Iran’s Un-Bankable Post-Pariah Proposition
The Tehran Stock Exchange capped a month-long rally on heavy trading volume as the Vienna nuclear deal left the benchmark index essentially flat for the year, with major sanctions relaxation delayed until early 2016. The UN could then lift banking prohibitions including connection to the SWIFT global payments network, and Chinese and Indian institutions are positioned to be among the first to resume correspondent and local relationships and led delegations calling on business and government representatives in recent months. However their enthusiasm has been muted, as credit and capital markets despite nominal access remain subject to pervasive official control, and banks’ balance sheet hole may already exceed the USD 100 billion frozen in Iran’s international accounts.
President Rouhani convened a conference early this year to debate approaches for the huge bad loan ratio estimated at 20-25 percent of the total if normal accounting standards applied. Oversight and resolution gaps have been regularly cited in IMF reports, and the central bank lacks independence as it is just one voice on the Monetary and Credit Council setting policy. Economic growth was 2 percent in the latest quarter with inflation more than halved to 15 percent from 2014’s 40 percent. With relative currency stability, the difference between the formal and parallel exchange rates narrowed to average 30,000 rial/dollar, and unification is still a near-term goal. “Profit rates” for borrowers, to be followed by all 30 state and private institutions in the no-interest Islamic system, were recently reduced 2 percent to 20 percent, and reserve requirements fell to 13.5 percent. The government-run giants include Melli, Industry and Mine, Agriculture, Sepah and specialized Housing and other units, while private competitors like Saderat and Pasargad often have official ties as part of wider family business conglomerates. Non-performing assets are concentrated in real estate, where a large buyer subsidy program began under the Ahmedijad administration, while manufacturing is operating at only 60 percent capacity. According to the central bank, most commercial lending is for immediate cash flow rather than longer-term investment.
A list of 600 individual and corporate defaulters has been compiled as an important step in addressing problems and reported in the media including the new English-language Financial Tribune. However they are politically-protected names and workout procedures are undeveloped. Banks have also been ordered to divest non-core activities like property speculation which supported the bottom line amid credit woes. Meanwhile they are locked in to previous high-yield deposits at 30-percent plus rates which prevailed under runaway inflation. A task force is exploring setup of a single disposal agency for overdue debts and recapitalization needs, which together may amount to one-quarter the system’s USD 500 billion size, as earnings for banks listed on the stock market declined 7 percent for the latest period.
The Tehran exchange has been touted by frontier enthusiasts as a longstanding financial sector channel, in contrast with absence in post-embargo Burma and Cuba. Since the 1990s it has been member of the Istanbul-based Federation of Euro-Asian Exchanges, a technical body which works to harmonize infrastructure and regulation and also includes archenemy Israel. Modern brokerage and electronic capacity support trading and settlement, and price-earnings ratios are in low single digits for the hundreds of companies offered at over USD 100 billion in combined capitalization. The biggest weightings are in telecoms and petrochemicals, and IPOs and small stake privatizations have been staples for retail punters. Foreign investors can in principle acquire majority ownership with permission, and Gulf buyers in particular were active before sanctions.
True availability is limited as the free-float is only around USD 30 billion with shareholding dominated by government institutions like pension funds, the Revolutionary Guard, municipalities, and religious foundations. Along with average citizens, they received no-payment transfers in the past under Iranian-style privatization. Despite their preponderance and failure to exercise traditional corporate governance, international fund joint ventures such as between Tehran’s Turquoise Securities and the UK’s Charlemagne Capital have been launched with promises of quick value cultivation. However banking and equity markets remain choked by decades of underbrush that will not be cleared even if anti-nuclear intentions are in the rapprochement’s preliminary operational phase.
