Iranian Banks Struggling As Challenges Intensify, Says Darien Analytics

Iranian banks are grappling to stay balanced despite the growing challenges they face in the form of international sanctions and a besieged economy with a currency that can lose 10% of its value over the course of a single day. On the surface, most banks show strong funding in the form of retail deposits, a fairly low operating cost base and reasonable profitability. But a scrutiny of asset quality shows that problems are appearing, says Darien Middle East in its February issue of darien analytics.

The Darien study seeks to bring to Iranian banks the type of analysis it carried out on Gulf banks (MEES, 10 October 2011). However, the London-based consultancy acknowledges that getting to the bottom of Iranian banking is not easy given that disclosure is sometimes poor. Despite the difficulties, it put together a preliminary summary of Iranian banks’ recent financial position, excerpts of which are shown in the table below (for the full report and table see www.darienmiddleeast.com). The inescapable conclusion, said Darien Middle East, is that the Iranian banking system is bankrupt. In simple terms this means the true value of its assets is less than the true value of its non-equity liabilities. Non-performing loans (NPLs) in the banking system totalled $50bn in 2010, according to publicly available information. But capital funds of the banking system – including government-owned development banks and specialized credit institutions – amounted to $28.8bn as of March 2011.

Darien notes that it is unrealistic to think that the banks will suffer a total loss on their NPLs, but if the likely recovery rate is less than 40% (implying a loss of $30bn) then the banking system is technically insolvent. This means that if banks wrote down their loan portfolios today to their true value, their capital funds would be wiped out. In 2004, NPLs accounted for 10% of all loans in the system, official figures say. That is high, but not completely out of line with what is seen in some other emerging markets. In contrast, at $50bn in 2010, NPLs represented 25% of all loans. And some Iranian banks start classifying NPLs when payments are six months past due, rather than the international standard of three months. Iran’s NPL situation raises questions over solvency, the quality of credit appraisal within the banks, and the quality of banking supervision in the Central Bank, says Darien. But it concedes that sanctions are causing problems for many institutions that would otherwise be expected to perform reasonably well.

Darien notes that three banks, including Bank Sadarat, have suffered “runs” when depositors rushed to withdraw Iranian rials, intending to convert them to hard currency or gold. Daily withdrawal limits were imposed because the banks did not have sufficient local currency to meet demand. This is worrying because in general banks are only unable to pay local currency obligations when they are in deep trouble. Also no one expects the rial to stabilize any time soon so the runs are likely to continue, warns Darien.

Corruption Scandals

Confidence has been further damaged by the corruption scandals that emerged in September 2011 with revelations that obscure businessman Amir-Mansour Khosravi, who has strong ties to the Ahmadinejad regime, had fraudulently acquired $2.8bn from leading banks. This triggered a wave of arrests and investigations across the banking sector (MEES, 10 October 2011). The events suggest that control systems are weak and/or unenforced and indicate a political dimension where an already vulnerable banking system “can and will be increasingly used by regime figures to finance political campaigns and buy influence,” notes the report.

Despite the problems, the picture is not entirely gloomy, said the consultancy. Iranian banks have enjoyed fat margins: until recently they have been paying 6-15% on deposits and charging about 25% on loans. They are operating in a sizeable economy – Iran’s GDP is nearly as big as Saudi Arabia’s at about $340bn in current prices, and it has a large population (75mn). Investment banking services are generating new revenues and electronic banking is increasing retail banking efficiency. And for the moment, Chinese and East Asian companies are happy to pick up the business that other foreign institutions decline as a result of sanctions. Left alone, Iranian banks would be making plenty of money. But they are not left alone. Most of the largest banks are faced with some form of economic sanctions and all are going to be increasingly subject to political pressures, warns Darien, adding that exchange rate problems are going to continue to wreak havoc on the sector.

Largest Iranian Banks, Summary Of Financial Position (IR Bn, except where stated)

Source : Darien Middle East.

Notes:

1.     Unconsolidated results have been used, so as to present a purer picture of the bank’s balance sheet and performance, although in the case of Bank Melli, only consolidated figures were available.

2.     Iranian years end on 20 March, so figures for 1389 refer to 20 March 2011 and for 1,388 they refer to 20 March 2010.

3.     Bank Mellat’s figures refer to 22 August 2009.

4.     The asset figures in dollars have been calculated using the exchange rate for 20 March 2011 ($1=IR10,250), for 20 March 2010 ($1=IR9,709.7), and, in the case of Bank Mellat’s, 22 August 2009 ($1= IR9,761.9). Exchange rates are taken from Oanda.com.

5.     The figure for “Loans” includes loans to the private sector, the public sector and the government.

6.     The figure for “Deposits” includes sight deposits, savings deposits, term investment deposits and “other” deposits.

Consolidated Balance Sheet Of Commercial Banks (IR Trillion, except where stated)

Source : Darien Middle East.

Figures refer to the 20 state-owned and privately-owned commercial banks. They do not include state-owned specialized banks (such as Bank of Industry and Mines) or other specialized banks. The figures in US dollars have been calculated using end of year exchange rates published by Oanda.com (see notes for previous table). The source for the data is the Central Bank of Iran. On the assets side of the balance sheet, commercial banks show a large item termed “other” assets, and on the liabilities side they show large items termed “other” liabilities and “foreign exchange loans and deposits.” The dates refer to the Iranian years 1389, 1388 and 1387, which end on 20 March 2011, 20 March 2010 and 20 March 2009.

© Copyright MEES 2012.