What problems concern Armenian bankers, what should borrowers do, for whom it is increasingly difficult to properly service loans, what is the advantage of a high reputation - the CEO of "Ameriabank" CJSC spoke about all this in his interview with news.am. deputy, financial director Gevorg Tarumyan.
Mr. Tarumyan, the statistics of the first three months of this year are moderately negative regarding the banking system. What factors do you think will have the biggest impact on the banking system in 2016?
2015 GDP growth (3%) was higher than forecast, but that's where the good news ends. 2015 It was a very difficult year for the banking system. The reduction of private remittances by more than a third (35%) led to a sharp decline in investment, domestic trade, and thus imports, and zero growth in some sectors of the economy (such as construction). This, in turn, caused a decrease in lending volumes and a deterioration in the quality of the loan portfolio. 2016 in the first quarter, the decline in the volume of private remittances practically stopped, and today the main indicators of economic activity are positive or zero, but not negative. In these conditions, despite the low rates of lending growth, it is pleasing that the volume of lending is not decreasing, but increasing. Two indicators of the banking system are cause for concern: the volume of non-performing loans, which is almost 11%, and the profitability of banks, which is approaching zero. The impact of various external and internal factors indicates that in the current year the banking system will continue to work in conditions of low economic activity and relatively low demand for banking services. The latter is also caused by the reduction of the population.
Can you identify the main positive and the main negative factors?
The main negative impact comes from Russia, where economic decline continues amid low oil prices. Let's hope that in the second half of the year we will witness, if not the recovery of economic growth in Russia, then at least a significant slowing down of the rate of decline. The other negative factor is more long-term and is related to the slow process of reforms in Armenia's business environment.
The sharp economic growth expected in Iran due to the lifting of sanctions can have a significant positive impact on Armenia's economy. There are also positive expectations regarding the 2014-2015 by the CBA of RA. with the consistent easing of the unprecedentedly tight monetary policy implemented. We expect new transactions of mergers and acquisitions in the banking system, as a result of which the enlarged banks will become more reliable and efficient. The effectiveness of investments in banks is measured by return on equity. Let me say that in 2016 according to the results of the first quarter, this indicator was only 2.2% in the RA banking system. This is a very low indicator and banks should make efforts to improve the situation.
2015 The most painful problem for banks was loan repayment? What is the situation in 2016?
Traditionally, the quality of the credit portfolio in Armenia has been at a high level. Until 2008-2009 the weight of non-performing loans did not exceed 4-5%. However, after the global economic crisis, this figure reached 8.4% in 2014, and in 2015, it exceeded 10% for the first time. In Ameriabank, this indicator was lower, and during this year, the share of non-performing loans in the loan portfolio has already decreased by 2 percentage points, making 5.35%. Unfortunately, the overall index of the banking system does not show significant change and remains high at around 11%. The good news is that today's non-performing loans in banks are a legacy of past years, and fortunately, there is no increase in non-performing loans among new ones. According to our estimates, the weight of non-performing loans has already reached its maximum and in 2016 this figure will decrease.
And if we evaluate the situation from the borrower's point of view? For many, the credit burden is beyond their means. And it's not always the borrower's fault.
Even two years ago, borrowers were working under different conditions. Sales volumes were significantly higher and the US dollar exchange rate was 15-20% lower. Due to the high demand and the favorable exchange rate of the ruble, the volume of exports to Russia was increasing. However, external economic shocks and the devaluation of the dram had a negative impact on the borrowers' financial condition, thus weakening their ability to service the loans. You know that more than 75% of the loan portfolio of the RA banking system are dollar loans (because the banks' liabilities are mostly in dollars). In the case of business loans, everything is much more complicated, because here the level of dollarization is higher, and monetary inflows are highly dependent on weak domestic consumption and exports (which, as a rule, depend on the Russian market). If the client's business is stable, but as a result of external shocks, a drop in domestic demand and fluctuations in exchange rates, cash inflows have temporarily decreased, we offer to use our bank's package, which is valid until 2016. August 1. The idea of the offer is that the borrowers of other banks, who have properly serviced their loan during the previous year, can refinance it in Ameriabank with more favorable terms, which will allow to lighten the credit burden.
As a result of refinancing, the terms of the loan are revised: the term, interest rate, repayment schedule, so that the amount of monthly payments made by the borrower is reduced in accordance with his cash income. The promotion applies to both small and medium-sized businesses, as well as mortgage loans and all types of consumer loans.
Turning to the businesses you fund, what is the situation there? How important is the bank's understanding of the client's business for successful cooperation?
I think gone are the days when banks were less interested in the success of the client's business, when collateral was the main prerequisite for lending, when the client's business was not transparent, and efficiency was secondary. Fortunately, Ameriabank chose the strategy of close cooperation with the client from the beginning. Today, our customers include well-established companies with whom we have come a long way. Our bank employs people specialized in various fields of the economy, and with their help the bank evaluates credit risks, and the client gets the opportunity to make his business more efficient. In addition, we try to understand the financial and production risks of clients, to understand their dependence on exchange rate fluctuations and external shocks. To mitigate these risks, we impose certain contractual restrictions on customers that protect their business from failure.
How would you describe the bank's liability base?
We can say that we have an ideal commitment structure. They are well-diversified by sources: funds raised from customers (time and demand), loans from international financial institutions and other large borrowings (funds raised from foreign banks, subordinated debt, bond issues, trade finance instruments), and each has an almost equal share of the bank. in the liability structure. As you know, Ameriabank is the leader in the RA banking system both in terms of total liabilities and funds raised from clients. Moreover, we are recording continuous growth in term deposits of individuals, although there are more attractive offers in the market in terms of interest rates. In our opinion, customers are becoming more and more financially literate, and for them, the quality of service, high liquidity and the level of capital adequacy and, therefore, reliability of the bank are becoming more important than extremely high interest rates. We are making great efforts to significantly reduce interest rates on borrowing from international financial institutions. And the result of those efforts is obvious. today, Ameriabank attracts funds from international financial markets at lower interest rates than most banks in Armenia and the region. The reputation of our bank also plays a big role.
Speaking of reputation, I know that a number of events took place in May that confirmed Ameriabank's high reputation among international financial institutions.
Yes, you are right. The first half of May was a period of good news for us. International rating agency Fitch reaffirmed the long-term foreign currency issuer's B+ rating, changing the outlook to stable from negative a year ago. The fact that the forecast was set to "stable" means that, according to the agency's estimates, Ameriabank will maintain its position despite the pressure from the external environment. We also signed a USD 20 million loan agreement with the German Development and Investment Company (DEG) to finance small and medium-sized businesses. Another nice event, the European Bank for Reconstruction and Development awarded Ameriabank with the "Deal of the Year Energy Efficiency Award" for contributing to increasing the energy efficiency of the greenhouse infrastructure in Armenia.
Mr. Tarumyan, many people today do not make long-term plans, they prefer conservative development models, which are specific to markets experiencing decline or stagnation: to maintain the current level of business, to wait until the crisis passes. You chose a different strategy: the aggressive growth strategy. Was the choice conscious?
Previously, when the annual growth of the banking system was 15-20%, everyone had the opportunity to grow. Today, when Armenia's economy is oversaturated with loans, the number of new business projects is limited, and the competition between banks has intensified, few are able to ensure portfolio growth. Bank margins are also shrinking. Inefficient banks become unprofitable, and the question arises as to why and at what expense they can provide growth. From the beginning, our bank adopted a different policy aimed at long-term development rather than short-term profit. At the end of last year, Ameriabank signed two unprecedented deals for Armenia with international financial institutions, as a result of which the European Bank for Reconstruction and Development invested 40 million USD to acquire a package of shares of Ameriabank, and the International Finance Corporation provided a long-term subordinated loan of 50 million USD. Thanks to these transactions, our capabilities in the field of lending will significantly exceed the capabilities of the market in the next 3 years. The almost double increase in capital allows us to finance such large projects that no Armenian bank was able to finance alone before. During the year, we increased our market share by 2 percentage points to 15%. And despite the temporary slowdown in economic activity and economic-geographical risks, we are optimistic about the future and are making long-term plans. We believe that institutional structures like banks should not react rigidly to economic cycles, which are inevitable, but should be a stable partner for business. Let me say more: today, within the framework of Ameriabank's credit campaigns, we not only refinance the loans provided by other banks, but also allocate a sufficient volume of additional credit funds to the borrowers of other banks, because our capital, our financial resources allow this, unlike many other banks that today unable to finance their clients due to lack of capital and credit resources. So the current results prove that we are moving in the right direction and our chosen model is justified.