Fitch Ratings International Agency Analyst for CIS Financial Organizations Nelly Badalyan’s exclusive interview to Mediamax Agency and Banks.am portal

- What developments are observed in the banking system of Armenia following the results of the first quarter? There is economic growth registered from the beginning of the year in the country. How is it reflected in the activity of banks?

- The first tendency, observed in the market, is the stirring up of banks in the sphere of crediting: simultaneously with positive shifts in the economy, we observe moderate growth of the credit portfolio. As we have mentioned before, following the results of 2010, the growth of the banking system is expected to make within the range of 15%. The second tendency is certain reduction of USD liabilities’ cost. At that, banks feel the lack of AMD liabilities and their cost remains relatively high.

- In the first quarter, 2010, the first deal on merger in the banking system of Armenia was announced. What is your assessment of the merger of “Ameriabank” and “Cascade Bank”? Will this become a “contagious example” for others?

- I believe that a key role here was played by the aggressive policy of “Ameriabank” and its owners, who want to occupy leading positions in the Armenian market. It seems to me that other large Armenian banks keep to more conservative stances; this is why this is a singular deal for the nearest prospect.

Mergers, undoubtedly, will take place, but this is an issue of a longer-term prospect and there are no perquisites yet for mass consolidation in Armenia.

- From the beginning of the year, CB consistently toughens the monetary-credit policy and carries out struggle against dollarization. How justified, according to you, are the measures of CB in conditions of fragile revival of economic growth?

- Last year, the tendency of carrying out expansive monetary-credit policy was observed worldwide, but at a certain moment those programs should be stopped. The Central Bank of Armenia believes that now is a proper time to absorb excessive liquidity and lift the possible inflation risks for the economy. If this is done without damage to economy growth and to crediting, there are no special risks in that. 

Concerning the measures on reducing dollarization of economy, the Central Bank tries to diversify the rates on liabilities in AMD and in foreign currency, which should lead to reduction of rates on currency deposits as compared to AMD, and thus, change the behavior of the depositors.

Another problem is that there is not significant demand for credits in foreign currency; this is why banks need AMD liabilities.

- “ACBA-Credit Agricole Bank”, rated by Fitch, leads among banks as to the number of enforceable fulfillment of court decisions on withdrawal of credit debts. Does this evidence weak assessment of risks in this bank?

- This is not related to weak assessment of credit risks, as compared to other banks. This is related to the fact that the portfolio of “ACBA-Credit Agricole Bank” is very diversified and it has many small credits and, correspondingly, the number of problematic credits is larger as well. However, the sums, collected as a result of fulfillment of court decisions, are not large. Consequently, this will not have effect on balance indices, on the capital and the profit of the bank.

- How do the matters stand in the second bank, rated by Fitch, - “VTB Bank (Armenia)”? Last year, the bank had problems related to a large credit portfolio in construction sector. Did the bank manage to overcome the problems?

- The bank undertook many internal measures on organizing business processes on improving the system of risk management and on working with problematic debts. Last year, the bank really had relatively high level of problematic assets, however, starting from the second half of 2009, the bank managed to break this tendency.

The positive results of the crisis were the fact that the bank improved business processes on assessing the borrower and the work with problematic assets.

- What lessons did the banking system of Armenia learn as a result of the crisis?

- I believe that this was a very good stress test for risk management in banks, since no one had rich experience of work with problematic debts and withdrawal of pawns. It is difficult to speak of the banking system in general, but banks we rate in Armenia revised their internal procedures, toughened requirements towards the borrowers and pawns, became more conservative in managing currency risks.

- So why are banks still passive as to cooperating with the collector agency?

- I believe, first of all, this is related to the fact that this is a new service in the Armenian market and banks are not well familiar with it yet. Secondly, there are no methods yet on assessing the fair cost of portfolios of problematic credits. Usually, banks offer collector agencies credit portfolios, consisting of numerous small credits, since it is not interesting for the bank to work with each of those credits anymore. I believe that this should be a demanded service, taking into account growth of overdue debts in 2009.

- The public often criticizes Armenian banks, because instead of effectively assessing the risks and “not sitting on liquidity”, they prefer more not to credit at all, than to credit and then work over improvement of business processes.

- First of all, banks naturally became more conservative as to risk assessment. Secondly, banks collected liquid means mainly in foreign currency, while there is great demand of AMD credits. Also, at this stage, the Armenian banks can afford not to develop active crediting due to high profitability on governmental bonds (about 14%), high rates on interbank REPO operations and a very large spread among rates of attracting and placing means.

At the same time, not every business may afford rates, which are offered by Armenian banks. With growth of competition, in conditions of single-digit inflation, rates on funding and crediting will gradually reduce, large banks will increase their share in the market and it will become more and more difficult for small banks to function in these conditions. 

This process may take quite a long time, but probably in long-term prospect small banks will become nonviable and they will have to leave the market or to merge with larger players.

- EBRD President stated a few days ago that the Greek crisis may have its serious negative influence on the economy and the banking system of entire Eastern Europe. Does this imply Armenia and its banks as well?

- Only very indirectly: in case the problems in European zone lead to significant slow down in revival of global economy or to significant reduction of the cost of energy carriers and aggravation of the situation in Russia. Armenian banks have very small risks concerning EUR.

- After return to the floating exchange rate for the national currency, the constantly fluctuating AMD exchange rate continues being a “headache” both for banks and for Armenian companies, involved in international trade. What decision in this sphere would be more optimal for Armenia? Wouldn’t it be right to link the national currency to EUR, like Baltic countries do, and thus get rid of speculations from inside?

-Linkage to strong currencies may provide economic agents with periods of relative stability, but they are also fraught with possible abrupt single-stage changes of the currency rate, which was observed in Armenia and many other countries of the region last year.

Fluctuations of AMD recently have been related to also the narrowness of the market, its small sizes, as well as to high volatility of world markets. Stabilization in world economy may contribute to stabilization in the local currency market as well.

- In the USA, they actively discuss the issue of decrease of banks’ opportunities in the sphere of operations with investment tools. Meanwhile, Armenia is getting ready for securitization of mortgage agreements. What precaution measures should be taken in order to reduce the risks of reoccurrence of the American scenario with derivatives in the local market?

- Securitization is a tool, which may give the chance to attract necessary resources and players to the mortgage market for its further development in conditions of deficit of long-term means.

Armenian National Hypothec Company (NHC) refinances only those mortgage credits, which are issued based on definite requirements and standards.

There is the risk of worsening of the assessment of borrowers by banks in case of securitization of credits; however this risk may be reduced depending on how the deals on securitization are structured. For instance, investors may demand certain quality of credits to include in portfolios at sale; they can also demand banks purchasing the lower tranches of deals, thus participating in any losses as a result of worsening of the portfolio quality.