ACBA Bank: publicity and a new development paradigm

ArmInfo. This year, one of the largest banks in Armenia, ACBA Bank, has made an extremely serious claim in the market. Due to the accumulated profit, the bank increased its authorized capital from 30 to 50 billion drams, and in mid-September announced an open and free subscription to its shares for a total of 7.5 billion drams.

This became an unprecedented case in the history of the country's banking system - when a bank, which has been bringing stable high profits to its current shareholders for many years, decided to open its capital to the public. The need for such an approach was associated with a paradigm shift based on the desire to bring the Bank to a new level of development, dictated by the conditions of market competition, where, as you know, the strongest survive. The ArmInfo economic observer asked Chief Financial Officer of the Bank Styopa Zakinyan to tell about the process of the Bank's entry into the public market.

Please, tell us what events preceded the IPO and what incentives prompted the Bank to make this, in fact, unprecedented decision?

The main incentive for us is an ambitious and long-term development strategy. We must look ahead and in no case rest on our laurels of the achieved success, or even worse - start marking time. We realize that if changes are not made, we can face the so-called growing pains, and in order to avoid them we need to change the development paradigm. This is not just a re-branding, through which the bank has successfully passed, it is a change in the philosophy of development, which is based on the principles of complete openness and work in an open public environment, which dictates to us a new interesting and promising development model.

As you know, this year the Bank increased its authorized capital from 30 billion to 50 billion at the expense of accumulated retained earnings. Thus, in terms of the size of the authorized capital, the bank took the second place, and after a successful subscription to shares, we will be the leader by this indicator.

The entire authorized capital of the bank today consists of 5 million shares, that is, at a nominal price of 10 thousand AMD for each share. A 92.05% stake out of 5 million shares belongs to CJSC ACBA-Federation, which, as a holding company, unites agricultural cooperatives in 10 regions of the country (a special model that formed the bank's share structure when it was founded in 1996 – ed. note), 5 % is owned by SACAM Int., which is part of the French financial Credit Agricole bank group, and 3% is owned by employees of the bank and its affiliated credit company ACBA-Leasing. I would like to draw your attention to the last circumstance. It was in this year that we implemented a program for the participation in the capital of bank employees and a leasing company, which was unprecedented in scale. All those employees who had three years of experience in the bank were given the opportunity to become its shareholders, and the "ACBA-Federation" allocated shares for 1,116 employees from its share in the capital. That is, before starting the publicity process, we decided first of all to stimulate employees, attract them to capital and thereby strengthen the sense of corporate community and responsibility for the result.

You announced a public issue of 500 thousand shares, but not at the nominal price, but higher - at AMD 15,000 per share. How was this price formed?

The nominal value of one share is 10,000 AMD, but its book value is currently about 15,000, because in the structure of the total capital - not the authorized capital, but the total one, taking into account retained earnings and the main reserve, and this is about 22.5 billion AMD - the price of a share is just and is 14,500 and by the end of this year, according to our calculations, due to the new accumulated by that time profit will be exactly 15,000 AMD per share.

As far as I understand, you intend to end the year with a total capital of over 80 billion drams, in the structure of which 57.5 billion will be accounted for by the authorized capital. This is a tangible figure, although, to be honest, the volume of new emissions compared to this figure seems to me small.

I agree with you. But the question here is not quantity, but, if I may say so, the quality of the capital structure. The fact that the announced public issue is the first step towards the publicity of the company.

I see what you mean. You have followed a different path than most other banks that reorganized into Open Joint Stock Companies, but in fact, as before, did it counting on the so-called "anchor" investors and their old shareholders, mainly those who already owned majority, key packages of shares. Apparently, this is why the shares of such banks and companies are only nominally listed on the stock exchange and there are no transactions on them.

I will not assess the motivation of such practices, I will only say that we have a different approach to this process. We are strengthening the bank's capital precisely for the purpose of further development according to the new public scheme. Look, purely financially, the capital adequacy ratio (sufficiency – ed. note) of the Bank's capital at the end of last year was 16.3% - quite a good result, corresponding to the average indicator for the banking system of the country as a whole. We have now begun the process of capital strengthening in order to take on more credit burden in the future and at the same time be able to maintain a high level of capital adequacy. This is the first thing. Secondly, the bank's strategic development plan assumes the possibility of issuing (additional issue) of another 3.5 million shares. Thus, the share of the main shareholder of the bank, ACBA-Federation, will gradually decrease.

With what share of the authorized capital the main shareholder of the bank in the person of "Federation" will agree to part in the end. Or a reverse question - how open can a bank be to the public?

Everything will depend on the success of the transition to, so to speak, maximum publicity. I can say that in the process of opening capital to the public, we do not intend participation in the subscription to the shares of the old majority shareholders, and according to the long-term strategy of the bank, we can ultimately talk about “opening” the bank's capital up to 40-45%. But again, I want to clarify - the possibility of new share issues will depend on the pace of our further development. If the capital does not keep up with the development, we will initiate additional issues. So far, in addition to 5 million shares, we have registered in the charter the possibility of placing another 3.5 million shares. Time will tell further. But maybe there will be no need for this if we generate high profits and internal resources will allow us to increase capital. But our goal is not only to increase capital, but also to be as open as possible. After all, we have to go through listing on the Armenian Stock Exchange (AMX).

Yes, this is an important procedure for any public company. When do you plan to go through the listing procedure (the procedure for including securities in the exchange list of securities admitted to exchange trading - ed. note)?

Our goal is to get to the Abonds stock exchange. To do this, at least 15% of the shares must be on the open market. After the current issue, the placement terms of which will end in a month, this level will reach, taking into account the shares of our employees, 12% and we will be able to register on the Bbonds exchange. When we finish the placement, we will register a new charter with new capital in the Central Bank, we will register new shareholders in the Central Securities Depository, then we will apply to the exchange for the listing procedure. According to our plans, we will have time to do this by the end of this year. That is, the holders of our shares will already be able to conduct transactions on the secondary organized market. The market maker of our shares has already been determined. It is well known, we have already chosen it - the company "Dimension Investments" - a local investment company that is ready to purchase a certain portfolio to ensure the liquidity of shares on the market. If the market is active and there is a need for a second market maker, then we will pick it up. I repeat, we are very interested in a real liquid market for our shares. In general, we are very interested in more active trading in equity securities, including non-bank companies, and the shares of our bank would be an integral part of this market.

Yes, but, unfortunately, this is not happening yet, and you, in fact, open the market and hopefully other banks and companies will follow you.

In our country, unfortunately, traditionally, when a company grows, its owners are looking for new partners, while they can enter the open market through an IPO and thus attract additional resources for development. After all, the country's economy needs alternative investment instruments, since apart from real estate and government bonds and a small amount of corporate bonds, there are no others. But the latter are also distinguished by low liquidity. We need to build the market, its infrastructure and introduce new instruments, especially equity securities, and we hope that we will not be alone in the market.

Moreover, our Bank is ready to be an underwriter for large companies. According to our estimates, large private clinics, restaurant chains, and promising manufacturers of goods can enter the market. And it is important that with this the investment environment and infrastructure will begin to form, new local institutional investors will appear on the market.

Before the meeting, I reviewed your financial indicators, and despite the fact that the situation in the economy is not yet entirely favorable and the country has not recovered from the coronavirus crisis and the war, nevertheless, how do you assess the market reaction to the price of the bank's shares in the secondary market? Is there any confidence that the free market will react positively to the book value of the Bank's shares of 15,000 AMD and the shares will be quoted above their book value? It is clear that the market is governed by the law of supply and demand, but are there any forecast calculations?

My point of view is, of course, subjective, since I represent the Bank and I am its CFO. However, I think that the price of shares on the free market should go up. But this is a purely subjective assessment. Of course, you are right, it is very difficult to predict the level of supply and demand, but within the framework of the bank's projected indicators, and especially the level of return on equity and projected profit, we assume the obligatory payment of dividends to our shareholders. For example, according to the results of last year, despite a very difficult year, we paid out dividends in the amount of 2.5 billion AMD. I believe that next year we will at least maintain these rates, and moreover, that part of the profit that will not go to dividends remains in the bank and, as a result, will increase the book value of the shares. That is, one of the components of the share price - book value - will grow all the time. Although, of course, we must first of all focus on the level of supply and demand.

But demand, of course, is associated with both the profitability of the bank and a decrease in the risk of loss of profitability.

Of course, in the medium-long term, they are interconnected. According to our business plan, we forecast to double the bank's loan portfolio in the next 5 years. This is not an ambitious program - it is only 15% annual growth. We have proved this, as our loan portfolio has actually doubled in the previous 5 years. That is, there were growth rates. From the point of view of the deposit base, this portfolio has tripled, now we expect it to at least double. As a result, we must double the bank's profit. If, according to the strategy, we are able to increase the efficiency of work, keeping costs and at the same time increasing profitability, then we will record the best results in terms of profitability. And according to this business plan, we will increase the return on capital (ROE) to 15%. I would like to note that over the past 5 years we have paid 57% of the generated profit as dividends. This background can be quite attractive to potential investors.

To what extent are your forecasts in sync with the macroeconomic situation in the country? The Central Bank increases the discount rate of interest, thereby resisting inflationary processes, mainly emanating from external factors. This is the main uncertainty when working with dram instruments. 

I agree, but we expect significant growth in nominal GDP. And banks, as you know, in their activities more use indicators of growth in nominal GDP to their advantage. If the economy grows in nominal terms by at least 10%, then we will grow in parallel. It is very important here to reduce operating costs by investing in banking technologies and digitalization of products. In the medium and long term, these investments will pay off. With all this in mind, we will improve the profitability of our business and expect results that exceed those recorded in the last 5 difficult years, taking into account such factors as lockdown, war, and the systemic crisis of 2016. Thus, the net interest income of our bank at the end of 2020 amounted to 78% of total income, 13% from investments in the trading portfolio and 9% accounted for non-interest income. The share of the latter, of course, needs to be increased, although this is a perfectly acceptable indicator for banks in developing countries. 

Reformatting into a real public company, the bank needs to change some processes and procedures, introduce new standards of corporate governance. Are you ready for this?

Of course, we also attach great importance to this issue. Indeed, since we open up capital to the public, it is very important to radically strengthen the level of corporate governance of the bank. And we are working to implement the best standards, practices, principles of both the Basel Committee on Banking Supervision and the OECD (Organization for Economic Cooperation and Development - ed. note). This is not a one-time process, but a phased one. As a first step, we intend to increase the number of independent directors on the bank's Board. We are currently working on an internal corporate governance code, an important component of which will be to protect the interests of new minority shareholders. Commissions will be created under the Council. Moreover, their leaders must be independent directors. There are commissions where all members must be independent. And so, gradually, the more our bank becomes more open, the more independent directors should be involved in the Board of the bank.

I wish you success and thanks for the interview.