Post sanctions Iran banks set for strong revival

Dubai: Iran’s nuclear deal with the world powers and the eventual lifting of sanctions could drastically change the fortunes of Iranian banks that have suffered for long due to the international Isolation of economy, according to analysts.

“A lifting of sanctions would be credit positive for Iranian banks. Significant new business opportunities would arise from increased trade and investment in the sizeable Iranian economy. This would, in turn, boost growth in the banking sector and support the performance of their loans,” said Constantinos Kypreosm, a senior credit officer at Moody’s

Iran’s domestic economy reached $397 billion in 2014, with Iranian banking sector assets standing at $558 billion. This makes Iran one of the largest economies in the region, with a banking system comparable to that of the UAE and Saudi

The repatriation of frozen assets and potential interest from foreign investors and financial institutions in the Iranian banking sector would allow domestic banks to strengthen their solvency levels through much-needed recapitalisation. “Lifting the sanctions will allow the Iranian authorities to use more of their foreign exchange reserves [estimated at $90 billion, Dh330 billion], half of which have been frozen abroad. Business opportunities in Iran following a comprehensive agreement would be enormous,” said Garbis Iradian, Chief Economist, Africa/Middle East of IIF.

Moody’s said freeing up of these reserves is a prerequisite for unlocking the potential of the Iranian banking sector, as lack of capital is currently hindering its growth.

International sanctions imposed on Iran since 2012 have isolated the country from trade and investment and halved its oil exports to around 1.1 million barrels per day. As a result, the economy contracted 6.6 per cent in 2012 and 1.9 per cent in 2013 before growing by 3.8 per cent in 2014.

In the absence of international sanctions, analysts expect a strong recovery in domestic investments that will boost Iran’s financial sector. “The Iranian government estimates that it needs $200 billion in new oil and gas investment by 2020. More support for CAPEX will come through the release of $100 billion worth of frozen assets which will most likely be used to invest in infrastructure and oil and gas investments, meaning Iran will represent a net demand on regional oil services and equipment,” said Steen Jacobsen, Chief Investment Officer at Saxo Bank.

A combination of sanctions and economic deterioration has impaired banks’ loan quality. In addition, weak risk management and corporate governance have led to directed lending, especially at government-owned banks. As a result, finances in the banking sector are weak. Reported non-performing loans (NPLs) reached 14.4 per cent of total loans on an aggregate basis in 2014, while provisioning covered about 36 per cent of NPLs, and the capital adequacy Ratio was just 6.8 per cent.

According to the IMF, there are concerns that NPL levels may be underreported given past supervisory forbearance and weak loan classification standards. An informal statement from a former banking official put the amount of non-performing assets at some $70 billion, more than double the official figure. Furthermore, although the sector appears to have adequate local currency liquidity, we understand that the sanctions have created a severe shortage of hard currency.

In addition to strengthening the banks’ finances, the IMF has also identified the need for Iranian authorities to enhance laws on Anti-Money Laundering (AML) and countering the financing of terrorism (CFT). Specifically, the IMF has called for a move towards risk-based AML/CFT that would allow for the criminalisation of terrorism financing, the freezing and confiscation of assets and closer international cooperation.