Economy, Business And Markets

Risks to Banking Stability Contained

Risks to Banking Stability ContainedRisks to Banking Stability Contained

Risks to the fundamental stability in the Iranian banking system is forecast to remain contained in the fiscal year ending March 20, 2016, a new report says, predicting a slower growth for the sector.

According to a report released earlier this month by the Business Monitor International (BMI), “risks to the fundamental stability will be lower than 2013 - when the industry muddled through a serious crisis - as the macroeconomic situation stabilizes and the central bank finds more firepower to support highly leveraged banks.”

The report says the reduction in risks is partially attributed to the expected release of $7 billion of Iran’s frozen assets overseas as a result of the interim nuclear deal Iran made with the six world powers, known as the P5+1, in November 2013. BMI expects such measures to be extended as negotiations continue to reach a permanent agreement over Tehran’s nuclear energy program by a November 24 deadline.

However, the report underlines the high base effects that its claims “will lead to a slower growth in the commercial banking sector” in the fiscal year ending March 20, 2016, compared to the current fiscal year, which ends on March 20, 2015.

BMI argues that profitability in the banking sector will be minimal due to the increased non-performing loan ratio, the dominance of highly leveraged state-owned banks and a lack of access to global financial markets.” High base effects and an increase in price pressures compared to multi-year lows seen in June will lead to a decline in the expansion of the Iranian commercial banking industry and a slower deposit growth in the coming quarters, the report adds.

Falling inflation and increased confidence in the general economy have improved the attractiveness of putting deposits in banks over the past few months, according to the BMI report.

BMI also expects “real lending growth to continue over the coming quarters, having returned to positive territory in March and expanded by 6.7% in June. The pace of expansion will remain slower than deposit growth. The non-performing loans ratio currently stands within the 15-25% band and is likely to remain elevated, dissuading banks from lending. Growth in the economy will also not be rapid enough to trigger a robust uptick in loans.” It also forecasts loan growth of 4% in real terms in the current fiscal year and 3% in the next.

The issue of bad loans will oblige banks to put aside large sums to shield against non-repayment. The dominance of highly leveraged state-owned banks in the financial system will also reduce room for restructuring and diversifying income streams. Monetary authorities and the government have highlighted the need to reform the banking system, but the effect of reform will only be felt in a few years given significant technical and political challenges to its implementation.