Economy, Business And Markets

Report Forecasts Shaky Growth for Banking

Report Forecasts Shaky Growth for Banking Report Forecasts Shaky Growth for Banking

The banking sector is expected to benefit from a lifting or even easing of sanctions imposed on Iran in recent years over its nuclear energy program, a report says, predicting that lending growth will pick up in the coming years.

“It will take months for banking sanctions to be unwound, the impact in the near term will only be marginal, Business Monitor International says in its latest report forecasting Iran’s commercial banking sector.

Sanctions against Iran are expected to be lifted soon after Tehran reaches a final nuclear deal with six world powers, known as the P5+1. Negotiations are underway to hammer out the deal by the end of June. The unwinding of sanctions will take time, but by the end of 2015 BMI expects numerous banking sanctions to have been suspended. “This will help stabilize the Iranian banking sector, but a boom in lending or deposit growth is still a long way off.”

High base effects and price pressures will weigh on deposit growth over the coming quarters, the report noted. Deposit growth averaged 2.1 percent in 2014, down from a 5.6 percent in 2013, but the report projects deposit growth of three percent in real terms in the year to March 2016, and five percent in the year after.

Lending growth will show a similar trend to deposits, with its growth in the coming months bolstered only slightly by sanctions relief.

The report forecasts real lending growth of 4.2 percent in the year to March 2017 as the economic expansion accelerates, though the issue of non-performing loans (NPLs) remains pressing.

The NPL ratio for commercial banks is currently at 15.6 percent, though unofficial reports say it could be twice the amount.

The practice of forcing banks to support failing enterprises by government’s lending directives has declined during the current administration of President Hassan Rouhani; however, the previous administration forced banks to give heavy loans to businesses which have not yet been repaid.

Capital injections by the central bank will contribute to reducing systemic risks in the Iranian banking sector. Iran will receive approximately $700 million per month from its frozen international accounts under the extension of an interim agreement on its nuclear program signed with the P5+1 (United States, Russia, China, United Kingdom, France and Germany) in November 2014. In addition, the report anticipates further financial assistance following the agreement that is expected to be signed in July. While not nearly enough to support growth of an economy heavily reliant on oil sales, this will go some way towards bolstering the central bank’s firepower, it predicted.

President Rouhani pledged to undertake a series of reforms to the economy, including liberalization measures, introducing tighter controls over the growing money supply and increasing the independency of the Central Bank of Iran from government’s interference. BMI says the executive will seek to implement reforms to the banking sector as well, to diminish the influence of the government in decision-making process of the private banks and alleviate systematic risk in the industry.

According to the report, given systemic risks in the banking sector, profitability of commercial banks will be minimal in 2015 and 2016.

Bad loans will oblige banks to put aside large sums to shield against non-repayment, and the dominance of state-owned banks in the financial system will reduce room for restructuring and diversifying income streams, according to the report.