ArmInfo. Continuation of ArmInfo’s Interview with CEO of ACBA-Credit Agricole Bank Hakob Andreasyan Could you comment on the current high prices of agricultural products in the domestic market? Is it because of the high cost of agricultural production? The year was marked with freezing. But our surveys have demonstrated that the prices of fruit and vegetables were also rather high because the farmers who suffered losses due to the crop failure had to compensate for their damage, and they did it. Besides, the price growth was due to the growth of fruit and vegetable export. You are right, the cost of agricultural production is growing in the country – we observe big expenses and small crops. I think the growth in prices of agricultural products is a long process and it is observed not only in Armenia, but also in other countries. Consumption is increasing, population is growing, and the demand for high quality agricultural products is rising. The high quality Armenian agricultural products are well sold in both local and foreign markets. If the agrarian sector in Armenia is properly organized and efficient production and processing technologies are introduced, the sector will be able to demonstrate considerable growth. Would you tell us about the new agriculture lending products the Bank is going to introduce? The bank is providing a wide range of credit products, including loans for agriculture and agribusiness. In the course of time, the demand for some of the products has diminished and some of them have left the market due to low efficiency. Some products, on the contrary, have been improved and are still in the market. Our long experience has taught us to promptly respond to the demand, and we regularly study the trends, refresh the old products, and revise the terms of provision. Today we are going to facilitate the access to the products aimed at upgrading the agricultural production and agribusiness. For instance, the matter may concern more efficient anti-hail technologies. Though these are very expensive investments, nevertheless, they have long-term efficiency. These technologies can be produced in Armenia at a quite reasonable price. As you have probably understood, the matter concerns the anti-hail systems we have been talking about for a long time but have not launched their production. In the meantime, some farm enterprises have purchased them abroad and protect their facilities against the hailstorm. Another problem that needs to be solved without delay is the insurance of agrarian risks. The lack of such an instrument is connected with the fact that the loans may become more expensive. But I am not inclined to connect these two elements. The problem is that the Armenian companies simply do not work in this segment, because they think it very risky and they are unable to control such risks. My French colleagues have also studied the situation in Armenia and have arrived at the conclusion that it is still early to introduce the insurance of agrarian risks in Armenia. But now we are looking for mechanisms allowing the economic entities to make use of such insurance. We are currently looking for partners. Yes, it should be taken into account that introduction of the insurance of agrarian risks will undoubtedly raise the prices of agricultural products, since it requires additional expenses from the economic entities. On the other hand, we see that sometimes the lack of such insurance affects the cost of production and also causes a price growth. So, the accurate calculation of these price formation mechanisms is able to estimate the benefits and the losses and to stabilize the prices. Anyway, one should start from small insurance amounts which can guarantee minimum risks at least. Here we have another little nuance – the insurance becomes profitable if the customer makes use of not one, but a few products in the package. I think it would be interesting for the insurance companies to work with the «package customers», but they are not yet ready for that and consider it to be extra expenses. We are not yet ready to understand psychologically that insurance is not luxury but a necessity. Don't you think the state's participation or at least the state-private sector partnership is needed here? I do not know how much grounded the state's participation will be, but these issues are already in the focus of the Armenian Agriculture Ministry's attention. Relevant debates have already been held. However, the agrarian sector representatives themselves should come out with relevant proposals. It is necessary to conduct serious preliminary surveys to find out how much justified the state's participation will be and what specific help it should render. I should point out that during the preliminary debates some economic entities expressed a desire to make use of small agriculture insurance, but it is not clear how much this product will be demanded on a massive scale. We should study this field and probably work out specific proposals jointly with experienced international partners. As regards our bank, we are naturally very much interested in introduction of that product. In the meantime, I am not inclined to think that our agriculture is going around in circles. Over the past few years, a lot of things have changed for the better. The main problem is that the entities themselves are very small; consequently, they obtain low incomes but spend much. In this context, the farm cooperatives are very topical. Recently I have been honored to familiarize myself with the French experience. I have visited a cooperative specializing in meat processing. The farmers supply the cooperative with meat, which can be processed into various types of meat products. That cooperative does not sell products; it only fulfills the orders of its member farmers. As a result, the farm enterprise bears small expenses on the processing of its own meat, because the meat is processed by the cooperative, which has low cost of production but big outputs. I have also familiarized myself with the work of wine production cooperatives. A few winemakers consolidate and give their grapes to the cooperative for processing. On joining the cooperative, farmers acquire a guaranteed procurer and then share the profit. The French Credit Agricole encourages the creation of such cooperatives, working out specific business projects and dealing with logistical issues in lending. We can also work out such projects, but first of all we need the customers' desire and interest in such projects. It is no secret that our people's proprietary senses are subtle, but it is not a reason to refuse efficient economy management and future incomes. We are observing the following trend in the banking sector: the banks' non-interest incomes are growing, while the interest incomes are dropping. Many banks have started working out products that increase the commission fees. It is the banks' natural reaction to the crisis caused by the lending reduction due to the lack of effective demand for loans. The banks start focusing on various services and non-credit based products. But the success of that non-credit or small credit retail mostly depends on the customer base scales. The banks have to fight for the customers and open more branches, especially in towns. Despite the specific mission of your Bank, the Bank positions itself as a successful universal bank and you also increase your offices in the towns. Does your large Bank also need to spend on even more expansion of the branch network? We have always been strong in the provinces. We started our activities in the provinces and we used to work only with provinces for a long time. At present we are working in all provinces of Armenia. We had insufficient presence in Yerevan, while in the provinces we had quite many branches. In 2014 the Bank is going to open branches both in the capital city and in the provinces. We want to ensure our presence in different communities of Yerevan. Services should bring not only interest incomes but also non-interest incomes, because the credit margin is dropping not only in Armenia, but also worldwide. For instance, some French banks were working in France with an almost negative margin or did not earn money at all. But they are working with many other products. The specificity of the French banking sector is that the so-called cross-selling is very popular there – the banking services are sold together with insurance services. Moreover, the banks have their own insurance companies working in various insurance segments. They can promptly respond to the problems and needs of their customers. For example, Credit Agricole is a founder of three insurance companies. In one of the provinces, the bank obtains more than half of its revenues from the insurance activities. Banking competition is intensifying worldwide. Therefore, to increase their revenues, the banks introduce new technologies, reduce expenses, and sell non-traditional banking products. The banks passed this path long ago. We are passing it at a quickened pace by using the existing methodology and technologies. Today we are highly competitive with our foreign partners. Our only weak spots are the lack of good market specialists, adequate assessment of the ongoing developments, fulfillment of serious complex tasks and integrated approaches. The current reforms are as important for the future as those conducted in the period of privatization and creation of market economy rudiments. I mean the pension reform as well. It has demonstrated the lack of public confidence in the reforms and that factor should be changed. In that case we will be able to switch to a different, qualitatively new level of economic relations, standards and solutions. The country’s economy faces an important task to develop small and medium entrepreneurship. However, the impression is that the task is becoming monumental for the banks, which have considerably reduced the SME lending over the past one or two years despite the support programs and tangible foreign funding. What do you think of it? Now we are very much interested in SME lending, which has sharply dropped over the last crisis-affected years. Earlier the banks had no problems and had no desire to win back their customers. Each of the Armenian banks had its own SME customer base and was working in that segment without any problems. But now the number of SME customers has sharply declined and it has become a big problem for the banks. The customers are moving from one bank to another and think that the problem is the particular bank. They come across difficulties with servicing of the operating credits and increase their loan debt burden by refinancing the debt. Yes, they used to invest in the fixed assets and new technologies, but over the past few years the output of products and services have declined but the loan debt burden has remained. This is the main problem of the banking sector – the number of customers is dropping, the competition is intensifying, and the customers are migrating from one bank to another. Our businessmen suppose that they purchased at high prices and now they have to sell at cheap prices. They do not think that their loan debt is growing and that the sooner they part from some of their assets, the better. Would you tell us about the ACBA Business Partner program? The program implies conceptual changes in the approaches to business conduct, i.e. changes in the business structure and philosophy. Earlier the banks sold single-unit specific products to the customers, while the customers could have several products both at that particular bank and other banks. Earlier the banks did not try to satisfy the customers, they were guided by the principle “I will sell what I can obtain profit from and I won’t sell unprofitable products, let the customer look for them at other banks”. This approach has been fully exhausted. Now a customer is considered as a full partner and a bank is trying to satisfy all the needs of the customer as a single set. We offer long-term Bank-Customer partnership. The format implies an individual approach to each customer. The Bank should be well aware of the customer’s needs and the situation in the customer’s business and personal life. Moreover, the Bank regularly updates that information. This enables the Bank to rapidly respond to the customers’ problems and to offer options of solutions. Thus, the customers become predictable for the Bank. In addition, a bank should have relevant technologies. We provide our customers with a wide spectrum of package offers. What indices will the Bank achieve by late 2014? Now it is important for us to find correct solutions to the current situation and we do not strive to take the lead in specific indices. We were operating at a loss, because we graded some outstanding big loans we provided a few years ago. We want to completely clean our balance sheet. We started cleaning it in early 2014. The Bank's loss in the first half of the year dropped twofold to 600 million AMD. The Bank still has some things to write off in the second half of 2014 and this issue has been discussed with the shareholders. As regards other indices, as compared with early 2014, the assets have grown to 269 billion AMD, the capital has dropped by 600 million AMD, and the loan book has risen to 176 billion AMD. The Bank intends to increase the loan book to 185-190 billion AMD by late 2014, though it is very hard to fulfill this task, because agricultural loans do not enjoy a big demand in the autumn. The Bank is also planning to increase the deposit portfolio and to open 4 new branches – 2 in Gyumri, 1 in Metsamor and 1 in Yerevan. Three branches have already been opened this year. In 2015 we also intend to open new branches equipped with advanced technologies. In addition, we are going to replenish our workforce capacity with highly skilled specialists.

ArmInfo. It has already been 100 days since Hakob Andreasyan was appointed as CEO of ACBA-Credit Agricole Bank. On this occasion, he has agreed to give an interview to ArmInfo. Mr. Andreasyan, I would like to start our interview with a question about one of the most crucial fields for our country, agriculture and agribusiness, the fields where your bank has always been the leader. Today the government is paying increased attention to agriculture and your bank is actively involved in relevant projects. But few banks are following your example, which means that there are serious risks in this sector. What risks do we have here? What instruments do you use to minimize them? We still have no developed agriculture insurance system, nor do we have a proper hail guard, so, our farmers continue sustaining losses. For 16 years already ACBA-Credit Agricole Bank has actively financed agriculture as its core mission is to serve this sector. Today our bank has substantial experience in this field. I think that the key advantages of any bank are its employees and customers. I can say that we have both, and this helps us to be in the vanguard on this market. In Jan-June 2014 our loan book grew by 13bln AMD to 176bln AMD, where the share of agricultural loans grew from 32% to 40%. There are a number of factors that have ensured this growth. The first factor is our strategy. The current situation in agriculture has proved that we must be consistent in financing this sector and must continue increasing its share in our loan book, especially as our wish is backed up by the government’s policy. Over three years ago the government launched a program to subsidize the interests on agricultural loans. This program is supposed to provide almost 15bln AMD annually for small-sized loans. The interest on the loans is 14%, with 4-6% (depending on community) subsidized by the government. This program is a chance for farmers to get cheaper loans. Even though this resource is open for all banks, ACBA-Credit Agricole Bank has the lion’s share of it – over 14bln AMD annually. This year we have used our own resources to lower the interests on AMD loans and to make them more affordable. Many banks complain of high risks in financing farmers, especially as they are forced to borrow part of the money in foreign exchange. Yes, of course, forex risks are really tangible for our bank as the greater part of the funds we attract, including the money borrowed from international donors, are in foreign exchange. Hence, we are taking certain steps to get AMD resources as well as to hedge part of our forex risks when attracting funds from different international donors. By doing this, we are seeking to ring-fence farmers from untypical risks. The key thing we are doing here is cutting our margin as hedging results in growing interests and more expensive resources. But we are ready to do this so as to free our borrowers from forex risks and to give them easier access to our resources. This year we have provided AMD loans worth 3bln AMD at 14% against 15% in the past. We got this money from KfW in the framework of GAF programs. We already had this money last year but were unable to actively place them for different reasons. Was it targeted? Yes, of course. It was meant for agriculture. It is important that the loans were both medium- and long-term as well as both small- and big-size. Short-term loans were aimed to help farmers to replenish their floating funds, while medium- and long-term loans are invested mostly in development programs. What could you say about investment activity in the country? How much money have you spent on investment loans? Unfortunately, in the last years our investment loan book has shrunk. A couple of years ago we had high activity and high demand for such loans. And we successfully met it using different sources, including own funds. Other banks were also active in this field. Today I am not sure what a share investment credits have in our agricultural loan book. I think some 10%. In the past when farmers were more active in planting orchards and building greenhouses, almost 15% of our agricultural loans were medium- and long-term investment credits. Can we say that agribusiness in Armenia is pending? This is a global tendency. Things are almost the same in Europe and Russia. Some developments in Russia have direct impact on us. For example, in early 2014 the Russians were actively discussing the problem of labor migrants. Now they have reviewed their attitude towards our compatriots, but at the beginning of the year lots of people with stable monthly earnings in Russia were forced to go back home. And the problem here is that the money they sent home was the only source of income for our customers in rural areas. As far as I understand, this money shapes the demand for banking services and additional financing? Yes, if a customer is solvent, if he or she earns a stable income, we invest money in serving him. Today agribusiness in Armenia is facing not bad chances to regain its positions on Russia’s agricultural and food markets. Today we are actively developing and are already applying new lending products in agriculture. Particularly, we are planning to introduce technologies that will allow farmers to reduce their costs. Our technologies are very expensive, while in many other countries they are much more economical. One of the best examples is Israel, where they have farms amid deserts and even sell their agricultural products worldwide. Yes, I fully agree with you, Israel is a painful subject for Armenia as many experts wonder why they can do it and we cannot? Just one example: one Israeli company wants to launch a new drip irrigation system in Armenia and they have asked us to find a farm where they could test it. We are ready to finance such projects. I think autumn is the best time for a bank to appear with new products. In autumn customers are more active borrowers as compared with summer.