In a conversation with the correspondent of ArmInfo news agency, Artak Hanesyan, Chairman of Ameriabank Directorate - General Director, presents his views on the new image and prospects of the banking system of Armenia.
In 2016, the crisis phenomena that began to appear in the middle of 2014 and deepened in 2015 will be more significant for Armenia. The situation worsened at the border of 2014-2015 with the jump in the exchange rate of the US dollar, as well as with a clearer manifestation of difficulties in the economy. And the difficult economic situation affects the banks, which are the same for the economy as the circulatory system for a person. In 2014-2015, Armenia's economic growth rate slowed down from 3.5% to 3%. Banks were affected by the deterioration of asset quality, problems arose even in large businesses, not to mention the retail sector. This is accompanied by an increase in reserves and a decrease in the profitability of the banking system. According to the forecasts of international organizations, the economic growth rate of Armenia in 2016 will be lower - 2.2%. Many experts compare 2016 with the peak of the 2009 crisis. All these manifestations are felt most heavily by the banking system, most of whose participants, in addition to bringing lending out of recession, must also ensure the requirement of the Central Bank to increase the capital to the normative scale of 30 billion drams by 2017. In fact, a serious transformation of the banking sector is inevitable, but the reduction of the number of players, along with their enlargement, will enable not only to independently withstand the shocks of the crisis, but also to contribute to the growth of the country's GDP at a proper level through lending to the key sectors of the economy.
How many participants will remain in the banking system in 2017?
In my opinion, it is enough to have only 10-11 banks in the banking system of Armenia, of which 5-6 will be major players - system-forming banks, and the rest will be niche banks, although the total number of banks may reach 15 by the end of the year. Half of the banks today face a serious capitalization problem. by 2017, the amount of capital should reach 30 billion drams. Moreover, most of them do not significantly reach the normative scale. No matter how the situation changes, it should be understood that the essence of development lies in it.
Won't a significant reduction in the number of banks lead to monopolization of the market?
I don't think it will lead to monopolization. Let me explain why, for example, in Georgia, two large banks share 70-75% of the market, and the rest goes to the other 18 banks. But even under such conditions, there is no pronounced monopolization of the banking system. And in Armenia, we are talking about the expansion of a healthy system, because having 10-11 banks is a completely sufficient indicator for our economy, under the conditions of the current population.
What do you think, is the forecast of the growth of the banking system of Armenia in 2016 realistic?
First of all, let me say that 2015 was a difficult year for Armenia. It was necessary to solve a number of problems, including dram devaluation, significant drop in transfers, drop in demand, etc. In fact, the banking system of Armenia did not grow in 2015. Yes, individual banks managed to grow in certain directions and parameters, but the system as a whole did not grow quantitatively. The year was also difficult in terms of qualitative indicators, as deteriorating asset quality forced banks to spend more on building up provisions for potential loan losses. As a result, the efficiency of the banking system decreased. 2016 will be a turning point, because the safety cushion was already created in 2015, the loan reserves were formed, and due to the careful analysis of the creditworthiness of potential borrowers, the growth of lending was restrained, as a result, banks accumulated large reserves to secure non-performing assets. In 2016, I still expect some improvement in asset quality, but even if that doesn't happen, it's unlikely to deteriorate. I think that there will even be a positive shift in the direction of development, the growth of key indicators, if, of course, banks manage to solve the problem of effective realization of the property pledged in terms of non-performing loans.
It turns out that the rescue of the drowning is in the hands of the drowning. And why, when the economy needs support, banks direct all necessary resources, even suffering losses, and when banks need support, then they have to rely on themselves.
Unfortunately, it is. Each bank itself finds the methods of getting out of the created situation or the tools to replace them, including the potential buyers of real estate accumulated in banks as a result of non-performing loans. We see that the real estate market is illiquid, there was a drop in prices in 2015, naturally, this complicates the process of selling mortgaged property.
What should the state do to address these negative consequences and what should the regulator do?
On the one hand, the regulator, in order to regulate the financial market, in December 2014, at the peak of the dram devaluation, tightened the mandatory reserve ratio (from 12% to 24%) for funds involved in foreign currency. This led to large costs, reducing the AMD lending to a minimum. In order to correct the situation related to lending, in 2015, the Regulator eased, in some cases reduced to zero, the mandatory reserve requirement for obligations in foreign currency and AMD in the case of placement of bank bonds in the domestic and foreign capital markets, as well as funds raised from international financial organizations for a period of more than 2 years. And it is an incentive to attract cheaper and long-term funds. In this regard, the Regulator correctly approached the solution of the created problems.
As for the government's steps, it is necessary to pay attention to easing the conditions for system-forming and export-oriented enterprises. It can be subsidies, cheap loans, as well as temporary tax holidays. As we can see, there are various methods of promotion, the consistent and active use of which will help domestic enterprises to maintain their position in the export sector during the difficult crisis period.
Doesn't the substantial dominance of the volume of funds raised by banks (5.5 billion US dollars, including funds raised by international programs) over the volume of lending (4.7 billion US dollars) indicate serious problems of banks in terms of realization of funds in the crisis phase?
It will not be very correct to draw conclusions based on the indicators recorded during the crisis years. There can be many factors in the situation. In 2015, banks had to curb lending. First of all, it was dictated by the scarcity of funds in Armenian drams, and we know that consumer lending is carried out in drams. Second, the review of risk management in many banks provided for the tightening of requirements for potential borrowers, especially in terms of their ability to fulfill obligations in crisis conditions. Among the requirements for borrowers, the debt coverage ratio (DSCR - Dept Service Coverage Ratio) was first revised: it was tightened from the previous 1.1 to 1.4, that is, if the turnover or income falls by about 30%, problems may arise regarding the fulfillment of obligations to the bank. This is followed by collateral, the tightening of requirements for which was dictated by low liquidity and falling real estate prices.
Crisis phenomena began to be felt in the middle of 2014, which deepened in 2015. How much the banks will be able to overcome this situation will be shown by 2016, which implies serious structural changes in the banking system.
What role does Ameriabank reserve for itself in correcting the lending situation of the Armenian economy? Does the EBRD's participation in the replenishment of Ameriabank's capital make it possible to expect the involvement of large-scale funds from external sources?
We will receive 40 million US dollars (about 20 billion AMD) in the form of direct investments in the capital of Ameriabank, in two stages. Initially, within the framework of the additional issue, the EBRD invested 30 million USD (about 15 billion AMD), receiving 20% of the package of shares of Ameriabank, and the remaining 10 million USD is planned for future capital increase. By increasing the capital, Ameriabank's capital adequacy will reach 19%. In addition to EBRD funds, a subordinated loan of USD 50 million was provided by IFC.
It is clear that it is not possible to attract significant funds from domestic sources in a short period of time. And thanks to the mentioned 90 million US dollars, in fact, we have the opportunity to attract at least 500 million US dollars of additional funds from external sources, both from partners already working with us, and from new sources. We have already had a number of meetings with international financial organizations and banks that are interested in the Armenian financial market. In addition, our current partners, with whom we work quite successfully on various projects, have expressed their desire to continue cooperation with us through additional funding.
In case of attracting such large funds, will the bank not face the difficulty of their effective allocation?
I wouldn't say it's a challenge, it's more of a problem that needs to be solved. Of course, there is the concern that the market is not comprehensive and therefore cannot accept huge amounts of funds, whatever their price. That is why we are planning to implement the process in stages within 1-2 years. Of course, from the point of view of efficiency, it would be better for the bank to immediately use this opportunity to increase profitable assets. However, knowing the size of the market and the existing demand, we are going to implement these funds in stages. For example, next year we are going to increase credit investments by 100-130 million US dollars, but if the demand still exceeds our expectations, then this amount can be larger, especially since we have the opportunity to quickly attract additional funds from our partners.
There are big and good projects that need financial support, both for lending and further promotion, and we are talking about serious funds, and accordingly, the bank must have a significant amount of capital. Ameriabank's position in terms of attracting and lending to large taxpayer clients is quite strong.
Which areas are prioritized in Ameriabank's credit policy?
We are very interested in the field of agribusiness, in particular, the construction of greenhouses, 80-90% of the products of which are exported to Russia. We are also interested in the fields of energy and mining, and in terms of the latter, despite the decrease in international prices of energy and mining raw materials, the demand for products remains. And that's why we feel very comfortable lending to mining companies. We are also very interested in the telecommunications sector, where we have projects and in 2016 we plan to lend a number of new projects.
SMEs are within the scope of Ameriabank's targeted lending. We will always pay great attention to this direction and make SME loan products as attractive as possible in order to increase our customer base in this segment.
Do you foresee an M&A opportunity in addition to lending?
Yes, we have never ruled out the possibility of M&A (merger and merger) with one or more banks. To say more, we receive and discuss such proposals from time to time. We look very closely at the performance of banks that may be of interest to us in terms of acquisition or merger. There aren't many of them, but they are there nonetheless. It all depends on the price.
I think that 2016 will be very interesting in terms of unification and strengthening of the banking system, at least in 2015 we saw the beginning of that process, two merger transactions took place (ProCredit Bank with Inecobank, and BTA Bank with Armeconombank). At the beginning of 2017, we will already see a new banking system with serious structural changes, stronger and more stable.
EBRD, as a rule, offers both corporate governance and risk management mechanisms from participating in the capital of any bank. Are you taking advantage of this opportunity?
We have sufficiently developed corporate governance mechanisms that meet international standards. But, realizing that a reputable shareholder like EBRD can have a new coin in improving corporate governance, we will of course take advantage of their suggestions. The same can be said about risk management. We are always open to such suggestions. And today, the goal of the EBRD project is to support the capitalization of Ameriabank, contributing to the realization of its strategic growth goals, with the final goal of the IPO (initial public offering of shares) in the future.
Ameriabank's IPO plans are quite intriguing. When do you plan to enter the international capital market?
They are not plans for the coming year, we understand well that IPO is not an end in itself, we have to work consistently to achieve that goal. We need to ensure greater growth, both quantitatively and qualitatively, and of course the external environment should also be favorable for the implementation of the IPO.
The new format of cooperation with the Eurobank is aimed at the implementation of a more ambitious strategy, in particular, entering international markets with an initial public offering (IPO). IFC's subordinated loan will also help prepare for the IPO.
What kind of trend in interest rates can be expected in 2016 and what could be the reason for this?
You don't have to wait for interest rates to drop. Let me tell you why. First, attracting funds in the domestic market in AMD is an expensive pleasure. In other words, we should take into account repo rates, the yield of securities, including government bonds, as well as deposit interest rates, when pricing loans in AMD. This is about AMD funds. And I don't foresee significant fluctuations in terms of US dollar funds either, because, first of all, the pricing is affected by the Libor rate, which is directly related to the US Federal Reserve rate, which increased by 0.25 in 2015, with the prospect of an increase in 2016. , secondly, it is the country risk, which is not moving in a positive direction for now, and thirdly, it is the corporate risk (borrower's risk), that is, the tendency of the fluctuation of interest rates of funds in USD will be insignificant - 0.5%. Ameriabank will finance large projects on the most favorable terms for the borrower.
Is Ameriabank planning to expand its branch network, or is the focus still on expanding remote services?
In 2016, we plan to open two new branches, one in the capital and the other in the region, as a result of which the total number of branches will reach 14. In addition, we are expanding the number of quick customer service points. Two such points are already operating today, and we are going to open four more in the republic in 2016. They are cash-in/cash-out ATMs, kiosks, internet banking. We prefer the use of new technological methods of customer service, plus the quality of service, rather than the further expansion of the branch network. Among them, we are talking about the new investor, the BankWorld remote banking self-service system of the Irish company CR2, which will be available at the end of 2016. This initiative is aimed at the implementation of one of the strategic goals of the bank, in particular, to offer customers a complete package of innovative banking services through modern technologies, which implies a single platform for all remote banking services, which will ensure the maximum convenience of performing banking functions for customers. At the same time, this system will contribute to the development of the culture of remote banking services in Armenia.
Source: arminfo.am