Yerevan /Mediamax/. Interview with Emil Soghomonyan, Chairman of the Union of Armenian Banks (UAB), Chairman of the Board## of “Prometey Bank”, to Mediamax and Banks.am portal

- How would you describe the year of 2008 for Armenian banking system and for “Prometey Bank”?

- The year of 2008, just like the previous ones, was very successful for our banking system. In 9 months, the banking system registered serious progress in all directions. The total assets of the system in 9 months increased for 24% and made 967bln AMD, the credit investments increased for 46%, making 624bln AMD.

Individuals’ deposits grew for almost 7%, making 176bln AMD. The total capital of the banks increased for 31% up to 217bln AMD, and the net profit of the banking system in 9 months grew for 18%, making 20bln AMD.

Almost in the same proportions all indices of “Prometey Bank” also increased in accordance with the outlined strategic program.

- Do you believe that Armenia might be turned into the regional financial center against the background of existing problems and low integration into international markets?

- The idea of turning Armenia into a financial center at the moment of its introduction was quite realistic and appropriate. Today, in conditions of the global financial crisis, I believe that this idea is a bit premature. One will be able to return to this issue after the crisis stops. Today we should strive to make Armenia withstand the financial crisis without shocks.

- Almost half of Armenian banks announced increase of credit and deposit rates – what is the policy of “Prometey Bank”?

- The interest rates for credits and deposits are reconsidered in the whole banking system, and this is natural. All banks announce about attracting means at 10%, 10,5% and even 11%, and the increase of prices for attracted means mechanically leads to increase of prices for credits.

If we take into account the fact that those 10-11% in reality cost the banks 12.5% (banks have obligatory reservation in the CB and insure the deposits in the Deposit Insurance Fund), the resource turns out to be quite expensive and in the given conditions it is natural that banks should credit at interest rates starting from 18 up to 24%.

If earlier banks attracted deposits at up to 6-7% and issued credits at 14-16%, now, when the deposit rate has reached 11%, the margin has not undergone changes and makes 6%, as before.

Today the credit interest rate in “Prometey Bank” fluctuates within 18% - the increase made 2-3%.

- In September, banks demanded from CB to lift limitations for maximum permitted credit interest rate.

- Yes, we are for reconsidering this limitation. The maximum allowed credit interest rate, under the Civil Code, is defined in the twofold volume of CB accounting rate. That is to say, if at present the accounting rate is established at the level of 11.5%, the maximum accounting credit rate makes 23%.

Banks fairly speak against this, since today even in Europe there are small and quickly registered credit products with the interest rate of 36-40%.

In Armenia, the given law came into force in 1998 and was justified for that period, since the deposit rates reached up to 20-24% then, and the credit rates – up to 72% then. Today, when banks cannot use rates over 23%, this contradicts market relations. I don’t think that that if the given limitation is abolished, banks will announce unprecedented rates. The growth of rates will have effect exclusively on micro credits and consumer credits with high level of risk, and will reach 24-26%.

We discuss the given issue with the Central Bank and want to present it to the consideration of the government and the parliament.

- A few months ago the State Commission for Protection of Economic Competition made warnings to certain banks, accusing them in anti-competition accords.

- There were no anti-competition accords between banks and insurance companies. To correctly assess their risks, banks prefer insurance and assessment companies, which they trust. Many Armenian insurance companies have miserable capital, and they do not get reinsured in larger companies. How can one trust them insurance of real estate? At the same time, there are many other credits, to receive which, the customers use services of the insurance company they prefer.

We do not consider this to be limitation of competition, and this is why banks dispute the decision of the Commission in Court, the verdict of which, I hope, will be fair.

- The banking system recently has started demonstrating activity in the capital market. What are the plans of “Prometey Bank” in this direction?

- This year we realized a close issue of shares - at the volume of about $6.5mln. A foreign bank was the purchaser.

I welcome increase of the banks’ activity in the capital market, since this is the most important means to attract resource. “Prometey Bank” does not yet have intention to realize a public placement, since today we do not need additional resource. If such a necessity appears, it is not ruled out that we will think about realizing a public placement.

- Different opinions are voiced today on possible influence of the global crisis on Armenia. What do you think in this connection?

- I think the crisis will not have significant influence on Armenia. Reduction of individual transfer volumes is possible, which will mainly be conditioned by the financial state of our compatriots, working in Russia. I believe that this may become noticeable in the first quarter of 2009.

In conditions of the global crisis, inflow of foreign capital and new investments in Armenia is possible. Taking into account the presence of big Diaspora, Armenia is in the most auspicious conditions among CIS countries.

The crisis influences mining-metallurgical industry of Armenia, however, I believe that the situation will be fixed by the government through new programs and proposals.

- What does the financial system of Armenia need for full integration into the world market? What role can All-Armenian Bank play in this process?

- I have a positive attitude towards the establishment of the All-Armenian Bank, which will be dealing with crediting of state programs. Our well-off compatriots from the Diaspora, people with medium income, as well as the Armenian government, will be the shareholders of the bank. All-Armenian Bank will not compete with commercial banks; it will be involved in crediting state importance programs. This will become one of the most important steps in the process of turning Armenia into a financial center.

Concerning integration, here we have no problems. One can say that Armenian banks are fully integrated into the world market, having correspondent relations almost with all large international financial structures. Besides, many of those structures are shareholders of Armenian banks, the fact evidencing the reliability of Armenian banks.

Today the only negative factor of the Armenian banking system, if one can consider it such, is the small volume of capital. At that, I do not see anything bad in the fact, since small banks are much more flexible, they react timely on any requirements of the market, are much more reliable and liquid.

I believe that our banks meet the requirements of the Armenian economy. On the other hand, banks need to stir up crediting in accordance with the requirements of various economy branches.

- Recently talks circulate, according to which mergers and acquisitions are expected in the banking system of Armenia.

- The Board of the Central Bank of Armenia repeatedly offered assistance to commercial banks for organization of mergers. What concerns the decisions, they should be made by the shareholders of banks.

I am not a supporter of excessive consolidations. Let us not forget that the global financial crisis was a result of such consolidations, or, to be more exact, a result of absence of a structure, which would regulate those consolidations globally.

- AEPLAC “Armenian Economy in 2007” report reads that imperfection and inefficiency of the financial market is the main obstacle on the way of Armenia’s economic development. The same document noted that the difference between interest rates of deposits and credits in Armenia makes 11.2%, which is the largest index in the world.

- I do not think that the margin of credits and deposits in Armenia is the highest in the world. As I have already noted, we attract means at 10-11%, and the rates for business credits on average make 18%m and the margin at the level of 6-7% is a normal phenomenon. The figure of 11.2%, brought by AEPLAC, is conditioned by the fact that 2-3 largest banks in Armenia in 2007 attracted deposits at very low interest rates and issued expensive credits. In the majority of banks, in 2007 the margin made the same 6-7%.

I consider ungrounded the opinion, according to which the financial market is inefficient. One can count on the fingers of one hand Armenian enterprises, which gained credits directly from foreign financial structures. All the remaining enterprises work at the expense of credits, issued by Armenian banks.

The credit investments have already exceeded $2bln and soon will make 20% of GDP. I do not think that today the demand of Armenian economy exceeds the offer of banks.

- What tasks do the Union of Armenian Banks and “Prometey Bank” face for 2009?

- The Union of Armenian Banks intents to submit to the consideration of the Central Bank and the government a number of proposals, related to the fact that a number of current laws seriously hinder the development of consumer and mortgage crediting.

The main deposit for consumer and mortgage crediting is real estate, and there are many gaps in the Civil Code concerning management and realization of the given deposit. As a result, delays take place, concerning amortization and realization of the pawned real estate property. We will ask the leadership of the country to operatively react to these issues. Besides, today no cadastre of movable property functions in Armenia, the fact causing additional problems in car crediting process.

We will turn to the government with a package of legislative proposals to solve these and other problems and we hope that the package will be approved in 2009.

Now, concerning “Prometey Bank”: heading this bank for already 17 years, I have always been keeping to conservative policy in accordance with the strategic program, adopted by shareholders.

In 2009, the bank will continue its stable growth – without mergers and acquisitions. I do not realize aggressive policy and I am a supporter of stable development.

Next year we will try to be more flexible and gain more profit, securing fulfillment of all commitments to the customers and keeping adherent to high quality service culture.