Yerevan /Mediamax/. Exclusive interview with Tim Slater, HSBC Bank Armenia cjsc CEO, to Mediamax News Agency and the Banks.am web portal##

- Mr. Slater, recently there have been many talks in Armenia about the creation of regional financial center. And there is no clear understanding of how this is going to function and what the aim of this financial center will be. What’s your understanding and your attitude towards this idea?

- It is not something I’ve heard discussed a lot, to be honest. I think it is quite a difficult concept as each country has its laws, and regulators. But, having said that, we have to recognize that we have a strong banking sector here in Armenia, well regulated by the Central Bank.

Creation of open borders would assist, but Armenia would also need to be demonstrably the best in terms of a strong rule of law and respect of property rights. If Armenia can show superiority within the CIS region on the legal aspects and the property rights, there would be a valuable opportunity.

- In the region, Armenia has difficult relations with Azerbaijan and Turkey. Do you believe that it makes sense to talk about such a regional center, if on e does not have relations with two out of four neighbors in the region?

- It depends on how you define “regional”. If your idea of regional is predominantly, say, Georgia and Armenia, for the time being, then it is possible. It would be difficult to imagine including Russia, because Russia has a much larger economy. That is not to say that small economies cannot become financial centers. We would find it in Hong Kong, which is a very small place but it became the financial center for China and in the Far East. That was built on hard work, good education (both of which Armenia does very well) and again strong respect and enforcement of the law and property rights in particular. Other things help, for example common language, like Russian, which people learn as a second language at school, so that helps. But I do not see the regional financial center aspiration as a short-term goal, to be honest.

- How real is the prospect of attracting financial recourses of HSBC Banking Group to realize large-scale investment programs in Armenia?

- We are a conservative bank in approach, and that’s because we have learnt painful lessons in our 143-year history. We have an approach of being well capitalized as a Group. But also, to raise in deposits first and then lend, rather than inject big investments from elsewhere, where you have lots of additional risks, foreign exchange risk in particular. So as we grow, our capital gets bigger, our deposit base gets bigger, and you will see us doing bigger projects.

I think, in future we will also see the rise of syndication, where banks get together to pool their resources and make one big loan that would otherwise be too big for any one bank. And this is very common in the West, because there are so many projects that are just too big for any one bank. But that market does not really exist here at the moment, banks like to hold on to their customer, but this is really an admission that as one bank, we cannot do everything for this customer, their demands are too big. So that is something that will develop as well.

- A year ago your predecessor Anthony Turner stated that in a year the bank planned to make up for the “missed segment” of crediting of small and medium enterprise. Did the bank manage to fulfill the given task?

- The SME sector is definitely one that is growing in importance to us. When you look at World Bank and IMF studies, of all the emerging markets, they stress the importance of the engine of growth that the SME sector providers. It is often one of the biggest employers, and I believe it is here too.

Our overall commercial lending portfolio grew by between 70 and 80 percent last year, and within that there was big growth in SME. A lot depends on how you define SME. You define it by number of employees or turnover? If you define SME as a turnover under USD5 million a year, there are a lot of SME’s that we lend to, and we certainly have ambitions to grow more, because of their crucial role in the economy.

- According to the Central Bank, there is growing demand for mortgage, so do you have any specific strategy for the mortgage?

- We offer normal residential mortgages up to 15 years. I am hopeful that we will extend that surely to 20-year mortgages, because property prices have risen so much, there are a lot of our customers that cannot afford to take a mortgage now. But if we allow them to repay over 20 years, we will allow more people to exercise their dream of owning their own family home.

We also offer renovation loans and construction loans, and we are looking at the moment bringing a couple of other products now, which is refinancing of other banks’ mortgages, where our rate is cheaper than other banks, we will invite those customers to come to HSBC and enjoy better rates. We will call it probably a refinance mortgage, so that’s under discussion and planning stage at the moment.

Another product is the equity release loan, where you engage your bank and say: “look, I have got a property, I don’t need mortgage as such, but I would like to borrow some money, to repay over five years, and I would like to get a good interest rate, because I am giving the bank good security”. That is another product that we are investigating.

- We know that your bank has certain plans concerning the management of the pension funds that are going to be set up as a result of the pension reform.

- We are still waiting for the legislation to come out from the Central Bank, which I suspect will probably be towards the end of this year, and we are waiting for that with interest. Pensions are very important to Armenia. Perhaps, more than is recognizes they are doing at the moment. After Armenia won its independence, people enjoy the opportunity to earn money and spend it. I am quite surprised that male people spend on cars, for instance. And I am told that a lot of people spending money on cars, perhaps, aren’t thinking about long-term future. And certainly what we see in the West is increasingly people relying less on their families, and more on their own savings. We can debate whether that is right or wrong, and I know that the family unity is very strong in Armenia, which is very important and very positive, but when you are planning pensions, you have to think 30-40 years ahead. It would be wise, and the government recognizes this, for people perhaps not to rely solely on the family unit for security in their old age, well not completely anyway. So, at the moment really there is property and bank deposits. We would like to bring out some other products, some savings products. Unfortunately, some of the legislation here in Armenia makes it difficult, and I am sure that the government will also look at this, providing encouragement for people to save. Where I come from, for instance, the government provides tax breaks for pension savings. So if you agree to save on a regular basis, and you cannot access the money till you are 65, then the money that is earned is tax-free during that period. But we will look to perhaps bring out some former savings products before any changes in the legislation.

- Do you have any specific plans regarding the Armenian capital market after the purchase of the Armenian Stock Exchange and the Armenian Central Depository by the NASDAQ OMX?

- At the moment we would be involved perhaps as a bond issuer.

The takeover of Armex and CDA by OMX and NASDAQ is very positive for the development of the Armenian capital market. I know they have got a number of important initiatives to really try to encourage companies to list and raise money for their growth. And again, I see it as just a natural development. Some people say it is competition for the banking market, I don’t. It is a part of the whole cake, growing bigger and the bigger market, the more business there is for everybody. Even if you end up with a smaller slice, if the cake is bigger, everybody is still better off, and so is the country.

- Recently Armenian banks started attaching great importance to implementation of new technologies - elements of internet and mobile banking. What are the plans of your bank in this direction?

- There are going to be important developments. HSBC is looking to introduce internet banking for personal customers at the end of this year. One of the advantages of HSBC is that I guess we already have it elsewhere: it is just a question of adapting it for the Armenian market. We already have internet banking for our commercial customers, so that they can see their balances, make payments, and that has a very tight security. Personal internet banking will also have tight security; I think that is very important.

We would also look to bring in telephone banking and introduce call centers. Sometimes you need to talk to somebody, but you do not want to come into the bank. What customers want today is a multi-channel banking. Sometimes they want to come into the bank and meet somebody face-to-face. For that we are opening more branches. Three new branches last year and three this year. Sometimes they just want to use an ATM machine and we offer the largest network in Yerevan. Sometimes they want to access the internet. At other times, they want to talk to somebody, but it is not convenient for the customer to come to the bank. It is the question of offering our customers the choice of different channels that they can use when they want and how they want, as it suits them.

One of our successful services is our Status Service, which is designed for people that borrow more than USD200.000, or have more than 35million drams on deposits. We give those people VIP status service. We have a separate area in the banking hall you have seen at the downstairs. You get a dedicated relationship manager who understands your business and personal affairs and is there to advise you and be your financial partner and help you. It is not like going into a banking hall, where you may perhaps meet a different member of our staff each time. You get the same person, who understands you, knows your needs, comfortable sitting area, special rates that reflect the value of that customer to us. And that seem to be growing very well here, with evident further potential.

- Do you notice any specific trends in the development of the banking sector in Armenia? And what do you think about the level of competition in the banking market? How fair is it and how does it become a driving force for the banks to introduce new services and products to the customers?

- The competition is quite strong now; we have 22 banks here. And that excludes the credit organizations. The Central Bank grants licenses to new banks, so that keeps adding to the number. In fact, I would say that 22 it a lot for an economy the size of Armenia, even though it is growing very fast. And I would see potentially consolidation in the future. It has happened in many countries. The question is “what the catalyst for that is?” I do not know what the strategy of the Central Bank is here, but, whatever it is, I would imagine they would leave it to market forces, which is the right approach. In other countries what I have seen is consolidation trends to be driven by problems: when some banks get into trouble you get the strong banks taking over weaker ones. And I would see that as the most likely catalyst of driving consolidation in the future.

The progress the Armenian economy and the banking system have made has been incredible in the last 12 years that we have been privileged to operate here. The Central Bank has done a good job in managing that, it has not always been an easy job.

Regulation can, unless it is carefully introduced, restrict an economy, and there are dangers in that. A couple of issues; for instance the Civil Code says that personal customers can take the money from their term deposits anytime. I can see why the government brought that legislation in. But my own view is that it is not good for the banking sector. I think the law promotes instability, and if there’s a rumor that the bank is getting into trouble, people will rush to that bank to try to get their money out. Banks can collapse extremely quickly. This law also restricts us from bringing in certain products. We would like to bring in five-year guaranteed capital-protected investments, indices. At the moment we are unable to do that because of this legislation.

The legislation that restricts the maximum interest rate to 22 percent is also perhaps not good for Armenia. What it means, is that a lot of people, particularly poorer people, higher risk people, maybe people, who live in rural areas, just cannot get access to credit. It is uneconomic for banks to offer loans at 22 percent, then there people get no credit at all. Alternatively it drives those people underground sources of credit, loan shops, which are unregulated. Better to have that sort of lending within the banking sector, where it can be properly regulated and controlled. So, there are a few things that could be changed, despite my generally positive view of the banking market.

- The last question concerns the financial crisis. Armenian economy is relatively small and not so involved in the global economy, but do you foresee any problems that this crisis can cause for the development of the Armenian economy?

- Because we are very much an emerging market and coming from a low base, there is a lot of catching up CIS states have to do. There is a big opportunity to grow, without worrying about what is going on in the rest of the world. Our biggest trading partner both in imports and exports is Russia. And if these problems in the West impact the Russian economy, that’s probably the biggest risk. But, Russia is growing very quickly, and I do not see any threats there at the moment. So, no I am not too worried about what is going on in the rest of the world. We have got other problems, that, perhaps, we need to have resolved here in Armenia, and those are more urgent than worrying about the capital markets there. Armenia is not dependent on those fortunately. Maybe there will be some minor effects.