Bank Mergers and Acquisitions Benefit Iran

Financial institutions throughout the world have historically–voluntarily or otherwise–relied on mergers and acquisitions to adapt to an ever-evolving climate that has only surged following the Great Recession.

As talks of mergers are heating up to modernize the Iranian banking system that is laden with toxic loans, weighed down by a cumbersome credit crunch and in dire need of comprehensive structural reforms, it seems opportune to take a look at Iran’s consolidation experience and fancy a vision of an inevitable not-too distant future.

In its modern banking experience of more than a century, Iran has witnessed a number of consolidation cases, but the main bulk of the action that came after the Islamic Revolution in 1979 has defined the current banking regime.

A study conducted by the Association of Private Banks and Credit Institutions reveals that the Council of Islamic Revolution, which acted as an ad-hoc legislative body before its dissolution, decreed a total of 28 banks, 16 thrift institutions and two investment companies as national or state-owned, and then moved to merge them.

In light of the major social and economic changes emerging after the revolution, it was deemed that “the number of banks, funds and credit institutions existing at the time was not consistent with the economic conditions of the country”, according to the study.

  How Today’s Iranian Banks Came to Be

A series of sweeping changes ensued, whereby Bank Melli Iran (now the country’s largest bank) and Bank Sepah (the oldest Iranian bank) were declared state-owned entities and Bank Refah Kargaran emerged as a government institution owned by the Social Security Organization.

Bank Saderat Iran (now boasting the most expansive Iranian banking presence on foreign soil), a formerly private bank, was also declared state-owned and a provincial bank.

However, Bank Mellat and Tejarat Bank formed as a result of a slew of the largest M&As in the history of the Iranian banking system, the former appeared as a state-owned commercial bank after 10 private banks were merged while the latter emerged as a state-owned commercial lender following the merger of 11 private lenders.

Among today’s specialized banks, Bank Maskan (the agent bank of the housing sector) was established after the former state-owned Mortgage Bank and a series of provincial savings funds were merged.

The former Rural Cooperatives Bank and a chain of rural agricultural funds were merged to form Bank Keshavarzi (Agriculture Bank) while the now-ceased Industrial Credits Bank merged with related savings funds to become the current Bank of Industry and Mine.

Other state-owned lenders, namely Post Bank, Tose’e Ta’avon Bank (Cooperatives Development Bank), Exports Development Bank and Iran-Venezuela Bi-National Bank, were formed independent of the M&A framework after the revolution.

As the aforementioned study notes, even though core banking did not exist at the time, the mergers did not succumb to potential hazards such as diminished consumer trust.

Furthermore, the institutions formed as a result of consolidation deals did not face personnel backlash, as surplus staff were allowed to voluntarily retire after receiving a bonus 10-year work experience.   

But consolidation–and its success–has not been exclusive to state-owned lenders in Iran. In fact, the private Bank Ayandeh was the result of one of the most successful M&A cases in the country.

It rose out of the ashes of Bank Tat and two credit institutions under new leadership in 2014 while Caspian Credit Institution and Nour Credit Institution emerged after eight and five credit cooperatives were dissolved respectively.

Bank Ayandeh managed to nab Euromoney’s best bank transformation award for 2017 and currently has 16 trillion rials ($390 million) in capital as stated in its latest balance sheet.

Parviz Aghili, a seasoned banker formerly of HSBC who is now chief executive of the private Middle East Bank, became the latest proponent of bank consolidation when he recently said the number of banks and credit institutions in Iran will need to be significantly reduced–maybe halved–out of the current 35 in the next few years.

Iranian financial institutions, especially private ones, will be able to enjoy the scale, efficiency and talent upgrade that will come with a well-researched, targeted consolidation effort.

It will be a much-needed boost in spearheading the foray into the realm of digital banking and fintech association, which is not only beneficial, but absolutely vital to the survival and relevance of banks in the future.