Sanctions-hit Iranian banks have little scope of international business

The banking sector’s structural vulnerabilities will restrict their engagement with foreign lenders

There's little scope for Iranian lenders to get recapitalised as US sanctions further weaken the Iranian economy. Reuters

Iranian banks have a limited scope of engagement with international financial institutions as lenders elsewhere will look to eliminate any exposure to the country once full US sanctions kick in.

The vast majority of international banks are vulnerable to sanctions because of the dominant role of the US and the dollar in the global economy and financial system, Fitch Solutions, a part of the Fitch Group said in a report on Wednesday. Even beyond the US sanctions, the Iranian banking sector’s “structural vulnerabilities” will restrict their engagement with international lenders, it added.

US sanctions on Iranian oil imports will come into force in early November and already the Iranian economy is under pressure. The economy is likely to contract this year and next on the back of sharp declines in oil exports and a further slump in already-low foreign investment inflows. Iranian banks, most of which are state-owned or state-linked, have struggled in the tough economic status quo.

The lenders have exceptionally high levels of bad debt, with non-performing loans estimated at 13 per cent of gross loans in 2017, said the report, citing Institute of International Finance data. However, Fitch estimates that the real ratio is likely even higher, as local reporting standards discourage the categorisation of loans as non-performing.

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“The capital adequacy is very low, standing at less than 6 per cent in that same year, compared with the Basel III-stipulated 8 per cent -- plus a 2.5 per cent cushion,” said the report.

Iranian banks' inability to engage with the international banking system will remain the case regardless of any eventual progress on much needed industry reforms.

Iran's parliament this month approved measures that are essential to implement international standards against money laundering and the funding of terrorism set by the Financial Action Task Force.

“While we view the Iranian parliament’s recent passing of legislation to bring domestic banking sector regulations in line with international standards as a positive step, we do not believe that this will substantially impact international banks’ perceptions of risks associated with operating in the Islamic republic as long as US sanctions remain in place,” Fitch analysts wrote in the report.

Iran’s banking sector vulnerabilities are primarily the result of challenging economic conditions in the years leading up to nuclear sanctions relief in 2016, as well as extensive government interference with lending practices and weak regulatory enforcement under the former Ahmadinejad administration.

Lenders increased the interest rate to attract deposits but many are now in trouble because of the weak economy.

Meanwhile, the US Treasury on Tuesday announced additional sanctions on the multi-billion dollar network for Iran’s powerful Basij paramilitary force, targeting 22 entities including corporations and some of the private banks that were not on the list previously.

Among those targeted are Bank Mellat, Mehr Eqtesad Iranian Investment, Mehr Eqtesad Bank, Parsian Bank, Sina Bank, Bahman Group, Tadbirgaran Atiyeh Investment Company, Negin Sahel Royal Company, Mehr Eqtesad Financial Group, and Technotar Engineering Company.

Also on the list are Iran Tractor Manufacturing Co, Esfahan's Mobarakeh Steel Co, and Iran’s Zinc Mines Development Company.