Friday, November 29 2024 09:01

ArmInfo.Yerevan, November 23, 2024. ArmInfo. The announced withdrawal of the Armenian branch of the prominent international Hongkong and Shanghai Banking Corporation (HSBC), a banking group with British roots, from the domestic market has raised a valid question within the country’s financial community: where will HSBC's clients, particularly its business clientele accustomed to international banking standards since 1996, go? The announcement earlier this year of HSBC Bank Armenia's acquisition by a bank with exclusively Armenian roots brought both reassurance and numerous questions. ArmInfo's Director General and economic observer Emmanuil Mkrtchyan sought to clarify the situation with David Sargsyan, Deputy Chairman of the Management Board of Ardshinbank.

 

- Mr. Sargsyan, when Ardshinbank finalizes the deal with HSBC Bank Armenia, what will the integration of these two major banking institutions look like, and what can HSBC's long-standing clients accustomed to Western standards expect from this transaction?

- Ardshinbank signed the acquisition agreement with HSBC Bank Armenia on February 6 of this year. The agreement stipulates that HSBC Bank Armenia will continue to operate within HSBC's orbit until the completion of the transaction, and Ardshinbank does not have any control over its operations. Full control will transfer to Ardshinbank on the closing date, scheduled for November 29, 2024. The closing depends on three main factors. First, regulatory approval from Armenia’s Economic Competition Protection Commission, which we’ve already received. Second, approval from the Central Bank of Armenia, which has also been secured. The third factor depends on how quickly the specialists from Ardshinbank and HSBC London can ensure the transfer of databases from HSBC London to Ardshinbank. In fact, from a technical standpoint, this is the most labor-intensive and demanding part of the transaction, as it involves not just data transfer, but the full transfer and integration of data and core banking software from one system at HSBC London to another system used by Ardshinbank here in Yerevan. This is a very meticulous task, with the merging of data, services, and technologies being carried out step by step. We are now nearing the end of this process. We recently completed the second testing phase to identify and fix any remaining issues, and we are confident that we will be ready by the 29th. Once completed, HSBC Bank Armenia will be renamed Ardshininvestbank.

 

- Why is the deal being executed through Ardshininvestbank instead of directly? There is speculation that Ardshininvestbank will become a subsidiary investment bank of Ardshinbank.

- This is not the case. The transaction consists of two main stages. First, the acquisition of HSBC Bank Armenia is completed, and the bank is renamed Ardshininvestbank. In the second stage, Ardshininvestbank will merge into Ardshinbank approximately 2–3 months after the completion of the first stage. The second stage will commence once the full shares of HSBC Bank Armenia are acquired, requiring the resolution of procedural, operational, regulatory, and other technical issues related to the merger. Why Ardshininvestbank? Because it was the former name of our bank, which has been patented and registered by us, and there’s no need to invent something entirely new for just a few months.

 

- What can the clientele of HSBC Bank Armenia expect? Will there be any inconveniences, restrictions, or changes? After all, as the saying goes, "habit is second nature," and people may have to adapt to new software, a mobile app, and processing systems.

- We are doing everything possible to ensure that clients feel minimal disruption during this transition. All HSBC Bank Armenia clients are already receiving envelopes containing new bank cards along with detailed instructions for activation and usage. Account numbers will remain unchanged, and the cards themselves are essentially the same but with a new design. The mobile banking system will retain the same login credentials as before; the only difference is that clients will need to change their passwords, since they’re accessing a new system and mobile banking application. There will be no need for clients to physically visit the bank. We are committed to creating the least inconvenience possible, ensuring that clients' experience remains seamless and that they notice no significant changes. These clients will continue to be served at the same six branches currently operated by HSBC Bank Armenia, and by the same managers with whom they are already familiar. We are maintaining these elements because we believe this approach is essential.

 

- HSBC Bank Armenia has traditionally catered to its niche clientele oriented towards the Western financial market, including international organizations operating in Armenia. Will corporate clients, particularly legal entities, encounter any “hiccups” during the transition?

- Unfortunately, over the past decade, not all Armenian banks have been able to conduct international transactions seamlessly. Correspondent accounts in USD and EUR have been notably limited. Prior to February 2022, there were only three banks in Armenia capable of executing direct USD operations: our bank, HSBC Bank Armenia, and Ameriabank. Other banks had to rely on third-party institutions, primarily in Russia, for such transactions. After 2022, when Russia's banking system was largely cutted off from the Western financial system, this issue became even more pronounced. Many banks in Armenia currently lack the capability to perform full-fledged international transactions in USD and EUR. In this context, HSBC Bank Armenia’s corporate clients, especially international companies, IT firms, and other businesses, have nothing to worry about. Our bank is one of only two viable alternatives capable of ensuring uninterrupted international operations. As such, there will be no disruptions or issues for these clients during or after the transition.

 

- Will HSBC Bank Armenia's financial products be replicated by you?

- There's no need to replicate anything. There are no financial products offered by HSBC Bank Armenia that we don't already provide to our clients. On the contrary, HSBC had its own limitations regarding the range of services it offered in Armenia. With the transition to Ardshinbank platform, not only will the availability and range of international market services not diminish, but they will expand significantly. Clients will gain access to a broader range of new services that they could not previously access through HSBC Armenia. For instance, HSBC Armenia had internal restrictions - like the absence of debit cards. Clients couldn’t transfer money from their cards to cards of other Armenian banks; they had to use third-party payment systems for such operations. On our platform, these limitations disappear. From an international perspective, clients will benefit from enhanced services, including transfers, letters of credit, trade financing, securities transactions, and much more.

In this context, transitioning from HSBC to Ardshinbank is an excellent choice. Clients will maintain access to international markets and currencies while gaining a wider range of services. Our VIP clientele will also continue to enjoy tailored service under a new concept and branding, which we’ll announce soon.

 

- On the topic of Ardshinbank's strict compliance procedures, which we discussed a year ago, how does this align with HSBC Bank Armenia's practices? Could there be concerns?

- Ardshinbank's entire compliance and sanctions policy is built on three fundamental pillars: first, the Armenian legislation, second, all of the sanctions mandated by the UN. Finally, Ardshinbank completely applies all of the sanctions mandated by the US, EU, and UK. This means our compliance policies are on par with those of any international bank. When conducting international financial operations in dollars or euros, compliance with these jurisdictions' requirements is non-negotiable. Ardshinbank adheres to these standards without compromise. Since our last discussion on implementing advanced compliance systems, the regulatory environment has only grown more complex. New sanctions and requirements emerge almost daily, necessitating ongoing effort to stay updated and compliant. Understanding the practical application of these sanctions, especially within the context of the U.S. and UK precedent-based legal systems, is a critical aspect of this work.

Today, the compliance department is the cornerstone of our bank's risk management framework. Its decisions are binding and cannot be overridden by anyone in the bank. This ensures that Ardshinbank remains protected from potential risks, adhering to a robust, exception-free compliance system.

 

- What about the risk of losing clients due to this strict procedure? Moreover, many financial practitioners and theoretical economists argue that the compliance system imposed by the West is unjustified! Banks have assumed the roles of both prosecutors and defense attorneys. Banks ignore the fundamental principle of the presumption of innocence․ Surely, you must agree there’s some truth in this?

- No, there’s none of that anymore! Unfortunately, today there’s a presumption of guilt. In this sphere—international finance—the presumption of guilt prevails. If our compliance officer is not sufficiently convinced that a particular transaction is “clean” and complies with the regulations of the jurisdictions I’ve mentioned, they have the right - and the obligation - to stop it. Yes, you’re right, clients often complain about the inconvenience or even outright refusal of services. But there’s no alternative - these are the rules.

 

- But isn’t it true that 60% of Armenia’s export-import operations are tied to Russia? Using these compliance standards from the EU, US, and UK, it’s possible to shut down any transaction involving the Russian Federation, wouldn’t you agree?

- I understand your concern. However, let me reiterate: today, we are the largest bank in Armenia and one of the few channels through which Armenian businesses, economic entities, and the government interact with the international financial system. This position has been established because, unlike most Armenian banks, we have direct access to international markets, whereas many others traditionally operated through banks in the Russian Federation. All these channels closed in March 2022. For this reason, we cannot afford to have these channels shut down for us. We maintain zero tolerance for any export-import operations that, directly or indirectly - through third parties, fourth-party banks, shell companies, etc. - fail to meet compliance requirements. Does this mean that some clients might choose to go to other banks? Perhaps, I don’t know. But the banks they move to are not direct participants in the international payments market. Unfortunately, there’s no other alternative. Otherwise, we too would lose access to the international financial system, and the entire Armenian banking system would follow. Who would suffer in the end? The clients.

 

- It’s interesting that despite these self-imposed restrictions, Ardshinbank continues to lead the banking market, and judging by the acquisition deal with HSBC Bank Armenia, it has no plans to relinquish its market position. Could you tell us about the bank's current strategy, which allows it to stay ahead?

- The bank has held a leading position in the Armenian banking system for many years. Today, we are ahead in all key indicators, including the return on capital and assets. The only area where we are still second is the size of our loan portfolio, but we intend to surpass this by the end of the year. The fact that we haven’t been the leader in the loan portfolio was a decision made by our management to limit the volume of lending. In Q3, we lifted this restriction, and we are on track to finish the year strong in this area as well. As for our strategy, as you know, we are a universal bank with strong capabilities across corporate, retail, and investment banking. We also have a solid international trading business. What’s key is to diversify the bank’s sources of income during times of economic instability, high volatility, and geopolitical turbulence.

 

- But the bank's profit over the past nearly three years has been skyrocketing, following the principle of "every cloud has a silver lining"…

- All the hype around the massive re-export and re-import doesn’t take into account three important elements. First, before the Russian-Ukrainian conflict, many goods produced by multinational companies, such as food products, household chemicals, cigarettes, etc., were manufactured in Russia or Ukraine for the CIS markets. Essentially, all of "unilever," so to say, was imported from there. After 2022, our domestic consumption of these goods shifted from Russia to other markets, where the same factories continued to produce the same products. So, it was simply a substitution of one supplier market with another. The second important element is that most Armenian banks used to work through Russian banks, such as VTB or Sberbank. They made their dollar or euro transfers through these banks. One day, all of that came to a halt. Out of 18 banks, 15 stopped conducting these operations, and as a result, the clients of these banks moved their operations to Ardshinbank and two other banks. Technically, this accounts for 40-50% of the market. So, the market structure has changed. Over these 2.5 years, the number of our clients has grown dramatically. We had 200,000 clients, and now we have 390,000. The third factor is the uniqueness of Armenia: our largest diaspora lives in Russia. There are 2.5 million Armenians there, and more than 800,000 of them are citizens of Armenia. It’s clear that a huge number of these people simply transferred their family savings to Armenia because they have businesses and personal interests here. Some decided to save their capital in the face of uncertainty. Some of these funds ended up in our bank. And it’s not necessarily oligarchs. All three of these factors are crucial for understanding why things are happening as they are.

 

- But you can't deny the statistics that show that the main high incomes of banks over the past three years came not from lending to the economy, but from commissions and trading operations with securities. So, it turns out that despite having such high excess liquidity in the economy, the real sector didn't get much! Why did this happen? Did high interest rates get in the way?

- The past years were marked by high instability and volatility in international markets, and this growth led to a significant increase in the margins of financial operations. Uncertainty automatically increases margins. On the other hand, this uncertainty spurred inflation and led to a rise in key interest rates globally. This is what caused the record profits of banks. Banks that previously earned by lending to the economy, managing credit risks, now switched their strategy and started earning by lending to the government through buying securities, as well as from commissions and high margins. Take, for example, the US dollar, where lending on the domestic market was around 7-8% per year. Why give loans to the economy at 8% amid inflation, if you can buy US Treasury bonds with those US dollars and earn 5.3% annually, with no risk, no capital allocation, and no need to form reserves for potential losses? That’s the reason. This is why our bank decided to limit credit activity. Now, the situation is changing, interest rates are going down, and our behavior is shifting towards more credit-aggressive strategies.

To answer your question, there’s another factor to consider. The fact is that the country has had, and continues to have, high economic growth. Almost all sectors are feeling it, and this led to the emergence of excess liquidity. Corporate clients themselves stopped asking for loans, as they had enough liquidity. Moreover, there were no problems with repaying previously taken loans. This is textbook macroeconomics. High rates slow down lending, prevent inflation from overheating, and increase savings. Now it’s time to transform savings into investments, and we are ready to reinvest in the real sector.

However, I wouldn’t say the real sector has stagnated over the years. I can’t agree that capital hasn’t gone into expanding the potential of the economy. We are seeing good shifts in agriculture. People are making real capital investments in intensive orchards, which will start generating added value in 5-7 years. We can see how well the IT sector is developing. When all of this translates into quality that will reflect in the domestic economy? It’s hard to say, but it will happen. However, our main problem, in my opinion, is significant gap in education, the lack of well-trained, professional, and creative people who can create new enterprises, companies, and initiatives. Without this, trust me, there will be no major shifts in the economy, even with the availability of capital capable of financing any viable business idea.

 

- Thank you for the interesting and candid conversation.