YEREVAN, JULY 18, ARMENPRESS. Armenia is perceived as a "peaceful haven" for funds, and this is a positive sign. Armenian banks have a sufficient base of non-resident individual and legal entity clients. Most of these clients are related to the Armenian Diaspora. Hovhannes Khachatryan, head of the Assets, Liabilities and Capital Management Department of "Ameriabank" CJSC, mentions this, with whom "Armenpress" presents the interview below.
Mr. Khachatryan, to what extent are Armenian banks integrated with international markets? How do the changes in global financial markets affect the banking system of Armenia?
The main ways of integration of Armenian banks into international markets are financial infrastructure, capital market and partnership relations with individual financial institutions (B2B). From the point of view of financial infrastructure, Armenia is sufficiently integrated with international markets. I mean relations with correspondent banks, the SWIFT system, the rating of banks by Fitch and Moody's agencies, the presence of NASDAQ OMX in Armenia, etc.
From the point of view of partnership relations, the mentioned connection is ensured by cooperation with international financial institutions through involved loans, trade financing instruments and various credit programs. The mentioned path of integration plays a big role in the development of the banking system of Armenia.
However, the influence of the capital market is insignificant, as it is unfortunately still in the early stages of development in Armenia. In addition to operating in the domestic market, Armenian banks should consider issuing Eurobonds or initial public offerings (IPOs) on major international platforms. Ameriabank has chosen this path. We are pleased with the largest transactions concluded with the European Bank for Reconstruction and Development (EBRD) and the International Finance Corporation (IFC), which enabled Ameriabank to significantly increase its regulatory capital. But listing on the London Stock Exchange, which is what we are trying to achieve, is another level of integration.
Regarding the second part of your question, let me say that in a dollarized economy, the balance sheets of banks are mostly in dollars, and the interest rates of dollar funds attracted from foreign markets are, as a rule, related to the LIBOR (London Interbank Offered Rate) rate. When the US Federal Reserve raises interest rates, LIBOR immediately goes up, so our borrowing rates go up as well. This is a manifestation of the direct and very serious influence of foreign markets on us. By the way, in order to avoid transferring the mentioned risk to the borrowers, we partially hedge it. Such a step, of course, implies certain additional costs for banks.
In addition, our economy is highly dependent on the international prices of raw materials. First of all, we are talking about metal prices, which are one of the driving forces of our economy. The second important factor is energy prices, which have a great impact on the Russian economy, as well as the flow of remittances. Fluctuations in prices in international raw material markets have a significant impact on our strategic decision-making. Lending, asset quality dynamics, foreign exchange rate, inflation and interest rates are closely related to these indicators.
A very recent example is the so-called Brexit, that is, the referendum on the withdrawal of Great Britain from the European Union. It already had a partial impact on oil and gold prices, exchange rates, and most importantly, expectations of economic entities. Since this impact on the Armenian economy and financial system occurs through the real sector (as opposed to the capital markets), the impact will therefore have a certain time lag.
A stable base of resources allows banks to conduct a successful credit policy and, in general, to be active in the market. At the same time, attracting long-term and affordable funds from international markets has become a problem for many banks during the crisis. However, in this regard, Ameriabank is quite active, which is clearly evidenced by the bank's raising of 20 million US dollars from the German DEG company in May, and then concluding a deal with responsAbility Investments AG. How do you manage to convince foreign partners that cooperation with you is profitable?
Yes, very recently we successfully placed a USD 20 million debt security between four Luxembourg investment funds through responsAbility Investments AG. The funds generated from the placement of securities will be directed to lending to small and medium-sized enterprises in Armenia, financing renewable energy and energy efficiency projects. Attracting funds from foreign markets is of great importance for us, because savings in Armenia are quite limited. Banks that do not have access to external sources are forced to rely on expensive domestic deposits, which in terms of balance sheet diversification, interest rates and terms of borrowing are incomparable to borrowing from international markets.
The current period is characterized by weak economic activity and the presence of certain geopolitical and economic risks. Even in such an environment, we managed to significantly increase our portfolio of funds attracted from international financial institutions and lower the interest rates of these funds. I would like to draw your attention to an important factor of our cooperation with international financial institutions. All these financial institutions present many requirements to banks, which are fixed in credit agreements. We must comply with certain financial standards: capital adequacy, credit risk, we must comply with environmental and social responsibility norms, corporate governance standards. On the one hand, this limits the freedom of action and complicates bank management in a certain way. However, at the same time, the bank's development is becoming more continuous and balanced. Our credit policy and all processes are aligned with the specified requirements (they mainly derive from European directives, as most of our partners are European financial institutions). We and our partners believe that ultimately all this is aimed at improving the quality of financial intermediation and therefore also the structure of the Armenian economy.
But there is another side to the question. Attracting funds is half the battle, they still need to be deployed. Are loans required? And how to maintain a balance between the bank's aspirations to increase the loan portfolio and assess credit risks?
One of the priority tasks of the bank is risk assessment. It is not for nothing that they say that the banking business is nothing but "buying risks" and "selling risks". Credit risks have increased amid modest economic growth, dram devaluation, and reduced remittances from Russia. At the same time, the quality credit demand has decreased.
Today, Ameriabank has almost no limit on attracting resources. The bank's capital adequacy ratio is 18% against the norm of 12%, which enables us to significantly increase the loan portfolio. Our only limitation is our credit market, where 20 banks operate in a limited economic environment with a limited number of business projects in need of financing. Recently, two main trends have been observed in the credit market. On the one hand, there is a discrepancy in financial flows among borrowers for various reasons. Moreover, we are talking about companies with healthy, properly structured and stable foundations, which have experienced temporary difficulties in business and complications related to loan servicing. On the other hand, some banks are unwilling to continue serving their customers. In this situation, we decided to start a big credit campaign. Due to our long-term funds, we offer borrowers the most attractive conditions both in terms of credit terms and interest rates. We are already successfully implementing the mentioned program, which covers not only business loans, but also consumer and mortgage loans. Today, we are the absolute leader in the market with a 15% market share and we expect further growth of this indicator after the end of the credit campaign.
How do the bank's strategic plans affect the structure of assets and liabilities, and how do you manage the balance sheet, given the fact that the bank's total assets exceed USD 1 billion?
Having $1 billion in assets is our first step. Our strategic plans go far, and in the near future Ameriabank will have the opportunity to significantly increase its size. As the person responsible for the management of the bank's assets and liabilities, I must say that the management of assets of 1 billion US dollars in such a small market as ours requires the existence of quite complex systems. In such a case, the manual control option does not work. Our bank's assets make up 10% of Armenia's GDP. And as a system forming bank, we feel our responsibility, the need to be predictable and stable. Today, the risks of Ameriabank are, in a certain sense, the risks of the entire banking system. For example, our actions to manage the Bank's liquidity affect the entire banking system. Therefore, we are stricter and more conservative in terms of liquidity and market risk management. We are not limited to one source of funding, be it a deposit or raising funds from foreign markets. We pay great attention to the diversification of funding sources. The main sources are funds raised from customers, international financial organizations through trade financing instruments, various credit programs and debt securities. We recently successfully issued dollar bonds in the domestic market. The volume of the issue was 15 million USD, and the coupon yield was 6.75%.
Your customers are very lucky. Such an interest rate is rare in the market today.
Yes, the maximum interest rate for dollar deposits (1-2 years) is 5.5%. But let me tell you where the 6.75% interest rate came from. The point is that the policy change by the Central Bank in the sphere of mandatory reserves favors the issuance of long-term bonds. in this case, issuing bonds requires lower provisioning costs than deposits, which is why the bank can offer such high interest rates without increasing its total borrowing costs. In addition, from the point of view of liquidity management, issued bonds are considered a more stable resource base than time deposits. Strange as it may seem, bonds are also more liquid for the client, as they can be sold on the secondary market, often without significant interest loss. We encourage the Central Bank's policy to promote bond issuance and believe that it will become an impetus for the development of the capital market.
It's no secret that the Armenian market is small, and the growth of banks at the expense of the domestic market is limited. At the same time there is a huge foreign market. Do Armenian banks have the opportunity to enter foreign markets, and in what directions can this be done?
Today, Armenian banks have a sufficient base of non-resident physical and legal entity clients. Most of these clients are related to the Armenian Diaspora. Some of them are commercial organizations (mainly Russian) that are served by Armenian banks. In general, the fact that Armenia is perceived as a "peaceful haven" is a positive sign.
Are high interest rates the reason our financial market is so attractive?
No, not only. Although interest rates in Armenia are definitely competitive, the main factor is that the risks in Russian banks are of greater concern to customers, and many prefer to keep their funds in Armenian banks. When it comes to lending, we have many regulatory restrictions and complexities associated with credit risk assessment in other countries. That is why Armenian banks rarely carry out such activities.
We are definitely interested in the idea of expanding into foreign markets. However, despite these ambitions, we will be happy if the Armenian economy grows rapidly, financial flows increase, investments are made, the country's GDP increases, and banks can play a greater role in serving our economy. After all, the main mission of Armenian banks is lending to the Armenian economy.