Capital Intelligence Confirms Bank of Industry and Mines Outlook as Stable

Capital Intelligence has confirmed Iran's Bank of Industry and Mines Financial Strength Rating with the sovereign long-term rating of "BB-"–the same as Iran's sovereign rating. 

The rating agency also assigned the Support Rating of "2" to the state-owned lender. Similarly, the Foreign Currency Ratings of "BB-" Long-Term and "B" Short-Term are affirmed for BIM.  

CI adds that the outlook on these ratings remains "stable".

According to a statement published by CPI Financial, BIM's FSR is supported by reasonably good asset quality, especially in the context of the averages of the Iranian banking system, given the more than full loan-loss reserve coverage for non-performing debt. 

Further key supporting factors are BIM's government ownership and its status as the country's leading institution for long-term development finance for key projects and sectors. Although conventional liquidity ratios appear tight, the nature of the business model (and especially the very limited utilization of customer deposits) makes these ratios of little relevance. 

According to CI, another key supporting factor is the bank's direct access to regular government funding. While some of this may be discretionary, the bulk of BIM's funding is as a line item in the annual national budget, assuring stability.

The main constraining factors are a capital base that, despite augmentation by asset revaluations, remains under some pressure from a rapidly growing level of risk-weighted assets and the business model itself, in that much of the lending is in the form of individually large facilities denominated in forex. This latter factor gives rise to both concentration risk and indirect forex risk, unless the project itself generates forex income.

Sovereign Rating Stable 

CI Ratings' outlook for Iran's sovereign ratings is currently "Stable". This indicates that Iran's sovereign ratings are likely to remain unchanged in the next 12 months, provided key metrics evolve as envisioned in CI's baseline scenario and no other credit quality concerns arise. 

The 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 spillover from the conflicts in neighboring countries.

The statement adds that while the capital adequacy ratio will benefit from the additional capital from asset revaluations, BIM (as with all other state-owned banks) needs additional capital, very preferably in the form of fresh cash equity.

In terms of asset quality, how two situations play out will have a considerable influence on asset quality. In the economy in general, there is a major problem with payment arrears by state-owned or state-controlled companies and institutions. Should the government be able to resolve (or at least reduce) this problem, it would go a long way toward easing asset quality pressures in the banking system as a whole.

The second situation is more peculiar to BIM. Given its business model and policy role, most of its lending has been project related. As a result of sanctions, a number of in-progress projects have overrun construction timelines or budgets (or both) and the associated lending has become at least technically non-performing. 

When these projects are finally completed and become cash generating, the old loans will be replaced with new ones to match the new cash flows. The exposures will effectively start performing again.

Given BIM's role as a policy bank, access to liquidity is not an issue. However, the pricing of such funding may become so, given the pressures elsewhere on profitability. Although management is good, in the final analysis, BIM's performance will depend on the tasks assigned to the bank as part of its policy role and whether sufficient resources are made available to fill this role efficiently.