International lenders to limit dealings with Iranian banks over US sanctions

Iranian banks have a limited scope of engagement with international financial institutions as lenders elsewhere will look to eliminate any exposure to the country once US sanctions kick in.

The vast majority of international banks are vulnerable to sanctions because of the dominant role of the United States and the dollar in the global economy and financial system, Fitch Solutions, a part of the Fitch Group said in a report yesterday. Even beyond the US sanctions, the Iranian banking sector’s “structural vulnerabilities” will restrict their engagement with international lenders, it said.

American sanctions on Iranian oil imports will come into force in early November and already the Iranian economy is under pressure. The economy is likely to contract this year and next on the back of sharp declines in oil exports and a further slump in already-low foreign investment inflows. Iranian banks, most of which are state-owned or state-linked, have struggled in the tough economic status quo.

The lenders have exceptionally high levels of bad debt, with non-performing loans estimated at 13 per cent of gross loans in 2017, said the report, citing Institute of International Finance data. However, Fitch estimates the real ratio is likely even higher, as local reporting standards discourage the categorisation of loans as nonperforming.

“The capital adequacy is very low, standing at less than 6 per cent in that same year, compared with the Basel III-stipulated 8 per cent – plus a 2.5 per cent cushion,” said the report.

Iranian banks’ inability to engage with the international banking system will remain the case regardless of any eventual progress on much needed industry reforms.

The Iranian Parliament this month approved measures that are essential to implement international standards against money laundering and the funding of terrorism set by the Financial Action Task Force.

“While we view the Iranian Parliament’s recent passing of legislation to bring domestic banking sector regulations in line with international standards as a positive step, we do not believe that this will substantially impact international banks’ perceptions of risks associated with operating in the Islamic republic as long as US sanctions remain in place,” Fitch analysts said.

Meanwhile, the US Treasury on Tuesday announced additional sanctions on the multibillion dollar network for Iran’s powerful Basij paramilitary force, targeting 22 entities including corporations.

Iranian lenders have very high levels of bad debt, with non-performing loans estimated at 13% of gross loans in 2017