Interview of the Director of “Armswissbank” Investment Department Karen Turyan and Head of Corporate Finance Department Arkady Pinachyan to Mediamax Agency and Banks.am portal

- “Armswissbank” recently became the market maker of “Artsakh HPP” OJSC shares. What are your expectations from the market of this issuer’s shares?

Karen Turyan: I would like to first provide a short historic excursus. The period for the company’s shares placement was unfavorable and coincided with the negative situation, formed in world and Armenian financial markets. The shares were placed in conditions, when tendencies for reduction prevailed in the markets and increase of interest rates were observed everywhere. Of course the issue was not placed fully, but it was a bold step and nevertheless, it was successful. “Armswissbank” was one of the issue’s underwriters and 51% of the placed volume fell on the share of the bank.

At the current stage, the expectations are limited by increase of liquidity in the secondary market, that is to say, by formation of stable and trustworthy prices on the stock exchange.

The volume of own investment capital of “Armswissbank” in the capital of “Artsakh HPP” makes about 40mln AMD. The portfolio will be actively sold and purchased; at the initial stage of the market making we will use the means from our portfolio. By the way, “Armswissbank” is also ready to service individuals and legal entities, interested in “Artsakh HPP” shares.

Arkady Pinachyan: We do not expect too active circulation of shares, since, in the final end, 86% of the company’s capital is owned by NKR government. Nevertheless, we believe that there will be activity both as to purchase and as to sale, especially taking into account the recent positive news, coming from the company, in particular, launch of new “Tgri 1” HPP operation and the company’s statement on payment of dividends at the volume of 10% from the nominal value of the shares.

- “Armswissbank” is the first market maker in the stock market in Armenia. Can one assume from this that the remaining issuers are not interested in liquidity of their shares?

Arkady Pinachyan: “The unwritten rule” of any company, which enters the stock market, is to secure liquidity of the secondary market. The majority of stock companies in Armenia were founded in the period of privatization and their mission is based on the basic motives of stock company formation, in particular, attracting means from the capital market. Thus, these companies cannot even be criticized. The importance securing liquidity of the secondary market by issuers is based on their long-term development strategy.

In case with “Artsakh HPP”, there is readiness to make the shares attractive so that investors at any moment are sure that they are able to convert their asset into money at an acceptable price.

If today the investor sells his/her share on the stock exchange basing on our quoting (1060 AMD), taking into account the 10% dividend for 8-9 months, the yield from sale of the share will make 14-15%. In high liquidity markets there are very few cases, when the dividend has such a high share in the composition of the income, since the profit of the company is assessed by the market and is included in the cost of the share.

By the way, the prospectus of “Artsakh HPP” issue did not even provide for payment of dividends following the results of 2009 fiscal year; however the leadership of the company made such a decision in order to demonstrate its readiness for active cooperation with shareholders. Moreover, in future the company intends to attract new resources from the capital market.

- As the market maker of “Artsakh HPP” OJSC shares, does “Armswissbank” put forward any requirements for the issuer in terms of managing relations with investors?

Arkady Pinachyan: Definitely. Besides the function of the market maker, we render “Artsakh HPP” consultation services on implementing the system of corporate management.

“Armswissbank” and “Artsakh HPP” have carried out volume work in this direction, as a result of which internal legal documents, regulating those relations, have been elaborated. Those documents will be presented for approval at the first general meeting of shareholders of “Artsakh HPP” OJSC due on April 27. The approval of those documents will make it possible to implement modern standards of corporate management in the company, aiming at protecting minor investors, increasing transparency of the company’s activity, regulating interrelations between the management structures of the stock company and the reporting, as well as realizing other operations, characteristic of modern public companies.

- What investment policy does “Armswissbank” carry out this year?

Karen Turyan: This year, the main direction in our investment activity is the market of governmental bonds. The bank cooperates with the Ministry of Finance in managing the internal state debt and is one of the leaders in the market.

We intend to also provide services of trust management, offer brokerage services: with our help any customer can purchase shares of the largest international companies.

We also offer deals with derivatives in order to avoid fluctuations of the currency exchange rate and hedging of the currency risks. Now we observe significant growth in demand for forward and option transactions. Such services are actively used by companies of the real sector. If the company is an importer and after realization of import in the local market it should convert the proceeds into foreign currency, it will undoubtedly make a forward deal in order to avoid risks of currency exchange rate fluctuation. Thus, the company gains the chance to clearly plan its incomes and expenses in national currency. 

- By the way, how did the recent AMD depreciation influence on the participants of security market?

Karen Turyan: AMD interest rates increased in the market of bonds. Simultaneously, the demand for governmental securities decreased, and the demand for AMD, on the contrary, increased.

- Over the past few weeks, first deals with corporate bonds since January started to be concluded. What is their nature?

Karen Turyan: - It is yet early speaking about stirring up of the market of corporate debt. Now, as I have already said, the yield of governmental bonds increases. And since the latter are not subject to taxation and are less risky, consequently, corporate bonds lose their competitiveness as compared to the governmental ones.

- How do you assess CB’s steps on dedollarization? Won’t they have negative effect on the activity of the banking system and, in particular, on “Armswissbank”?

Karen Turyan: Our bank does not face problems. We have governmental bonds, which we can convert into AMD at any moment and thus secure the necessary AMD liquidity. I believe that the banking system also has this opportunity.

One should not perceive toughening by CB as something bad, since the measures aim at stabilizing the financial system. Yes, maybe this is not very pleasant for banks, but it would be worse if the abrupt fluctuations of the currency exchange rates repeated.

- A significant difference has formed between purchase and sale applications of banks quoted on the stock exchange and other companies. Despite the absence of deals, the applications for purchase, nevertheless, are almost twice lower, as compared to the prices, at which the latest deals on the given securities were concluded. What is this conditioned by?

Arkady Pinachyan: The secondary security market is the reflection of the company’s activity. Today, unfortunately, we do not have this, since there is lack of liquidity: there is no stable demand and offer, necessary for proper price formation. The one, who sells, wants to sell at the highest price, and the buyer wants to buy as cheap as possible.

Indeed, this fact deserves the attention of issuers. Increase of prices for the issuer’s shares makes it possible to carry out new issues. Companies should elaborate and implement clear strategies on stirring up the secondary market.

- What is your idea of the medium-term prospects concerning the Armenian stock market?

Arkady Pinachyan: The stock market, as compared to all other debts instruments, has one significant advantage. For instance, inflationary expectations discourage investors’ from investing in AMD assets. In case with shares, this problem almost disappears. The share absorbs the inflation: together with increase of prices everywhere, the prices for shares also increase.

On the other hand, as a result of the recent amendments in the tax legislation, companies, which take up public offering and are quoted on the stock exchange, are relieved of 50% of the profit tax and VAT.

Another stimulus for development of the market is the wide implementation of international financial reporting standards in Armenia. In the financial market of Armenia there are necessary bases created for functioning of investment and pension funds.

Nevertheless, one should not expect volume IPOs in Armenia today. The Armenian capital market may not be interesting for companies, which have large ambitions: their demand may be met after placement of shares in London, Moscow and other financial centers. Let me bring a relative example: Today Armenia lacks an investment basis, which would allow placing for instance $100mln, no matter how attracting the offered security is.  

The most difficult stage of stock exchange development is the beginning. Then this market grows as a snowball. While studying the experience of a number of Asian financial centers, often we find out that only 20-30 years ago they completely lacked an exchange market.

- A few governemtnal enterprises are planned to be privatized with the use of the exchange. Will “Armswissbank” participate in this process?

Arkady Pinachyan: First of all we actively participated in discussion of those programs, got familiar with the financial situation of those enterprises. I should state with regret that, despite the fact that the idea was good, same cannot be said about the choice. Consequently, we decided to refrain from participation in this program.

- Starting from 2009, the idea on permitting exchange trading of foreign currency assets has been actively discussed. The idea, however, is not realized. What is the stance of “Armswissbank” concerning this issue? 

Karen Turyan: There is volume demand abroad for purchasing assets in Armenia, expressed in foreign currency, since USD interest rates are much higher here than in Europe and the USA.

Of course, there is the problem of dollarization, but, nevertheless, I think that circulation of bonds, expressed in foreign currency, would have positive influence on the local capital market.