all sectors of the economy, except for transport and
communication and trade sectors, as loans there contracted
by 10.9% and 2.5%, respectively. The highest growth rate in
loans was reported for public catering and related services,
agriculture and consumer loans, by 15.4%, 11.4% and
10.2%, respectively. At the end of the semester, the shares
of consumer loans, industry and trade credits were large in
total loan portfolio, making up 21.6%, 20.7% and 18.4%,
respectively.
Relative to the end-year, the share of non-performing
loans and receivables (classified as watched,
substandard, and doubtful) has grown by 1.3 percentage
points to 5.6% of total loan and receivables portfolio. A loan
portfolio with a fast growing rate in the past 3 years (as high
as 30% annual growth on average) has considerably
contributed to the increasing of the share of non-performing
loans and receivables. In this context, a trend of slowing
growth rate is good for mitigation of credit risk.
(The end of the arrow shows data as of 30.06.2014

the beginning - as of 31.12.2013)
Share of NPLs in total loans to the
sector
12%
Constraction
11%
10%
+ 2 .1
Public
catering
9%
Consumer
8%
+ 0.1
7%
6%
Transport
5%
+ 0 .9
Mortgage
+ 1 .7
Industry
Trade
+ 2.2
+ 2 .2
4%
+ 0 .6
3%
2%
Agriculture
1%
0%
0%
3%
6%
9% 12% 15% 18% 21% 24% 27% 30%
Share of NPLs of the sector in total NPLs

(Contribution)

S h a re o f n o n -p erf o rmi n g l o a n s i n t o t a l l o a n
p o rt f o l i o
Belarus
Ukraine
Russia
Armenia
Georgia
Kazakhstan
30.06.2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
21%
18%
15%
12%
9%
6%
3%
0%
Source: IMF.
32
In the period under review, the shares of non-performing

loans were somehow larger in credit to industry as well as
mortgage and construction loans: these shares grew by 2.2,
2.2 and 2.1 percentage points to 5.8%, 6.4% and 10.4%,
respectively. As of the end of the first half of 2014, the
shares of non-performing mortgage, construction and
industry loans in total non-performing loan portfolio stood at
8.5%, 10.1% and 19.6% (as of 31.12.2013, these were
7.6%, 11.5% and 16.7%), respectively. Persistently stable
shares of industry and mortgage loans made it possible for
these loans to contribute greatly to non-performing loans in
total loan portfolio. Whereas the contribution of construction
loans to the formation of non-performing loans in loan
portfolio has reduced because of the decreased share of
these loans in loan portfolio.
As calculated by international methodology 33, the share of
non-performing loans and receivables in total loan and
receivables portfolio has grown by 1.0 percentage point
relative to the end-year and amounted to 8.3%. Relative to
the first half of the previous year, the net loan loss
provisions/assets ratio has reduced by 0.1 percentage point
to 0.7%.
33
According to international methodology, the share of non-performing loans

and receivables in total loan and receivables portfolio is calculated as the
ratio of loans and receivables classified substandard, doubtful and loss
to total loans and receivables.
S t ru c t u re o f b a n k l o a n s t o res i d en t s , b y
ec o n o my s ec t o rs
(bln AMD)
100%
2000
80%
1500
60%
1000
40%
500
20%
2013
30.06.14
2012
2011
2010
2009
2008
2007
2006
2005
2004
0%
2003
The Herfindahl-Hirschman Concentration Index of loans

for economy sectors remained the same, 0.12, which points
to some concentration of loans in the banking system. The
same indicator calculated using the banks average was 0.17,
again at the same level. The indicator of banks average is
higher in comparison with the banking system loan sectoral
concentration index and this is an indication of relatively
high sectoral concentration of loans provided by some
banks. At the end of the semester, relative to the end-year,
the share of loans made to large borrowers has reduced by
0.7 percentage point to 24.5% of total loan portfolio34.
Other
Financial sector
Consumer (including mortgage)
Trade
Credit risk stress scenarios
35
Construction
Agriculture
30.06.2014
Loss of the banking

system
25 % of watched,
substandard and
doubtful loans
classified into
losses
AMD 22.0 billion or
5.0% of regulatory
capital of the
banking system
Total capital
adequacy of the
banking system in
case of stress
scenario
15.5%
Stress scenarios
75 % of
doubtful loans
classified into
losses
Industry
30 % of standard
loans classified
into watching
loans
AMD 5.9 billion

or 1.4% of
regulatory
capital of the
banking system
AMD 53.5 billion

or 12.2% of
regulatory capital
of the banking
system
16.0%
15.0%
Loans to residents (right-hand scale)

S h a re o f l o a n s t o t h e b u s i n es s es a n d
i n d i v i d u a l s i n t o t a l l o a n p o rt f o l i o
100%
80%
60%
40%
20%
2013
2012
2011
2010
Loans to individuals

L o a n s t o ma j o r b o rro w ers / t o t a l l o a n s
(mln AMD)
600000
45%
450000
30%
300000
15%
150000
Stress scenario of credit risk derived from off-balance

sheet contingent liabilities
30.06.14
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
0%
2003
Stress scenarios
30.06.2014
30.06.2014
Loans to businesses
2009
2008
2007
2006
2005
2004
0%
2003
In the period under review, relative to the end-year, there

has been some worsening in the results of stress test on
credit risk, which was attributable to an increased share of
non-performing loans in the loan portfolio. The worst
scenario considered revealed cases of infringement of the
total capital adequacy requirement at some banks. However,
even with a possible loss arising from credit risk, capital
adequacy of the banking system remains above the
established threshold of 12%, and the probability of
emergence of insolvency problems is estimated to be low.
Loans to major borrowers
When 50% of off-balance sheet

contingent liabilities performed
Share of loans to major borrowers (right-hand scale)
34
The banks risk on large borrowers exceeds 5% of average monthly

regulatory total capital, taking the interdependence into account.
35
This stress-scenario and the other ones following are not prepared to
forecast emergence of any risks, but rather aim to reveal the weaknesses of
the financial system, as well as assess its ability to absorb such risks.
36
Off-balance sheet contingent liabilities include unused part of lines of
credit, credit cards, overdrafts, L/Cs, guaranties and sureties.
22
20
18
16
14
12
10
8
6
4
2
0
Number of banks
Banking sector violates capital

adequacy ratio in case of 7% loss
of credit portfolio (not taking into
consideration the collateral).
100
The results of stress scenario36 of credit risk derived from

off-balance sheet contingent liabilities denote that the capital
adequacy ratio at individual banks is not plunging more than
0.5 percentage point, so no infringement of the ratio by any
bank is reported. In this context, the impact of credit risk
Th e n u mb er o f b a n ks v i o l a t i n g c a p i t a l
a d eq u a c y reg u l a t o ry ra t i o u n d er d y n a mi c
g ro w t h o f l o a n l o s s es
85%
90%
95%
16.0%
40%
45%
50%
55%
60%
65%
70%
75%
80%
Banking system capital adequacy ratio in

case of stress scenario
16.2%
1%
6%
10%
15%
20%
25%
30%
35%
Banking system capital adequacy ratio

before stress scenario
Loan portfolio loss
33
arising from off-balance sheet contingent liabilities on

financial stability is estimated to be insignificant.
The level of liquidity of commercial banks has
decreased .
Th e d y n a mi c s o f a c t u a l a n d reg u l a t o ry
l i q u i d i t y ra t i o s o f t h e b a n ki n g s y s t em
150%
125%
100%
75%
50%
25%
2013
2012
2011
30.06.2014
N21 actual ratio
2010
2009
2008
2007
2006
2005
2004
2003
0%
N21 regulatory ratio
N22 actual ratio
N22 regulatory ratio

Th e ra t i o o f b a n ki n g s y s em a s s et s t o
l i b i l i t i es b y t erms t o ma t u ri t y
150%
125%
100%
75%
50%
Up to 30 days (including demand)
31-90 days
30.06.14
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
25%
0%
Up to one year
4.1.3. Liquidity risk

In the first half of 2014, the level of liquidity of
commercial banks somewhat diminished. Relative to the end
of the year, prudential ratios of total liquidity and current
liquidity have decreased by 1.6 and 7.2 percentage points to
27.5% and 135.1% (with minimum thresholds of 15% and
60%), respectively. Prudential ratios of total liquidity and
current liquidity for Group 1 foreign currencies have reduced
by 1.7 and 10.1 percentage points to 20.3% and 104.8%
(with minimum thresholds of 4% and 10%), respectively. At
individual banks, total liquidity and current liquidity
prudentials were in line with regulatory requirements, so no
infringement of such liquidity indicators by any bank has
been reported.
At the end of the first half of 2014, assets and liabilities
by maturity were structured as follows: for up to 30-day
(including demand deposits), up to 3-month and up to 1-year
maturity baskets the assets to liabilities ratios37 were
100.5%, 94.5% and 84.0% (as of 31.12.2013, these were
108.6%, 101.6% and 88.7%), respectively. Considerable
negative liquidity gap persists only in the up to 1-year
segment, which is due to increased maturity of loans along
with deepening financial intermediation.

Th e ra t i o o f b a n ki n g s y s t em ma j o r
l i a b i l i t i es t o t o t a l l i a b i l i t i es
(mln AMD)
2013
Major liabilities
30.06.2014
2012
2011
2010
2009
2008
2007
2006
2005
2004
35%
30%
25%
20%
15%
10%
5%
0%
2003
700000
600000
500000
400000
300000
200000
100000
0
The assets to liabilities ratio for up to 30-day (including

demand instruments) maturity baskets is particularly
important for commercial banks in maintaining their current
liquidity. In the last 5 years, the ratio has always been in the
range 90%-110%, pointing to the banks' ability to provide
current liquidity all the time.
In the period under review, risks to debt concentration of
commercial banks have reduced: the share of large liabilities
in total liabilities has contracted by 4.2 percentage points to
22.0%.
Major liabilities to total liabilities ratio (right-hand scale)

The structure of funds financing loans of banking
system of Armenia
(bln AMD)
2000
150%
1500
Loans
125%
1000
100%
500
0
75%
50%
-1000
25%
Deposits from legal entities

Loans to individuals
Loans/deposits (right-hand scale)
J 14
J 13
J 12
J 11
J 10
J 09
J 08
J 07
J 06
J 05
-2000
J 04
-1500
J 03
Deposits
-500
Deposits from individuals

Loans to legal entities
34
Relative to the end-year, foreign borrowings of commercial

banks have decreased by 6.9%. Funds attracted from
international financial institutions have reduced by 7.6% to
40.0% of total foreign borrowings. The main lender countries
included Russia (20.3%), Luxemburg (11.7%), and
Netherlands (6.1%). The share of long-term loans amounted
to 87.7%, which almost excludes risks that such liabilities
might be refinanced in a short-term horizon.
0%
Relative to the end-year, the loans to deposits ratio38 has

increased by 3.7 percentage points to 116.0% at the end of
the semester.
37
The calculation of ratios of assets and liabilities includes off-balance sheet

contingent liabilities by a 20% weight.
38
In the calculation of this ratio, credit includes loans (lease and factor
operations inclusive) to real sector, while deposits include funds attracted
from individuals and companies.
Liquidity risk stress scenarios
Th e n u mb er o f c o mmerc i a l b a n ks v i o l a t i n g
l i q u i d i t y reg u l a t o ry ra t i o s i n c a s e o f
i n d i v i d u a l s ' c a l l a n d t i me d ep o s i t s ru n o f f
Stress scenarios
Withdrawal of
25% of
individuals time
deposits
Withdrawal of
25% of demand
liabilities
Withdrawal of 25% of
demand liabilities and
of 25% of individuals
time deposits
Total liquidity ratio of

banking system
21.9%
23.6%
17.4%
Current liquidity ratio

of banking system
100.0%
146.6%
100.0%
Number of banks
21
18
15
12
The banking sector

violates the regulatory
requirement of total
liquidity
9
6
3
99%
92%
85%
78%
71%
64%
50%
43%
36%
29%
22%
8%
15%
0
1%
Relative to the results of liquidity risk stress tests

conducted at the end of the year, the first half of 2014
results suggest that liquidity indicators have reduced to some
extent as the level of liquidity of commercial banks declined.
As stress scenarios show, some banks reported breaches of
total and current liquidity requirements. However, high liquid
assets in these banks are sufficient to cover an outflow of
liabilities. In this context, the emergence of liquidity
problems undermining financial stability is estimated to be
negligible.
57%
30.06.2014
Deposit runoff
Number of banks violating N21 and N22
Number of banks violating N22
Number of banks violating N21
Stress scenario of liquidity risk derived from off-balance sheet

contingent liabilities
Stress scenarios
30.06.2014
Banking system total liquidity ratio

Banking system current liquidity ratio
When 50% of off-balance sheet contingent

liabilities performed
23.8%
117.0%
According to the results of stress-test to assess liquidity

risk arising from off-balance sheet contingent liabilities, some
banks will report infringement of regulatory total and current
liquidity standards. However, high liquid assets in these
banks are enough to cover contingent liabilities. In this
context, the liquidity risk arising from off-balance sheet
contingent liabilities is estimated insignificant in terms of
leaving an impact on financial stability.
4.1.4. Market risk

Foreign exchange risk
In the first half of 2014, the Armenian dram exchange rate
fluctuating against other currencies drove the domestic
banking system to revaluation losses reaching AMD 1.2
billion or 0.3% of total regulatory capital. As a result of
foreign currency revaluation, 15 banks incurred losses and 7
banks reported profit. The banking system generated net
revenue of AMD 6.5 billion from foreign exchange
transactions.
Potential impact of market risk on the financial stability

is estimated to be very weak.
In the period under review, the share of foreign currency

loans has grown by 0.3 percentage point to 64.0% of total
35
loan portfolio whereas the share of foreign currency deposits

has decreased by 0.7 percentage point to 70.3% of total
deposit portfolio. The banking sector's foreign currency
positions are virtually closed, with net long position
(including derivatives) amounting to AMD 4.3 billion or 1.0%
of total regulatory capital (as of 31.12.2013, it has been a
negative value of AMD 370 million or 0.1% of total regulatory
capital)39.
Net i n c o me o f t h e b a n ki n g s y s t em f ro m
f o rei g n c u rren c y t ra d es a n d rev a l u a t i o n
(mln AMD)
17000
13000
9000
5000
1000
Foreign exchange risk stress scenarios
-3000
2013
30.06.2014
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
-7000
Stress scenarios
30.06.2014
Net income from foreign currency trades

Positive (negative) exchange gap from foreign currency revaluation
Profit (loss) in
case of 5%
appreciation
(depreciation)
of AMD/USD
Profit (loss) in
case of 5%
appreciation
(depreciation)
of AMD/EUR
AMD -60.2
million or
0.014% of
regulatory
capital
(AMD 60.2
million)
AMD -23.8
million or
0.005% of
regulatory
capital
(AMD 23.8
million)
Banking systems
profit (loss) from
foreign currency
revaluation
Possible
maximum
10-days loss
estimated
through VaR
Model
AMD 27.2
million or
0.01% of
regulatory
capital
If worst possible stress scenarios reviewed in the above

stress-test40 unfold, bank losses resulting from an open FX
position will be insignificant and the impact of such losses
on the financial stability will be weak.
Interest rate risk

A v era g e i n t eres t ra t es o f b a n k d ep o s i t s a n d
l o an s
30%
25%
20%
15%
10%
5%
0%
I III I III I III I III I III I III I III I III I III I III I III I
03 04 05 06 07 08 09 10 11 12 13 14
Average interest rate of loans in USD
The first half of the year marked a trend of slight rise in

interest rates of loans and deposits. By currency structure,
interest rates of loans and deposits in Armenian dram tended
to increase whereas interest rates of loans and deposits in
U.S. dollar to decline. The weighted average interest rate of
dram loans rose 0.5 percentage point, but that of interest
rate of U.S. dollar loans fell 0.2 percentage point. The
average interest rate of deposits in dram grew 0.1 percentage
point, while the weighted average interest rate of U.S. dollar
deposits dropped 0.3 percentage point. Overall, spreads of
interest rates of AMD and USD loans and deposits have
increased by 0.4 and 0.1 percentage points, respectively.
Average interest rate of loans in AMD

Average interest rate of deposits in USD
Average interest rate of deposits in AMD
The average weighted duration gap of present value of

assets and liabilities of the banking sector is almost closed
and varies in the region of a half year. This means that
possible fluctuations in market rates will not lead to major
losses in the banking system.
39
Derivative instruments include derivative contracts signed with foreign

governments, central (national) banks, financial organizations and reputable
international institutions for long-term deposits that are rated A + (A1) or
higher than A+ (A1) by Standard & Poor's or Fitch (Moody's).
40
The calculation of losses estimated through stress-scenarios and the VaR
Model (the VaR Model is not considered as a stress-scenario since the
calculation of the model considers historical exchange rate series of
currencies) is based on FX positions of commercial banks as of 31.12.2013.
36
Interest rate risk stress scenarios
30.06.2014
Banking
systems
profit (loss)
Impact of 2 pp. increase

increase (decrease) of
market interest rates on
the economic value of
capital,
estimated through the
Duration Method
Deviation of net interest

income from expected
income of the three months
ahead in case of 2 pp.
increase (decrease) of market
interests,
estimated through the
Interest rate-sensitive assets
and liabilities Gap Method
AMD -5.6 billion or 1.3%

of banking system
capital (AMD 5.6 billion
or 1.3% of banking
system capital)
AMD -234.6 billion or 0.1%

of banking system capital
(AMD 234.6 billion or 0.1% of
banking system capital)
In case of worst possible stress scenarios, possible losses

of banks resulting from interest rate fluctuations are in the
region of 3.0% percent of capital. This implies that losses of
the banking system resulting from interest rate fluctuations
will neither be significant nor will cause vulnerabilities to
Price risk
In the first six months under review, the price risk of the
banking system remains very low. The share of financial
assets available-for-sale and held at fair value through profit
or loss has contracted by 0.3 percentage point to 6.5% of
total assets.
Th e s h a re o f f i n a n c i a l a s s et s a t f a i r v a l u e
t h ro u g h p ro f i t o r l o s s a n d a v a i l a b l e f o r s a l e
f i n a n c i a l a s s et s i n t o t a l a s s et s
(bln AMD)
200
12%
175
10%
150
In the period under review, as a result of interest rate

fluctuations, net income generated by the banking sector
from revaluation of financial assets available-for-sale and
held at fair value through profit or loss was AMD 657 million.
8%
125
100
6%
75
4%
50
2%
25
0
Risks associated with real estate price fluctuations

remained manageable. Domestic commercial banks further
provided mortgages with loan-to-value ratio mostly between
60-80%, while taking quite a strict approach in evaluating
borrower creditworthiness. Such restrictions significantly
lower the possibilities of loan losses from real estate price
volatilities.
0%
I III I III I III I III I III I III I
08
09
10
11
12
13
14
Financial assets at fair value through profit or loss and
available for sale
The share of financial assets at fair value through profit or
loss and available for sale in total assets (right-hand scale)
Real estate price change stress scenarios

30% depreciation of real estate
The banking systems loss due to revaluation
of own real estate property (price risk)
30.06.2014
AMD 14.7 billion
(or 3.3% of banking
system capital)
The banking systems loss due to a 30% loss

of vulnerable credit portfolio41 (taking into
consideration that the collateral involved has
been sold at a depreciated cost), if a stressscenario occurs (credit risk)
AMD 7.4 billion

(or 1.7% of banking
system capital)
The banking systems loss due to a 100%

loss of vulnerable credit portfolio (taking into
consideration that the collateral involved has
been sold at a depreciated cost), if a stressscenario occurs (credit risk)
AMD 25. billion

(or 5.7% of banking
system capital)
41
Vulnerable loan portfolio represents the sum of loans outstanding, the

residual values of which exceed the 30% devaluated values of the real
estate used as collateral.
37
If the stress scenario of 30% devaluation of real estate

price unfolds, maximum potential losses of commercial
banks associated with price and credit risks will increase in
2-3 years, which is mainly attributable to the real estatesecured lending rate growing faster than the regulatory
capital and to the loan-to-value ratio increasing amidst
stronger competition.
However, real estate price volatility is not high (taking into
account the last 2-3 years developments), so the impact of
credit and price risks remains non-susceptible to financial
stability.
4.1.5. Capital adequacy and profitability

The capital adequacy of commercial banks remains at a
reasonable level.
Th e s t ru c t u re o f t o t a l reg u l a t o ry c a p i t a l
(mln AMD)
2013
30.06.2014
2012
2011
2010
2009
2008
2007
2006
2005
2004
40%
35%
30%
25%
20%
15%
10%
5%
0%
2003
510000
450000
390000
330000
270000
210000
150000
90000
30000
-30000
-90000
Deductions from the capital

Share capital
Retained eamings
Statutory general reserves
Book value of additional capital
Long-term subordinated borrowings
Total regulatory capital
Total regulatory capital adequasy (right-hand scale)
Total regulatory /total assets (right-hand scale)
P ro f i t a b i l i t y ra t i o s o f t h e b a n ki n g s y s t em
(mln AMD)
30.06.2014
Net profit
2013
2012
2011
2010
2009
0%
2008
4%
2007
8%
10000
2006
12%
20000
2005
16%
30000
2004
20%
40000
2003
50000
Return on assets(ROA, right-hand scale)

Return on earnings (ROE, right-hand scale)
In the first half of 2014, commercial banks' total capital

adequacy ratio fell by 0.5 percentage point to 16.2%, which
was driven by the loan portfolio with its faster growth rate
over that of total regulatory capital. In the period under
review, individual banks kept their total capital adequacy
prudentials in compliance with established requirements, so
no bank reported breaches of capital adequacy standards.
As of the end of the first half of 2014, relative to the endyear, total regulatory capital of commercial banks has grown
by 2.8% to AMD 440.3 billion. The share of tier 1 capital has
increased by 2.2 percentage points to 88.8% of total
regulatory capital. This ratio points to a strong ability of
commercial banks risk to absorb risks to their capital.
In the first half of 2014, net profit of the banking system,
calculated in accordance with the Central Bank supervisory
reports,42 amounted to AMD 18.3 billion, with 16 banks
reporting profit and 6 banks incurring losses. Compared with
the same reference period last year, annualized return on
assets and annualized return on equity ratios of the banking
system have grown by 0.3 and 2.0 percentage points to 1.3%
and 8.0%, respectively. The increase in banking system
profitability figures was driven largely by the ratios net loan
loss provisions to assets and non-interest expense to assets
having dropped by 0.3 and 0.4 percentage points,
respectively. Net interest margin43 having reduced by 0.5
percentage point considerably affected the profitability of
commercial banks.
In the period under review, gross revenues of the banking
system grew by 1.2% to AMD 282.0 billion but gross
expenditures reduced by 1.7% to AMD 258.1 billion. The
shares of interest income, non-interest income and interest
expense have increased while the share of return to/from
assets loss provisioning contracted.
42
This differs from IFRS mainly on the part of loan loss provisioning for
standard assets.
43
Net interest margin is calculated as ratio of net interest income to assets.
38
I n c o mes a n d ex p en s e o f b a n ki n g
s y s t em
mln AMD
2013
Provisioning from asset losses
4 . 2. C R EDI T O RG ANI Z A TI ON S
30.06.2014
2012
2011
2010
2009
2008
2007
2006
2005
2004
600000
500000
400000
300000
200000
100000
0
-100000
-200000
-300000
-400000
-500000
-600000
2003
Net profit of the banking system, calculated in accordance

with International Financial Reporting Standards, amounted
to AMD 17.9 billion, with annualized ratios of return on
assets and return on equity having reached 1.2% and 7.4%,
respectively.
Non-interest expense
Interest expense
Recovery
Credit organizations represent the second largest sector

of Armenias financial system, with their assets making up
7.4% of entire financial system. In the period under review,
credit organizations reported significant increases in assets,
liabilities and capital.
Non-interest income
Interest income
Assets, liabilities, capital and profit of credit organizations

(thousand AMD)
Indicator
31.12.2013
31.12.2014
Growth (%)
Assets
209841599
242183153
15.4
Liabilities
132243167
145819185
10.3
77598432
96364328
24.2
5852591
3872024
Capital
Net profit
B a n ki n g s y s t em R OA i n s el ec t ed E a s t
E u ro p ea n a n d CI S c o u n t ri es
6%
4%
During the semester, the share of non-performing loans

and receivables has grown by 0.5 percentage point to 4.3 %
of total loan and receivables portfolio. The share of nonperforming loans and receivables is the relatively high in
public catering and other service sectors, mortgage and
consumer loan segments, amounting to 14.9%, 10.1% and
9.0%, respectively.
2012
30.06.2014
Kazakhstan
30.06.2014
Armenia
Georgia
2013
Russia
Ukraine
2013
Bulgaria
Czech Republic
2011
2010
2009
2008
2007
2006
2005
2003
2004
Belarus
B a n ki n g s y s t em R OE i n s el ec t ed E a s t
E u ro p ea n a n d CI S c o u n t ri es
Belarus
Bulgaria
Czech Republic
Russia
Ukraine
Armenia
Georgia
Kazakhstan
2012
2011
2010
2009
2008
2007
2006
31%
26%
21%
16%
11%
6%
1%
-4%
-9%
2005
Profit of credit organizations, calculated in accordance

with International Financial Reporting Standards, totaled AMD
3.5 billion, with the annualized ratios return on assets and
return on equity having reached 3.1% and 7.7%,
respectively.
0%
-2%
-4%
2004
Net profit of credit organizations, calculated in accordance

with the Central Bank supervisory reports, amounted to AMD
3.8 billion. During the semester, 28 credit organizations
posted profit, 5 reported losses. In the period under review,
relative to the same reference period last year, the
annualized ratios return on assets and return on equity of
credit organizations have decreased by 0.2 and 0.4
percentage points to 3.4% and 8.9%, respectively.
2%
2003
During the first half of 2014, total capital of credit

organizations demonstrated growth rate outpacing that of
total assets by 8.8 percentage points. As a result, the total
capital to total assets ratio (leverage ratio) has increased by
2.8 percentage points to 39.8%.
Source: IMF.
39
B a l a n c e o f l o a n s t o res i d en t s b y c red i t
o rg a n i z a t i o n s , b y s ec t o rs
(bln AMD)
100%
225
200
80%
175
150
60%
125
100
40%
Other
2013
30.06.14
2012
2011
2010
2009
2008
2007
2006
2005
0%
25
0
2004
75
50
2003
20%
Financial sector
The share of non-performing loans and receivables,

classified as substandard, doubtful and loss and
calculated by international methodology, increased by 0.3
percentage point and reached 5.2%. In the period under
review, relative to the same reference period last year, the
ratio of net provisions to total assets has been the same,
0.6%.
In all maturity time bands of assets and liabilities (up to
180-day (including demand instruments), from 180- day to 1year, more than 1-year), the amount of assets was in excess
of the amount of liabilities. This is a clear indication, ceteris
paribus, that the level of liquidity risk of credit organizations
is low.
Consumer loans (including mortgages)
Credit risk assessment scenarios44
Trade
Construction
Stress scenarios
Agriculture
Industry
30.06.2014
Loans to residents (right-hand scale)
Total loss of
credit
organizations
25 % of loans in
watched, substandard
and doubtful
categories classified
into loss loans
75 % of loans
in doubtful
category
classified into
loss loans
30 % of loans
in standard
category
classified into
watched loans
AMD 1.8 billion or

2.0% of regulatory
capital
AMD 549.9
billion or 0.6%
of regulatory
capital
AMD 4.9 billion

or 5.4% of
regulatory
capital
Compared to the banking system, capitalization of credit

organizations is stronger, and according to various stress
scenarios, credit organizations are fully capable to absorb
potential risks.
4 . 3. S E C U RI TI E S MAR K E T PA R TI CI P AN T S
Th e s t ru c t u re o f a s s et s i n t h e c a p i t a l a d eq u a c y
ra t i o o f i n v es t men t c o mp a n i es a s o f
30.06.2014.
28%
2%
70%
Credit Risk
Market Risk
Operational Risk
As of June 30, 2014, there were 21 banks providing

investment services and 8 investment companies in the
securities market of Armenia. Also 3 investment fund
managers are registered in the financial market of Armenia,
two of which are entitled to run a mandatory fund and one a
voluntary pension fund.
In the first half of 2014, relative to the end-year, total
assets of investment companies have grown by 6.5% and
amounted to AMD 28.8 billion, but total capital has reduced
by 0.4% to AMD 5.2 billion. As of June 30, 2014, total profit
of investment companies has been AMD 734 million. During
the semester, seven companies posted profit and one
incurred losses.
44
Stress-scenarios are built on an assumption that the amounts of loans of

credit organizations are unchanged and the secured property is ignored
(which means that where loans are classified as loss, a possible sale of the
collateral is not considered).
40
As of June 30, 2014, credit risk of investment companies

accounted for 69.9% of risk weighted assets; market risk
constituted 27.9% and operational risk, 2.2%. Remarkably,
interest rate risk had the largest share in market risk of
investment companies (82.8%), while foreign exchange and
share price risks constituted, respectively, 16.6% and 0.6%.
As of the end of the first half of the year, a total of 24
classes of securities of 16 reporting issuers were admitted to
trading in the regulated market. Two issuers were
accountable on both shares and bonds. The share of equity
securities issued by three commercial banks was 25% of
total issuance of securities, while the share of bonds issued
by four financial institutions was 55% of total issuance of
bonds. Total amount of shares was AMD 53.4 billion and
total amount of bonds, AMD 15.4 billion. Six of these bonds
were in foreign currency with their share making up 53%.
As of June 30, 2014, there were 2083 registries of
nominal security holders and 105585 nominal security
owners running registries at the Central Depository of
Armenia.
4 . 4. I N S U RA N C E C OM P A NI E S
As of June 30, 2014, there were 9 insurance companies 45
licensed to perform insurance business in the Republic of
Armenia.
In the period under review, the amount of assets of
insurance companies has reduced by 7.6% to AMD 46.2
billion and the amount of liabilities decreased by 14.1% to
AMD 29.2 billion. However, total capital has grown by 6.3%
to AMD 17.0 billion. During the semester, the share of
insurance companies in the domestic financial sector
contracted by 0.1 percentage point to 1.4% of the financial
sector assets. In the period under review, relative to the
same reference period last year, the amount of accrued
premiums, the main indicator of insurance activity, has
plunged by 30.8% to AMD 15.7 billion (the drop of this
indicator in the previous reference period was 4.7%).
The annualized premiums to GDP ratio, another key
indicator of insurance companies, was 0.65%, which had
fallen by 0.18percentage point in relation to 2013 46. In June
2014, the premium per capita ratio was AMD 9,546 versus
AMD 11,850 reported as of December 2013.
I n s u ra n c e s ec t o r a s s et s , a s o f 3 0 . 0 6 . 2 0 1 4
5
5%
6
5%
7
4%
8
3%
9
2%
10
1%
11
12%
4
6%
1
32%
3
11%
2
19%
1. Deposits with banks, 2. Sums receivable on direct

insurance, 3. Securities sold under repo agreements 4.
Costs for future periods and prepayments on insurance,
5. Fixed assets, 6. Reinsurers share in insurance
reserves, 7. Government and non-government
securities, 8. Borrowings, 9. Bank accounts,
10. Claims to reinsurers on compensation,
10. Other assets
45
This section actually collates indicators of 8 insurance companies active

and reportable, since one company, although duly licensed, does not carry
out insurance activities.
46
Based on the 2013 data, the premiums to GDP ratio on non-life insurance
was 3.53 % on average in developed industrial countries and 1.31% in
emerging countries (source: Swiss Re, Sigma No 3/2014, May 2014).
41
Ma i n ra t i o s o f i n s u ra n c e s ec t o r o f A rmen i a
(AMD)
0.9%
14000
12000
10000
0.6%
8000
6000
0.3%
4000
2000
Insurance premiums/GDP(left-hand scale)
30.06.2014
2013
2012
2011
2010
2009
2008
0
2007
0.0%
Insurance premium per capita (right-hand scale)

I n s u ra n c e p remi u m/ G DP i n E E C a n d CI S
(2 0 1 3 )
In the period under review, relative to the same reference

period last year, the loss ratio of insurance companies has
reduced by 8.5 percentage points to 53.7%47. The reduction
came along with insurance companies expense ratio48
having dropped by 3.6 percentage points in relation to the
previous year to 26.7%. This may well point to an increased
operational effectiveness of insurance companies. Relative to
the same reference period of previous year, net profit of
insurance sector was positive, amounting to AMD 1.7 billion,
based on calculation in accordance with the Central Bank
supervisory reports. The annualized return on assets and
annualized return on equity ratios have risen to 7.1% and
20.8%, respectively. The aforementioned ratios calculated in
accordance with IFRS amounted to 7.1% and 19.8%,
respectively.
The shares of risk-weighted assets and required solvency
in the insurance sector capital adequacy ratio were 40.0
percent and 60.0 percent, respectively. The regulatory capital
adequacy ratio of the insurance sector was 165.1% (marginal
value of regulatory capital adequacy is 100%).
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
1
Solvency risk
1. Georgia, 2. Ukraine, 3. Romania, 4. Turkey,

5. Russia, 6. Kazakhstan, 7. Azerbaijan,
8. Armenia -2013, 9. Armenia - 30.06.2014
Source: Central Bank of Armenia,
Swiss Re, Sigma No 3/2013.
L o s s a n d ex p en s e ra t i o s o f I n s u ra n c e
s ec t o r
As stress-scenarios shown below unfold (a 10% rise in the

indemnification rate and a 5% growth of insurance
payments), the change in solvency levels of insurance
companies was assessed. Results suggest that the level of
solvency will not incur notable changes, so the likelihood of
risks undermining financial stability in the insurance sector is
very low.
140%
120%
Solvency assessment stress scenarios
100%
80%
Stress scenarios
60%
30.06.2014
Growth of reimbursement rates, 10%, and
insurance payments increase, 5 %
40%
20%
Loss ratio
30.06.2014
2013
2012
2011
2010
2009
2008
2007
0%
Expense ratio
Required growth of UIPR of the

insurance sector, if the stress scenario
occurs
Total capital adequacy ratio of the
insurance sector, if the stress scenario
occurs
AMD 1.0 billion or 5.9% of regulatory

capital of the sector
155.3%

Credit risk
Allocating funds of the insurance sector in low-risk assets
allows keeping investment risk at a low level. Assets
equivalent to technical reserves are invested primarily in
time and demand deposits with commercial banks as well as
government and non-government bonds.
47
The loss ratio was calculated using the following formula: (net accrued
indemnity + net provisions to technical reserves (except for unearned
insurance premium reserves, UIPR) + other transaction costs on insurance) /
(earned insurance premiums sums refunded on the contracts terminated).
48
The expense ratio was calculated using the following formula: non-interest
expense / (earned insurance premiums sums refunded on the contracts
terminated).
42
Credit risk assessment stress scenarios
Th e s h a re o f ri s k w ei g h t ed a s s et s a n d req u i red
s o l v en c y i n i n s u ra n c e s ec t o r c a p i t a l a d eq u a c y
ra t i o , a s o f 3 0 . 0 6 . 2 0 1 4
Stress scenarios
30.06.2014
Loss of the insurance

sector
Classifying 30% of
standard assets
into watched
category
Classifying 5% of
standard assets
into loss
category
Sharp increase of
outstanding claims
reserves, 25%
AMD 0.8 billion or

4.6% of regulatory
capital
AMD 1.4 billion or

8.4% of regulatory
capital
AMD 0.5 billion or

3.1% of regulatory
capital
159.0%
153.8%
160.0%
The total capital

adequacy ratio of the
insurance sector, if the
stress scenario occurs
2.9%
34.7%
2.4%
60.0%
The results of credit risk assessment stress-tests show that

potential loss of the insurance sector is low.
Required solvency indicator
Credit risk
Operational risk

The results of foreign exchange stress scenario suggest
that the loss of insurance companies resulting from foreign
exchange risk is not considerable: it merely exceeds 0.5% of
the value of regulatory capital.
Foreign exchange risk assessment stress scenarios49
Stress scenarios
30.06.2014
Insurance sectors
gain (loss) in case
of foreign
exchange
revaluation
Gain (loss) in case of

1% AMD
depreciation
(appreciation) versus
USD
Gain (loss) in case

of 1% AMD
depreciation
(appreciation)
versus EUR
Maximum potential
10-day loss valued
through a VaR
method
AMD 20.0 million or

0.1% of regulatory
capital (AMD -20.0
million)
AMD 3.5 million or

0.05% of
regulatory capital
(AMD -3.5 million)
AMD 14.0 million or

0.1% of regulatory
capital
Liquidity risk
The level of liquidity risk in the insurance sector is low,
which can be seen through the results of the stress-scenario.
The level of liquidity amounted to 333.2%, while the
minimum threshold is defined 100%.
Liquidity risk assessment stress scenario
Stress scenario
30.06.2014
Required growth of outstanding claims
reserves when the stress scenario occurs
Liquidity of insurance companies when the
stress scenario occurs
Sharp increase of outstanding claims

reserves, 25%
AMD 0.5 billion or 3.1% of regulatory
capital
333.2%
The share of insurance market in the financial sector

remains small. Risks to insurance companies are controllable
and non-vulnerable in the financial stability point of view.
49
The calculation of losses estimated through stress-scenarios and the VaR

Model (the VaR Model is not considered as a stress-scenario since the
calculation of the model considers historical exchange rate series of
currencies) makes an assumption that FX position of insurance companies
would not change in a 10-day time-span.
43
SUMMARY
In the period under review, the financial risks were further
manageable in the banking sector which is the largest part of
the financial system. The growth rate of loans has decreased
which is positive for credit risk mitigation in the upcoming
time horizon in terms of financial stability. Some quality
deterioration in credit portfolio was recorded due primarily to
accelerated growth of the loan portfolio in the past 3 years.
However, with a possible loss arising from credit risk, capital
adequacy of the banking system remains above the
established minimum threshold. The probability of
emergence of liquidity and market risks to threaten financial
stability is estimated to be low. Non-bank financial
institutions also saw their business operations, and the
regulatory indicators were further maintained within the
required limits.
44
5 . S T A B IL IT Y O F F I N A N C I A L M A R K E T
INFRASTRUCTURES
Highlighting the importance of the payment and

settlement system of the Republic of Armenia and how it
affects the domestic monetary policy and financial stability,
the Central Bank further pays due attention to the countrys
systemically important payment and securities settlement
systems and the telecommunication network supporting their
activities.
Most interbank settlements in the territory of the Republic
of Armenia are made via the Central Bank systems 50. More
than 99% of the value of interbank payments in Armenia is
made via the Central Bank systems.
5 . 1. I N T E RBA NK P AYM E N T S VI A E L E C TR ON I C
P A Y M E NT S Y ST E M O F C EN T RA L BA NK
In the first half of 2014, there were about 1.6 million of
payments, with a total value of AMD 5351.4 billion, executed
via the Electronic Payment System (EPS) of the Central Bank
of Armenia.
In the period under review, the value of payments kept on
growing while the number of payment messages has plunged
sharply compared to the level reported in previous years.
The results of the EPS monitoring indicate that the

system is safe and reliable and trouble-free from the
system stability point of view.
P a y men t s b y E l ec t ro n i c P a y men t S y s t em
( w i t h o u t ex c h a n g e ma rket t ra n s a c t i o n s )
bln AMD
thousand pieces
3000
2000
2500
1600
2000
With a stably growing value of payments, the decrement in

the number of payment messages necessitated an in-depth
study of the reason of the decline by examining the message
types according to general and target sectors (budgetary and
interbank segments, in particular).
The analysis showed that the reduction in the number of
payments is mainly due to the decrease in the number of
budgetary payments, which was influenced by a sharp
increase in the use of MT 202 bulk message types.
1200
1500
800
1000
400
500
0
0
I II III IV I II III IV I II III IV I II
11
12
13
14
Payments valum
Payments quantity (right-hand scale)
Th e d y n a mi c s o f p a y men t s n u mb er b y MT
400000
350000
As a conclusion, it should be mentioned that the

reduction in the number of payments is not for economic
reason but results from optimizing the message types used in
the system and active use of bulk message types which
somehow replaced single message types applicable in
different markets. This contributes to easing of the workload
of the system while increasing its efficiency.
50
Payments via the Central Bank systems involve the payments made
through Electronic Payments System, EPS (excluding stock exchange trades),
payments related to transactions with indirect monetary instruments of the
Central Bank, payments executed within the Central Bank as well as final
settlements of ArCa cards system and the Government Securities Accounting
and Settlement System, GSASS (cash leg of transactions). For details, see
the paper Payments and Securities Clearance and Settlement Systems in
the Republic of Armenia, 2010.
300000
250000
200000
150000
100000
50000
0
F M AM J J O S ON D J F M AM J J O S ON D J F M AM J
12
13
14
MT-100
MT-108
MT-120
MT-122
MT-123
MT-131
MT-132
MT-133
MT-202
MT-203
45
The risks in the system are reviewed separately for each

area described below.
Credit risk
There is no credit risk identified in the EPS.
Credit risk to the settlement bank (i.e. the Central Bank) in

the system is non-existent since the participant will, in case
of insufficient funds with their correspondent account, be
able to use an intraday repo instrument, which is secured by
government bonds of the Republic of Armenia, securities of
the Central Bank of Armenia, and/or high-rated corporate
bonds. The size of the attracted fund is calculated using the
percentage subtracted from the market value of the bond
(haircut). Nor is there credit risk to the recipient as it gets the
notice of the payment only after the payment is made final
and irrevocable51.
Liquidity risk
The likelihood of emergence of liquidity risk and
systemic problems in the EPS is very low.
Th e d y n a mi c s o f a v era g e d a i l y p a y men t s
o n o w n ex p en s e
In the period under review, the daily average indicator of

own liquidity used for assessment of liquidity risk52 has
plunged considerably, yet staying above the marginal value
of 1.
The dropping of the indicator is conditioned by a
significant increase in the value of payments53 and
sustainable level of opening liquidity of the day.
2.8
2.4
2.0
1.6
1.2
0.8
0.4
J MMJ S N J MM J S N J MM J S N J MM J S N J MM J S N J MM
09
10
11
12
13
14
Notwithstanding the tumbled indicator, average opening

liquidity of the day continues to exceeding the average daily
payments.
Average daily opening/ average daily debits

Marginal value
A v era g e d a i l y p a y men t s , a v era g e d a i l y

o p en i n g b a l a n c es , a v era g e d a i l y o p en i n g
a v a i l a b l e l i q u i d i t y c o mp a ra t i v e a n a l y s es
In assessing the liquidity risk in terms of the above

indicators, it should be noted that the calculation of the
indicator does not include incoming payments (crediting of
the account) and/or funds from other sources to increase
liquidity.
(bln AMD)
The above indicator was monitored across individual

banks as well, and the results of the monitoring suggest that
the likelihood of liquidity risk is estimated to be minimal.
210
180
150
120
90
60
30
0
J FMAMJ JOSONDJ FMAMJ JOSOND J FMAMJ J OSONDJ FMAMJ
11
12
13
14
Reported rejections in the system and their share in total

payments made through the system is an important measure
for the assessment of the liquidity risk. The number of
rejections due to insufficient liquidity as well as its share in
Average daily balance (opening)

Average daily available balance (opening without ArCa freezing)
Average daily payments
46
51
For details, please see the publications Financial Stability Report, and
the Payments and Securities Clearance and Settlement Systems in the
Republic of Armenia, 2007.
52
The daily average indicator of own liquidity was calculated on the basis of
a ratio of opening liquidity on dram correspondent accounts of commercial
banks to debits (payments) through the account. Incoming payments are not
included in the indicator so that a stress-scenario can assess the likelihood
of bank rejections if additional liquidity is not available within a day, namely
to which extent would banks generate their payments using only opening
balances of their own funds. The calculation does not include cash
enhancements through their own accounts of commercial banks. The
indicator is calculated for a system level (aggregate for all banks), so
indicators may vary across commercial banks.
53
The debits side of the account, including the EPS payments on other debit
flows on the account.
the EPS payments remain negligible a maximum of 0.8% by

value and 0.002% by number throughout the two quarters.
These rejections are merely due to individual cases and
may be a result of improper management of liquidity
(payment flows) by the participants, so this could not affect
the liquidity of the system.
Intraday distribution of payments

There were two peak hours (in terms of value and
number) during an operational day for executing payments
at the opening and closing of the day.
Some changes were observed in patterns of intraday
distribution of payments.
The peak for payments by number has moved to the
closing of the day, increasing the end-of-day share of
payments (the semiannual figure is 20%, from 3:00 p.m. to
4:00 p.m., which is 4-5 percentage points higher from the
indicator reported in the previous year).
Rejections due to insufficient liquidity are

insignificant.
Some changes were observed in regard to intraday

distribution of payments.
I n t ra d a y d i s t ri b u t i o n o f t h e v a l u e o f
p a y men t s o n a n a v era g e s emi a n n u a l b a s i s
%
35
30
25
20
15
10
5
1 half 2013
2 half 2013
18:0119:00
16:0117:00
14:0115:00
12:0113:00
10:0111:00
08:0009:00
The peak for payments by value remained the same (from

10:00 a.m. to 11:00 a.m.), yet the share has increased
during the reporting period by 10 percentage points to an
average 31% of intraday payments. Because no changes in
the share at the closing of the day were observed, and the
share of payments in the remaining hours contracted instead,
the increase of the share in the peak hour contributed to
even more unequal intraday distribution of payments by
value.
1 half 2014
Concentrations during certain hours of the day did not

cause problems.
I n t ra d a y d i s t ri b u t i o n o f t h e n u mb er o f
p a y men t s o n a n a v era g e s emi a n n u a l b a s i s
%
35
30
Despite the changes in the hourly distribution of

payments, the system remained free of troubles while the
risk was estimated to be minor. The peak of payments by
value was recorded at the opening of the day and,
fortunately, was not followed by the peak of payments by
number. As a result, the risk to liquidity and capacity of the
system is estimated to be minor. Intraday distribution of
payments by number was mainly due to the change in the
behavior of participants in respect of message types in the
system. Payment concentrations at the closing of the day did
not cause problems thanks to an adequate level of system
capacity as well as optimization of message types in use
(which resulted in a considerable reduction of total payment
flows).
25
20
15
10
5
0
08:0009:00
10:0111:00
1 half 2013
12:0113:00
14:0115:00
2 half 2013
16:0117:00
18:0119:00
1 half 2014
In the period under review, the payments per hour

ratio has dropped, and the probability of risks
associated with the system capacity is estimated to be
minor on the whole.
Given the positive performance of liquidity and

operational availability indicators of the system, as well as a
very small share of rejections in total payments (for details,
please see the relevant subsections), an uneven distribution
and concentration of payments during certain hours of the
day did not lead to problems in the first half of 2014. The
likelihood of emergence of risk to the system is generally
low.
47
System capacity
Ma x i mu m n u mb er o f p a y men t s p er h o u r, b y
mo n t h
In the first half of 2014, the number of payments per hour

in the system plummeted dramatically, which was
determined by dynamic use of bulk message types, on the
one hand, and reduced number of single message types, on
the other.
number
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
J FMAMJ J ASONDJ FMAMJ J ASONDJ FMAMJ J ASONDJ FMAMJ
11
12
13
14
Dy n a mi c s o f t h e i n d i c a t o r ex c eed i n g 2 5 0 0
p a y men t s p er h o u r a n d i t s s h a re i n t h e
t o t a l o p era t i o n a l h o u rs o f c u rren t mo n t h
In the period under review, the maximum hourly rate was

4652 payments per hour against 5997 payments/hour
recorded in 2013. The maximum daily rate of payments has
reduced notably to 26028 compared to the peak of 41809
payments/day ratio reported in 2013. The peak hour was
recorded in February, from 11:00 a.m. to noon, making up
27% of the number and 16% of the value of the days
payments. The maximum hourly rates by month have
reduced considerably.
%
100
80
60
40
20
0
J F M A M J J A SO N D J F M A M J J A SO N D J F M A M J
12
13
14
Share in operational hour
Th e d y n a mi c s o f p a y men t s ex c eed i n g t h e
t h res h o l d o f 2 5 0 0 , 3 5 0 0 a n d 4 3 0 0
p a number
y men t s p er h o u r
80
70
The shares of all marginal indicators (including the

payments per hour) have shrunk. Moreover, starting from
October 2013, the 4300 and more payments per hour ratio
was no longer observable whilst the 3500 and more
payments / hour rate has become very rare.
The matching with total payments via EPS shows that an
abrupt fall in the marginal indicators was due to the reduced
number of total EPS payment messages, which in turn is
driven by optimization of message types applicable in the
system.
60
50
40
30
20
10
0
J FM AMJ J AS OND J FM AMJ J AS OND J FM AMJ
12
13
14
2500-3500
3500-4300
4300 and more
The above system capacity indicators and the results of a

special study54 denote that the hourly peaks were determined
by increased activity of a few commercial banks in certain
days. Given the optimization of message types used in the
system as well as the lack of actual incidents in the
meantime, the likelihood of emergence of capacity-related
risks is estimated to be low.
Operational availability of the system

Operational availability of the EPS is 100%.
No incident affecting the operational availability of

Electronic Payment Systems of the Central Bank during the
first half of 2014 was reported. In the period under review,
the operational availability was 100% for the EPS and 100%
for the system Operational Day55.
54
The study was made to determine the nature of utmost payments per hour
(on a monthly basis) and to identify the payer behavior.
55
The 2008 Financial Stability Report of the National Bank of Denmark
states that operational availability for systemically important RTGS system,
which is compliant to ESCB system requirements, should be very high, e.g.
operational availability of TARGET was 99.65 percent, which is considered a
good indicator.
48
5 . 2. G U AR AN TY O F DE P O S I T S
In 2005, the Central Bank of Armenia established the
Deposit Guaranty Fund. The Fund acts in accordance with the
Republic of Armenia Law on Guaranteeing Reimbursement of
Bank Deposits of Individuals. An important pillar for financial
stability, the Fund contributes to strengthening the
soundness of the banking system, enhancing public
confidence in the banking system and protecting depositor
interests in the country.
In the first half of 2014, the banking sector of Armenia saw
a sustainable growth of bank deposits of individuals and the
number of depositors.
As of the end of the first half of 2014, relative to the last
year, the amount of deposits of individuals has grown by
around 6.70%, with the amount of guaranteed deposits
grown by 3.14%, to AMD 268,045,018 thousand. Relative to
the end-year 2013, the number of individuals holding
guaranteed deposit has increased by 1.72% to 1,609,636
persons (excluding former USSR Savings Bank depositors
who have been registered with VTB Armenia Bank CJSC).
In the banking system of Armenia, the biggest community
of depositors only holds deposits in local currency. As of the
end of the period under review, the share of depositors who
only hold deposits in dram was 84.56% in total. The share of
depositors who only hold foreign currency deposits was
6.50% in total. The above figures did not change much in
comparison with the previous reporting period.
At the end of the first half of 2014, the share of local
currency deposits in the banking sector of Armenia has
grown by 0.14% to 30.74% in relation to the end-year 2013.
5 . 3. C R EDI T R EGI S T RY AN D A C RA CR E DI T B U R EA U
The Central Bank Credit Registry

The Credit Registry has been functioning within the
structure of Statistics Department of the Central Bank of
Armenia since January 1, 2003. Core function of the Credit
Registry is to collect reliable information for effective
surveillance and analysis. The Credit Registry keeps record of
loans in excess of AMD 1.5 million and loans in the amount
less than AMD 1.5 million which were fallen overdue and
classified. At the end of the first half of 2014, the number of
loans in the database of the Credit Registry was 1,922,918
from which 1,790,675 were loans provided to individuals
and 132,243 loans provided to companies.
49
The number of loans registered in ACRA database
Individuals
Legal persons
Total
Th e n u mb er o f req u es t s rec ei v ed d u ri n g f i rs t
h a l f o f 2 0 1 3 -2 0 1 4
25000
20000
15000
10000
5000
Outstanding
Repaid
Total
433682
1356993
1790675
19688
112555
132243
453370
1469548
1922918
The total number of loans registered with the Credit

Registry has increased by 405,688 in relation to the first half
of the previous year. At the end of the period under review,
the Credit Registry possessed information on 453,370 loans
outstanding and 1,469,548 loans repaid. According to the
Credit Registry data, in the first half of 2013 lending
institutions originated 120,725 loans in number compared to
129,170 loans provided during the first half this year.
0
J
2013
2014
Changes to the methodology and software package for the

operations of the Credit Registry are underway. Specifically,
starting from January 1, 2014, the Credit Registry halted the
practice of providing information to queries made by
commercial banks and credit organizations in order to assess
borrower creditworthiness and monitor current loans.
Work is carried out to design a similar database and
uniform reporting formats so that commercial banks and
credit organizations could furnish information to the Credit
Registry and ACRA Credit Bureau in an improved manner.
This will contribute to an increased effectiveness of activities
of financial institutions and better quality of information
collected on borrowers. Further efforts are spent to increase
the effectiveness in using the Credit Registry data for
supervisory and analytical purposes.
Th e n u mb er o f l o a n s reg i s tered i n A CR A
d a ta b a s e (i n th o u s a n d s )
8000
7000
6000
5000
The ACRA Credit Bureau

In the period under review, relative to December 2013,
the number of clients registered with the ACRA Credit Bureau
has increased by 3.2% to 1,402,334 as of June 30, 2014.
Note that 98% of these clients are individuals. In the
meantime, the number of loans in the database has
increased by 9.2% to 9,089,145 loans as of June 30, 2014.
4000
3000
2000
1000
0
11
12
13
14
Number of loans outstanding
Number of loans repaid
Th e n u mb er o f b o rro w ers reg i s t ered i n

A CR A d a t a b a s e ( i n t h o u s a n d s )
1400
Any individual or company can obtain information from

the Credit Bureau about their credit history. For credit history
of the client and/or partner, companies have to sign a
service contract with the Credit Bureau and get a written
consent from the subject of credit history.
1200
1000
800
600
400
200
0
11
12
13
14
Individuals
Legal persons
Source: ACRA Credit Bureau.
50
The Credit Bureau began providing credit reports from

April 2007. In the first half of 2014, relative to the same
reference period last year, the number of credit reports has
risen dramatically, by 112%.
Starting from 2014, the Credit Bureau cooperates with
Express Credit UCO, a universal credit organization and

Orange Armenia CJSC, a telecommunications services
provider. The cooperation with Orange Armenia CJSC

involves the Credit Bureau getting information on overdue
payments and entering it with its database. Currently, the
Credit Bureau negotiates with ArmenTel CJSC, another
provider of telecommunications services, for further
cooperation. Moreover, the Credit Bureau has an access to
public databases of the Armenian Ministry of Labor and
Social Affairs and is authorized to obtain information from
the Armenian Traffic Police Service about penalties 60 days
fallen overdue (it counts from the next day of the established
deadline for payment of penalties), in accordance with the
Republic of Armenia legislation. Negotiations with the
Armenian Ministry of Finance over getting information on
outstanding tax liabilities are also underway.
Th e n u mb er o f rep o rt s p ro v i d ed b y A CR A
c red i t reg i s t ry
400000
350000
300000
250000
200000
150000
100000
50000
0
11
12
13
14
Source: ACRA Credit Bureau.
A multi-level coding system has been developed to protect

the information possessed by the Credit Bureau and prevent
its unauthorized use by third parties. The system tracks all
actions, and an ongoing monitoring of the system is in place
to prevent suspicious and illicit action.
SUMMARY
The results of monitoring indicate that credit and liquidity
risks to the Electronic Payment System are minimized, the
level of system capacity is satisfactory, and the intraday
payments are executed uninterruptedly. No operational risks
were identified in the system, so the systems availability has
been at an internationally accepted level.
In general, the EPS operation is satisfactory. The
developments in the payment and settlement system
remained manageable, without such risks that could
undermine the financial stability.
51
C HA R T S
Regional economic growth rates .....................................................................................................................................
Annual growth rate of world trade .................................................................................................................................
10
Brent oil prices ..................................................................................................................................................................
10
Copper prices ....................................................................................................................................................................
10
Molybdenum prices ..........................................................................................................................................................
11
Wheat prices ......................................................................................................................................................................
11
Gold prices ........................................................................................................................................................................
11
Inflation in selected countries .........................................................................................................................................
11
10-year government bond yield ......................................................................................................................................
12
Interest rate policies of central banks ...........................................................................................................................
12
USD exchange rate versus EUR and GBP ......................................................................................................................
13
Interbank interest rates ....................................................................................................................................................
13
The anuual growth of main sectors of economy ..........................................................................................................
16
GDP expenditure components .......................................................................................................................................
16
Growth of lending to main sectors of economy ...........................................................................................................
17
Armenia government budget deficit (-) / surplus (+) ....................................................................................................
18
Armenia's imports by commodity groups ......................................................................................................................
18
Armenia's exports by commodity groups ......................................................................................................................
19
Armenia foreign trade, by country ..................................................................................................................................
19
Net private transfers and income of seasonal employees ..........................................................................................
20
Net non-commercial remittances of individuals by banking system ..........................................................................
20
Nominal average wage and unemployment ..................................................................................................................
21
Future conditions index and its components ...............................................................................................................
21
Households' debt and income indicators ......................................................................................................................
21
The structure of household liabilities to financial institutions ....................................................................................
22
Consumer and mortgage loan portfolio of banks and credit organizations ..............................................................
22
Consumer loan portfolio structure of banks and credit organizations of Armenia ..................................
22
Average apartment price index in Yerevan ...................................................................................................................
23
Apartments prices by communities in Yerevan ............................................................................................................
23
Real estate sale and purchase transactions index ......................................................................................................
24
Volume of loans to real estate market ..........................................................................................................................
24
Monthly volume of repo transactions and repo interest rates ....................................................................................
26
Volume of transactions on credit resource platform and weighted average interest rate ......................................
26
Excess funds in AMD (reserve funds in AMD/ actual reserve funds) ..........................................................................
26
Yield curve change ...........................................................................................................................................................
27
Spread of 6-month and 10-year bonds ..........................................................................................................................
27
Treasury bills allocation volumes and weighted average yield ..................................................................................
27
Security trades by investment service providers ..........................................................................................................
27
Volume of transactions with government securities and volume of transactions with government
securities/outstanding government securities ratio ....................................................................................................
28
Repo transactions by investment service providers .....................................................................................................
28
Securities trades and repo transactions at regulated market of securities ..............................................................
28
Volume of operations in exchange market of Armenia and the exchange rates .....................................................
29
Transactions in exchange market of Armenia by currencies ......................................................................................
29
52
Exchange rates in exchange market of Armenia ..........................................................................................................
29
The structure of financial system assets, by financial institutions .............................................................................
30
Banking system stability map ..........................................................................................................................................
30
Financial intermediation ..................................................................................................................................................
31
Share of 4 largest banks assets, liabilities and capital in total banking system ......................................................
31
Foreign investors' participation in banking system capital of Armenia .....................................................................
31
The structure of risk weighted assets calculated in banking system capital adequacy
index,as of 30.06.2014 ...................................................................................................................................................
32
Loans to economy ............................................................................................................................................................
32
The change of the share of NPLs in the loans to different sectors of economy .......................................................
32
Share of non-performing loans in total loan portfolio ..................................................................................................
32
Structure of bank loans to residents, by economy sectors ........................................................................................
33
Share of loans to the businesses and individuals in total loan portfolio ..................................................................
33
Loans to major borrowers/total loans ............................................................................................................................
33
The number of banks violating capital adequacy regulatory ratio under dynamic growth of loan losses ............
33
The dynamics of actual and regulatory liquidity ratios of the banking system .........................................................
34
The ratio of banking system assets to liabilities by terms to maturity .......................................................................
34
The ratio of banking system major liabilities to total liabilities ..................................................................................
34
The structure of funds financing loans of banking system of Armenia ....................................................................
34
The number of commercial banks violating liquidity regulatory ratios in case of individuals' call and time
deposits runoff ..................................................................................................................................................................
35
Net income of the banking system from foreign currency trades and revaluation ..................................................
36
Average interest rates of bank deposits and loans ......................................................................................................
36
The share of financial assets at fair value through profit or loss and available for sale financial assets
in total assets ....................................................................................................................................................................
37
The structure of total regulatory capital .........................................................................................................................
38
Profitability ratios of the banking system ......................................................................................................................
38
Income and expense of banking system .......................................................................................................................
39
Banking system ROA in selected East European and CIS countries ..........................................................................
39
Banking system ROE in selected East European and CIS countries ..........................................................................
39
Balance of loans to residents by credit organizations, by sectors .............................................................................
40
The structure of assets in the capital adequacy ratio of investment companies as of 30.06.2014 ......................
40
Insurance sector assets, as of 30.06.2014 ...................................................................................................................
41
Main ratios of insurance sector of Armenia....................................................................................................................
42
Insurance premium/ GDP in EEC and CIS (2013) ........................................................................................................
42
Loss and expense ratios of Insurance sector ................................................................................................................
42
The share of risk weighted assets and required solvency in insurance sector capital adequacy ratio,
as of 30.06.2014 ..............................................................................................................................................................
43
Payments by Electronic Payment System ......................................................................................................................
45
The dynamics of payments number by MT ...................................................................................................................
45
The dynamics of average daily payments on own expense .......................................................................................
46
Average daily payments, average daily opening balances, average daily opening available liquidity
comparative analyses .......................................................................................................................................................
46
Intraday distribution of the value of payments on an average semiannual basis ....................................................
47
Intraday distribution of the number of payments on an average semiannual basis ................................................
47
53
Maximum number of payments per hour, by month ...................................................................................................
48
Dynamics of the indicator exceeding 2500 payments per hour and its share in the total operational hours of
current month ...................................................................................................................................................................
48
The dynamics of payments exceeding the threshold of 2500, 3500 and 4300 payments ....................................
48
The number of requests received during first half of 2013-2014 ..............................................................................
50
The number of loans registered in ACRA database ......................................................................................................
50
The number of borrowers registered in ACRA database .............................................................................................
50
The number of reports provided by ACRA credit registry ............................................................................................
51
T AB L E S
IMF Overview of the World Economic growth Projections ..........................................................................................
Qualitative public debt indicators of the Republic of Armenia ................................................................................
17
Residential buildings completion by sources of financing .........................................................................................
24
Indices of government coupon bonds in circulation, by maturity as of 30.06.2014 ..............................................
27
Indices of overnment securities portfolio of comercial banks as of 30.06.2014 ....................................................
27
The Herfindahl-Hirschman Concentration Index ..........................................................................................................
31
Credit risk stress scenarios ............................................................................................................................................
33
Stress scenario of credit risk derived from off-balance sheet contingent liabilities ...............................................
33
Liquidity risk stress scenarios ........................................................................................................................................
35
Stress scenario of liquidity risk derived from off-balance sheet contingent liabilities ...........................................
35
Foreign exchange risk stress scenarios .......................................................................................................................
36
Interest rate risk stress scenarios .................................................................................................................................
37
Real estate price change stress scenarios ....................................................................................................................
37
Assets, liabilities, capital and profit of credit organizations .......................................................................................
39
Credit risk assessment scenarios ..................................................................................................................................
40
Solvency assessment stress scenarios .........................................................................................................................
42
Credit risk assessment stress scenarios .......................................................................................................................
43
Foreign exchange risk assessment stress scenarios ...................................................................................................
43
Liquidity risk assessment stress scenario ...................................................................................................................
43
The number of loans registered in ACRA database ...................................................................................................
50
54
G L O S S A RY O F T E R M S
Economic growth
The growth of volume of goods and services produced in the economy

during a certain period of time.
Inflation
Consumer price index
An increase in the general level of prices of goods and services.
Balance of payments
A system of recording of all economic transactions of Armenia (residents

and non-residents) with the rest of the world over a reporting period (a
quarter, a year).
Foreign trade
This involves an exchange of capital, goods, and services across

international borders or territories, in the form of exports and imports.
Gross external debt
Gross external debt, at any given time, is the outstanding amount of

those actual current, and not contingent, liabilities that require
payment(s) of principal and/or interest by the debtor at some point(s) in
the future and that are owed to nonresidents by residents of an
economy.
Credit risk
Credit risk refers to the risk that a borrower will default on any type of
debt by failing to make payments which it is obligated to do. The risk is
primarily that of the lender and includes the lost principal and interest,
disruption to cash flows and increased collection costs.
Liquidity risk
Liquidity risk is the risk that a given security or asset cannot be traded
by the financial institution quickly enough in the market to prevent a
loss (or make the required profit).
Foreign currency risk
Foreign currency risk is the risk that a change in exchange rate in the
market will adversely affect profits and/or capital of the financial
institution.
Interest rate risk
Interest rate risk is the risk that interest rate volatilities in the market will
adversely affect profits and/or capital of the financial institution.
Price risk
Price risk is the risk that a change in price of securities in the market or
price of similar financial instruments on balance sheets will adversely
affect profits and/or capital of the financial institution.
Standard asset
Watched asset
An asset which is serviced under a contract, and is not problematic.
Substandard asset
An asset the contractual obligations towards which are not performed

due to the borrowers fragile financial standing or inability to repay the
debt.
Doubtful asset
An asset the contractual obligations towards which are not performed; it

is more problematic, making its collection at the given time very difficult
or impossible.
Loss asset
An asset non-collectable and fully impaired uncollectible, so that its

recording on the balance sheet is no longer reasonable.
Nonperforming asset
An asset which has been classified by the bank as watched or

substandard or doubtful or bad.
Major borrower
A party the risk on which exceeds 5 percent of total capital of the bank.
Major liability
A liability that amounts to 5 percent and more of total liabilities of the

financial institution, without regard to affiliation.
Return on assets (RoA)
A ratio of net annual profit to average annual total assets.
An index of the variation in prices paid by typical consumers for retail

goods and other items. The consumer price index measures the changes
in the price of a market basket of consumer goods and services
purchased by households.
An asset which is serviced under an original contract yet certain

circumstances have emerged that may undermine the borrowers ability
to serve that asset.
55
Return on equity (RoE)
A ratio of net annual profit to average annual total capital.
Total liquidity
A ratio of high liquid assets to total assets.
Current liquidity
A ratio of high liquid assets to demand liabilities.
Regulatory total capital
The difference between total capital as shown in statement on financial

standing and deductions as specified in Central Bank Regulation 2 on
Banks and Banking.
Capital adequacy
A ratio of regulatory total capital to risk weighted assets.
Leverage
A ratio of total assets to total capital.
Off-balance sheet contingent Off-balance sheet contingent assets include outstanding credit lines,
asset
credit cards and overdrafts as well as letters of credit, guarantees and
warranties provided.
Net provisioning
The difference between provisions to and recoveries from assets loss

reserve fund.
Net foreign currency position The difference between assets and liabilities in FX assets and local
currency assets containing FX risk.
Gross foreign currency

position
This position measures the sum of absolute values of positions of

various currencies.
The Herfindahl-Hirschman
index
This index is defined as the sum of the squares of the market shares. It
varies between 0 and 1, characterizing the level of concentration (values
near to 0 denote lower concentration.
Economic cost of capital
The difference of the present value of total assets and present value of
total liabilities.
Spread
The difference between deposit and credit interest rates
ABBREVIATIONS
CBA
Central Bank of the Republic of Armenia
GDP
Gross Domestic Product
GNDI
Gross National Disposable Income
NSS
National Statistics Service
IMF
International Monetary Fund
UNO
United Nations Organization
CIS
Commonwealth of Independent States
ECB
European Central Bank
USA
United States of America
FRS
Federal Reserve System
NMC
National Mortgage Company
FDI
Foreign Direct Investment
RF
Russian Federation
IFRS
International Financial Reporting Standards
MTPL
Motor third party liability insurance
CDA
Central Depositary of Armenia
TB
Treasury Bills
EPS
Electronic Payments System
GSASS
Government Securities Accounting and Settlement System
The Central Bank of the Republic of Armenia, 6, Vazgen Sargsyan str., 0010, Yerevan, http:// www.cba.am
56

Central Bank of Armenia Releases 2014 H1 Financial Stability Report

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Central Bank of Armenia Releases 2014 H1 Financial Stability Report

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CENTRAL BANK OF THE REPUBLIC OF ARMENIA

This Financial Stability Report presents an assessment of potential risks

Policy Implementation and Armenian Financial System: Development,

The data published in this report are as of 30.09.2014

The Central Bank of the Republic of Armenia

4.1.1. Financial intermediation; concentration ......................................................... 31

Financial stability can be characterized as concurrence of financial and

The Financial Stability Report of the Central Bank of the

financial institutions of Armenia, and

The set of risks threatening financial stability has not

The first half of 2014 was prominent with downside

Monetary authorities kept on implementing

Economic developments in trade partners cannot be

The main risks affecting financial stability of Armenia

exports and private remittances have been slower (see

Armenia's economic growth stands below the projected

Slowing growth rates in the banking credit is mostly due

Though in some cases on an upside track, risks in the

The first half of 2014 was marked with a number of

However, international organizations' and markets'

The first half of 2014 started with optimistic expectations,

Indicators marked by asterisk in this chart and the ones

Global instability factors are persisting, and despite global

IMF Overview of the World Economic growth Projections, %

Notwithstanding weak activity reported in the first half of

International developments and predictions were based on information

developed countries is expected to be 1.8%, 0.5 percentage

In the U.S.A., economic growth slowed down during the

Eased monetary conditions of the U.S. Federal Reserve

Developments in Euro-area are positive, but low

Despite positive developments mentioned above, a

Slowing of economic growth in developing countries

Import (developed countries)

Developing countries, which generate 2/3 of global

Developments in commodity markets were largely in

(USD per barrel)

As economic activity grew stronger in late 2013, the

Behavior of prices of base metals was determined

(USD per ton)

The first half of 2014 saw an increase of prices of basic

Current geopolitical situation in the Middle East and

Source: Bloomberg Data Warehouse.

During the first two quarters of 2014, prices of base

was USD 6884 per ton, dropping by 9.1% in relation to the

(1000 USD per ton)

In the short run, other conditions being equal, base

The wheat prices have decreased.

(USD per bushel)

(USD per troy oz)

In the short-term perspective, in view of optimism for

Source: Bloomberg Data Warehouse.

The spread of interest rates of government bonds

In the first half of 2014, relative to the previous

and other highly liquid government bonds. However,

Source: Bloomberg Data Warehouse.

The central banks of main developing countries and of

New enhancements of capital have contributed to better

In particular, in June the ECB did a 10-basis-point cut on

Eur Refi rate

Source: Bloomberg Data Warehouse.

The Bank of England kept monetary policy rate at a low

Favorable macroeconomic developments encouraged