CI: Iran’s Sovereign Rating “Stable”

Capital Intelligence Ratings (CI Ratings or CI) has announced that its outlook for Iran's sovereign ratings is currently "Stable".

According to the credit agency's website, 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 outlook balances the 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 conflict in neighboring countries.  

CI’s Iran sovereign ratings comes as the firm has also affirmed in its July report the Financial Strength Rating of the state-run Export Development Bank of Iran at “BB-” with a “Stable” outlook. The FSR is supported by the bank’s sound capital adequacy ratio in spite of a marked decline, its privileged access to low-cost funding due to its official policy role, and its well-managed cost base.

As CI puts it, any upward or downward revision to EDBI’s FSR would almost certainly closely track movements in the sovereign rating of Iran.  

EDBI continues to perform an important policy role in supporting efforts to increase and diversify Iran’s non-oil exports, which have followed a growing trajectory since the lifting of sanctions in January 2016.

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 stands to benefit significantly from the improving economy and lower inflation.

However, according to the credit agency, the high and increasing non-performing financing ratio, together with unprovided NPFs, are important caveats regarding the bank’s capital.

FSR is constrained by a still difficult operating environment and sovereign risk, and by the low amount of usable liquid assets held by the bank.

The report adds that although EDBI’s financing-based 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 EDBI’s financing portfolio and also constrains the rating. As EDBI is a government-owned policy bank, its FSR is explicitly linked to the rating of the sovereign and therefore cannot exceed the sovereign Long-Term Foreign Currency Rating of “BB-” for Iran.

Capital Intelligence Ratings has been providing credit analysis and ratings since 1982 and now rates over 300 banks, corporations and financial instruments in 39 countries. A specialist in emerging markets, CI Ratings’ geographical coverage includes the Middle East, the wider Mediterranean region, Central and East Europe, South Asia, Southeast Asia, the Far East, and North and South Africa.

 Support Rating

Due to its special remit, EDBI’s support rating is affirmed at “2”, which indicates a very high likelihood of further foreign currency liquidity and capital support by the Iranian government.

EDBI’s Long- and Short-Term FCRs are both affirmed at “BB-” and “B’, respectively, with a “Stable” outlook, and remain at the level of Iran’s sovereign FCRs.

Nonetheless, if asset quality continues to deteriorate, whether in terms of higher NPF ratio and/or lower loss coverage of NPFs, this will likely put downward pressure on the bank’s FSR.

Asset quality, however, remains a key constraining factor to the ratings and its deterioration reflects still challenging conditions encountered by many sectors in Iran as a result of the sanctions, as well as government arrears arising from delays on completion of large government projects.

NPFs rose very significantly in at the end of the fiscal 2015-16, although the NPF ratio was up only slightly due to the large increase in gross financings.