Iran’s Benighted Bank Anniversary Era
The Teheran Stock exchange was up 20 percent on the local index from January to end-June as the one-year mark of the nuclear freeze for sanctions elimination deal was reached, with bank performance lagging on limited removal of internal policy and external boycott obstacles. US and UK Treasury Department representatives have tried to reassure Iranian counterparts of business resumption scope with reconnection to the SWIFT global payments network, but specific guidelines have not been offered as Washington’s dollar system ban legislation awaits reconsideration and possible renewal after year-end expiry. Mid-tier European banks have participated in recent transactions like the EUR 50 million takeover of a listed detergent producer, and large global groups may step into the proposed Boeing sale of jumbo jets approved under waivers, but signoff on clear entry remains blocked by national restrictions and multilateral reservations about counter-terror financing through the FATF inspection body. Iran’s new parliament, with a large bloc of moderate economic reformers according to reports, has passed legislation to be more compliant but still rejects the notion of foreign oversight. It has also adopted provisions to advance a sharia-based debt market through near-term government issuance to cover contractor arrears, which will also be paid from unblocked reserve accounts under the Geneva accord.
The dozen listed Tehran state and private commercial banks, with combined assets at 40 percent of the $500 billion sector total, have reported declining profits and outright losses on a 30 percent interest margin squeeze, despite progress in selling noncredit holdings under new central bank rules. The latter have included real estate investments, where developer and residential prices have recovered slightly. Tight fiscal and monetary policy and poor business and consumer sentiment linger under recession. Real interest rates are steep with inflation at 9 percent and the lending benchmark reduced to 18 percent in June. Reported NPL ratios average 15 percent and provisioning has been lax under local application of dated Basel I capital adequacy and prudential standards. Long-term deposits are less than 30 percent with the existing ban on above one-year acceptance which experts expect to be lifted post-sanctions. Informal intermediaries have been outside supervisory jurisdiction and outcompeted on return and service. A valuation discount prevails where the price-earnings level is under the current 7 times on the Tehran exchange, and the financial sector is just 2 percent of GDP as compared with services at 50 percent and oil at 15 percent.
The IMF in April estimated growth this fiscal year at 4 percent on single-digit inflation, and it urged greater central bank independence and monetary discipline to accompany foreign investor opening. The president and religious Expediency Council choose the governor, who is but one member of the dozen-strong Money and Credit body dominated by other ministries. They are supposed to follow money supply and other targets set in the 5-year development plan, but studies show they are regularly missed as with the 5 percent overshoot of 25 percent expansion since 2011. The big three state-run banks Mellat, Saderat and Tejarat, where direct government ownership was spread to other official funds with 2009 “privatization,” account for two-thirds of exchange-listed assets and are in the worst shape by standard financial and operating measures according to brokerage reports working to convince overseas fund managers to sanction allocation.
