Commercial banking in Iran will continue to grow next year but the growth pace is expected to slow down, according to new forecasts. This will be partly due to inflationary pressure and high levels of base effect in previous years, though inflation has seen a sharp decline in recent months in Iran.
The October report by the Business Monitor International predicted that Iran’s banking profits are likely to remain low as a result of a lack of access to global financial markets.
The high ratio of non-performing loans and the lack of competition due to the dominance of state-owned banks will also hamper development in the banking sector, the report said.
Total bank assets expanded by an average of 17.5 percent in the first half of 2014, compared to the same period a year earlier. The growth in bank assets was the result of a general improvement in Iran’s economy, as it came out of recession in spring after two years of contraction, and declining inflationary pressure, as the Rouhani administration remained committed to a monetary discipline over the past year, the report said.
BMI predicted Iran’s real GDP to grow by 2.8 percent and 2.9 percent in 2014 and 2015, respectively. Iran’s economy contracted by 1.9 percent in the year ending March 2014 and by 6.8 percent the year ending March 2013. The US government estimates suggest that the Iranian economy is 25 percent smaller today than its pre-2012 growth trajectory indicated, according to The Economist.
The consumer price index (CPI) is showing signs of decline, helping encourage lending and borrowing. Inflation stood at 14.6 percent year-on-year in June, falling from about 45 percent a year earlier.
BMI forecast total commercial bank assets to expand by 14 percent in real terms in the year ending in March 2015 and by 8 percent in the next year.
“The risks to fundamental stability [of the banking sector] will be lower than in 2013, when the industry muddled through a serious crisis,” BMI said. With the new fiscal and monetary discipline enacted by the Rouhani government the macroeconomic situation is stabilizing. Furthermore, the central bank has gained some badly needed firepower to support the highly leveraged banks through the release of $6.1 billion of its foreign assets, a part of total $100 billion in foreign assets blocked overseas due to the sanctions imposed by the West in recent years against Iran.
The Central Bank of Iran gained access to some of its frozen assets in exchange for halting its uranium enrichment activities, under an interim nuclear deal signed with the P5+1 (US, Russia, China, Britain, France and Germany) in November 2013. The nuclear talks between the two sides continue, with negotiators from both sides hoping to reach a permanent agreement by the November 24 deadline.
The sanctions imposed since 2012 have curbed growth of the financial sector, as they cut Iranian banks’ link with global markets. The easing of sanctions will help the sector, which is at its infancy, grow considerably.
Loans Slower Than Deposits
Falling inflation and increased confidence in the economy have improved the attractiveness of putting deposits in banks over the past few months. Bank deposits increased by 13.4 percent in real terms in the first half of 2014 compared to the same period in 2013. Deposits had fallen by 10.6 percent through 2013. Deposits are set to grow by 8 percent in real terms in the fiscal year of 2015/16, from 12 percent in the fiscal year of 2014/15, BMI projected.
Real lending growth will continue over the coming quarters, having returned to positive territory in March and expanded by 6.7 percent in June. The pace of expansion in lending will remain slower than deposit growth. The non-performing loans ratio - the amount of NPLs over total loans - currently stands within the 15-25 percent 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. BMI forecast loan growth of 4 percent in real terms in the current fiscal year and 3 percent in the next.
Low Profitability In 2015
Commercial bank profits will be minimal in 2015, according to BMI’s forecast. The issue of bad loans will oblige banks to put aside large sums to shield against non-repayment by debtors. The ministry of economy and the central bank are looking for avenues to increase banks’ lending power, namely through forcing them to sell their loss making holdings and wiping NPLs off their balance sheets. These moves are expected to help address solvency issues faced by banks in the long run, but will probably eat away short term profits.
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 sector, but the effect of reform will only be felt in the next few years given significant technical and political challenges to its implementation.
The BMI report argued in the report that if nuclear talks between the P5+1 and Iran will not reach a breakthrough, ongoing sanctions against the banking industry would continue over the next two years, stopping international transactions with global banks and making it impossible for Iranian banks to raise capital in the international bond market or expand their presence abroad.
