Commercial banking growth as predicted by a recent report is to be slowed down in the fiscal year beginning March 21.
“Risks of defaults will increase” for the banking industry, Business Monitor International predicts in its February report, though it says risks to fundamental stability are lower than in 2012 and 2013.
The report has generally depicted a gloomy environment for the industry, while Iranian authorities believe that challenges in various sectors, including in the banking industry, will be manageable.
“Banking profits are likely to remain minimal, as a lack of access to global financial markets due to financial sanctions, the high ratio of non-performing loans and the lack of competition due to the dominance of state-owned banks will hamper development in the banking industry,” the report says.
Total asset growth in the Iranian banking sector will flatline over the coming quarters, “mainly due to a worsening macroeconomic environment as inflationary pressures increase and oil prices remain low.”
Total bank assets expanded in real terms by an average of 16.3 percent in the 12 months to September 2014, versus the same period a year ago, from a 13.4 percent contraction over 2013. Although lender’s assets are still increasing, the pace of their expansion has declined in the third quarter of 2014.
The recent growth in bank assets was the result of a general improvement in the Iranian economy, as it comes out of recession, and declining inflationary pressures, due to contractionary monetary policies adopted by the Central Bank of Iran.
Iran’s GDP will grow 1.4 percent in 2015, slowing down from 1.7 percent in 2014, as lower oil prices will force the government to cut spending, in turn weighing on Iran’s state oriented economy, BMI forecasts. BMI had previously predicted Iran’s real GDP to grow by 2.9 percent in 2015.
The Iranian economy has come out of a two year recession. It contracted by around two percent in 2013, and 5.8 percent in 2012. According to American government estimates, the Iranian economy is 25 percent smaller today than its pre-2012 growth trajectory indicated, The Economist previously reported.
Inflationary pressures will increase. Consumer price index (CPI) is likely to rise from lows seen in 2014’s second quarter, and average 23 percent in the fiscal year running from March 21, 2015 to March 20, 2016, from an estimated 21 percent in the previous fiscal year. CPI has declined considerably, helping encourage lending and borrowing. It stood at 35.6 percent in the fiscal year running from March 21 2013 to March 20 2014.
The BMI predicts that total commercial bank assets to expand by three percent in real terms in year ending in March 2015, before flatlining in the next fiscal year. The Fitch Group company previously forecast a 14.0 percent expansion in assets for the fiscal year ending March 2015 and 8.0 percent expansion for the following fiscal year.
Rising Risk of Defaults
The banking industry’s debt to the central bank stood at 680 trillion rials ($24.9 billion at market rate) at the end of September 2014, a 9.7 percent increase compared to its level in February 2014. Banks have little choice but borrowing from the central bank or from one another, and “we cannot preclude that some defaults by private banks will take place in 2015.”
But risks to fundamental stability are lower than in 2012 and 2013, when the industry muddled through a serious crisis. The economy is on better footing today. Capital injections by the central bank will also contribute to reducing systemic risks.
