ARMENIAN BANKING SECTOR GETS SERIOUS

UNCLAS SECTION 01 OF 02 YEREVAN 000862 SIPDIS SIPDIS SENSITIVE E.O.12958: N/A TAGS: EFIN ECON EAID AM SUBJECT: ARMENIAN BANKING SECTOR GETS SERIOUS -------------- SUMMARY -------------- ¶1. (U) Steady macroeconomic growth, stable inflation, a strong local currency and inspired, independent leadership at the Central Bank have given Armenia's banking sector room to grow. According to new data, the sector grew by more than 20 percent last year. Western banks, led by HSBC ten years ago, have a foothold in Armenia's capital, and together with growing local banks, business has shifted over the years from facilitating remittances and trade finance to mortgages, auto loans and construction finance. Recent institutional and legal developments -- with significant USG or Diaspora assistance -- are bringing promising changes and accelerating momentum to the financial sector. END SUMMARY. ¶2. (U) By the end of 2007, the Netherlands' PostBank, Russia's GasPromBank, Austria's Raiffaisenbank, Lebanon's ByblosBank and Germany's ProKreditBank (Germany) will join HSBC, which has been the only major multinational bank currently operating in Armenia. The Central Bank of Armenia (CBA) projects a 40 percent growth rate in the banking sector over the next three years. These developments should lead to more robust capital markets, lower interest rates, significant imported management expertise, greater access to credit and the elimination of "pocket" banks and insurance companies. -------------- DIASPORA ROLE IN LAUNCHING BANKING SECTOR -------------- ¶3. (U) The financially powerful Armenian communities abroad have played a role in development of the sector. With his own funds, UK-based financier Bob Manukian helped found HSBC Armenia and continues to hold a 30 percent share (and now profits handsomely from his investment). Armenian-American Jerry Cafesjian founded Cascade Bank and several other affiliated financial institutions. HSBC Armenia CEO Anthony Turner pointed out to us that while a rising tide floats all boats --and Armenia's sustained strong macroeconomic performance was certainly a rising tide - the sector is still crowded with undercapitalized banks. -------------- --- MARKETS, NOT BANKS, AS HISTORICAL CREDIT SOURCES -------------- --- ¶4. (SBU) Penetration of the Armenian banking sector into the overall economy has been historically low, both in real terms and as compared to Armenia's neighbors. The short duration of the banks' deposits has been one of the structural causes for their inability to extend credit. Banks have only been able to take in funds at short maturities and thus have been reluctant to lend on longer terms to corporate and individual borrowers. This constraint is easing, however, as the banks are turning to capital markets to borrow at longer terms. In September 2006, Cascade Credit issued the country's first registered bond -- the first registered security for that matter -- backed by USAID Development Credit Authority (DCA) guarantee, thereby making bonds issuance possible. Recently Ararat Bank -- with USG technical assistance -- issued coupon bonds for 1 year at 8 percent interest. This transaction was groundbreaking in that the bonds pay quarterly interest, whereas in the past, all debt issuances had been sold as discount paper. It has also been demonstrable: Ineco Bank and First Mortgage Company are planning to offer DCA-guaranteed bonds amortized over 5 years, which will also involve USG technical assistance. -------------- POSITIVE CHANGE COMING TO THE BANKING SECTOR -------------- ¶5. (SBU) Another structural cause for the low level of credit access has been the management structures and practices within the banking system. Most Armenian banks only offer a limited range of products and operate under a system of collateral-based lending. Since September 2006, however, Converse Bank, ACBA Bank and Armenian Development Bank have had total or partial ownership changes. Two other Armenian banks are also reportedly in play and may be for sale; moreover, Anelik Bank will offer significant additional shares, and VTB has announced it will increase its capital by $40 million. Additionally, well-known international banks have expressed their willingness to join HSBC and have either announced their entry into the market or are in the process of conducting their due diligence. ¶6. (U) Part of this ownership shift trend is the result of the CBA's higher capital requirements for banks. Effective January 1, 2008, minimum capital for new entry banks will rise from $5 million to $14.5 million, and this requirement will apply to all banks by January 1, 2009. Many argue that this is driving out the "casual" owners of banks in favor of those demonstrating more capital and management commitment. ¶7. (U) Access to credit by the general population outside of Yerevan YEREVAN 00000862 002 OF 002 - a major USG development concern - may be increased by a pending transaction by Armenia's Postal Service, Hay Post. Operated under management contract to Post Finance International, a consulting group formerly associated with ING Bank in the Netherlands, Hay Post has stated its intent to create Hay PostBank, a bank that will be located in all post offices. The prospect of a new bank with up to 900 new locations raises significant opportunities to expand access to affordable credit to Armenia's rural and lower income families. Again, the USG has encouraged this development by providing technical analyses of the banking sector and the business opportunities they represent to Hay Post. -------------- -------------- STRONG, INDEPENDENT LEADERSHIP AT THE CENTRAL BANK -------------- -------------- ¶8. (SBU) Tigran Sargsian has been Chairman of Armenia's Central Bank for nine years (since March 1998),has been a consistent supporter of reform, and is highly-regarded by the local banking community. Re-appointed in March 2005, Sargsian's term runs until March 2012. GODFREY 1