BANK INVESTMENT BOOMING IN ARMENIA
A News Commentary by Haroutiun Khachatrian

EurasiaNet, NY
Aug 27 2007

Fueled by high economic growth rates, Armenia’s banking sector is
rapidly expanding, with several new, large-scale multi-million dollar
foreign investments expected in the coming months.

Yerevan’s Garegin Nzhdeh Square illustrates the transition involved.

The square’s sidewalks are packed with street traders, one of the
clearest signs that Armenia’s "shadow economy" lingers. The lines of
people at three nearby automatic bank tellers waiting to pay utility
bills or get cash, however, suggests a parallel trend: the old Soviet
image of banks as just a place where extra money could be stored is
beginning to fade.

Armenia’s ongoing high rate of economic growth (12.1 percent for
the first six months of 2007, according to official statistics)
largely explains the trend. In 2000, average monthly salaries stood
at roughly $55, while today they average $205. With incomes rising,
residents are turning to bank loans, with interest rates ranging from
15-22 percent, to expand their purchasing power still further.

Since 2004, the banking sector has expanded at a rate of between 10
to 20 percent a year to stand currently at more than $1.6 billion. In
the first six months of 2007, banking assets’ value climbed by $244
million, or about 83 billion dram, according to the Central Bank.

Nonetheless, in terms of the ratio of total bank assets to Gross
Domestic Product, Armenia ranks as an outsider country. This ratio,
commonly used by specialists to evaluate the banking sector, was just
over 19 percent by the end of 2006. In most post-Soviet countries,
it can stand as high as 50 percent.

Central Bank officials put that difference down to relatively strict
requirements for issuance of loans and reserve levels, among other
indicators, and the Central Bank’s weekly verification of commercial
banks’ balance sheets.

Some experts agree. "Indeed, Armenian banks are probably the best
among the CIS countries in terms of the quality of assets," commented
Tigran Jrbashian, the Armenian director of the Armenian-European
Policy Legal Center, a European Union-funded think tank in Yerevan.

With additional investors moving into the field and demand for bank
services growing, competition is becoming key. In addition to banks
from Russia, the United Kingdom and Iran, new banks have been formed
in recent years with capital from the US, Switzerland, Ukraine and
Kazakhstan.

The Central Bank announced in July that Russia’s Gazprombank,
Austria’s Raiffeisen Banking Group and the Lebanese Biblos Bank have
indicated their intention to invest in the Armenian banking sector,
either via takeovers or by creating subsidiaries. In addition, Arminfo
has reported that the German-based ProCredit Holding AG, an investment
company that is the majority shareholder in a bank group for transition
and developing economies, and the Russian investment bank Troyka
Dialog are also considering entering Armenia through similar routes.

The British-run HSBC Group Holdings, which has been working in
Armenia since 1996, has announced plans to make new investments and
open several new branches. Details were not available. The expansion
plans of ACBA-Credit Agricole, an Armenian-French joint venture, is
being backed by a $12 million loan from Citigroup and the European
Bank of Reconstruction and Development.

The entrance of GazPromBank, in particular, is thought likely to fuel
competition with one of the largest foreign bank players in Armenia’s
market — Russia’s VTB Bank, which took over the Armenian Savings Bank
in 2004. In late July, VTB Armenia Chief Executive Officer Valery
Ovsiannikov told ArmInfo news agency that the bank is looking for
capital to see through proposed projects worth $500 million.

With the expansion, expert Jrbashian hopes that the quality of banking
services could improve, too. Already, banks are increasing interest
rates for deposits, while some are also venturing into relatively
new products for the region – student loans, low-fee credit cards
for account holders and cumulative interest-rate accounts that vest
to accountholders’ children upon their reaching adulthood.

But more banking activity could mean higher inflation, a situation
often seen in rapidly growing economies which consume large sums of
money in a short time. The Central Bank has hoped that a stock market,
planned for introduction in the coming year or two, could help keep
that risk even lower, but, for now, as bank investment grows, the
outcome is far from certain.

Bankers say that inflation could provide a clue. Despite earlier fears
that inflation for July 2007 compared with December 2006 might be
as high as 4 percent, the increase ranked a mere 0.6 percent. This
slight jump, despite above-average growth in the banking sector,
has suggested that money supplies have not yet outstripped economic
activity. For now, the bets are on that the Armenian economy has room
to absorb still more.

Editor’s Note: Haroutiun Khachatrian is a Yerevan-based writer
specializing in economic and political affairs.

From: Emil Lazarian | Ararat NewsPress