EDBI Support Rating Raised

Capital Intelligence Ratings announced on Thursday that it has affirmed the Financial Strength Rating (FSR) of Export Development Bank of Iran (EDBI) at ‘BB-’. The FSR is supported by the bank’s strong capital adequacy, its privileged access to low cost funding (due to its official policy role) and its well managed cost base.

According to cpi.com, the high non-performing financings (NPFs) ratio and un-provided NPFs are important caveats regarding the bank's capital. The FSR is constrained by a still difficult operating environment and high sovereign risk, together with the low share of usable liquid assets held by the bank.

Although conventional liquidity ratios are sound, the high level of contingent commitments constrains the rating as they could tighten both liquidity, as well as capital ratios, if drawn before new funding from official sources is made available. High borrower concentration remains a feature of the bank’s financing portfolio and also constrains the rating. As the bank is a government-owned policy bank, its FSR is explicitly linked to the rating of the sovereign.

Due to its special remit, and in light of the recent upgrade of Iran’s Sovereign Long-Term Foreign Currency Rating (FCR) to BB-/B/Stable (from B+/B/Stable), EDBI’s Support Rating is raised to ‘2’ from ‘4’, which indicates a very high likelihood of further foreign currency liquidity and capital support being made available by the authorities should the bank need it. EDBI’s Long- and Short-Term FCRs are affirmed at ‘BB-’ and ‘B’, respectively, with a ‘Stable’ Outlook, and remain at the sovereign level.

Sovereign Ratings Stable

Any upward or downward revision to EDBI’s FSR (and therefore its other ratings) would almost certainly closely track movements in the sovereign rating. CI’s Outlook for Iran’s sovereign ratings is currently ‘Stable’. This indicates that Iran’s sovereign ratings are likely to remain unchanged within the next 12 months, provided that key metrics evolve as envisioned in CI’s baseline scenario and no other credit quality concerns arise. The sovereign outlook balances the projected positives from the partial lifting of sanctions against the potential adverse impact from what may be a prolonged period of low oil prices, together with concerns related to any spill-over from the conflict in neighboring countries.

EDBI continues to perform an important policy role in supporting efforts to increase and diversify non-oil exports, which are expected to grow further with the lifting of sanctions. Given its sound franchise and business model as one of Iran’s four specialized state-owned banks with direct access to regular government funding, EDBI should benefit significantly from improving economy, more favorable inflation prospects and the stabilization of the exchange rate over the medium to long term.

Asset quality is relatively weak, although it remains in line with the average for the Iranian banking system. NPFs declined modestly in FYE15 and loss coverage for NPFs improved. However, NPFs resumed growth at a rapid pace in H1 FYE 16 (a trend that continued in the second half of FYE 16), although the ratio of NPFs to gross financings was up only marginally due to the brisk credit expansion.

Going forward, the underlying credit risk on buyer credits could potentially increase given the recent change in the bank’s policy, which no longer requires all credits to be insured by the Export Guarantee Fund of Iran (EGFI). That said, as of FYE16 only one line of credit was not insured by the EGFI.

Conventional funding and liquidity ratios are of limited relevance given the nature of the business model and especially the low utilization of customer deposits. Instead, the bank’s direct access to regular governmental funding is considered to be a key supporting factor.

The bank’s capital adequacy ratio continues at a very solid level and is a key supporting factor, regardless of the recent decline. The strong capital base provides the necessary means for growth of financings, as the operating environment gradually improves.

CI expects profitability to remain relatively weak because of continued high provisioning needs, although profitability at the operating level remained sound, boosted by a lean cost base. That said, EDBI is a state-owned policy bank with export development as its main goal; profitability is therefore a second order concern of management.