As relations with the West improve slowly, Iranian banks are poised to resume their overseas activities. The Persia International Bank was established in 2002 following the merger of London branches of Bank Mellat and Bank Tejarat. Mohammad Reza Meskarian, the CEO of the PIB, was in Iran this week for a brief visit. He shared his views about Iranian banking in the post-sanctions era with the Financial Tribune in his office in central Tehran.
Meskarian said there were two restrictions on Bank Mellat and one of them was imposed by the British government and the other by the European Union. By November 2009 no UK-based bank could have transactions with Mellat and hence PIB also was unable to transact with its shareholders. From July 2010 Bank Mellat was also blacklisted by the EU Council. The situation got worse by January 2012 as the other shareholder, Bank Tejarat was also blacklisted by the council.
Regulators then claimed that the PIB is owed 100% by two blacklisted entities. There were no clear allegations against PIB except that it has been operating under Bank Mellat. Although Mellat has challenged the ruling through EU courts, the PIB also perused its case separately on the premise that according to the bank’s constitution they are not under the control of their major shareholders. This process took about three years as it was a political issue.
The case was submitted in October 2010 and the court’s verdict was issued in June 2013 in favor of PIB which the European Council did not appeal.
Since nuclear negotiations with the six world powers and Iran (officially known as the Joint Comprehensive Plan of Action) were underway, PIB had a reactivation plan and as part of the plan was prepared to resume operations as soon as sanctions are removed.
As such, they have already provided a plan to the UK regulatory authorities including Prudential Regulatory Authority (PRA) and Financial Conduct Authority (FCA) and are waiting their response. If they agree with the plan they will ask for a number of documents like capital adequacy, liquidity adequacy and the recovery and resolution plan which are being prepared.
“Similar procedures will be followed in Dubai and we need to submit a plan to the Dubai Financial Services Authority (DFSA) which has the same standards.”
For the reestablishment of PIB correspondent relationship with banks, Meskarian said unfortunately they have not yet received a reliable positive response from any of the contacted banks with which they had relations before the sanctions were imposed.
“My expectation is that after the adoption day (Oct. 18) of the JCPOA, more action will be taken. In my understanding the main reason these banks have not shown any positive sign for reactivation of correspondent relations is the US threats…These banks have paid more than $15 billion in fines as part of a settlement agreement.”
Weathering the Sanctions
Meskarian says his bank has not been active since 2010. But they retained the license and their branches in the UK and Dubai were also under sanctions with assets frozen.
But the PIB was making a profit up until 2009. The bank had a pre-tax profit of 140% of its total capital and a net profit of about 100%. After sanctions they could not take any new business and that hurt their profit to a great extent.
“The size of our balance sheet was reduced from €1.4 billion in 2009 to €900 million in 2010 and now it is €225 million. However, we have not made any loss so far,” he said.
“Last year’s profit was only €800,000 down from €1.4 million previously. The small profit was achieved by cutting staff in Dubai and London and with the help of frugality. We were also able to collect interest on our loans. As part of the business plan we hope to reach our 2009 level within three years of reactivation. Our profit is expected to reach €7 million in 2016-2017 and will further increase to 16 and 28 million euros in the following years.
Iran Business
Apart from the political issues, transparency and anti-money laundering regulations that have hurled Iran on top of the risky countries, the Iranian banks and regulatory authorities are required to take action to comply with western regulatory requirements, Meskarian stressed.
Since the 2008 financial crisis, banks regulatory requirements have been rising dramatically. Iran needs to comply with these oft-changing requirements about capital/liquidity adequacy ratios and salaries of senior managers. There is a gap between regulatory requirements in Iran and other countries which calls for analysis.
“I tried to bring one of the UK financial consultant agencies here and there are more advisers coming and giving talks in conferences organized by the CBI and Iran Chamber of Commerce.”
But he says the gap cannot be plugged within a few months and there should be an effective plan to close the gap over the years. Iran needs to comply and get closer to international regulatory requirements for better correspondent relations with other banks. If Iranian banks seek loans from European banks, they must comply with western regulations.
“The other issue is anti-money laundering regulatory requirements on which I believe Iran has not taken enough action so far. The Financial Action Task Force (FATF) has raised this issue and some changes have been made, CBI officials say. It will take time to see the impact of these changes, but the effort is obviously worth it.
