"It is not ruled out that the aggressive competition of the financial market leads to the reduction of the number of Armenian banks"
What is the situation like in the Armenian banking system today? Why did the four banks leave the market? Are new mergers possible? What changes can bring forth digital technologies in this field and what is behind the cryptocurrency? B4B.am talked about these and other issues with Ashot Osipyan, Chairman of the Executive Board and CEO of ARARATBANK OJSC.
Mr. Osipyan, by the end of 2014, the Central Bank of Armenia increased the minimum capital requirement to AMD 30 billion vs previous AMD 5 billion for the banks operating on the territory of the Republic of Armenia. As a result, several banks were merged, while the rest increased their capital. Has it led to qualitative changes in the banking system?
Of course, it has. Firstly, as a result of those changes, today we have a qualitatively new banking system, which is more competitive in the regional financial market. Secondly, the capital increase led to the stability of the financial market, which will allow commercial banks to overcome the challenges in the international financial markets, which are related to the introduction of the Basel III new regulatory standards and the application of IFRS 9 (International Financial Reporting Standards), ensuring new developments and finally, thanks to the capital increase, banks can participate in financing larger economic projects.
As a result of those changes, the number of commercial banks reduced to 17 (out of 21 banks). Is the Armenian economy fine with this figure or is there still room for reduction?
When I was younger, I answered this question categorically, saying that Armenia needs some 11 to 13 banks, bringing as an example the number of banks in the Baltic countries. However, my position is not so categorical now and I think that the number of banks is determined by the market and the traditions shaped in the economy.
In Armenia, 17 banks are in hot competition. Marketing experts call it a "bloody competition" or a "red ocean", which, as a rule, leads to mergers and reduction in the number of banks. The banks, which are more adaptive, modern, and more competitive and have the best technologies in all stages of banking processes will continue to operate in the market. When, for comparison, we look at the banking system of the region, for example that of the Russian or Georgian banking system, we can see that we have no such big concentration in the Armenian banking system. So, this natural process — the market concentration — will go on, and as a result of this aggressive competition it is not excluded that the number of banks will be reduced.
During these changes ARARATBANK acquired the Armenian Development Bank. Meanwhile, you didn’t rule out that you might acquire one more bank. Is it still on your road map?
I’ll put it this way, we have two options for development in the strategy of ARARATBANK - organic and non-organic growth. Look, the Armenian Development Bank was, in fact, our third achievement. Firstly, we provided growth in non-organic way by acquiring a credit organization, secondly - a loan file from commercial bank, and thirdly we acquired a bank, the integration process of which was successfully completed in autumn 2017. I must say that the idea of non-organic growth is still under our strategy and we will implement it, provided it is a possible and beneficial option.
Three banks (ProCredit, BTA Bank and Areximbank) out of four, which left the market, were the banks which operated completely based on foreign capital. Did they leave the market for business or political reasons?
First of all, I must say that it is not desirable for me — both as a citizen and as a bank manager — when any foreign company leaves Armenia, because their presence provides not only additional competition, but also a new business culture. However, on the other hand, the exit of the banks you mentioned was a normal process, and, in my opinion, was largely due to the adherence to incorrect business models.
However, ProCredit Bank, for instance, was considered a small but quality bank and enjoys success in other countries.
I wouldn’t like to discuss the success of ProCredit Bank in other countries, as it is ambiguous. I must note that the advantage of ProCredit Bank throughout the world is the effective application of SME lending technology, created by its founder IPC Consulting. In 2007, when ProCredit Bank stepped into the Armenian market, it started working with the same technology which had been already introduced to Armenia and applied by eight banks. ProCredit Bank could not withstand the competition in this niche and tried its best in large business, consumer lending and other fields, but in vain.
What about other banks?
I wouldn’t like to give separate estimations. However, I am sure that the exit of other banks was also due to the adherence of the wrong business models. There are all prerequisites and conditions for the development of the banking system in Armenia, and this is not only my opinion, but also the opinion of our partner international financial institutions. It means that if those four banks had good indicators, good models and quality management, they would remain in the Armenian market.
Mr. Osipyan, the Central Bank has been long conducting an expansionary or moderate monetary policy and keeping the refinancing interest rate at a quite low rate - 6%. How did it impact the interest rates and volumes of lending?
First of all, I must say that I am very glad that our society gradually starts to pay attention to the refinancing interest rate, its meaning and influence. Of course, the impact of that policy is noticeable both in terms of decrease of lending interest rates and growth of lending volumes.
The low refinancing rate is especially a serious spur for AMD loans. The average loan interest rate for AMD loans in 2017 dropped by about 2 percentage points, which is a major shift.
The growth of lending volumes is tangible in all directions. Specifically, by the example of our bank, the lending volumes grew especially in the fields of tourism, agriculture, light industry and mortgage lending.