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Lending, Deposit Growth Far
Economy, Business And Markets

Lending, Deposit Growth Far

Business Monitor International has predicted that Iran’s banking sector will benefit from the removal of sanctions at the start of 2016 as the removal of sanctions will offer much needed respite to the country’s beleaguered banking sector as economic growth picks up and the government gains access to $32 billion in frozen assets (which could be used for capital injections).
Lending growth will pick up in line with an improving economy, but a weaker rial and elevated inflation will weigh on deposit growth. However, the report cautions that the banking system will remain in a state of near-crisis over the coming quarters.
“The removal of sanctions will help stabilize the Iranian banking sector, but a boom in lending or deposit growth is still a long way off as impediments will remain for some time,” says the report.  
“The logistical problems in authorizing transactions from Iran will take months to be removed, given the complicated compliance issues especially for companies with both European and US operations given the different timing of sanctions removal.”
According to BMI, the key benefit from an unwinding of sanctions on the Iranian banking sector is the returning access to the Society for Worldwide Interbank Financial Telecommunication (SWIFT) transactions. This system – which provides the network for the majority of global bank-to-bank transactions - had isolated the Iranian economy, leaving the banking sector virtually cut off from the global financial system.
Banks are now able to undertake international transactions, raise capital in the international bond market, and expand their presence abroad. Iranian banks still cannot use US dollars for transactions, presenting a significant impediment to financing trade.
“On the back of sanctions relief, we forecast economic growth to pick up from an estimated 0.6% growth in FY2015 (fiscal year running from March 21, 2015 to March 19, 2016), to 4.5% by FY2017, respectively, which will improve the backdrop for the banking sector,” predicts the report.
“Inflationary pressures will moderate slightly; we forecast consumer price index (CPI) inflation to fall from 22% in FY2014 to 11% in FY2017.”
High base effects and price pressures will weigh on deposit growth over the coming quarters. Deposit growth has been flat over the past three years in real terms, and BMI projects growth of around 5.0% over the next three years, a notable uptick.

 Burden of NPLs
Lending growth will show a similar trend to deposits, with growth in the coming months bolstered only slightly by sanctions relief. BMI forecasts real lending growth of 4.2% in FY2016 as the economic expansion accelerates, though the issue of non-performing loans (NPLs) remain pressing.
The NPL ratio for commercial banks is currently at 15.6%. This has resulted from the former administration’s lending directives to support failing enterprises and the depreciation of the rial in 2014 and is expected to continue. The practice of forcing banks to lend has declined during the current administration of President Hassan Rouhani, and banks will be cautious as the macroeconomic situation improves only slightly.
Capital injections by the central bank will contribute to reducing systemic risks in the Iranian banking sector. Iran will receive access to around $32 billion in frozen assets under the nuclear deal. While not nearly enough to support growth of an economy heavily reliant on oil sales and given competing demands from other sectors, this will go some way towards bolstering the central bank’s firepower, especially given how leveraged the banking sector is.

 Narrow Income Streams
Given systemic risks in the banking sector, profitability of commercial banks will be minimal in 2016 and 2017. 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.
Some of Iran’s banks remain under US sanctions thus reducing the ability of the banking sector to grow rapidly from the removal of sanctions. In addition, BMI does not expect an influx of foreign companies into Iran over 2016. Very few multinational banks have a license to operate in Iran (Standard Chartered are one and have stated they do not intend to use it at present) and to be on the safe side their compliance departments are committed to avoiding any transactions with Iranian nationals or companies.
Twenty-nine banks operate in Iran, twenty of which are listed as private lenders. However, four of these banks—Bank Saderat, Bank Mellat, Tejarat Bank and Refah K. Bank—used to be state-owned banks that were privatized along with many other public-sector institutions.

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