Banks.am talked to the founder of RUMELS Management Solutions company Ruben Melikyan about the developments taking place in the Armenian banking sector.

- Mr. Melikyan, last year the net profit of the Armenian banks was 12% less than the record figure recorded in 2022. Does this mean that the rapid growth is a thing of the past and the banking system is returning to normal activity?

- We should not forget that the profit of the banking system in 2022 was unprecedentedly high: 262.4 billion AMD (ROE 23%), which was 4 times more than the result recorded in 2021: 65.5 billion AMD (ROE 7%).

That is why the profit recorded by the banking system last year, which was 12% less than the result in 2022 and amounted to 230 billion AMD, can be considered very encouraging. Hopefully, the banking system will be able to maintain a double-digit return on equity (ROE) over the next years.

The main reason for the decrease in net profit is due to the events that took place in Artsakh last year, in particular, there were banks that had activity and branches there.

During the last two years, the reliability of the Armenian banking system has significantly improved. During that time, only 25% of the net profit was paid in the form of dividends, amounting to 122 billion AMD, and the remaining 75% remained in the banks’ capital.

I would also like to draw your attention to the fact that over the past two years, the loan portfolio of the Armenian banking system has also increased by almost 25% and already amounts to 12.4 billion US dollars.

- What are your predictions for the current year? In your opinion, what will be the main factors affecting the Armenian banking sector in 2024?

- I believe 2024 might be successful for the banking system, most banks will continue to maintain a high level of profitability.

According to our preliminary forecasts, the profit of the banking system in 2024 will most likely be around 200 billion AMD (+/- 10%).

Also, we do not rule out certain large transactions, events in the banking system: mergers and acquisitions, changes in shareholding of banks, etc.

As for the main factors, we think that most of them can be more political, geopolitical than purely economic.
However, we predict that the Central Bank of Armenia will continue to reduce the refinancing rate, as inflation is at a manageable level.

Also, let’s hope that the relatively passive situation in the real estate market will become active already in the coming months.

- And to what extent can the developments in the global markets affect the banking system of Armenia?

- If we talk about purely economic factors then it should be taken into account that serious challenges have emerged in the world’s largest economies, which can cause an economic crisis.

- USA. Last year, international rating agencies lowered the credit rating of the US government (from the highest "AAA" level to "AA+"), due to concerns about the country’s financial condition and debt burden. Internal political problems, extreme polarization of the society, ahead of the November 5 elections, have also been added to the mentioned problems.

- China’s fast economic growth rates have remained in the past, it is predicted to be only 3-3.5% in the coming years.

- In the economies of EU countries, there is already a high probability of recession, which partially started last year and will continue and deepen during this year.

- Russia. Despite the fact that the Russian Federation is still able to effectively resist the unprecedented pressure of sanctions, it should be noted that during this period the exchange rate of the Russian ruble is already more than 90 rubles per US dollar (1.5 years ago it was at the level of 60-65 ), and the refinancing rate has already reached 16%. Under these conditions, it is difficult to imagine that the Russian economy will be able to have a stable and high growth if the conflict between the West and Russia does not end in the nearest future.

However, due to time lag, we believe that the impact of the mentioned events might not be significantly felt in Armenia this year.

- Recently it became known that HSBC Armenia leaving the Armenian market. How would you assess the role of the bank in terms of the establishment and development of the Armenian banking sector and, at the same time, how important is the prospect of having an international bank in our country?

- Although currently HSBC Armenia does not have a large market share in the banking system (only 3.2% of the total assets of the banking system, ranked 12th out of 18 banks), it is very bad news that such a decision was made. The bank has become one of the symbols of our financial market, it has been operating in our country since 1996, bringing in a completely new and innovative banking environment.

However, rumors about the bank’s intention to leave Armenia have been circulating for a long time, ever since HSBC left the Georgian market in 2012.

Separately, I would like to mention that there are hundreds of high-level specialists in the Armenian economy and, in particular, in the banking system, who gained their knowledge and experience while working at HSBC Armenia. After this transaction, I think many professional employees will join the team of Ardshinbank. I should also mention that after the transaction, Ardshinbank’s share of total assets will be more than 20%, which is considered an acceptable and manageable level of concentration.

I think at this moment it is necessary to develop a strategy and a road map and try to attract international financial brands to our country, creating the most attractive conditions for them. If we talk about banks, then the minimum capital amount (30 billion AMD/75 million USD) is very high and not adequate for our economy.

In my opinion, it is possible to consider an opportunity and set a lower capital requirement for digital banks that would like to enter our market. For example, the minimum capital requirement for digital banks in Georgia is 10 times less at the initial stage than for other banks, which is raised step by step during the operation of the digital bank. At the moment, several digital banks have already received similar licenses in Georgia, one of them is Peysera Bank.

- Do you think our banks manage to play a necessary role in the development of the capital market? In general, what are the main factors in the development of the capital market and what do we lack in this area?

- The development of capital markets should not be just an end in itself, it should be interesting for all parties, and the risks should be manageable. When developing the capital market, it is necessary to avoid the negative effects that developed countries have gone through as much as possible. At this stage, debt instruments can be considered more attractive for Armenia’s economy.

Of course, banks can play a certain role in this matter, but the relevant authorities are directly responsible for the development of the capital market.

About 6-7 years ago, only one or two banks issued bonds, and now, the number of such banks is 12, with a total residual value of more than 1 billion USD.

Some banks actively support private businesses in issuing securities (underwriting), provide investment services.

Over the past few years, we have also witnessed the establishment of various investment companies and funds, which is also a positive factor in terms of development of financial markets.

I think in the coming years we will witness a number of green bond issuances. There is a great demand for these bonds, especially from various international financial institutions.

- Recently, the main interest rate both in Armenia and neighboring countries has been decreasing. The monetary policy is not tightened in the international markets either. What does this mean?

- This trend is not observed in all neighboring countries, for example, in Turkey, the interest rate has recently been raised to 45%.

But, in general, you are right, very high inflation rates were recorded in the world in the past years, which prompted the central banks of various countries to increase the refinancing rate to curb inflationary trends.

The Central Bank of Armenia started this process earlier than other countries, that is why we did not witness an extremely high inflation. After the last reduction by the Central Bank of Armenia, the refinancing rate is 8.75% (for comparison, it is 5%-5.25% in the USA, 4.5% in the Eurozone).

We believe that these reductions will be continuous, which will support growth of the economy.

- Nowadays, the problem of facing challenges has become one of the most important ones both in the global world and in Armenian reality. In this regard, what do you think are the main challenges for both our economy and the banking sector?

- There is one main challenge for our state, it is the issue of security, on which both domestic and foreign investments, the exchange rate of the Armenian dram, the real estate market, the liquidity of banks, the quality of the credit portfolio, etc., directly depend.

I am convinced that if we manage to overcome these security challenges, we will have a continuous high growth and an increase in the quality of life of the population.

Khoren Ormanyan talked with Ruben Melikyan